Operations and Supply Management: A Critical Responsibility of Every Manager

Operations and Supply Management: A Critical Responsibility of Every Manager
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If you have an interest in becoming a great manager, the topics in this book are important for your achieving this goal. Whether the economy is booming or in a recession, delivering a firm's goods and services in the most effective manner is critical to its survival. And if you think this book is just about manufacturing and relevant only for people working in a factory, you are in for some surprises about this fascinating field.

At the most fundamental level, operations and supply management (OSM) is about getting work done quickly, efficiently, without error, and at low cost. In the context of this book, the terms “operations” and “supply” take on special meaning. “Operations” refers to the processes that are used to transform the resources employed by a firm into products and services desired by customers. “Supply” refers to how materials and services are moved to and from the transformation processes of the firm. Take a simple manufacturing plant that makes golf balls. The manufacturing plant takes rubber, cork, and other material from suppliers and through a series of transformation processes makes golf balls. These golf balls are sold to customers after moving through a distribution system designed to supply retail outlets with the golf balls. So when we use the term “operations and supply management” we are referring to this integrated system that at one end coordinates the purchase of material from suppliers and at the other end supplies the golf balls to the retail outlets where they can be purchased by customers.

Supply Chain

The topics in this book include those that it is felt all managers should understand. All managers should understand the basic principles that guide the design of transformation processes. This includes understanding how different types of processes are organized, how to determine the capacity of a process, how long it should take a process to make a unit, and how the quality of a process is monitored. Oil refineries, automobile manufacturing, computer makers, and food products all use different types of manufacturing processes. Similarly, services such as insurance companies, fast food restaurants, and call centers are organized in unique ways. Other than understanding how the processes within these operations are organized, another major set of topics relates to how the operations are supplied. Parts and other raw materials must be moved into and out of these operations. On the input side, suppliers' coordination is needed so that appropriate quantities of material and other items are made available. On the output or customer side, the finished goods are distributed often through a complex network of distribution centers and retailers. These supply activities include where to locate the facilities, strategic sourcing and outsourcing of material and service, and managing the supply inventories.

Companies today have found how essential great operations and supply management is to the success of the firm. Saving a dollar or a euro in how a product is produced or distributed results directly in an extra dollar or euro of profit. What other area can claim this? If Marketing sells an extra dollar or euro's worth of product, profit only sees a few percent of this. If Finance figures out a way to get an extra ½ percent on an investment, by the time the extra cost of procuring the investment, managing the transaction, and accounting for the investment is factored in, little return is left to show in added profit. Operations and supply management is focused on the actions of providing services and products. Doing this at low cost and at a level of service that meets customer expectations is essential for business success.

In this chapter, we study companies that have had great success due largely to great operations and supply management. IKEA, the Swedish home products retailer described in the opening vignette, is a model of operations and supply efficiency. Products are designed so that they can be produced, sold to the retail market through their superstores and delivered to the customer quickly and at very low cost. In the following section, Progressive Insurance, a service company, is described. Their innovative use of the Internet and mobile claims agents has given the firm significant competitive advantage through innovative operations and supply management.

THE PURCHASING MANAGERS INDEX (PMI)

During the first week of every month, headlines on the front page of The Wall Street Journal announce the current reading of the purchasing managers index (PMI). What is the PMI? Why is it so important to economists? How does it relate to the study of operations management?

The Institute for Supply Management (ISM, http://www.ism.ws) has been calculating this index since 1931. The index is like the Dow Jones Industrial Average, but instead of measuring the rise and fall of a set of stocks, the PMI measures the rise and fall of manufacturing in the United States. The index is calculated using a set of measures of new manufacturing orders, production volume, supplier deliveries, inventory levels, and employment. The data are collected from a monthly survey conducted by ISM.

The PMI is a leading indicator of economic activity. A PMI above 44.5 percent, over a period of time, indicates the overall economy, or gross domestic product (GDP), is generally expanding; a PMI below 44.5 percent indicates the GDP is generally declining. The distance from 44.5 percent indicates the strength of the expansion or decline.

The indicator is calculated from the activity levels for functions we study in operations management. We will study how manufacturing orders are processed, how decisions related to the volume that can be processed are made, coordination of supplier deliveries, management of inventory, and scheduling of employees.

CASE: PROGRESSIVE INSURANCE

Consider Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio. In 1991, the company had approximately $1.3 billion in sales. By 2006, that figure had grown to $14.5 billion. What trendy strategies did Progressive employ to achieve elevenfold growth in just over a decade? Was it positioned in a high-growth industry? Did it come up with a new insurance product? Did it diversify into new businesses? Did it go global? Did it hire a new, aggressive sales force? Did it grow through acquisitions or clever marketing schemes? It did none of these things. For years Progressive did little advertising, and some of its campaigns were notably unsuccessful. It did not unveil a slew of new products, nor did it grow at the expense of its profit margins, even when it set low prices.

Service

A key measure that sheds light on what Progressive did is the combined ratio (expenses plus claims payouts, divided by insurance premiums), the measure of financial performance in the insurance industry. Most auto insurers have a combined ratio that fluctuates around 102 percent; that is, they run a 2 percent loss on their underwriting activities and recover the loss with investment income. By contrast, Progressive's combined ratio fluctuates around 96 percent. The company has not only seen dramatic growth, but it is now the country's third largest auto insurer—and it also has been profitable.

The secret of Progressive's success is simple: It out-operated its competitors. By offering lower prices and better service than its rivals, it simply took their customers away. What enabled Progressive to have better prices and service was innovations in operations, new and better ways of doing the day-to-day work of providing automobile insurance.

Progressive realized that possibly the only way to compete with much larger companies was to actually change the rules for how to play the insurance game. The company introduced what it calls Immediate Response claims handling: A claimant can reach a Progressive representative by phone 24 hours a day, and the representative then schedules a time when an adjuster will inspect the vehicle. Adjusters no longer work out of offices from 9 to 5 but out of mobile claims vans. Instead of taking between 7 and 10 days for an adjuster to see the vehicle, Progressive's target is now just 9 hours. The adjuster not only examines the vehicle but also prepares an on-site estimate of the damage and, if possible, writes a check on the spot.

The approach has many benefits. Claimants get faster service with less hassle, which means they are less likely to abandon Progressive because of an unsatisfactory claims experience. The shortened cycle time has reduced Progressive's costs dramatically. The cost of storing a damaged vehicle or renting a replacement car for one day, around $28, is roughly equal to the expected underwriting profit on a six-month policy. It's not hard to calculate the saving this translates into for a company that handles more than 10,000 claims each day. Other benefits for Progressive are an improved ability to detect fraud (because it is easier to conduct an accident investigation before skid marks wash away and witnesses leave the scene), lower operating costs (because fewer people are involved in handling claims), and a reduction in claim payouts (because claimants often accept less money if it's given sooner and with less hassle).

No single innovation conveys a lasting advantage, however. In addition to Immediate Response, Progressive has introduced a system that allows customers to call an 800 number or visit its Web site and, by providing a small amount of information, compare Progressive's rates with those of three competitors. Because insurance is a regulated industry, rates are on file with state insurance commissioners. The company also has devised even better ways to assess an applicant's risk profile to calculate the right rate to quote. When Progressive realized that an applicant's credit rating was a good proxy for responsible driving behavior, it changed its application process. Now its computer systems automatically contact a credit agency, and the applicant's credit score is factored into its pricing calculation. More accurate pricing translates into increased underwriting profit. Put all these improvements together and Progressive's remarkable growth becomes comprehensible.

EFFICIENCY, EFFECTIVENESS, AND VALUE

Compared with most of the other ways managers try to stimulate growth—technology investments, acquisitions, and major market campaigns, for example—innovations in operations are relatively reliable and low cost. As a business student, you are perfectly positioned to come up with innovative operations-related ideas. You understand the big picture of all the processes that generate the costs and support the cash flow essential to the firm's long-term viability.

Through this book, you will become aware of the concepts and tools now being employed by companies around the world as they craft efficient and effective operations. EfficiencyDoing something at the lowest possible cost. means doing something at the lowest possible cost. Later in the book we define this more thoroughly, but roughly speaking the goal of an efficient process is to produce a good or provide a service by using the smallest input of resources. EffectivenessDoing the right things to create the most value for the company. means doing the right things to create the most value for the company. Often maximizing effectiveness and efficiency at the same time creates conflict between the two goals. We see this trade-off every day in our lives. At the customer service counter at a local store or bank, being efficient means using the fewest people possible at the counter. Being effective, though, means minimizing the amount of time customers need to wait in line. Related to efficiency and effectiveness is the concept of valueRatio of quality to price paid. Competitive “happiness” is being able to increase quality and reduce price while maintaining or improving profit margins. (This is a way that operations can directly increase customer retention and gain market share.), which can be metaphorically defined as quality divided by price. If you can provide the customer with a better car without changing price, value has gone up. If you can give the customer a better car at a lower price, value goes way up. A major objective of this book is to show how smart management can achieve high levels of value.

Service

Besides its importance to corporate competitiveness, reasons for studying OSM are as follows:

A business education is incomplete without an understanding of modern approaches to managing operations. Every organization produces some product or service, so students must be exposed to modern approaches for doing this effectively. Moreover, hiring organizations now expect business graduates to speak knowledgeably about many issues in the field. While this has long been true in manufacturing, it is becoming equally important in services, both public and private. For example, “reinventing government” initiatives draw heavily on supply chain management, total quality management, business process reengineering, and just-in-time delivery—concepts that fall under the OSM umbrella.

Service

Operations and supply management provides a systematic way of looking at organizational processes. OSM uses analytical thinking to deal with real-world problems. It sharpens our understanding of the world around us, whether we are talking about how to expand globally or how many lines to have at the bank teller's window.
Operations and supply management presents interesting career opportunities. These can be in direct supervision of operations or in staff positions in OSM specialties such as supply chain management, purchasing, and quality assurance. In addition, consulting firms regularly recruit individuals with strong OSM capabilities to work in such areas as process reengineering and enterprise resource planning systems.

The concepts and tools of OSM are widely used in managing other functions of a business. All managers have to plan work, control quality, and ensure productivity of individuals under their supervision. Other employees must know how operations work to effectively perform their jobs.

Cross Functional

B R E A K T H R O U G H

EFFICIENCY: IT'S THE DETAILS THAT COUNT

Getting passengers on a plane quickly can greatly affect an airline's costs. Southwest says that if its boarding times increased by 10 minutes per flight, it would need 40 more planes at a cost of $40 million each to run the same number of flights it does currently.

Not all the innovation in the airline industry is from Southwest. America West, working with researchers at Arizona State University, has developed an innovative boarding system called “reverse pyramid.” The first economy-class passengers to get on the plane are those with window seats in the middle and rear of the plane. Then America West gradually fills in the plane, giving priority to those with window or rear seats, until it finally boards those seated along aisles in the front. This is in contrast to the approach used by many airlines of just boarding all seats starting from the back of the plane and working forward.

The time it takes for passengers to board has more than doubled since 1970, according to studies by Boeing Co. A study in the mid-1960s found that 20 passengers boarded the plane per minute. Today that figure is down to nine per minute as passengers bring along heftier carry-on luggage. Both Boeing and Airbus, the two top commercial-aircraft makers, are working on improving boarding time as a selling point to airlines.

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Home > Chapter 1 > Operations and Supply Management: A Critical Responsibility of Every Manager

	Course-wide Content
		MH Enhanced Cartridge Interactive OM Data Files E-OPS Game Visit the OMC F. Robert Jacobs POM S... Excel Templates Sample of iPod Premium... Hot Shot Plastics Data Updates and Errata

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		Chapter Overview Chapter Outline PowerPoint Presentations Study Guide Questions ... Glossary Excel Templates Data Files iPod content Screencams Discussion Questions
	eBook
		Chapter Opener Operations and Supp... Careers in Operations ... What is Operations and... Current Issues in Oper... Differences Between Se... How Ikea Designs its S... Historical Development... Supply Chain Transform... Key Terms Case: Fast-Food Feast Selected Bibliography Review and Discussion ...

	Instructor Resources
		PageOut Appendices Test Bank Map to Harvard Cases Solutions Manual Framework PowerPoints Links to Prof. Resources CPS by eInstruction Instructor's Resource ... Updates and Errata PowerPoint Presentations Text Art Powerpoints

	Course-wide Content
		MH Enhanced Cartridge Interactive OM Data Files E-OPS Game Visit the OMC F. Robert Jacobs POM S... Excel Templates Sample of iPod Premium... Hot Shot Plastics Data Updates and Errata

	News, Articles & Links
		Web Links
	Quizzes
		Multiple Choice Quiz
	More Resources
		Chapter Overview Chapter Outline PowerPoint Presentations Study Guide Questions ... Glossary Excel Templates Data Files iPod content Screencams Discussion Questions
	eBook
		Chapter Opener Operations and Supp... Careers in Operations ... What is Operations and... Current Issues in Oper... Differences Between Se... How Ikea Designs its S... Historical Development... Supply Chain Transform... Key Terms Case: Fast-Food Feast Selected Bibliography Review and Discussion ...