THE McGRAW-HILL 36-Hour Course OPERATIONS MANAGEMENT

By Linda L. Brennan

The McGraw-Hill Companies, Inc.

Copyright © 2011 Linda Brennan
All rights reserved.
ISBN: 978-0-07-174383-9

Contents

PrefaceAcknowledgmentsChapter 1 Managing for ResultsChapter 2 A Practical Approach to OperationsChapter 3 Desired ResultsChapter 4 Organizational PerformanceChapter 5 Quality Across the OrganizationChapter 6 Technology Across the Value ChainChapter 7 Process EffectivenessChapter 8 Process QualityChapter 9 Project Definition for ResultsChapter 10 Project PlanningChapter 11 Project ControlChapter 12 Individual EffectivenessNotesIndexInstructions for Accessing Online Final Exam and Chapter Quiz Answers

Excerpt

CHAPTER 1

MANAGING FOR RESULTS

If you don’t know where you’re going, it doesn’t much matter how you get there.

—THE CHESHIRE CAT (PARAPHRASED FROM ALICE IN WONDERLAND BY LEWISCARROLL)

When you think about operations, what picture comes to mind? If you’re like mostpeople, you think of a manufacturing plant or assembly line. Occasionally, Iwill have a student who relates it to the context of surgery, as in “I’m havingan operation to remove a tumor tomorrow.”

While none of these ideas is wrong, the correct answer is much broader.Operations consist of whatever an organization does to make inputs becomeoutputs. It’s that simple. Really. Whether the organization is a servicecompany, a government agency, a not-for-profit entity, or a publicly tradedcorporation, it obtains inputs. Operations transform these inputs by addingvalue to them (and sometimes wasted effort) and make them available to others asoutputs. Operations management is about managing for results—that is,desired outputs.

After completing this chapter, you should be able to do the following:

• Describe an operation as a transformation system

• Explain the importance of operations management

• Recognize opportunities for operational improvements

• Identify sources of competitive advantage in an operation

Throughout this book, you will find a practical, commonsense approach tomanaging for results. Common sense is logical, has an intuitive appeal, and isclear when you think about it. There is a practical connotation to common sense.Unfortunately, as the architect Frank Lloyd Wright noted, “There is nothing moreuncommon than common sense.”

Not sure you agree? Consider the case of the rolling suitcase. The idea is thatthe case is too heavy to carry through the airport, so you pull it on wheels.Yet somehow you are expected to lift it into an overhead compartment to stow itaway. (Not to mention that the people who pushed ahead of you to get on theplane first took more than their allotted amount of overhead space.) Why nothave bench seats with storage underneath? No one would get hurt, and all thosebags wouldn’t impinge on your space. Isn’t that common sense?

Why do we have daylight savings time in fully electrified countries? Why do wehave a nine-month school year when children are no longer needed to work in thefields during the summer? Why do we still teach cursive writing in primaryeducation when very little is handwritten anymore? Because we have done thingsthis way for as long as anyone remembers.

Operations are like that. You can do something over and over, because that ishow you have always done it, and you can make operations very complex. Or youcan use basic principles that are memorable and have an intuitive appeal tocover most situations. Once you understand these principles, they will seem likecommon sense. This is the essence of the 36-hour course in operationsmanagement.

OPERATIONS AS A TRANSFORMATION FUNCTION

Inputs can come in conventional forms as direct labor, direct materials, andother direct costs. Inputs can also be capital items that are not consumed inthe operation. The idea of capital as cash wealth invested for a specificpurpose (such as technology, equipment, and land) has broadened to include humancapital (labor), intellectual capital (knowledge), and social capital(reputation, brand equity, customer loyalty, and so on).

Outputs can be categorized in several different ways. Generally we think interms of goods or services, but often outputs are a combination of both, on acontinuum from mostly service to mostly goods. On one end of the spectrum(mostly service) is an airplane ticket that represents a transportation service;in addition to the service, you may receive a drink and possibly a meal asgoods. The ticket itself is a facilitating good, something that enablesyou to receive the service. On the other end of the spectrum is the purchase ofa new refrigerator. You are buying the product as well as the delivery servicethat will enable you to use the product in your home.

Outputs can also be classified as tangible or intangible, in the sense thatsomething is tangible if it can be perceived by touch. Clearly, products aretangible. Production waste is tangible. Facilitating goods are tangible. Evensome services—such as a haircut, car wash, or packing/movingservice—are tangible. Intangible outputs tend to be emotional orexperiential results such as satisfaction, relaxation, convenience, andambience.

As I write this, I am sitting in a Starbucks, sipping a cappuccino, and bidingmy time between meetings. My drink is a tangible product. The chair in which Iam sitting is a facilitating good that enables me to enjoy the intangibleambience. I am also enjoying the convenience of a comfortable place to workbefore my next meeting, which is across town from my office.

To create any kind of output, an organization transforms inputs. There are fourelemental transformation functions: alter, inspect, store, and transport. Theyare applicable whether the output is a good, a service, or a combination of thetwo. An organization adds value to its inputs by performing some combination ofthese functions. If it does not add value, then why would a customer purchasethat organization’s output instead of purchasing the inputs directly?

In my Starbucks illustration, the milk and coffee have been altered: the milkhas been steamed and frothed, and the coffee beans were ground, tamped, andexpressed. Before serving it to me, the barista inspected the drink. The drinkmay also be considered as a product bundled with a service. Since I choose tostay at the store, Starbucks is also providing me with a storage service (for myperson), a place to wait while I consume my beverage.

The retail products available at Starbucks, such as bulk coffee, mugs, andcoffee machines, are all goods that can be purchased elsewhere. Since Starbuckshas transformed them by transporting the products to this location and storingthem on the display shelves, they have added value to them by providingconvenient accessibility and the implied endorsement of being good enough tomake Starbucks coffee. The company has also altered the bulk coffee by addingthe Starbucks logo and packaging. This adds the social capital of branding tothe inputs and provides an assurance of quality as an intangible output.

Operations are at the core of any enterprise. The effective management ofoperations is therefore one of the most critical success factors for anorganization.

OPERATIONS AS A COMPETITIVE ADVANTAGE

Often, executives and managers outside of the operational function view it asthe routine (and possibly uninteresting) part of the organization. This may betrue, but it is not the complete picture. I call this “elevator vision.”Elevators are part of a building that you really only notice when they don’twork. In the same way, when operations are viewed as routine, they only receivesignificant management attention when there is a problem.

That is one of the reasons that thinking of operations as a transformationfunction is foundational to our course. This perspective emphasizes results andencourages management to focus on where the value is added in the transformationprocess. Shifting perspectives in this way can have a significant impact onbusiness strategy.

There are innumerable taxonomies, diagrams, and academic frameworks forstrategic management. For our purposes, suffice it to say that something is”strategic” when it creates or sustains a competitive advantage. By viewingoperations as processes that add value to inputs through a transformation thatresults in outputs, you can more easily identify ways in which operationsmanagement can be a source of competitive advantage.

How can operations help to make an organization more competitive? Put simply, anoperation provides a competitive advantage by delivering products and servicesbetter, faster, and/or cheaper than the competition. That’s common sense!Better comes from higher quality. Faster is achieved by beingmore responsive and flexible. Cheaper is the result of reducing costs.These are general terms, of course; we will delve more deeply into these ideasin subsequent chapters. For now, consider the following “value matrix”and how it might inform strategic planning by applying better/faster/cheaper tothe transformation function. (See Table 1-1.) This is a general approachthat can help managers articulate the importance of operational considerationsin the overall business strategy. Being competitive takes a lot more than a goodmarketing strategy; companies are expected to execute and deliver to earncustomer loyalty.

Long recognized for its cost competitiveness, Wal-Mart has made a strategic moveto further reduce costs and provide faster service. Vying directly against whatis seen as Amazon.com’s weakness, the costs and delays of shipping onlinepurchases to customers, Walmart.com customers can have their orders shipped freeof charge to a local Wal-Mart and pick up their purchases at special servicedesks. This operation leverages the existing transportation costs of Wal-Martstores, encourages online customers to come to the stores, and presumablydelivers what the customers want faster and cheaper.

When I was a child, I remember enjoying trips to the hardware store with myfather, being fascinated by all the stuff the local shop owner managed to craminto a relatively small retail space. You don’t find many such stores since theadvent of “big box” retailers (Home Depot, Lowe’s, Wal-Mart, and so on).Interestingly, though, our metropolitan area has a local hardware store thatseems to be able to compete successfully against the bigger retailers. Why?Well, if we examine the situation in terms of better/faster/cheaper, the localstore has some clear advantages, as shown in Table 1-2. The local storeis part of a franchised chain, which provides some economies of scale thatenable the owner to leverage the chain’s buying power when purchasing productsfor sale. He is also more technologically advanced than he might have been as atotally independent operator, because he uses the franchise’s informationsystems (such as inventory control, a customer database, and the bar codescanner).

The key difference in his strategy, though, is the caliber of employees hehires. They are typically experienced problem solvers who enjoy helping othersand take pride in their work; often, they are retired from other professions.Another notable difference is in the location of the stores; all three sites heowns are in less congested commercial areas, away from the big chains and moreconvenient to residential customers.

A prudent business leader understands that the business’s value proposition mustbe distinctive, understood, and feasible. Such a view integrates the domains ofoperations management, sales/marketing, and finance/accounting. A well-fundedbusiness with a sizzling advertising campaign will not last without strongexecution. Alternatively, you can have a very effective operational system, butif the awareness of or accessibility to your goods and services is low, you willfail. In the same way, you may have an incredible idea for the “next greatthing” and a fabulous promotion plan to get the word out, but if you cannotafford to do any of it, you will still fail. It takes management andcoordination of all three domains. Do not settle for routine operations to focuson the other two aspects. A competitive organization is continuously improvingits results and achieving a strong balance.

TECHNIQUE: IDENTIFYING SOURCES OF COMPETITIVE ADVANTAGE

We have seen how examining the transformation function of a business can providea systematic basis to identify its competitive advantages in terms of offeringbetter, faster, and/or cheaper results. An alternative technique for identifyingsources of competitive advantage is known as the resource-based view(RBV) of the firm. First suggested by Wernerfelt, the RBV perspectiveenables a firm to evaluate existing resources—both tangible andintangible—and determine which to exploit, which to develop, and which toacquire. Lamenting at how infrequently executives were taking the time toconsider such matters, Kiernan argued that identifying and protecting anorganization’s sources of competitive advantage should be common sense.

Building on this perspective, Barney advanced a framework that can be used toevaluate resources and capabilities in terms of value, rareness, inimitability,and organization (VRIO). Competitive advantage is achieved through theorganized leverage of valuable resources and is sustained by the rareness andinimitability of the resources. More specifically, a firm’s resources arevaluable when they can be used to exploit opportunities and/or neutralizethreats. Property is a tangible resource that is often considered valuable.Brand equity might be a valuable intangible resource.

When few or none of the competing firms have a comparable capability, then it isconsidered rare. The location of an oceanfront hotel resort might be consideredrare. The worldwide recognition of the Coca-Cola trademark is rare.

A resource is inimitable if it creates a disadvantage for competitors and isdifficult or impossible for them to attain. A capability may be difficult toimitate because of its path dependency, meaning it was accumulated over time.The “magic” of Disney is hard for others to imitate because of its unusualhistory, starting with cartoons, moving into feature films, commercializingcharacters, and building theme parks.

Inimitability may result because it is unclear to competitors how thiscapability was created (known as “causal ambiguity”), as in the case of DellComputer’s material handling technologies. Or it may be socially complex in away that is hard to copy, as when key personalities or a distinctive corporateculture are in play—consider Chick-fil-A or Southwest Airlines.

Lastly, a firm is organized when it is prepared to leverage the resource’spotential for competitive advantage. If this element is missing, the competitiveadvantage will evaporate. A classic example is the graphical user interface(GUI) that was developed at Xerox’s Palo Alto Research Center (PARC). Unpreparedto commercialize the GUI, the organization sold the capability to Steve Jobs foruse at Apple. The rest, as they say, is history.

The VRIO model is a practical technique for identifying sources of competitiveadvantage across an organization, vis-à-vis the competition. In terms ofoperations management, a VRIO analysis can raise “elevator vision” (bad pun, Iknow) to examine how operational resources might contribute to the firm’scompetitive advantage. Rather than holding the organization back or simply beingas good as the competition, operations can take a more strategic role and becomethe best in the industry or even redefine the industry’s basis of competition.

For example, when a drug company holds a patent for a new treatment technology,that patent is a valuable resource. If it is also rare, in that there are noother efficacious methods of treatment, the company has an even greatercompetitive advantage. For the duration of the patent, competitors are unable toimitate the treatment; so for the drug company to use this competitive advantageit must be organized in a way that stimulates demand and provides adequatesupply. High-quality, efficient operations are a critical success factor.

One company renowned for its operational excellence is Insight Enterprises. In2009, Insight received the annual Operational Excellence Award from MicrosoftCorporation for the fifth time. Reviewing the company’s website, Insight.com,might provide some indication of how a resource-based view of the firm can leadto operational excellence. Founded in 1988, the company ranks in the Fortune 500and describes itself as “offering software and licensing services globally …in addition [to] hardware and value added services …”

It’s not hard to imagine that, while it grew as a licensed software distributor,Insight noted that there was a larger piece of the information technology (IT)business to win, specifically hardware and consulting services. A VRIO analysismight have looked something like the one in Table 1-3. Using the VRIOanalysis might have led Insight to make the following resource-based strategicdecisions:

• Leverage the distribution network by expanding offerings. Ouroperational excellence is a valuable strength—why not apply that tohardware?

• Develop additional and more exclusive licensing agreements, so we havean inimitable array of brand-name offerings.

• Invest in resources to provide technical support to our customers,building on the relationships we have to become a more comprehensive vendor.

While this is a hypothetical analysis, a company observer might note that thecompany did, in fact, move into hardware distribution and has many brandlicensing agreements (company website) for both software and hardware. Insightalso acquired Software Spectrum, Inc., purportedly to serve as a strongaccelerator of Insight’s evolution to a broad-based technology solutions advisorand provider, because of Software Spectrum’s expertise in business-to-businessIT services. This was followed in 2008 by Insight’s acquisition of Calence, LLC,a firm specializing in networking solutions, advanced communications, andmanaged services. The technique of VRIO analysis is not terribly complicated ortechnical—you might actually view it as common sense. The key benefit ofthis technique comes from the dialogue and focus it encourages among keydecision makers in the firm. It can help build consensus about the need for andpriority of resource acquisition, development, and leverage in the overallstrategic plan of an organization.

Application and Reflection

1. Use the value matrix to evaluate one of your favorite service providers.Develop a table that follows the format of the value matrix.

2. Use the resource-based view to evaluate a company for which you have worked.Develop a VRIO analysis.

SUMMARY

Operations are a critical success factor for most organizations and can be a keyelement in their competitive advantage. Viewing the operational system as atransformation function that adds value to inputs to create outputs helps toidentify non-value-adding activities, as well as ways to produce faster, better,and/or cheaper results.

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(Continues…)Excerpted from THE McGRAW-HILL 36-Hour Course OPERATIONS MANAGEMENT by Linda L. Brennan. Copyright © 2011 by Linda Brennan. Excerpted by permission of The McGraw-Hill Companies, Inc..
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