Web resources for this chapter include 

▸ OM Tools Software

▸ Internet Exercises

▸ Online Practice Quizzes

▸ Lecture Slides in PowerPoint

▸ Virtual Tours

▸ Excel Exhibits

▸ Company and Resource Weblinks

 www.wiley.com/college/russell

In this chapter, you will learn about…

• The Operations Function

• The Evolution of Operations and Supply Chain Management

• Globalization

• Productivity and Competitiveness

• Strategy and Operations

• Organization of This Text

• Learning Objectives of This Course

 Operations and Supply Chain Management FOR CHOCOLATE

Throughout this text, we’ll use chocolate to introduce the topics to be covered in each chapter. The cacao bean, from which chocolate is made, is the third most traded raw material in the world. We’ll trace the path of cacao beans through the supply chain from South America and the Ivory Coast of Africa through the roasters, brokers, and importers, to global factories and regional distribution centers, to local stores and other outlets that sell the myriad types of chocolate products. We’ll look at large and small companies, specialty products, mass-produced products, and services. We’ll cover design and quality, processes and technology, planning and control, supply chains, and more. At each stage we’ll illustrate how the principles of operations and supply chain management can be applied. Join us on this journey through the world of chocolate.

Operations management designs, operates, and improves productive systems—systems for getting work done. The food you eat, the movies you watch, the stores in which you shop, and the books you read are provided to you by the people in operations. Operations managers are found in banks, hospitals, factories, and government. They design systems, ensure quality, produce products, and deliver services. They work with customers and suppliers, the latest technology, and global partners. They solve problems, reengineer processes, innovate, and integrate. Operations is more than planning and controlling; it’s doing. Whether it’s superior quality, speed-to-market, customization, or low cost, excellence in operations is critical to a firm’s success.

 Operations management:

the design, operation, and improvement of productive systems.

Operations is often defined as a transformation process. As shown in Figure 1.1, inputs (such as material, machines, labor, management, and capital) are transformed into outputs (goods and services). Requirements and feedback from customers are used to adjust factors in the transformation process, which may in turn alter inputs. In operations management, we try to ensure that the transformation process is performed efficiently and that the output is of greater value than the sum of the inputs. Thus, the role of operations is to create value. The transformation process itself can be viewed as a series of activities along a value chain extending from supplier to customer.

 Operations:

a function or system that transforms inputs into outputs of greater value.

 Value chain:

a series of activities from supplier to customer that add value to a product or service.

The input-transformation-output process is characteristic of a wide variety of operating systems. In an automobile factory, sheet steel is formed into different shapes, painted and finished, and then assembled with thousands of component parts to produce a working automobile. In an aluminum factory, various grades of bauxite are mixed, heated, and cast into ingots of different sizes. In a hospital, patients are helped to become healthier individuals through special care, meals, medication, lab work, and surgical procedures. Obviously, “operations” can take many different forms. The transformation process can be

physical,

as in manufacturing operations;

locational,

as in transportation or warehouse operations;

exchange,

as in retail operations;

physiological,

as in health care;

psychological,

as in entertainment; or

informational,

as in communication.

THE OPERATIONS FUNCTION

Activities in operations management (OM) include organizing work, selecting processes, arranging layouts, locating facilities, designing jobs, measuring performance, controlling quality, scheduling work, managing inventory, and planning production. Operations managers deal with people, technology, and deadlines. These managers need good technical, conceptual, and behavioral skills. Their activities are closely intertwined with other functional areas of a firm.

Figure 1.1 Operations as a Transformation Process

ALONG THE SUPPLY CHAIN What Do Operations and Supply Chain Managers Do?

Operations managers are the improvement people, the realistic, hard-nosed, make-it-work, get-it-done people; the planners, coordinators, and negotiators. They perform a variety of tasks in many different types of businesses and organizations.

Tom McCarthy/Index Stock

iStockphoto

Let’s meet Claire Thielen, director of informatics at ARAMARK Healthcare; Ada Liu, division manager for Li & Fung Trading Company; and Erin Hiller, food technologist at a major chocolate manufacturer.

Claire Thielen is a health-care professional who specializes in decision support, process improvement, and organizational performance. She facilitates interdisciplinary teams as they pursue continuous quality improvement projects and analyzes methods and systems for managing information. Her projects include determining staffing patterns and workflow for computerized scheduling systems; consolidating policies, procedures, and practices for hospital mergers; developing and implementing balanced scorecards and benchmarking reports; designing clinical studies of new medication effectiveness; and conducting training sessions on process mapping and analysis. Claire Thielen improves quality, productivity, and information in the health-care industry.

© H. Mark Weidman Photography/Alamy

Ada Liu is a division manager for Li & Fung, a global sourcing company. She coordinates global production and distribution for major players in the garment industry. For one particular trouser order, she had the fabric woven in China (for their unique dyeing process), chose fasteners from Hong Kong and Korea (for their durability), and sent the raw materials to Guatemala for sewing (for their basic skills, low cost, and proximity to the United States). If problems should arise. Liu can reroute the order to one of its 7,500 suppliers in 37 countries. Ada Liu is a supply chain expert for Li & Fung.

Erin Hiller is a food technologist at a major chocolate manufacturer. She supports product, process, and cost improvement activities across various product lines in the manufacturing facilities. She undertakes, initiates, and coordinates projects for determining process capabilities, reducing waste and rework, and improving both quality and productivity. She evaluates new and emerging technologies and determines whether they would be beneficial to the product lines and manufacturing operations. Erin Hiller keeps operations up-to-date and running smoothly for making chocolate.

Sources: Claire Theilen, LinkedIn, accessed January 10, 2010; Joanne Lee-Young, “Furiously Fast Fashions.” The Industry Standard Magazine, (June 22, 2001); Job posting, http://jobview.monster.com/Food-Technologist-Confectionery-Chocolate-Experience-Job, accessed January 10, 2010 (fictional name).

Figure 1.2 Operations as the Technical Core

The four primary functional areas of a firm are marketing, finance, operations, and human resources. As shown in Figure 1.2, for most firms, operations is the technical core or “hub” of the organization, interacting with the other functional areas and suppliers to produce goods and provide services for customers. For example, to obtain monetary resources for production, operations provides finance and accounting with production and inventory data, capital budgeting requests, and capacity expansion and technology plans. Finance pays workers and suppliers, performs cost analyses, approves capital investments, and communicates requirements of shareholders and financial markets. Marketing provides operations with sales forecasts, customer orders, customer feedback, and information on promotions and product development. Operations, in turn, provides marketing with information on product or service availability, lead-time estimates, order status, and delivery schedules. For personnel needs, operations relies on human resources to recruit, train, evaluate, and compensate workers and to assist with legal issues, job design, and union activities. Outside the organization operations interacts with suppliers to order materials or services, communicate production and delivery requirements, certify quality, negotiate contracts, and finalize design specifications.

As a field of study, operations brings together many disciplines and provides an integrated view of business organizations. Operations managers are in demand in business, industry, and government. Chief operating officers (COOs) run major corporations as shown in Figure 1.3, Vice-presidents of Operations and Supply Chain Management oversee scores of departments, facilities, and employees. Typical jobs for new college graduates include business process analyst, inventory analyst, project coordinator, unit supervisor, supply chain analyst, materials manager, quality assurance specialist, production scheduler, and logistics planner. Even if you do not pursue a career in operations, you’ll be able to use the ideas you learn in this course to organize work, ensure quality, and manage processes. Regardless of your major, you can apply some aspect of operations management to your future career—as did Mark, Nicole, John, Vignesh, Margie, and Anastasia who tell their stories in Figure 1.4 and the OM Dialogues dispersed throughout the text. Let’s hear first from Mark Jackson, marketing manager for Pizza Hut.

Figure 1.3 Sample Organizational Structure

Figure 1.4 How Is Operations Relevant to My Major?

MARK JACKSON, Marketing Manager for Pizza Hut

As regional marketing manager for Pizza Hut, I’m responsible for 21 stores. It’s my job to make sure each store is operating properly and, when new products come out, to see that they are given the attention they deserve. I also coach managers and employees about their job and their relationship with the customer.

You would think that a marketing manager’s job would be concerned solely with advertising, special promotions, store signage, customer service, and the like. But we also deal with quality, forecasting, logistics, and other operational issues. Marketing and operations are almost inseparable in services. We can come out with a new product and spend mega bucks advertising it, but if the product is not made or delivered properly, all is lost.

The most important aspect of quality is consistency—so that the customer gets the same pizza at any Pizza Hut from whichever cook happens to be on shift. We have exact standards and specifications for our products, and it’s important that operating procedures be followed.

Scheduling is somewhat of a headache because of staff turnover and individual limitations on working hours. Some of that is alleviated in our new system where we allow employees to request days off up to six months in advance. They can put requests into the system when they clock in each day, and they can view upcoming schedules.

Our forecasting system keeps historical data on sales by hour and day of the week five years back. Forecasts are weighted averages of past demand—usually 60% of the past two weeks’ sales and 40% of the past six weeks’ sales. A manager can freeze the forecast and make manual adjustments, such as increasing demand during a home football game weekend or when a local festival is under way. Managers can also enter notes into the system when unusual occurrences affect demand, like a snowstorm. When the forecast is set, it generates a labor plan for the week, along with prep plans for salad, dough, breadsticks, and so forth. The labor plan just specifies the number of workers needed; it is up to the manager to do the detailed scheduling of individuals.

After quality, it’s all about speed of delivery—whether to the customer’s table or to the customer’s home. We have initiatives such as Ready for Revenue where we pre-sauce and pre-cheese in anticipation of customer orders, and Aces in Their Places where we make sure the best people are scheduled and ready to go for peak demand periods. As for delivery, we keep track of percent of deliveries under 39 minutes and percent of deliveries to promise. We found we could significantly reduce the number of drivers needed (and keep the same customer satisfaction numbers] by promising delivery within 39 minutes rather than 30. We also are more efficient now that dispatching divides our delivery areas into delivery pods and uses computerized estimates of transit time.

Now that you are aware of how operations might relate to your interests, let’s take a brief look at how the field of OM has evolved to its present state.

THE EVOLUTION OF OPERATIONS AND SUPPLY CHAIN MANAGEMENT

Although history is full of amazing production feats—the pyramids of Egypt, the Great Wall of China, the roads and aqueducts of Rome—the widespread production of consumer goods—and thus, operations management—did not begin until the Industrial Revolution in the 1700s. Prior to that time, skilled craftspersons and their apprentices fashioned goods for individual customers from studios in their own homes. Every piece was unique, hand-fitted, and made entirely by one person, a process known as craft production . Although craft production still exists today, the availability of coal, iron ore, and steam power set into motion a series of industrial inventions that revolutionized the way work was performed. Great mechanically powered machines replaced the laborer as the primary factor of production and brought workers to a central location to perform tasks under the direction of an “overseer” in a place called a “factory.” The revolution first took hold in textile mills, grain mills, metalworking, and machine-making facilities.

 Craft production:

the process of handcrafting products or services for individual customers.

Around the same time, Adam Smith’s Wealth of Nations (1776) proposed the division of labor , in which the production process was broken down into a series of small tasks, each performed by a different worker. The specialization of the workers on limited, repetitive tasks allowed them to become very proficient at those tasks and further encouraged the development of specialized machinery.

 Division of labor:

dividing a job into a series of small tasks each performed by a different worker.

The introduction of interchangeable parts by Eli Whitney (1790s) allowed the manufacture of firearms, clocks, watches, sewing machines, and other goods to shift from customized one-at-a-time production to volume production of standardized parts. This meant the factory needed a system of measurements and inspection, a standard method of production, and supervisors to check the quality of the worker’s production.

 Interchangeable parts:

the standardization of parts initially as replacement parts enabled mass production.

Advances in technology continued through the 1800s. Cost accounting and other control systems were developed, but management theory and practice were virtually nonexistent.

In the early 1900s an enterprising laborer (and later chief engineer) at Midvale Steel Works named Frederick W. Taylor approached the management of work as a science. Based on observation, measurement, and analysis, he identified the best method for performing each job. Once determined, the methods were standardized for all workers, and economic incentives were established to encourage workers to follow the standards. Taylor’s philosophy became known as scientific management . His ideas were embraced and extended by efficiency experts Frank and Lillian Gilbreth, Henry Gantt, and others. One of Taylor’s biggest advocates was Henry Ford.

 Scientific management:

the systematic analysis of work methods.

Henry Ford applied scientific management to the production of the Model T in 1913 and reduced the time required to assemble a car from a high of 728 hours to 1 ½ hours. A Model T chassis moved slowly down a conveyor belt with six workers walking alongside it, picking up parts from carefully spaced piles on the floor and fitting them to the chassis.1 The short assembly time per car allowed the Model T to be produced in high volumes, or “en masse,” yielding the name mass production .

 Mass production:

the high-volume production of a standardized product for a mass market.

American manufacturers became adept at mass production over the next 50 years and easily dominated manufacturing worldwide. The human relations movement of the 1930s, led by Elton Mayo and the Hawthorne studies, introduced the idea that worker motivation, as well as the technical aspects of work, affected productivity. Theories of motivation were developed by Frederick Herzberg, Abraham Maslow, Douglas McGregor, and others. Quantitative models and techniques spawned by the operations research groups of World War II continued to develop and were applied successfully to manufacturing and services. Computers and automation led still another upsurge in technological advancements applied to operations. These events are summarized in Table 1.1.

From the Industrial Revolution through the 1960s, the United States was the world’s greatest producer of goods and services, as well as the major source of managerial and technical expertise. But in the 1970s and 1980s, industry by industry, U.S. manufacturing superiority was challenged by lower costs and higher quality from foreign manufacturers, led by Japan. Several studies published during those years confirmed what the consumer already knew—U.S.-made products of that era were inferior and could not compete on the world market. Early rationalizations that the Japanese success in manufacturing was a cultural phenomenon were disproved by the successes of Japanese-owned plants in the United States, such as the Matsushita purchase of a failing Quasar television plant in Chicago from Motorola. Part of the purchase contract specified that Matsushita had to retain the entire hourly workforce of 1000 persons. After only two years, with the identical workers, half the management staff, and little or no capital investment, Matsushita doubled production, cut assembly repairs from 130% to 6%, and reduced warranty costs from $16 million a year to $2 million a year. You can bet Motorola took notice, as did the rest of U.S. industry.

The quality revolution brought with it a realization that production should be tied to consumer demand. Product proliferation, shortened product lifecycles, shortened product development times, changes in technology, more customized products, and segmented markets did not fit mass production assumptions. Using a concept known as just-in-time, Toyota changed the rules of production from mass production to lean production , a system that prizes flexibility (rather than efficiency) and quality (rather than quantity).

 Quality revolution:

an emphasis on quality and the strategic role of operations.

 Lean production:

an adaptation of mass production that prizes quality and flexibility.

The renewed emphasis on quality and the strategic importance of operations made some U.S. companies competitive again. Others continued to stagnate, buoyed temporarily by the expanding economies of the Internet era and globalization. Productivity soared as return on investment in information technology finally came to fruition. New types of businesses and business models emerged, such as Amazon, Google, and eBay, and companies used the Internet to connect with customers and suppliers around the world. The inflated expectations of the dot-com era came to an end and, coupled with the terrorist attacks of 9-11 and their aftermath, brought many companies back to reality, searching for ways to cut costs and survive in a global economy. They found relief in the emerging economies of China and India, and began accelerating the outsourcing of not only goods production, but services, such as information technology, call centers, and other business processes. The outsourcing of business processes brought with it a new awareness of business-to-business (B2B) services and the need for viewing services as a science.

Table 1.1 Historical Events in Operations Management

Era

Events/Concepts

Dates

Originator

Industrial Revolution

Steam engine

1769

James Walt

Division of labor

1776

Adam Smith

Interchangeable parts

1790

Eli Whitney

Scientific Management

Principles of scientific management

1911

Frederick W. Taylor

Time and motion studies

1911

Frank and Lillian Gilbreth

Activity scheduling chart

1912

Henry Gantt

Moving assembly line

1913

Henry Ford

Human Relations

Hawthorne studies

1930

Elton Mayo

Motivation theories

1940s

Abraham Maslow

1950s

Frederick Herzberg

1960s

Douglas McGregor

Operations Research

Linear programming

1947

George Dantzig

Digital computer

1951

Remington Rand

Stimulation, waiting line theory, decision theory

1950s

Operations research groups

PERT/CPM

1960s

MRP, EDI, EFT, CIM

1970s

Joseph Orlicky, IBM, and others

Quality Revolution

JIT (just-in-time)

1970s

Taiichi Ohno (Toyota)

TQM (total quality management)

1980s

W. Edwards Deming, Joseph Juran

Strategy and operations

Wickham Skinner, Robert Hayes

Reengineering

1990s

Michael Hammer, James Champy

Six Sigma

1990s

GE, Motorola

Internet Revolution

Internet, WWW

1990s

ARPANET, Tim Berners-Lee

ERP, supply chain management

SAP, i2 Technologies, ORACLE, DELL

E-commerce

2000s

Amazon, Yahoo, eBay, Google and others

Globalization

World Trade Organization

1990s

China, India

European Union

2000s

Emerging economics

Global supply chains

Outsourcing

Service Science

Green Revolution

Global warming

Today

Numerous

An Inconvenient Truth

scientists, statesmen, goverments

KYOTO

• Internet Exercises

With more and more activities taking place outside the enterprise in factories, distribution centers, offices and stores overseas, managers needed to develop skills in coordinating operations across a global supply chain. The field of supply chain management was born to manage the flow of information, products, and services across a network of customers, enterprises, and supply chain partners. In Figure 1.1, we depicted operations as a transformation process. Extending that analogy in Figure 1.5, supply chain management concentrates on the input and output sides of transformation processes. Increasingly, however, as the transformation process is performed by suppliers who may be located around the world, the supply chain manager is also concerned with the timeliness, quality, and legalities of the supplier’s operations.

 Supply chain management:

managing the flow of information, products, and services across a network of customers, enterprises, and suppliers.

Figure 1.5 Supply Chain Management

The era of globalization was in full swing in 2008 when a financial crisis brought on by risky loans, inflated expectations, and unsavory financial practices brought the global economy to a standstill. Operations management practices based on assumptions of growth had to be reevaluated for declining markets and resources. At the same time, concerns about global warming (worldwide) and health-care operations (domestically) ramped up investment and innovation in those fields.

It is likely that the next era in the evolution of OM will be the Green Revolution, which some companies and industries are embracing wholeheartedly, while others are hesitant to accept. We discuss green initiatives at length later in the text. The next section presents a brief discussion of globalization.

The Green Revolution is the next era in OM.

1 David Halberstam, The Reckoning (New York: William Morrow, 1986), pp. 79-81.

GLOBALIZATION

Two thirds of today’s businesses operate globally through global markets, global operations, global financing, and global supply chains. Globalization can take the form of selling in foreign markets, producing in foreign lands, purchasing from foreign suppliers, or partnering with foreign firms. Companies “go global” to take advantage of favorable costs, to gain access to international markets, to be more responsive to changes in demand, to build reliable sources of supply, and to keep abreast of the latest trends and technologies.

• Internet Exercises

Falling trade barriers and the Internet paved the way for globalization. The World Trade Organization (WTO) has opened up the heavily protected industries of agriculture, textiles, and telecommunications, and extended the scope of international trade rules to cover services, as well as goods. The European Union (EU) required that strict quality and environmental standards be met before companies can do business with member countries. Strategic alliances, joint ventures, licensing arrangements, research consortia, supplier partnerships, and direct marketing agreements among global partners have proliferated.

Figure 1.6 Hourly Compensation Costs for Production Workers [in U.S. Dollars]

Source: Bureau of Labor Statistics, International Comparisons of Hourly Compensation Costs in Manufacturing 2007. Washington, DC: March 26, 2009, p. 23.

Figure 1.6 shows the hourly wage rates in U.S. dollars for production workers in nine countries. Wage rates in Norway are the highest at $48.56 an hour, with comparable rates in Denmark. The United States and Japan pay workers $24.59 and $19.75 an hour, respectively, while China and Sri Lanka exhibit the lowest wage rates of $0.81 and $0.61 an hour. To put the wage differentials in perspective, a U.S. worker receives roughly the equivalent sum of money for working one hour as a Sri Lankan worker earns in a 40-hour week ($24.40). China’s wage rate is $32.40 a week. Not surprisingly, much of the world has moved its manufacturing to Asia, in particular to the large and populous country of China.

THE CHINA FACTOR

China accounts for 20% of the world’s population and is the world’s largest manufacturer, employing more production workers than the Unites States, United Kingdom, Germany, Japan, Italy, Canada, and France combined. Its 1.3 billion people represent not only an immense labor market, but a huge consumer market as well. As China’s industrial base multiplies, so does its need for machinery and basic materials, and as more companies move to China, so do their suppliers and their supplier’s suppliers. Although initially the preferred location for the production of low-tech goods such as toys, textiles, and furniture, China has become a strategic manufacturing base for nearly every industry worldwide.

The scale of manufacturing in China is mind-boggling. For example, Foxconn (the trade name of Taiwan’s Hon Hai Precision Industry Company) has two enormous industrial complexes in mainland China. The Guangdong Province site employs and houses approximately 270,000 workers, with its own dormitories, restaurants, hospital, police force, chicken farm, and soccer stadium. There are 40 separate production facilities “on campus,” each dedicated to one of its major customers such as Apple, Dell, Motorola, Sony, Nintendo, and HP. Foxconn is the world’s largest electronics manufacturer and China’s largest exporter. It also represents a shorter supply chain because it makes components as well as assembles final products. Currently. Foxconn is making a bid to enter the retail market in China and is expanding production into Mexico to better serve the U.S. market.

Figure 1.7 shows the gross domestic product (GDP) per capita for the United State and the largest emerging economies. China’s GDP per capita is about 12% of the U.S. level. However, as shown in Figure 1.8, China’s trade as a percent of GDP is almost triple that of the United States. Having a producer economy and healthy trade balance is an advantage in a global slump. China has problems with pollution, quality, and corruption but is steering its way out of the recession and entering into what it calls “the decade of China.”

Figure 1.7 GDP per Capita

Source: U.S. Department of Labor, A Chartbook of International Labor Comparisons, Washington, DC: March 2009, p. 39.

Figure 1.8 Trade in Goods as a Percent of GDP

Source: U.S. Department of Labor, A Chartbook of International Labor Comparisons, Washington, DC: March 2009, p. 43.

With over 18 million people, 5,000 skyscrapers, and the world’s largest deep sea container port, Shanghai is China’s largest city, and the financial heart of the burgeoning economy.

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While China’s manufacturing prowess may seem unbeatable, many companies have sought to reduce the risk of sourcing from only one country by expanding trade relationships with other low-cost countries, particularly India, Bangladesh, Pakistan, Vietnam, and to a lesser extent, Indonesia and Eastern Europe. Because of its proximity to the United States, Mexico and several Central American countries are popular sources for shorter lifecycle products.

Whether or not a company decides to do business with China, every company must consider the implications of the “China factor” on their profitability and competitive position. Managing global operations and quality in a far-reaching supply chain is an added challenge for operations and supply chain managers. Keeping domestic production competitive is an even bigger challenge. The New Balance “Along the Supply Chain” box shows how one company has met that challenge.

ALONG THE SUPPLY CHAIN The Balancing Act at New Balance

Boston-based New Balance Corporation is a nonconformist in many ways. It refuses to hire superstars to endorse its product, it shuns style in favor of performance, it holds fast to its emphasis on running shoes, and it is committed to manufacturing at least some of its product in the United States. New Balance currently has five factories in the United States, the last of its kind of makers of athletic shoes. It also has wholly-owned subsidiaries in 13 countries and a number of licensees, joint ventures, and distributors all over the globe.

Of its domestic production, owner Jim Davis says “it’s part of the company’s culture to design and manufacture here.” Producing close to their customers also allows quick turnarounds on new designs and order fulfillment. At New Balance’s factory in Norridgewock, Maine, well-trained employees make $14 an hour working in small teams performing half-a-dozen different jobs and switching tasks every few minutes. They operate computerized sewing equipment and automated stitchers that allow one person to do the work of 20.

New Balance is able to remain competitive at home by creatively adapting new technologies to shoemaking and constantly training their employees in teamwork and technical skills. Employees start with 22 hours of classroom training on teamwork and get constant training on the factory floor. They work in teams of five or six, sharing tasks and helping one another to make sure everything gets done. Many of the ideas for process improvement come from shop floor workers.

Says Davis, “In Asia, their labor is so inexpensive that they waste it. Ours is so dear that we come up with techniques to be very efficient.” Borrowing technology from apparel manufacturers, New Balance purchased 70 see-and-sew machines for $100,000 each and set up on-site machine shops to grind the 30 templates needed for a typical shoe. Making each set of templates takes about a week, but they allow workers to produce a pair of shoes in 24 minutes, versus 3 hours in China. Labor cost per shoe is $4 an hour in Maine compared to $1.30 in China. The $2.70 labor cost differential is a manageable 4% of the $70 selling price.

Staying involved with the manufacturing process helps New Balance develop better designs, improve quality, and innovate their processes, capabilities the company would lose if it outsourced all of its production. But staying in one country is not advantageous either, especially when a 10% market share of athletic shoes in China would be the equivalent of 100 million customers. New Balance relaunched a China strategy to prepare for the 2008 Beijing Olympic Games. To sell in China, it is necessary to produce there.

The company’s earlier foray into outsourcing on the mainland was not a good experience. In one of the most notorious cases of counterfeiting. New Balance’s own supplier flooded the market with unauthorized New Balance footwear and continued to do so even after the contact was canceled. New Balance spent millions of dollars in legal fees and lost millions more in sales without a satisfactory resolution to the problem. Today, the company has reduced the number of Asian suppliers and monitors them more closely. New Balance continues the balancing act between domestic and foreign production, and strives to produce closer to its markets, wherever in the world they might be.

Think about the differences between New Balance and Nike. How has each company chosen to compete? What types of shoes might New Balance want to make in its own factories? What types of shoes might it outsource?

Sources: Gabriel Kahn. “A Sneaker Maker Says China Partner Became Its Rival,” The Wall Street Journal (December 19, 2002), pp. A1. A8; “New Balance Shoots for Second in Local Market,” China Daily (November 13, 2003); “A Balancing Act,” Business and Industry (February 11, 2004), p. 22; Anne Thompson, “Companies Buck the Outsorcing Trend,” NBC News (May 12, 2006); New Balance Web site, http://www.newbalance.com/usa/

INDIA, THE WORLD’S SERVICE PROVIDER

Although we may think of globalization more in the context of products than services, there has been a dramatic rise in the global outsourcing of services as well. It began with back-office work such as accounting, claims processing, and computer programming. Now it extends to call centers, brokerage firms, financial analysis, research and development, engineering, medical diagnosis, architectural design, and more advanced work in information technology. As much as China is known as the world’s manufacturer, India is renowned for its export of services.

India has an enormous resource of highly skilled engineers, scientists, and technically trained workers available at less than half the cost of those located in developed countries.

In 2009, India exported $47 billion in IT services, a number that is expected to reach $200 billion by 2020. Indian companies, such as WIPRO, Infosys, and Tata Consultancy Services, are world leaders in software development and business processes, with plenty of room to expand. Some of that expansion is taking place in client countries, such as the United States. At the same time, multinational companies are setting up shop and expanding in India. IBM, the largest multinational company in India, employs 70,000 IT workers and is hiring an additional 5,000 workers in 2010.

China and India are not the only popular outsourcing venues. Increased outsourcing competition comes from other low-cost countries such as the Philippines, Vietnam, Malaysia, Mexico, Brazil, and Eastern Europe. In addition, many companies are bringing their supply chain closer to home, a concept known as near-sourcing.

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All this means that the dynamic nature of global competition is accelerating, and companies need to fight harder to remain competitive. Operations and supply chain managers are an important part of that fight, whether it’s maintaining overseas operations, coordinating supply chains, negotiating contracts, or monitoring quality. In the next section, we explore the concepts of competitiveness, and its surrogate, productivity.

PRODUCTIVITY AND COMPETITIVENESS

A global marketplace for products and services means more customers and more intense competition. In the broadest terms, we speak of competitiveness in reference to other countries rather than to other companies. That’s because how effectively a nation competes in the global marketplace, affects the economic success of the nation and the quality of life for its citizens. The OECD (Organization for Economic Cooperation and Development) defines competitiveness as “the degree to which a nation can produce goods and services that meet the test of international markets while simultaneously maintaining or expanding the real incomes of its citizens.” The most common measure of competitiveness is productivity. Increases in productivity allow wages to grow without producing inflation, thus raising the standard of living. Productivity growth also represents how quickly an economy can expand its capacity to supply goods and services.

 Competitiveness:

the degree to which a nation can produce goods and services that meet the test of international markets.

Productivity is calculated by dividing units of output by units of input.

 Productivity:

the ratio of output to input.

Output can be expressed in units or dollars in a variety of scenarios, such as sales made, products produced, customers served, meals delivered, or calls answered. Single-factor productivity compares output to individual inputs, such as labor hours, investment in equipment, material usage, or square footage. Multifactor productivity relates output to a combination of inputs, such as (labor + capital) or (labor + capital + energy + materials). Capital can include the value of equipment, facilities, inventory, and land. Total factor productivity compares the total quantity of goods and services produced with all the inputs used to produce them. These productivity formulas are summarized in Table 1.2.

Table 1.2 Measures of Productivity

Example 1.1 Calculating Productivity

Osborne Industries is compiling the monthly productivity report for its Board of Directors. From the following data, calculate (a) labor productivity, (b) machine productivity, and (c) the multifactor productivity of dollars spent on labor, machine, materials, and energy. The average labor rate is $15 an hour, and the average machine usage rate is $10 an hour.

Units produced

100,000

Labor hours

10,000

Machine hours

5,000

Cost of materials

$35,000

Cost of energy

$15,000

Solution

(a) 

(b) 

(c) 

The Excel solution to this problem is shown in Exhibit 1.1.

• Animated Demo Problem

Exhibit 1.1 Osborne Industries

• Excel File

Figure 1.9 Productivity Growth, 2008 (output per Labor hours)

Source: U.S. Bureau of Labor Statistics. International Comparisons of Manufacturing Productivity and Unit Labor Costs—2008, Washington, DC: October 22, 2009, p. 3.

The most common input in productivity calculations is labor hours. Labor is an easily identified input to virtually every production process. Productivity is a relative measure. Thus, productivity statistics provided in government reports typically measure percent changes in productivity from month to month, quarter to quarter, year to year, or over a number of years.

Productivity statistics can be misleading. Examining the formula for productivity, output/input, it becomes apparent that productivity can be increased in different ways. For example, a country or firm may increase productivity by decreasing input faster than output. Thus, although the company may be retrenching, its productivity is increasing. Seldom is this avenue for increasing productivity sustainable.

Figure 1.9 shows the growth rate in productivity for select countries for 2008, a year of global recession. Only five countries exhibited positive growth rates, led by Korea and the United States with increases of 1.2%. Examining the outputs and inputs more closely in Figure 1.10, we find that Korea and the United States achieved those increases in very different ways. Korea saw small increases in both its output and the input required to produce that output. The recession in the United States caused a decrease in both output and input; however, the cut in input (i.e., labor hours) was more severe, thereby producing a slight increase in productivity.

Figure 1.10 Percent Change in Input and Output, 2008

Source: U.S. Bureau of Labor Statistics. International Comparisons of Manufacturing Productivity and Unit Labor Costs—2008, Washington, DC. October 22, 2009, p. 3.

Productivity statistics also assume that if more input were available, output would increase at the same rate. This may not be true, as there may be limits to output other than those on which the productivity calculations are based. Furthermore, productivity emphasizes output produced, not output sold. If products produced are not sold, inventories pile up and increases in output can actually accelerate a company’s decline.

As the business world becomes more competitive, firms must find their own path to sustainable competitive advantage. Effectively managed operations are important to a firm’s competitiveness. How a firm chooses to compete in the marketplace is the subject of the next section: Strategy and Operations.

STRATEGY AND OPERATIONS

Strategy is how the mission of a company is accomplished. It unites an organization, provides consistency in decisions, and keeps the organization moving in the right direction. Operations and supply chain management play an important role in corporate strategy.

 Strategy:

provides direction for achieving a mission.

As shown in Figure 1.11, the strategic planning process involves a hierarchy of decisions. Senior management, with input and participation from different levels of the organization, develops a corporate strategic plan in concurrence with the firm’s mission and vision, customer requirements (voice of the customer), and business conditions (voice of the business). The strategic plan focuses on the gap between the firm’s vision and its current position. It identifies and prioritizes what needs to be done to close the gap, and it provides direction for formulating strategies in the functional areas of the firm, such as marketing, operations, and finance. It is important that strategy in each of the functional areas be internally consistent as well as consistent with the firm’s overall strategy.

Strategy formulation consists of five basic steps:

1. Defining a primary task

2. Assessing core competencies

3. Determining order winners and order qualifiers

4. Positioning the firm

5. Deploying the strategy

PRIMARY TASK

The primary task represents the purpose of a firm—what the firm is in the business of doing. It also determines the competitive arena. As such, the primary task should not be defined too narrowly. For example, Norfolk Southern Railways is in the business of transportation, not railroads. Paramount is in the business of communication, not making movies. Amazon’s business is providing the fastest, easiest, and most enjoyable shopping experience, while Disney’s is making people happy! The primary task is usually expressed in a firm’s mission statement.

 Primary task:

what the firm is in the business of doing.

Figure 1.11 Strategic Planning