Chapter 7: Operations Management and Quality

What Does Operations Mean Today?

Although you’re not always aware of it, as a customer you are constantly involved
in business activities that provide goods and services to customers. You wake up to
the sound of your favorite radio station, and on your bus ride to work or school, you
are messaging on a smart phone. Your instructors, the bus driver, the messaging
provider, and the morning radio announcer all work in service operations (or
service production) activities producing intangible and tangible products, such

as entertainment, transportation, and education. They provide intangible and tangible

service products, such as entertainment, transportation, education, and
communications services. Firms that make only tangible products—radios, smart
phones, buses, textbooks—are engaged in activities for goods operations (or goods
production).

The term operations (or production) refer to all the activities involved in making
products—goods and services—for customers. In modern societies, much of what
we need or want, from health care to fast food, is produced by service operations.
As a rule, managers in the service sector give more consideration to the human
element in operations (as opposed to the equipment or technology involved), because
success or failure depends often on provider-customer contact. As we saw with
airlines in the opening story, employees who deal directly with customers affect
customer feelings about the service. As we will see, a key difference between goods
and services operations is the customer’s involvement in service operations.
Creating Value Through Operations

Both services and goods provide consumers with utility, which is the ability of a
product to satisfy a human want or need, thus adding customer value—in terms of
form, time, and place. Form utility is created merely through transforming raw
materials into finished goods. Time utility is created when marketers make products
available when consumers want them. Place utility is created when products are
made available where they are convenient for consumers.

Creating a product that customers value is no accident; it results from organized

effort. Operations (production) management is the systematic direction and
control of the activities that transform resources into finished services and goods that
create value for and provide benefits to customers. In overseeing production,
operations (production) managers are responsible for ensuring that operations
activities create what customers want and need.

As Figure 7.3 shows, Operations (Production) Managers draw up plans to

transform resources into products. First, they bring together basic resources:
knowledge, physical materials, information, equipment, the customer, and human
skills. Then, they put them to effective use in a facility where the service is provided
or the physical good is produced. As demand for a product increases, operations
managers schedule and control work to produce the required amount. Finally, they
control costs, quality levels, inventory, and facilities and equipment. In some
businesses, often in small startup firms such as sole proprietorships, the operations
manager is one person. Typically, however, different employees work together to
complete these different responsibilities.
A. Differences Between Service and Goods Manufacturing

Both service and manufacturing operations transform raw materials into finished
products. In service operations, however, the raw materials, or inputs, are not things
like glass or steel. These service inputs are people who have either unsatisfied needs
or possessions needing care or alteration. In service operations, finished products or
outputs are people with needs met and possessions serviced.

There are several obvious differences between service and manufacturing

operations. Four aspects of service operations can make service production more
complicated than simple goods production: (1) interacting with customers, (2) the
intangible and unstorable nature of some services, (3) the customer’s presence in the
process, and (4) service quality considerations.

1. Interacting with Customers. Manufacturing operations focus on physical

goods, whereas service operations are a combination of goods and services.
 Manufacturing operations emphasize outcomes in terms of physical goods,
like a new jacket. But the products of most service operations are really
combinations of goods and services—both making a pizza and delivering
(serving) it. Service workers need different skills. For example, gas company
employees may need strong interpersonal skills to calm frightened customers
who have reported gas leaks. In contrast, factory workers who install gas pipes
in manufactured homes without any customer contact don’t need such skills.
2. Services Can Be Intangible and Unstorable. Intangibility refers to the
untouchable value consumers receive in the form of pleasure, gratification, or
a feeling of safety; unstorability refers to the idea that if a service isn’t used
when available, it’s usually wasted.
3. Customers’ Presence in the Operations Process. Service operations often
acknowledge the customer as part of the service transaction itself, since
service operations transform customers or their possessions. Because service
operations transform customers or their possessions, the customer is often
present in the operations process. To get a haircut, for example, most of us
have to go to a hair salon. As participants in the operations process, customers
can affect it. As a customer, you expect the salon to be conveniently located
(place utility), to be open for business at convenient times (time utility), to
provide safe and comfortable facilities, and to offer high-quality grooming
(form utility) at reasonable prices (value for money spent). Accordingly, the
manager sets hours of operation, available services, and an appropriate
number of employees to meet her customer requirements. But what happens
if a customer, scheduled for only a haircut, also asks for additional services,
such as highlights or a shave when he or she arrives? In this case, the service
provider must quickly adjust the service activities to provide customer
satisfaction. High customer contact has the potential to affect the process
 significantly. The manufacturers who produce the salon’s scissors, on the
other hand, don’t have to worry if a customer makes a last-minute change in
demands.
4. Intangibles Count for Service Quality. Customers use different measures to
judge services and goods because services include intangibles, not just
physical objects. Quality of work and quality of service are not necessarily the
same thing.

B. Operations Processes

An operations process is a set of methods and technologies used in the production

of goods and services.

1. Goods Production Processes: Make-to-Order versus Make-to-Stock

Processes. A make-to-order operation makes one-of-a-kind products,
according to customer specifications. A make-to-stock operation produces
standardized products in large quantities. The production processes are quite
different for the two settings, including procedures for designing gowns;
planning for materials purchases; equipment and work methods for cutting,
sewing, and assembling gowns; and employee skills for production.
2. Service Production Processes: Extent of Customer Contact. In high-
contact systems, such as a city metro system, the customer must be a part of
the service. Managers must therefore be concerned with issues of cleanliness,
punctuality, and usability of ticket kiosks. In low-contact systems, such as a
mail sorting office, customers do not have to be present while the service
transaction is being performed.
Business Strategy as the Driver of Operations

Companies go about selecting the kind of production that is best for their business
based on the firm’s larger business strategy. They aim to adopt the kind of production
that achieves that strategy in the most efficient way possible.

A. The Many Faces of Production Operations

Every company identifies a strategy that it can use for winning customer orders;
such strategies often include quality, lower prices, flexibility, and dependability.

1. Business Strategy Determines Operations Capabilities. Operations

capability refers to the activity or process that production must do especially well
to outperform the competition. Successful firms design their operations to
support the company’s business strategy. In other words, managers adjust
production operations to support the firms’ target markets. Because our four firms
use different business strategies, we should expect to see differences in their
operations, too. The top-priority operations capability (production capability)—
the special ability that production does especially well to outperform the
competition—is listed for each firm in Table 7.2, along with key operations
characteristics for implementing that capability. Each company’s operations
capability matches up with its business strategy so that the firm’s activities—
from top to bottom—are focused in a particular direction.

For example, because Toyota’s top priority focuses on quality, its operations, the
resource inputs for production, the transformation activities, and the outputs from
production are devoted first and foremost to that characteristic. Its car designs
and production processes emphasize appearance, reliable performance, and
desirable features at a reasonable price. All production processes, equipment, and
training are designed to build better cars.
 2. Expanding into Additional Capabilities. Over time, excellent firms
learn how to achieve more than just one competence.

Operations Planning

Managers from many departments contribute to the firm’s decisions about

operations management; this is a process of logical steps upon which the success of
the firm depends. The overall business plan provides guidance for long-term
operations plans.
A. Capacity Planning

The amount of a product that a company can produce under normal working
conditions is its capacity. A firm’s capacity depends on how many people it
employs and the number and size of its facilities. Operations wants to match
capacity to demand.

B. Location Planning

Facility location affects production costs and flexibility. Depending on the site of
its facility, a company may either be capable of producing a low-cost product or
 may find itself at a relative cost disadvantage. Goods production can be located
where the economics work most favorably; services, though, must be located near
customers.

C. Layout Planning

Layout, the physical location or floor plan, determines whether firms can respond
quickly and efficiently to customer requests for additional or different products
or find themselves unable to match competitors’ speed and convenience.

1. Process Layouts. In a process layout, equipment and people are grouped

according to function; this type of layout works especially well in make-to-
order shops due to their flexibility advantage.
2. Product Layouts. In a product layout, one type of product is produced in a
fixed sequence and is arranged according to its production requirements. It is
efficient for large-volume, make-to-stock operations that mass-produce
products quickly, often using an assembly line which is a same-steps layout
in which a product moves step by step through a plant on conveyor belts or
other equipment until it is completed. While advantageous for large-volume
production, a disadvantage is inflexibility when changes are required.
 3. Fixed-Position Layouts. A fixed-position layout is necessary when, because
of size, shape, or any other reason, managers cannot move the service to
another production facility. In fixed-position layouts the product or client
remains at one location; equipment, materials, and human skills are moved to
that location, as needed, to perform the service or to build the product. While
recovering at home from a knee replacement, for example, physical
rehabilitation specialists come to the patient’s home for rehab services. When
home plumbing goes bad or the roof leaks, repair services are brought to that
home—at its fixed position—where the services are performed. Such layouts
are used for building huge ships that can’t be moved, for constructing
buildings, and for agricultural operations—plowing, fertilizing, and
harvesting—at farm sites.

D. Quality Planning

Any complete operations plan must ensure that products are produced to meet the
firm’s and customers’ standards of quality—the combination of characteristics of a
product or service that bear on its ability to satisfy stated or implied needs.
Performance refers to how well the product does what it is supposed to do;
consistency refers to the sameness of product quality from unit to unit.

E. Methods Planning

In operations systems, methods improvement refers to methods implemented to

reduce waste and inefficiency.

1. Improving Process Flows. A process flowchart is helpful in identifying the

sequence of production activities, movements of materials, organizing and
recording information and work performed at each stage of the process.

2. Improving Customer Service. Customer service can be improved at various

stages along the process flowchart.
Operations Scheduling

Operations scheduling involves developing timetables for acquiring the resources

needed for production. Continuing with the flow of activities in Figure 7.4, once
managers and their teams have determined the operations plans, they then develop
timetables for implementing the plans. This aspect of operations, called operations
scheduling, identifies times when specific activities will occur. In this section we
consider four general kinds of schedules. (1) The master schedule is “the game plan”
for deciding the volume of upcoming activities for months ahead. (2) Detailed
schedules show day-to-day activities that will occur in production. (3) Staff
schedules identify who and how many employees will be working, and when. (4)
Finally, project schedules provide coordination for completing large-scale projects.

A. The Master Production Schedule

A top-level master production schedule shows which products will be produced and
when, in upcoming time periods. Also, it provides information for planning on how
many people the company will have to hire and train, planning for purchases of food
products and the financing needed for those purchases, and planning for construction
requirements of new stores.

B. Detailed Schedules

A detailed schedule indicates daily work assignments with start and stop times for
assigned jobs at each workstation. Managers must assign start and stop times, and
employees need scheduled work assignments daily, not just weekly. Detailed short-
term schedules allow managers to use customer orders and information about
equipment status to update sizes and the variety of coils to be made each day.

C. Staff Schedules and Computer-Based Scheduling

Staff schedules specify assigned working times in upcoming days for each
employee on each work shift, and considers employees’ needs and the company’s
efficiency and costs, including the ebbs and flows of demand for production.
Computer-based scheduling can handle multi-shift activities for many
employees—both part-time and full-time—accommodating vacation times,
holiday adjustments, and daily adjustments in staffing for unplanned absences.
D. Project Scheduling

1. The Gantt Graphical Method: Named after its developer, Henry Gantt, a
Gantt chart breaks down large projects into steps to be performed and
specifies the time required to perform each one.

2. Project Scheduling with PERT charts break down large projects into steps
to be performed and specify the time required to perform each one; The
Program Evaluation and Review Technique (PERT) provides even more
information for controlling the progress of large projects. Also, shows the
necessary sequence among activities, from start to finish, and identifies the
critical path, the most time-consuming set of activities, for completing the
project. Figure 7.12 shows a PERT chart for renovating the college classroom.
The project’s nine activities and the times required to complete them are
identified. Each activity is represented by an arrow. The arrows are positioned
to show the required sequence for performing the activities. For example,
chairs and tables can’t be returned to the classroom (H) until after they’ve been
reworked (G) and after new floor tiles are installed (F). Accordingly, the
diagram shows arrows for G and F coming before activity H. Similarly,
funding approval (A) has to occur before anything else can get started.

The critical path is informative because it reveals the most time-consuming

path for project completion, and for most projects, speed of completion is vital.
The critical path for classroom renovation consists of activities A, B, D, G, H,
and I, requiring 9.5 weeks. It’s critical because a delay in completing any of
those activities will cause corresponding lateness beyond the planned
completion time (9.5 weeks after startup). Project managers will watch those
activities and, if potential delays arise, take special action—by reassigning
workers and equipment—to speed up late activities and stay on schedule.
Operations Control

Operations control requires managers to monitor performance by comparing

results with detailed plans and schedules. If employees do not meet schedules or
quality standards, managers can take corrective action. Follow-up, checking to
ensure that production decisions are being implemented, is a key and ongoing facet
of operations. Operations control includes materials management and quality
control. Both activities ensure that schedules are met and products delivered, both
in quantity and in quality.

A. Materials Management

Materials management is the process by which managers plan, organize, and

control the flow of materials from sources of supply through distribution of finished
goods.
Materials Management Activities for Physical Goods: Once a product has been
designed, successful materials flows depend on five activities:

• Supplier selection is the process of finding and choosing suppliers of services

and materials. This step includes evaluating potential suppliers, negotiating
terms of service, and maintaining positive buyer–seller relationships.

• Purchasing (sometimes called procurement) is the acquisition of all the raw

materials and services that a company needs to produce its products. Most
large firms have purchasing departments to buy proper services and materials
in the amounts needed.

• Transportation is the means of transporting resources to the producer and

finished goods to customers.

• Warehousing is the storage of both incoming materials for production and

finished goods for distribution to customers.

• Inventory control includes the receiving, storing, handling, and counting of all
raw materials, partly finished goods, and finished goods. It ensures that
enough materials inventories are available to meet production schedules,
while at the same time avoiding expensive excess inventories.

Lean Production Systems: Just-in-Time Operations

Lean production systems are designed for smooth production flows that avoid
inefficiencies, eliminate unnecessary inventories, and continuously improve
production processes. Just-in-time (JIT) production, a type of lean system,
brings together all needed materials at the precise moment they are required for
 each production stage, not before, thus, creating fast and efficient responses to
customer orders.

Inventory Management is Crucial for Producing Services

For many service firms, too, the materials stakes are high. The most important
“inventory” used for many high-contact services is not physical goods but exists in
the form of information about service product offerings, clients, their interests,
needs, activities, and even their plans for interactions with other clients.

B. Quality Control

Quality control means taking action to ensure that operations produce products that
meet specific quality standards.

Quality Improvement and Total Quality Management

It is not enough to control quality by inspecting products and monitoring service

operations as they occur. Businesses must also consider building quality into
products and services.

A. The Quality-Productivity Connection

It’s no secret that quality and productivity are watchwords in today’s competitive
environment. Productivity is a measure of economic performance: It compares how
much we produce with the resources we use to produce it. The more we can produce
while using fewer resources, the more productivity grows and the more everyone
benefits. Productivity refers both to the quantity and quality of what is produced.
At the national level, the most common measure is called labor productivity, because
it uses the amount of labor worked as the resource to compare against the benefits,
the country’s GDP, resulting from using that resource:

This equation illustrates the general idea of productivity. We prefer the focus on
labor, rather than on other resources (such as capital or energy), because most
countries keep accurate records on employment and hours worked. Thus, national
labor productivity can be used for measuring year-to-year changes and to compare
productivities with other countries.

B. Managing for Quality

Total Quality Management (TQM) includes all of the activities necessary for
getting quality goods and services into the marketplace; this process involves all
parts of the business, including customers, suppliers, and employees. To bring all
the interests of the stakeholders together, TQM involves evaluating costs of poor
quality, identifying the sources causing unsatisfactory quality, assigning
responsibility for corrections, and ensuring that those responsible take steps for
improving quality.

1. The Cost of Poor Quality

Producers of goods and services suffer financial distress from poor-quality

service or products.
 2. Quality Ownership: Taking Responsibility for Quality. With TQM,
employees and suppliers ultimately accept quality ownership—the idea that
quality belongs to each person who creates it while performing a job.

C. Tools for TQM

Hundreds of tools have proven useful for quality improvement, ranging from
statistical analysis of production data, to satisfaction surveys of customers, to
competitive product analysis—a process by which a company analyzes a
competitor’s products to identify desirable improvements. Five of the most
commonly used tools for TQM are:

1. Value-Added Analysis. Value-added analysis refers to the evaluation of all

work activities, material flows, and paperwork to determine the value that they
add for customers.

2. Quality Improvement Teams. Quality improvement teams are groups of

employees from various work areas who meet regularly to define, analyze,
and solve common production problems with the goal to improve both their
own work methods and the products they make.

3. Getting Closer to the Customer. Customers are the driving force for all
business activity; the most successful firms keep close to their customers and
know what they want in the products they consume. Improvement projects are
undertaken for both external and internal customers. Internal customers exist
wherever one employee or activity relies on others in the firm.

4. The ISO Series. ISO 9000 is a certification program attesting that a firm or
laboratory has met the quality-management requirements set by the
International Organization for Standardization. The ISO 14000 program
 certifies improvements in environmental performance. It requires a firm to
develop an environmental management system: a plan documenting how the
company has acted to improve its performance in using resources and in
managing pollution. The plan must not only identify hazardous wastes the
firm expects to create, but also stipulate the plans for treatment and disposal
of those wastes.

5. Business Process Reengineering. Business process reengineering focuses on

productivity and quality and entails rethinking each step in a process by
starting over from scratch. Reengineering involves the redesign of business
processes to achieve improvements in cost, quality, service, and speed.

Adding Value Through Supply Chains

A supply chain (or value chain) for any product is the flow of information,
materials, and services that starts with raw-materials suppliers and continues through
other stages in the network of firms until the product reaches the end customer.

A. The Supply Chain Strategy

Supply chain strategy is based on the idea that members of the chain, working as
a coordinated unit, will gain competitive advantage.
 1. Supply Chain Management. Supply chain management (SCM) looks at the
supply chain as a whole in order to improve the overall flow through a system
composed of companies working together. Each of the chain’s members gains
competitive advantage in this situation.

2. Reengineering Supply Chains for Better Results. The results often include
lower costs, faster service, and the coordination of flows of information and
materials.

B. Outsourcing and Global Supply Chains

Outsourcing is the strategy of paying suppliers and distributors to perform certain

business processes or to provide needed materials or services. Global outsourcing
creates new operations jobs for supply chain management and, sometimes, the need
for more or different types of employee training.