FAQ: Fundamentals of Operations Management

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1 Question 1: Why use operational performance measurement systems instead of just measuring customer satisfaction? Answer 1: Performance measurement is generally acknowledged to be critical to the successful operation of any organization. Goals are defined by expected results and described in terms of measures. Thus, an operational performance measurement system establishes a vehicle for communication with which managers describe expectations, to each other and their subordinates, in precise and understandable terms. Measures and numbers represent the language of business. Using this language, people agree on what performance is expected of them, and then they adjust their behavior sufficiently to ensure achievement of the desired results. Indeed, the only purpose for measuring something is to influence human behavior. Therefore, to maximize performance, there must be a clear articulation of expectations (which are detailed with measures and goals), and then actual results are compared to ensure the desired outcomes are accomplished. In the event that results do not match expectations, actions are taken to bring performance in line. The challenge for executives is to ensure that measurement systems facilitate human performance. An example would be making a decision to use operational performance measurement systems (financial measurements) instead of just measuring customer satisfaction. Although some companies make a formal evaluation of customer satisfaction, few take it seriously enough to improve it consistently over time. This is mainly because customer satisfaction surveys produce invaluable customer and market information essential to a company's strategic business plan. The information generated includes mainly customer characteristics and essential needs-profile information for each market segment surveyed. However, such surveys should not be undertaken if there is no management commitment to continuous improvement. On the other hand, operational performance measurement systems are financial measures and tend to be profit related (by operating income) and related to return on capital and sales growth or generation of cash flow. In today's marketplace, it is important for organizations to use a framework for integrating measures derived from strategy. Although retaining operational measures is primary, companies should also take into consideration the customer perspective in which the business will compete. Question 2: Is it possible for a firm to consistently satisfy customers without 1

2 an effectively managed operation function? Answer 2: Every organization has three main business functions: operation, finance, and marketing. Operation is concerned with the creation of goods and services, finance is concerned with provision of funds necessary for operation, and marketing is concerned with promoting and selling goods or services. The operation function consists of all activities that are directly related to producing goods or providing services. It is the core of most business organizations because it is responsible for the creation of an organization's goods or services. Its essence is to add value during the transformation process (the difference between the cost of inputs and value and price of outputs). With an effectively managed operation function, a firm can consistently satisfy customers through the effective coordination and management of efforts across all functional areas. A well-managed operation function can consistently satisfy customers through activities that include (1) the design of the physical transformation process that provides the specific value a customer desires; (2) the design of systems planning, scheduling, and controlling the transformation input output process; and (3) the design of systems for monitoring and improving organizational benefits and effectiveness to create products and services that satisfy customers. As a result, customers perceive value added in the purchase products and services. Most customers today expect more than a product or a service; they expect a product or service bundle that will be satisfied only when the whole package meets their perceived expectations. Through operations management, people are able to design and manage the value-adding systems organizations use to sustain customer satisfaction. Question 3: Why should you integrate operational decisions with those made in other functional areas? Answer 3: To consistently satisfy customers, an organization must effectively integrate operational decisions with those made in its other functional areas. The three primary functions in organizations are operation, finance, and marketing. These business functions are interrelated and overlap. Marketing establishes the demand for goods or services, finance provides the capital, and operation actually makes the goods or provides the service. Of the three functions, operation typically employs the greatest number of people and requires the largest investment in assets. For these reasons, management of the operations function has often been viewed as an opportunity to improve a firm's efficiency and reduce costs. But operations 2

3 can also be an avenue to increase sales, gain market share, and maintain customer satisfaction. Thus, managing operations well requires communication with the customer, and operations managers must work with other business functional areas. Successful operation managers realize that although the operation function is critical to attain customer satisfaction and organizational effectiveness, it is but one of several vital business functions. Coordinating and integrating communications and decision making between all business functional areas provide customers with clarity, consistency, and a higher degree of satisfaction. Thus, the integration between operational decision making and the value-adding activities of other functions is also critical to the ongoing enhancement and attainability of customer satisfaction and competitive advantage. Question 4: Is ERP only for manufacturing firms? Answer 4: Enterprise resource planning (ERP) software is used to control most of the common business activities, like sales, delivery, billing, and productions. In the early days of business computing, companies used to write their own software to control their business processes. ERP takes process flow and integration to the enterprise-wide level. It integrates the data within an organization and relies to a great extent on understanding process flows as the base source of understanding data integration. Because many of these processes are common across various types of businesses, ERP is not only for manufacturing firms. Some of the ERP software caters to a wide range of industries from manufacturing industries to service sectors like software vendors and hospitals. In today's global competitive marketplace, ERP applications are moving from the manufacturing and financial areas of business into other sectors, including customer services, sales and marketing, and sales force automation. For example, although handheld computers enable the collection of data wherever it is generated, mobile ERP can improve the accuracy of data and can increase its generation. ERP applications show promise for the management and integration of basic business processes and the development of a centralized information repository for transactional data. Question 5: What is integrated supply? What is actually being outsourced in these situations? 3

4 Answer 5: Purchased materials have historically accounted for about half of U.S. manufacturing costs, and many manufacturers purchase more than half of their parts. The purchasing or procurement function plays a crucial role in supply chain management. Purchasing must make sure that the parts and materials required by the product specifications are of the desired quality and are delivered on time. If poor-quality parts and materials are used, the final product will be of poor quality. If deliveries are late from suppliers, final products will likely be late to the customer. In effect, the supplier is an integral part of the company's quality management program and supply chain management, and it is subject to the same goals and responsibilities as other functional areas. In the past, many manufacturing companies purposefully purchased parts or materials from different suppliers so that the company would not be dependent on the uncertain performance of any one supplier. However, the supply chain management practices have resulted in a new approach of partnering, known as integrated supply, between the purchasing company and suppliers. In integrated supply, a distributor offers to provide high level of service on an entire line of products at agreed-upon prices in exchange for a guarantee that it will receive all of the distribution business in that product line. An additional aspect of the integrated supply, known as partnering relationship, is the involvement of the supplier in the product design process. In many cases, the supplier is given the responsibility of designing a new part or component to meet the quality standards and features outlined by the company. In return, the company enters into a long-term purchasing agreement (sole source) with the supplier that includes a stable order and delivery schedule. Nonetheless, sole source limits suppliers to gain more control over quality and delivery. With sole source, a company purchases a part of the material from few suppliers, sometimes only one. For example, every part except the engine block in one car manufacturer's engine is single source, resulting in only 69 total suppliers, which is half the normal number for a production engine. In return for the suppliers' assurance of top quality and low cost, the company guaranteed the suppliers their jobs for the life of the engine. Thus, it is necessary to keep in mind that both integrated supply and sole source obviously create an intensely competitive environment among suppliers, with quality and service being factors in the selection process. Question 6: How do you balance long-term business relationships with direct competition? Answer 6: In a pure market with many buyers and sellers, the buyer can 4

5 compare many different possible suppliers of the product and select the one that provides the best combination of characteristics (such as design, time, and price). The coordination costs associated with this wide latitude of choice, however, are relatively high because the buyer must gather and analyze information from a variety of possible suppliers. Relationship management and long-term business relations have been greatly valued and supported by operation managers. Through integrated supply, organizations have supported establishing long-term business relationships with a limited number of suppliers, with quality and service being factors in the selection process. The message from manufacturing and service managers was clear: Minimize costs through long-term business relationships, and stay ahead of the competition. Conversely, in today's global economies, although some vendors remain relatively healthy, your relationships with your suppliers may be challenged as a result of increased competitiveness and all-out price wars. Long-standing loyalties to your preferred supplier are out the window when there is a potential for substantial cost savings from a challenger. Managers are arguing that by allowing increased flexibility and efficiency, the strategic placement of work with external suppliers is set to grow ever greater. Using only the latest technologies, more new external suppliers compete to provide service and manufacturing organizations with skills that are otherwise difficult to obtain. Thus, there is a need to balance long-term business relationships with direct competition between multiple suppliers and service providers. In today's marketplace, outsourcing to more varied suppliers is an essential and dependable way to remain ahead of the competition. Yet, the road to selecting suppliers demands careful consideration. The emphasis should not only be placed on price but on all aspects of the purchase. As with any procurement, there is one general rule to bear in mind: You get what you pay for. There are a few things to keep in mind if you are considering a review of a long-term business relationship with a supplier. If possible, managers need to investigate the supplier's financial outlook and keep a list of alternatives handy if it is determined that the supplier might be on shaky ground. This is generally more important in the area of service partners than it is for commodity suppliers. Nonetheless, managers must look at the entire supply chain, including potential suppliers, and determine which people and suppliers would work best in certain situations. 5