customer through an engineered flow of

WHAT IS OPERATIONS information, physical distribution, and cash.

MANAGEMENT?
3 ENTITIES OF BASIC SUPPLY CHAIN
It is a large term for several smaller Seller is a supplier who provides goods and
subjects when a company wants to operate services or a person or organization with whom
smoothly, grow their business, satisfy customers, the buyer does business. Their generic term in
and make money, operations management is at marketplace is seller. Supplier provides materials,
work. E-commerce, global competition, customer energy, services, or components for a product or
service, productivity, and quality are all parts of service such as plastic, fabric, electric wiring or
operations management. Without globalization, aircraft.
it is impossible for a company to expand to a
larger more beneficial market. If a company does Producer is the one who receives components
not have good customer service, then it will not from the seller to produce a finished good or
have satisfied customers, therefore, no business service such as shirts from fabric, crockery from
and no profits. Productivity and quality must be plastic, power from electric wiring, or provides
at a maximum in order for them to make the transportation through aircraft.
most money for a business. All of these elements
need to work together to create a successful Customer is the one who receives the finished
business.
product. That is the one who wears those shirts,
It is the management of systems or uses the crockery, turns on the light, or flies in
processes that create goods or provide services. an airplane.
Goods are defined as physical items that includes
raw materials, parts, and sub-assemblies. As well
as, final products such as cellphones and 3 TYPES OF SUPPLY CHAIN
automobiles. These goods cost the consumer
STRATEGIES
money and are sold by a business. On the other
hand, services are activities that provide some Stable supply chain strategy is appropriate for
combination of time, location, form, or
chains that are focused on execution, efficiencies,
psychological value. These are also provided by a
and cost performance. They use simple
business. Examples of goods and services can be
connectivity technologies and have little need for
found all around us.
real-time information. For example, table salt
manufacturer uses scaled production and
dedicated capital assets.
All businesses have a supply chain, a supply
chain as a process that is put up in place by a Reactive supply chain strategy works well when
company in order to gather materials, produce,
the chain acts to fulfill demand from trade
and distribute their product. these supply chains
partners. For example, manufacturer of a sports
can include a business’s facilities, functions, and
team apparel for fans when it seemed makes it
activities that are involved in producing and
to the next round, more products are needed.
delivering a product or service. A supply chain
However, for the losing team, demand virtually
sequence begins with raw materials and
disappears.
concludes at the final product which the
customer purchases. Efficient reactive supply chain strategy focuses
A supply chain is a global network used to on the efficiency and cost management on the
deliver products and services from raw materials, total delivered cost of finished goods. For
producer, distributor, retailer, and ends with example, in supermarket chains, distribution
centers, logistics providers, and manufacturers
cooperate to replace the goods sold in the shops plants, and showrooms that built and distributed
within less than 24 hours. the Ford cars.

Benefits of Vertical Integration

FLOWS IN SUPPLY CHAIN o Control

o No Dependency
Information flow includes o Synchronized

• Invoices Lateral or Horizontal Integration. An expanding

• Sales Literature of a business by acquiring a similar company in
• Specifications the same industry. It is contrasted with vertical
• Receipts integration where company produces different
• Orders items which are related to one product. the
• Rules and Regulations company may do this via internal expansion,
acquisition, or merger. The process can lead to
Primary cash flow includes monopolies if a company captures the vast
majority of the market for that good or service.
• Payments of Products
For example, a company that manufactures
• Supplies
shampoo may add other brands to appeal to a
wider customer base.
Primary product flow includes

• Materials
Benefits of Lateral or Horizontal
• Components Integration
• Supplies
• Services o Economies of Scale and Scope
• Finished Products o Focuses on Particular Business
o Know Their Market Well
Reverse product flow includes

• Returns for Repair

• Replacements
DIFFERENCES BETWEEN VERTICAL
• Recycling AND LATERAL INTEGRATION
• Disposals
When a company wishes to grow through
a vertical integration, it is seeking to strengthen
its supply chain, reduce its production costs,
2 TYPES OF SUPPLY CHAIN capture upstream or downstream profits, or
MANAGEMENT access downstream distribution channels.

However, when a company wishes to grow

Vertical Integration. It is an arrangement in
through a horizontal integration, it is seeking to
which the supply chain of a company is owned by increase its size, diversify its product or service,
that company. Usually, each member of the achieve economies of scale, reduce competition,
supply chain produces a different product or or gain access to new customers of the same
market specific service and the products combine market.
to satisfy a common need. This structure still
persists in some companies. Vertical integration
enterprise may grow from an entrepreneurial
base by adding department and layers of STAGES OF SUPPLY CHAIN
management or through mergers and MANAGEMENT EVOLUTION
acquisitions. For example, in an attempt to create
a self-sufficient enterprise, Ford owned iron ore
mines, steel mills, fleet of ships, manufacturing
Stable. The nucleus organization lacks internal It is the management of the flow of goods
and services which includes the movement and
definition in goals. There are no external
storage of raw materials, work-in-process
connections other than a few transactional links.
inventory, and finished goods from point of origin
▪ Unplanned activities to point of consumption. Every product that
▪ More threats reaches an end user represents the cumulative
▪ Less Forecasting effort of multiple organizations. Some
▪ Demand and Supply Issues organizations have only paid attention to what
▪ Poor Payment Flows was happening within their four walls, while
some did not. But the entire chain activities
Multiple Dysfunction. Nucleus organizations ultimately delivered products to the final
begins to improve effectiveness, efficiency, and customer. The result was disjointed and often
quality within functional areas. ineffective supply chain.

▪ Departments perform their functions one

after the other.
▪ There is no collaboration between various
3 TYPES OF INTERELATED
departments. PROCESSES THAT BUSINESSES ARE
▪ No partnership formed with customers and COMPOSED OF:
suppliers.
1. Upper management processes
Semi-functional Enterprise. These organizations 2. Operational processes
3. Supporting processes
are fully integrated between departments using
enterprise resource planning or ERP. Each of these is different and corresponds
to different levels of company similar to their
▪ Individual firm begins to focus on business
titles. All businesses, no matter what size, use
processes, rather than compartmentalized
these basic processes to produce and provide the
functions.
products and services that we, as consumers,
▪ Corporate wall link supply chain partners
desire.
together.

Integrated Enterprise. The firm integrates its

internal network with the internal networks of Operations management includes many activities
supply chain partners in order to improve that a company uses to allow it to run more
efficiencies, product or service quality, or both. smoothly. These include:
▪ Complete sharing of information across
 Forecasting – involves identifying trends in
integrated networks.
▪ Team building and planning across a company’s past data in order to plan for
corporate boundaries. the future. This allows for a company to be
able to order raw materials, hire and fire
Extended Enterprise employees, and identify the products that
will be the most profitable in the near
▪ Some companies sheltered from changes, future.
so they are less advanced.  Capacity planning – Forecasting goes hand-
▪ Some took advantages of changes.
in-hand with capacity planning
▪ Some organizations believe that they are
in most advanced stage.  Facilities and layout
 Scheduling
 Managing inventories – is closely related to
WHAT IS A SUPPLY CHAIN
capacity planning, purchasing, and
MANAGEMENT? forecasting. However, inventories are
 managed more often and with less lead  Focuses on achieving the objective.
time than the previously mentioned  It means doing the right things.
activities.  It is not process and time oriented.
 Assuring quality  It looks at whether the something is done
or not.
 Motivating and training employees – is an  It has no/less economic sense.
activity connected to assuring quality for  It has long run perspective.
the company. if a company’s employees are  Effectiveness in an organization should
motivated and excited to work, then the come first.
quality of a product is going to be better  Input to output ratio is not considered.
than if an employee didn’t have that  It can be considered as an extroverted
motivation. approach as it is measured between one or
 Locating facilities – placement of facilities more organizations.

is essential in the distribution of products Efficiency. Doing the things right.

to the customer and even the
transportation of raw materials to a  It is an accomplishment of or the ability to
company. locating that placement of a accomplish a job with a minimum
facility is based on the closeness of the expenditure of time and effort.
supplier, as well as the cost of distribution
and the distance to customers. (Standard Performance / Actual
Performance). If it is desired to have a
 Purchasing – these activities would not be
greater performance than standard
completed accurately without forecasting. performance, then the efficiency will be
 Distribution – is similar to managing “less than one”. Otherwise, it will be a
inventories because of the lack of lead time “greater than one”.
given before a product needs to arrive to a
 Focus on performing a task in a best
customer.
possible manner
 Maintenance  Focuses on maximum result with
least time and effort
 It means doing things in right
WHY LEARN ABOUT OPERATIONS manner.
MANAGEMENT?  It is process and time oriented.
 It looks at how the activity is done.
Businesses are created to be profitable and
 It has higher economic sense.
successful things like forecasting, location
 It has short run perspective.
planning, and quality assurance are essential in
creating a profitable business. Without these
 Efficiency should be followed by
effectiveness.
tools, that wouldn’t be possible.
 Input to output ratio is considered.
 It can be considered as an introvert
3 RELATED TERMS ABOUT approach as it measures the
performance issues (cost, time, and
IMPROVEMENT resources) within the organization.

Effectiveness. Doing the right things. Productivity. Doing the right things in a right
 It is defined as the degree to which an manner.
organization achieves its objective or the
 The productivity can be defined based on
level of achieving results.
economist, engineer, accountant, or
 Focus on desired result.
manager’s perspectives.
  Productivity is measured in terms of the
rate of output per unit of input.
 Productivity = Output / Input → Basic
Formula

The productivity includes

 Not only increasing the rate of

output per unit of input,
 But also increasing the quality level
of goods and services,
 Protecting the environment and
nature,  Overall cost. Being the low-cost provider
 Providing good level of life and for a broad customer base. These low costs
working conditions to employees. allow them to consistently capture higher
profits than their competitors.
Productivity based on quantity:
 Overall Differentiation. Is really doing
• Output/Production Input something different that makes your broad
• Output/Salary Input market customers willing to pay more for
• Output/Depreciation Input your products and services. These higher
• Output/Material Input profits allow companies to consistently
• Output/Third Party Input capture higher profits than their
• Output/The Others Input competitors.

Productivity based on value:  Cost Focus. Is a cost leadership strategy in

a narrow or focused market.
• Added Value/Production Input
• Added Value/Salary Input
 Differentiation Focus. A differentiation
• Added Value/Depreciation strategy that focuses in a narrow or
Input focused market.
• Added Value/Third Party Input
• Katma değer/The Others Input
CHAPTER 1 OPERATIONS AND
PRODUCTIVITY
WHAT IS A COMPETITIVE
ADVANTAGE? Production is the creation of goods and services.

A competitive advantage is when a Operations management (OM) is the set of

company achieved higher profits than the activities that creates value in the form of goods
average competitor in the product market. and services by transforming inputs into outputs.
Regardless of whether the end product is a good
or service, the production activities that go on in
the organization are often referred to as
Michael Porter suggested that generic strategies
operations, or operations management.
can be defined by two key dimensions.
Operations management (OM) is
 Scope. The company could target a board
the administration of business practices to
market or a narrow and focused market. create the highest level of efficiency possible
 Source. The company could be either low- within an organization. It is concerned with
cost leader or a differentiator. converting materials and labor into goods and
services as efficiently as possible to maximize the
profit of an organization. (Investopedia)

Operations management is chiefly concerned with

planning, organizing and supervising in
the contexts of production, manufacturing or the
provision of services. (TopMBA.com)

Operations management involves managing

the operations and processes of an
organization. (Corporate Finance Institute)

Operations management is an area

of management concerned with designing
and controlling the process of production WHY STUDY OPERATIONS
and redesigning business operations in the MANAGEMENT?
production of goods or services. It involves the
OM is one of the three major functions of
responsibility of ensuring that business
any organization, and it is integrally related to all
operations are efficient in terms of using as few
the other business functions.
resources as needed and effective in meeting
customer requirements. (Wikipedia) We want to know how goods and services
are produced. The production function is
the segment of our society that creates the
BASIC FUNCTIONS IN THE products and services we use.
ORGANIZATION To understand what operations managers,
do.
Marketing, which generates the demand, or at
OM provides a major opportunity for
least takes the order for a product or service.
an organization to improve its profitability
Production/operations, which creates, produces, and enhance its service to society.

and delivers the product.

Finance/accounting, which tracks how well the TEN STRATEGIC OPERATIONS

organization is doing, pays the bills, and collects MANAGEMMENTS DECISIONS
the money.
 Design of goods and services. Defines much
of what is required of operations in each of
A supply chain is a global network the other OM decisions. For instance,
product design usually determines the
of organizations and activities that supply a firm
lower limit of cost and the upper limits of
with goods and services; it is the activities
quality, as well as major implications for
required by the organization to deliver goods or
sustainability and the human resources
services to the consumer; it is the sequence of
required.
processes involved in the production and
distribution of commodity.  Managing quality. Determines the
customer’s quality expectations and
establishes policies and procedures to
identify and achieve that quality.
 Process and Capacity strategy. Determines
how a good or service is produced and
 commits management to specific ▪ Labor Specialization (Smith, Babbage)
technology, quality, human resources and ▪ Standardized Parts (Whitney)
quality investments that determine much
of the firm’s basic cost structure. Scientific Management Era (1880–1910)
 Location strategy. Requires judgements ▪ Gantt Charts (Gantt)
regarding nearness to customers, suppliers, ▪ Motion & Time Studies (Gilbreth)
and talent while considering costs, ▪ Process Analysis (Taylor)
infrastructure, logistics, and government. ▪ Queuing Theory (Erlang)
 Layout strategy. Requires integrating
Mass Production Era (1910–1980)
capacity needs, personnel levels,
technology, and inventory requirements to ▪ Moving Assembly Line (Ford/Sorensen)
determine the official flow of materials, ▪ Statistical Sampling (Shewhart)
people, and information. ▪ Economic Order Quantity (Harris)
 Human resources and job design. ▪ Linear Programming PERT/CPM (DuPont)
Determines how to recruit, motivate, and ▪ Material Requirements Planning (MRP)
retain personnel with the required talent
and skills. People are an integral and
expensive part of the total system design. Quality Focus
 Supply chain management. Decides how to
Lean Production Era (1980–1995)
integrate the supply chain into the firm’s
strategy, including decisions that ▪ Just-in-Time (JIT)
determine what is to be purchased, from ▪ Computer-Aided Design (CAD)
whom, and under what conditions. ▪ Electronic Data Interchange (EDI)
 Inventory management. Considers ▪ Total Quality Management (TQM)
inventory ordering and holding decisions ▪ Baldrige Award
and how to optimize them as customer ▪ Empowerment
satisfaction, supplier capability, and ▪ Kanbans
production schedules are considered.
 Scheduling. Determines and implements
Customization Focus
intermediate- and short-term schedules
that effectively and efficiently utilize both Mass Customization Era (1995–2005)
personnel and facilities while meeting
customer demands. ▪ Internet/E-Commerce
 Maintenance. Requires decisions that ▪ Enterprise Resource Planning International
Quality Standards (ISO)
consider facility capacity, production
▪ Finite Scheduling
demands, and personnel necessary to
▪ Supply Chain Management Mass
maintain a reliable and stable process.
Customization
▪ Build-to-Order
▪ Radio Frequency Identification (RFID)
THE HERITAGE OF OPERATIONS
MANAGEMENT
Globalization Focus

Cost Focus Globalization Era (2005–2020)

Early Concepts (1776–1880) ▪ Global Supply Chains

▪ Growth of Transnational Organizations
▪ Instant Communications Sustainability
 ▪ Ethics in a Global Workforce Logistics  Product typically produced at a fixed
facility.
 Many aspects of quality for tangible
products are easy to evaluate.
OPERATIONS FOR GOODS AND
 Product often has residual value.
SERVICES
Manufacturers produce a tangible product,
while service products are often intangible. But * Many products are a combination of a good and
many products are a combination of a good and a a service.
service, which complicates the definition of a
* The operation activities for both goods and
service.
services are often very similar. Both have quality
The operation activities for both goods and standards, are designed and produced on a
services are often very similar. Both have quality schedule that meets the customer demand, and
standards, are designed and produced on a are made in a facility where people are employed.
schedule that meets customer demand, and are
* Almost all services and all goods are a mixture
made in a facility where people are employed.
of a service and a tangible product.
However, some major differences do exist
between goods and services.

We should point out that in many THE PRODUCTIVITY CHALLENGE

cases, the distinction between goods and services
is not clear-cut. In reality, almost all services and The creation of goods and services requires
almost all goods are a mixture of a service and a changing resources into goods and services. The
tangible product. more efficiently we make this change, the more
productive we are and the more value is added to
the good or service provided. Productivity is the
CHARACTERISTICS OF SERVICES ratio of outputs (goods and services) divided by
the inputs (resources, such as labor and capital).
 Intangible.
 Produced and consumed simultaneously.
 Unique.
Improvement can be achieved in two ways:
 High Customer Interaction.
 Inconsistent Product Definition. (1) reducing inputs while keeping
 Often knowledge based. output constant or
 Services dispersed.
 Quality may be hard to evaluate. (2) increasing output while keeping
 Reselling is unusual. inputs constant.

CHARACTERISTICS OF GOODS PRODUCTIVITY MEASUREMENT

 Tangible. The use of just one resource input to measure
 Products can usually be kept in an productivity is known as single-factor
inventory. productivity.
 Similar products are produced.
 Limited customer involvement in
production.
 Product is standardized.
 Standard tangible products tend to make
automation feasible.
 However, a broader view of productivity is ✓ Typically, labor intensive (counseling,
multifactor productivity, which includes all teaching).
inputs (e.g., capital, labor, material, energy). ✓ Frequently focused on unique individual
Multifactor productivity is also known as total attributes or desires (investment advice).
factor productivity. Multifactor productivity is ✓ Often an intellectual task performed
calculated by combining the input units. by professionals (medical diagnosis).
✓ Often difficult to mechanize and automate
(a haircut).
✓ Often difficult to evaluate for quality
(performance of a law firm).
Use of productivity measures aids
managers in determining how well they are doing.
But results from the two measures can be PRODUCTIVITY INCREASES ARE
expected to vary. If labor productivity growth is DEPENDENT ON THREE
entirely the result of capital spending, measuring
just labor distorts the results. Multifactor
PRODUCTIVITY VARIABLES:
productivity is usually better, but more • Labor (10%)
complicated. Labor productivity is the more • Capital (38%)
popular measure. The multifactor-productivity • Management (52%)
measures provide better information about the
trade-offs among factors, but substantial These three factors are critical to
measurement problems remain. improved productivity. They represent the
broad areas in which managers can take
action to improve productivity.

SOME OF THESE MEASUREMENT

PROBLEMS ARE:
CURRENT CHALLENGES IN
Quality may change while the quantity of inputs OPERATIONS MANAGEMENT
and outputs remains constant. o Globalization
o Supply-chain Partnering
External elements may cause an increase or a
o Sustainability
decrease in productivity for which the system o Rapid Product Development
under study may not be directly responsible. o Mass Customization
o Lean Operations
Precise units of measure may be lacking.

Productivity measurement is
particularly difficult in the service sector, where Identifying ethical and socially
the end product can be hard to define. responsible responses while developing
Productivity measurements require specific sustainable processes that are also effective and
inputs and outputs, but a free economy is efficient productive systems is not easy.
producing worth—what people want—which Managers are also challenged to:
includes convenience, speed, and safety. ➢ Develop and produce safe, high-
Traditional measures of outputs may be a very quality green products
poor measure of these other measures of worth. ➢ Train, retain, and motivate employees in
a safe workplace
➢ Honor stakeholder commitments
PRODUCTIVITY OF THE SERVICE
SECTOR HAS PROVEN DIFFICULT TO
IMPROVE BECAUSE:
 SUMMARY long term planning for a company’s customer
service and business strategies. Operational
Operations, marketing, and strategies focus on the goals and aspirations of
finance/accounting are the three functions basic the company, as well as the actual plans for
to all organizations. The operations function getting the business to achieve their goals.
creates goods and services. Much of the progress
of operations management has been made in the
twentieth century, but since the beginning of
time, humankind has been attempting to improve
GLOBALIZATION
its material well-being. Operations managers are
Globalization means customers, talent,
key players in the battle to improve productivity.
and suppliers are worldwide. The new standards
As societies become increasingly affluent, of global competitiveness impact quality, variety,
more of their resources are devoted to services. customization, convenience, timeliness, and cost.
Productivity improvements and a sustainable
Globalization strategies contribute
environment are difficult to achieve, but
efficiency, adding value to products and services,
operations managers are the primary vehicle for
but they also complicate the operations
making improvements.
manager’s job. Complexity, risk, and competition
are intensified, forcing companies to adjust for a
shrinking world.
CHAPTER 2 THE GLOBAL The trend toward greater
interconnectedness and interdependence of all
ENVIRONMENT AND OPERATIONS the countries of the world.

STRATEGY
SIX REASONS DOMESTIC BUSINESS
OPERATIONS DECIDE TO CHANGE TO
GLOBAL ENVIRONMENT SOME FORM OF INTERNATIONAL
The global environment encompasses
OPERATION
broad, worldwide environment factors that are
 Improve the supply chain. The supply chain
beyond the scope or control of any community or
nation (collaborative on Health and the can often be improved by locating facilities
Environment). in countries where unique resources are
available. These resources may be human
Businesses are greatly affected by the resource expertise, low-cost labor, or raw
global environment, which refers to the material.
uncontrollable local and international
interactions that influence how a company  Reduce costs and exchange rate risk. Many
operates (Alison Tanner).
international operations seek to reduce
risks associated with changing currency
values (exchange rates) as well as take
OPERATIONS STRATEGY advantage of the tangible opportunities to
reduce their direct costs. Shifting low-
Operations strategy is the plan developed skilled jobs to another country has several
by the management team of an organization to potential advantages. First, and most
allocate funding to the business (accounting obviously, the firm may reduce costs.
tools). Second, moving the lower-skilled jobs to a
Operations strategy is an aspect of lower-cost location, frees higher -cost
operations management that is concerned with workers for more valuable tasks. Third,
reducing wage costs allows the savings to
be invested in improved products and
facilities (and the retraining of existing  Improve operations. Operations learn from
workers, if necessary) at the home better understanding of management
location. Finally, having facilities in innovations in different countries.
countries with different currencies can 6 Ways to Improve Business
allow firms to finesse currency risk (and Operations (Mike Kappel)
related costs) as economic conditions
▫ Streamline and simplify
dictate.
Trade agreements can lower tariffs ▫ Resolve small issues
 In Mexico, the creation of ▫ Keep up with trends
maquiladoras (free trade zones) ▫ Measure performance
allows manufactures to cut their
costs of taxation by paying only
▫ Inspire employees
on the value added by Mexican ▫ Set time aside to effect
workers. Mexican factories
located along the U.S. – Mexico
border that receive preferential  Understand markets. Because
tariff treatment.
international operations require
▪ World Trade Organization interaction with foreign customers,
(WTO) supplies, and other competitive businesses,
international firms inevitably learn about
• An international
opportunities for new products and
organization that
services.
promotes world trade
by lowering barriers to
the free flow of goods
across borders.  Improve products. Learning does not take
• Administering WTO place in isolation. Firms serve themselves
agreements and their customers well when they remain
• Providing a forum for open to the free flow of ideas.
trade negotiations
• Handling trade disputes
• Monitoring national
trade policies  Attract and retain global talent. Global
• Providing technical organizations can attract and retain better
assistance for employees by offering more employment
developing opportunities.
• Cooperating with other
international ❖ A worldwide strategy places added
organizations burdens on operations management.
▪ North American Free Trade Because of economic and lifestyle
differences, designers must target
Agreement (NAFTA) A free products to each market.
trade agreement between
Canada, Mexico, and the
United State.
CULTURAL AND ETHICAL ISSUES
▪ European Union (EU) A
One of these challenges is reconciling
European trade group that
differences in social and cultural behavior. With
has 27 member states.
issues ranging from bribery, to child labor, to the
environment. Managers sometimes do not know organization’s ability to adjust timely to other
how to respond when operating in a different factors or changes in the marketplace.
culture.

Globalization, with all its opportunities

and risks, is here. It must be embraced as ACHIEVING COMPETITIVE
managers developed their missions and ADVANTAGE THROUGH OPERATIONS
strategies.
Competitive Advantage ~ implies the creation of
a system that has a unique advantage over
DEVELOPING MISSIONS AND competitors. The idea is to create customer value
in an efficient and sustainable way.
STRATEGIES
 Competing on Differentiation. Uniqueness
Mission – we define the organization’s mission as
can go beyond both the physical
its purpose what it will contribute to society.
characteristics and service attributes to
Mission statements provide boundaries and focus
encompass everything that impacts
for organizations and the concept around which
customer’s perception of value.
the firm can rally. The mission states the
rationale for the organization’s existence.  Experience Differentiation. The idea of
Developing a good strategy is difficult, but it is experience differentiation to engage the
much easier if the mission has been well defined. customer to use people’s five senses so
they become immersed, or even an active
Strategy – with the mission established, strategy participant, in the product.
and its implementation can begin. Strategy is an  Competing on Cost. Provide the maximum
organization’s action plan to achieve the mission.
value as perceived by customer. Does not
Each functional area has a strategy for achieving
imply low quality.
its mission and for helping the organization reach
the overall mission. These strategies exploit Low-cost leadership ~ achieving maximum value,
opportunities and strengths, neutralize threats,
as perceived by the customer.
and avoid weaknesses.
Competing on Response ~ Response is broader
than just delivery to a customer of a good or
THREE STRATEGIC APPROACHES TO service. It also includes the organization's ability
COMPETITIVE ADVANTAGE to adjust timely to other factors or changes in
the marketplace.
Differentiation, is a marketing strategy designed
to distinguish a company’s products or services  Response. A set of values related to rapid,
from the competition. Experience differentiation flexible, and reliable performance.
engaging the customer with a product through
imaginative use of the five senses, so the 3 Aspects of Response
customer “experiences” the product.
1) Flexible response may be
Cost Leadership, is a term used when a company thought of as the ability to
match changes in a
projects itself as the cheapest manufacturer or
marketplace where design
provider of a particular product or commodity in
innovations and volumes
a competition.
fluctuate substantially.
Response, is broader than just delivery to a 2) The second aspect of response
is the reliability of scheduling.
customer of a good or service. It also includes the
3) The third aspect of response is
quickness.
 ISSUES IN OPERATIONS STRATEGY
Resources view – A view in which managers
evaluate the resources at their disposal and
manage or alter them to achieve competitive
advantage.

Value chain – analysis is used to identify

activities that represent strengths, or potential
strengths, and may be opportunities for
developing competitive advantage.

Five forces model – A way to analyze the five

forces in the competitive environment.

STRATEGY DEVELOPMENT AND

IMPLEMENTATION

STRATEGIC OM DECISIONS
These three concepts come into play as
operations managers make good decisions in the
seven major functional areas of operations
management, otherwise known as operations
decisions.

Strategic Product and Service

Management. What good or service do we offer
KEY SUCCESS FACTORS (KSFs) – Activities or
and what is the design of it?
factors that are key to achieving competitive
advantage.
Operations and Supply Chain
Management. Should we make or buy what we
need to produce our good or service? If we CORE COMPETENCIES – A set of unique skills,
purchase it, who can supply it?
talents, and activities that a firm does
Inventory Management. How much should we particularly well.

keep on hand? When do we re-order?

Forecasting and Capacity Planning. What does the ACTIVITY MAP – A graphical link of competitive
short-term and long-term schedule look like? advantage, KFS, and supporting activities.
How much can we make in what period of time?
 STRATEGIC PLANNING, CORE Transnational strategy — A strategy that
COMPETENCIES, AND OUTSOURCING combines the benefits of global scale efficiencies
with the benefits of local responsiveness. These
Outsourcing. Procuring from external firms transgress national boundaries.
sources services or products that are normally
part of an organization. CHAPTER 3 PROJECT MANAGEMENT
Potential Risks of Outsourcing include: When project management is implemented
right, it helps every part of the business run more
 A drop in quality or customer service.
smoothly. It allows your team to focus on the
 Political backlash that results from
work that matters, free from the distractions
outsourcing to foreign countries.
caused by tasks going off track or budgets
 Negative impact on employees.
spinning out of control (Teamwork. n.d.).
 Potential future competition.
 Increased logistics and inventory costs.

THREE PHASES OF PROJECT

GLOBAL OPERATIONS STRATEGY MANAGEMENT
OPTIONS ▫ Planning. This phase includes goal setting,

International business – a firm that engages in defining the project, and team
organization.
cross-border transactions.
▫ Scheduling. This phase relates people,
Multinational corporation (MNC) – a firm that money, and supplies to specific activities
has extensive involvement in international and relates activities to each other.
business, owning or controlling facilities in more ▫ Monitoring. Here the firm monitors
than one country.
resources, costs, quality, and budgets. It
also revises or changes plans and shifts
resources to meet time and cost demands.
THE FOUR OPERATIONS STRATEGIES
FOR APPROACHING GLOBAL
OPPORTUNITIES CAN BE CLASSIFIED Project Planning ~ goal setting, defining the
ACCORDING TO LOCAL project, and team organization.
RESPONSIVENESS AND COST
Project Organization ~ it is developed to make
REDUCTION:
sure existing programs continue to run smoothly
International strategy — A strategy in which on a day-to-day basis while new projects are
successfully completed.
global markets are penetrated using exports and
licenses with little local responsiveness.
Project Manager ~ project team members are
Multidomestic strategy — A strategy in which temporarily assigned to a project and report to
the project manager. Manager heading the
operating decisions are decentralized to each
project coordinates activities with other
country to enhance local responsiveness.
departments and reports directly to top
Global strategy — A strategy in which operating management.

decisions are centralized and headquarters

Work Breakdown Structure ~ defines the
coordinates the standardization and learning
project by dividing it into its major
between facilities.
subcomponents (or tasks), which are then
 subdivided into more detailed components, and Program Evaluation and Review Technique
finally into a set of activities and their related
costs is a hierarchical description of a project (PERT). A project management technique
into more and more detailed components. that employs three-time estimates for
each activity.

Critical Path Method (CPM). A project

Level
management technique that uses only
1. Project one-time factor per activity.
2. Major tasks in the project
3. Subtasks in major tasks PROJECT MANAGEMENT
4. Activities (or “work packages”) to be TECHNIQUES: PERT & CPM’S
completed FRAMEWORK
▪ Define the project and prepare the
work breakdown structure.
ETHICAL ISSUES FACED IN PROJECT ▪ Develop the relationships among the
MANAGEMENT activities. Decide which activities
must precede and which must follow
Project managers often deal with others.
▪ Draw the network connecting all the
 Offers of gifts from contractors activities.
 Pressure to alter status reports to ▪ Assign time and/or cost estimates to
mask the reality of delays each activity.
 False reports for charges of time and ▪ Compute the longest time path
expenses through the network. This is called
 Pressures to compromise quality to the critical path.
meet bonuses or avoid penalties ▪ Use the network to help plan,
related to schedules. schedule, monitor, and control the
project.
Project Scheduling ~ involves sequencing and ANSWERS THE QUESTIONS:
allotting time to all project activities. PERT & CPM
▪ When will the entire project be
Gantt Charts completed?
▪ What are the critical activities or
 Planning charts are used to schedule
tasks in the project—that is, which
resources and allocate time.
activities will delay the entire
 These are low-cost means of helping
project if they are late?
managers make sure that (1)
▪ Which are the noncritical
activities are planned, (2) order of
activities—the ones that can run
performance is documented, (3)
late without delaying the whole
activity time estimates are
project’s completion?
recorded, and (4) overall project time
▪ What is the probability that the
is developed.
project will be completed by a
specific date?
▪ At any particular date, is the project
Project Controlling ~ involves close monitoring of on schedule, behind schedule, or
resources, costs, quality, and budgets. Also means ahead of schedule?
using a feedback loop to revise the project plan ▪ On any given date, is the money
and having the ability to shift resources to where spent equal to, less than, or greater
they are needed most. than the budgeted amount?
 ▪ Are there enough resources available  Latest start (LS) = latest time at which
to finish the project on time?
an activity can start so as to not delay the
▪ If the project is to be finished in a
completion time of the entire project.
shorter amount of time, what is the
best way to accomplish this goal at  Latest finish (LF) = latest time by which
the least cost? an activity has to finish so as to not delay
the completion time of the entire project.

The early start and finish times (ES and EF)

NETWORK DIAGRAMS AND are determined during the forward pass. The late
APPROACHES start and finish times (LS and LF) are determined
during the backward pass.
The first step in a PERT or CPM Network is to
divide the entire project into significant activities
in accordance with the work breakdown
structure. There are two approaches for drawing FORWARD PASS
a project: A process that identifies all the early times.

 Activity-on-Node (AON). A network  Earliest Start Time Rule. Before an activity

diagram in which nodes designate can start, all its immediate predecessors must
activities. be finished:
 Activity-on-Arrow (AOA). A network  If an activity has only a single immediate
diagram in which arrows designate predecessor, its ES equals the EF of the
activities. predecessor.
 If an activity has multiple immediate
Note: A project network is a diagram of all predecessors, its ES is the maximum of all
the activities and the precedence EF values of its predecessors. That is:
relationships that exist between these  ES = Max {EF of all immediate predecessors}
activities in a project.  Earliest Finish Time Rule. The earliest finish
time (EF) of an activity is the sum of its
earliest start time (ES) and its activity time.
DETERMINING THE PROJECT That is:
SCHEDULE  EF = ES + Activity time

Critical Path Analysis ~ a process that

helps determine a project schedule. BACKWARD PASS
An activity that finds all the late start and
late finish times.
VARIABLES OF FINDING THE
CRITICAL PATH  Latest Finish Time Rule. This rule is again
based on the fact that before an activity can
To find the critical path, we calculate two
start, all its immediate predecessors must be
distinct starting and ending times for each
finished:
activity. These are defined as follows:
 If an activity is an immediate predecessor
for just a single activity, its LF equals the
 Earliest start (ES) = earliest time at
LS of the activity that immediately follows
which an activity can start, assuming all it.
predecessors have been completed.  If an activity is an immediate predecessor
 Earliest finish (EF) = earliest time at to more than one activity, its LF is the
which an activity can be finished.
 minimum of all LS values of all activities susceptible to delays. This means that we cannot
that immediately follow it. That is: ignore the impact of variability in activity times
 LF = Min {LS of all immediate following when deciding the schedule for a project. PERT
activities} addresses this issue.
 Latest Start Time Rule. The latest start time
(LS) of an activity is the difference between
its latest finish time (LF) and its activity time. THREE-TIME ESTIMATES IN PERT
That is:
 LS = LF − Activity time  Optimistic Time. The “best” activity
completion time that could be obtained in
a PERT network.
CALCULATING SLACK TIME AND  Pessimistic Time. The “worst” activity time
IDENTIFYING THE CRITICAL PATH(S) that could be expected in a PERT network.
 Most Likely Time. The most probable time
Slack Time. Free time for an activity. Also
to complete an activity in a PERT network.
referred to as free float or free slack.

After we have computed the earliest and

latest times for all activities, it is a simple matter EXPECTED TIMES AND VARIANCES
to find the amount of slack time that each FOR MILWAUKEE PAPER
activity has. Slack is the length of time an
activity can be delayed without delaying the
entire project.

Mathematically: Slack = LS − ES or Slack = LF – EF

PROBABILITY OF PROJECT
COMPLETION
Variation in activities that are on the
critical path can affect the overall project
completion time – possibly delaying it. This is one
The activities with zero slack are called
occurrence that worries the plant manager
critical activities and are said to be on the critical
considerably.
path. The critical path is a continuous path
through the project network that: PERT uses the variance of critical path
activities to help determine the variance of the
 Starts at the first activity in the project
overall project. Project variance is computed by
(Start in our example).
summing variances of critical activities.
 Terminates at the last activity in the
project (H in our example). PERT makes two more assumptions: (1)
 Includes only critical activities (i.e., total project completion times follow a normal
activities with no slack time). probability distribution, and (2) activity times
are statistically independent. With these
assumptions, the bell-shaped normal curve
VARIABILITY IN ACTIVITY TIMES shown in Figure 3.12 can be used to represent
project completion dates. This normal curve
Although some activities may be relatively implies that there is a 50% chance that the
less prone to delays, others could be extremely manufacturer’s project completion time will be
less than 15 weeks and a 50% chance that it will → The project’s expected completion date is
exceed 15 weeks. 15 weeks.
→ There is a 71.57% chance that the
equipment will be in place within the 16-
DETERMINING PROJECT COMPLETION TIME FOR A week deadline. PERT analysis can easily
GIVEN CONFIDENCE LEVEL find the probability of finishing by any date
Williams is interested in.
Let’s say Julie Ann Williams is worried that → Five activities (A, C, E, G, and H) are on the
there is only a 71.57% chance that the pollution critical path. If any one of these is delayed
control equipment can be put in place in 16 weeks for any reason, the entire project will be
or less. She thinks that it may be possible to plead delayed.
with the board of directors for more time. She → Three activities (B, D, F) are not critical and
wants to find the deadline by which she has a 99% have some slack time built in. This means
chance of completing the project. She hopes to that Williams can borrow from their
use her analysis to convince the board to agree to resources, and, if necessary, she may be
this extended deadline. able to speed up the whole project.
This due date would be greater than 16 → A detailed schedule of activity starting and
weeks. We again use the assumption that ending dates, slack, and critical path
Milwaukee Paper’s project completion time activities have been made available (see
follows a normal probability distribution with a Table 3.3 in Example 6).
mean of 15 weeks and a standard deviation of
1.76 weeks.
COST-TIME TRADE-OFFS AND
PROJECT CRASHING
VARIABILITY IN COMPLETION TIME
(1) The project is behind schedule, and (2)
OF NONCRITICAL PATHS the scheduled project completion time has been
Consider, for example, activity D in moved forward. In either situation, some or all of
Milwaukee Paper’s project. Recall from Overlay 3 the remaining activities need to be speeded up
in Figure 3.10 (in Example 7) that this is a (usually by adding resources) to finish the project
noncritical activity, with a slack time of 1 week. by the desired due date.
We have therefore not considered the variability
in D’s time in computing the probabilities of
Crashing. Shortening activity time in a network
project completion times. We observe, however, to reduce time on the critical path, in the
that D has a variance of 0.44 (see Table 3.4 in cheapest manner possible, so total completion
Example 8). In fact, the pessimistic completion time is reduced.
time for D is 6 weeks. This means that if D ends
up taking its pessimistic time to finish, the
project will not finish in 15 weeks, even though D COST-TIME TRADE-OFFS AND
is not a critical activity.
PROJECT CRASHING
CPM is a technique in which each activity
SUMMARY OF FINDINGS: WHAT has a normal or standard time that we use in our
PROJECT MANAGEMENT HAS computations. Associated with this normal time
PROVIDED SO FAR is the normal cost of the activity.

Project management techniques have thus However, another time in project

far been able to provide Julie Ann Williams with management is the crash time, which is defined
several valuable pieces of management as the shortest duration required to complete an
information: activity. Associated with this crash time is the
crash cost of the activity. Usually, we can shorten
an activity by adding extra resources (e.g., A CRITIQUE OF PERT AND CPM
equipment, people) to it. Hence, it is logical for
the crash cost of an activity to be higher than its As a critique of our discussions of PERT,
normal cost. here are some of its features about which
operations managers need to be aware:
Likewise, the cost of crashing (or
shortening) activity depends on the nature of the Advantages
activity. Managers are usually interested in
speeding up a project at the least additional cost.  Especially useful when scheduling and
Hence, when choosing which activities to crash, controlling large projects.
and by how much, we need to ensure the  Straightforward concept and not
following: mathematically complex.
 Graphical networks help highlight
 The amount by which an activity is crashed relationships among project activities
is, in fact, permissible T  Critical path and slack time analyses help
 Taken together, the shortened activity pinpoint activities that need to be closely
durations will enable us to finish the watched.
project by the due date
 Project documentation and graphs point out
 The total cost of crashing is as small as
who is responsible for various activities.
possible
 Applicable to a wide variety of projects.
 Useful in monitoring not only schedules but
costs as well.
STEP 1: Compute the crash cost per week (or
another time period) for each activity in the Limitations
network. If crash costs are linear over time, the
following formula can be used:  Project activities have to be clearly defined,
independent, and stable in their relationships.
Crash cost per period = (Crash cost -  Precedence relationships must be specified
Normal cost) / (Normal time - Crash time) and networked together.
STEP 2: Using the current activity times, find the  Time estimates tend to be subjective and are
critical path(s) in the project network. Identify subject to fudging by managers who fear the
the critical activities. dangers of being overly optimistic or not
pessimistic enough.
STEP 3: If there is only one critical path, then  There is the inherent danger of placing too
select the activity on this critical path that (a) much emphasis on the longest, or critical,
can still be crashed and (b) has the smallest crash path. Near-critical paths need to be monitored
cost per period. Crash this activity by one period. closely as well.
If there is more than one critical path, then select
one activity from each critical path such that (a)
each selected activity can still be crashed and (b)
the total crash cost per period of all selected
activities is the smallest. Crash each activity by
one period. Note that the same activity may be
common to more than one critical path.

STEP 4: Update all activity times. If the desired

due date has been reached, stop. If not, return to
Step 2.