Chapter 19

Managing Operations
Every organization “produces” something, whether it’s a good or a service. This chapter
focuses on how organizations do that through a process called operations
management. We also look at the important role that managers play in managing those
operations. Focus on the following learning outcomes as you read and study this
chapter.

LEARNING OUTCOMES

19.1 Explain the role of operations management.

19.2 Define the nature and purpose of value chain management.
19.3 Describe how value chain management is done.
19.4 Discuss contemporary issues in managing operations.

A MANAGER’S DILEMMA

As your students have learned throughout this course, organizational success in

today’s highly competitive marketplace is based on effective and efficient management
of all available resources. In their study of Chapter 19, students will have an
opportunity to gain a fundamental understanding of important principles of operations
management, which encompasses both manufacturing and services.

“A Manager’s Dilemma” describes the challenges faced by Hyundai Heavy Industries

Inc. at their ship building plant in South Korea. The facility, which covers miles and can
build over 30 ships at a time, relies on a steady stream of data including the tracking of
parts and progress of subcomponents. Hwang See-young, chief information officer at
Hyundai Heavy, is responsible for a system that combines data sensors, a 4g network,
and employee laptops to make sure that production runs smoothly. This system also
has the capabilities to host video conversations with employees in offices over a mile
away. In the future, Hyundai Heavy plans to implement their technology in its other
construction divisions.

Students are asked to picture themselves as the manager in charge of implementing

this plan. They should consider the value provided by these new systems. Employees
have instant access to the location of parts. Managers don’t have to waste time
walking around checking on the status of work. Coordination between work groups is
increased. Less money is spent on storing inventory that could sit for months without
being used. It’s only in the last twenty years that companies have realized the value of
having a power management information system and its impact on potential positive
impact production.

Chapter 19 examines the topics of operations management including productivity,

value chain management, e-manufacturing, and quality. The concepts in this chapter
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could be applied to almost every company, from the gigantic operations of Hyundai
Industries, to your local McDonalds.

CHAPTER OUTLINE

INTRODUCTION
Studying the operating system of an organization is essential to an
understanding of how a company’s efficiency, productivity, value chain
management, e-manufacturing, and controls contribute to its success in
producing goods and delivering services.

19.1 THE ROLE OF OPERATIONS MANAGEMENT

Operations management is the design, operation, and control of the
transformation process that converts resources into finished goods or services.
Exhibit 19-1 illustrates a simplified operations system. Operations
management is important for three key reasons:
A. Services and Manufacturing. Operations management encompasses
both manufacturing and services.
a. Manufacturing organizations are organizations that
produce physical goods.
b. Service organizations are organizations that produce
nonphysical outputs in the form of services.
B. Managing Productivity.
a. Productivity is the overall output of goods or services
produced divided by the inputs needed to generate that
output.
b. W. Edwards Deming believed that managers, rather than
workers, were the primary source of increased
productivity. Deming presented 14 points for improving
management’s productivity.
C. Strategic Role of Operations Management. Through mistakes learned in
the 1970’s when the U.S. lost their position as the dominant force in
manufacturing, organizations today realize the importance of operations
management to the overall strategy of the organization.

LEADERS WHO MAKE A DIFFERENCE

Muhtar Kent, CEO of Coca-Cola recognizes that keeping the Coke family of products
number one in customers’ minds requires attention to all aspects of production and
marketing. With an eye toward improvement, Coca-Cola worked with its biggest bottler
to eliminate longstanding “friction points” by creating a joint supply-chain organization.
Mr. Kent believes it’s important to meet customers’ needs and has employees visit 20
million shops every week so it can have a good understanding of what their customers
want from their company.

19.2 WHAT IS VALUE CHAIN MANAGEMENT, AND WHY IS IT IMPORTANT?

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 This section of Chapter Nineteen examines several aspects of value chain
management, including its definition, goals, benefits, and potential obstacles to
successful implementation.
A. What is value chain management?
In order to understand the term value chain management, students must
first grasp the meaning of several individual terms.
1. Value is the performance characteristics, features and attributes,
and other aspects of goods and services for which customers are
willing to give up resources.
2. The value chain is the entire series of organizational work
activities that adds value at each step from raw materials to
finished product.
3. Value chain management, then, is the process of managing the
sequence of activities and information along the entire product
chain.
B. Goal of Value Chain Management
Ultimately, customers possess the power in the value chain. The goal of
value chain management, therefore, is to create a value chain strategy
that meets and exceeds customers’ needs and desires, allowing full and
seamless integration among all members of the chain.
C. Benefits of Value Chain Management. Value chain management
offers several benefits, including:
1. Improved procurement
2. Improved logistics
3. Improved product development
4. Enhanced customer order management
19.3 MANAGING OPERATIONS USING VALUE CHAIN MANAGEMENT
Today’s dynamic competitive environment demands new solutions from global
organizations. Understanding how and why value is determined by the
marketplace has led some organizations to experiment with a new business
model, a concept we introduced in Chapter 9.
A. Value Chain Strategy
See Exhibit 19-2 and for a summary of six main requirements for
effective value chain management.
1. Coordination and collaboration among all members of the value
chain
2. Investment in information technology
3. Organizational processes, which are the ways that
organizational work is done. Changes must be made, as
illustrated below:
a. Improved demand forecasting is necessary and is enabled
through closer ties between customers and suppliers.
b. Selected functions may need to be accomplished
collaboratively with other partners in the value chain.
c. New measures are needed for evaluating performance of
various activities along the value chain.
4. Strong leadership is essential for successful value chain
management.
5. An organization’s employees play an important role as well.

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 a. Traditional, functional job roles are inadequate in a value
chain environment.
b. Flexibility is the key to job design in a value chain
management organization, and the hiring of employees
who have the ability to learn and adapt to changing
situations is a prerequisite for successful value chain
management in an organization.
6. Supportive organizational culture and attitudes are important as
well.
E. Obstacles to Value Chain Management (See Exhibit 19-3)
In successfully implementing value chain management, organizations
face several potential obstacles.
1. Organizational barriers. These barriers are among the most
difficult to handle. They include refusal or reluctance to share
information, reluctance to shake up the status quo, and security
issues.
2. Cultural attitudes. Unsupportive cultural attitudes—especially
trust and control—are also obstacles. In addition, organizations
are vulnerable to theft of intellectual property—proprietary
information that is critical to an organization’s efficient and
effective functioning and competitiveness.
3. Required capabilities. A number of capabilities are required,
including: extreme coordination and collaboration, the ability to
configure products to satisfy customers and suppliers, and the
ability to educate internal and external partners.
4. An organization’s people must be committed and willing to do
whatever is required to implement value chain management; in
addition, employees must be motivated to expend high levels of
effort.
4. CURRENT ISSUES IN OPERATIONS MANAGEMENT
Three issues currently top managers’ lists for improving operations
management: capitalizing on e-manufacturing technology, and successfully
implementing quality initiatives.
A. Technology’s Role in Manufacturing
Savvy companies are exploring ways to harness technology to improve
operations management.
B. Quality Initiatives
According to many experts, organizations that do not produce high-
quality products will be unable to compete successfully in the global
marketplace.
1. Quality is the ability of a product or service to reliably do what it’s
supposed to do and to satisfy customer expectations.
2. How is quality achieved? A good way to address this question is
in terms of the four management functions: planning, organizing,
leading, and controlling.
C. Quality Goals
Numerous organizations worldwide have pursued challenging quality
goals. Two of the most widely recognized quality goals are ISO 9000
and Six Sigma.

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 1. ISO 9000 is a series of international quality management
standards that set uniform guidelines for processes to ensure that
products conform to customer requirements.
2. Six Sigma is a quality standard that establishes a goal of no
more than 3.4 defects per million parts or procedures.
3. In summary, the key benefit of implementing value chain
management comes from the quality improvement journey itself,
rather than the achievement of a particular quality certification.
D. Mass Customization
Mass customization provides consumers with a product when, where,
and how they want it. Mass customization requires flexible
manufacturing techniques and continual dialogue with customers.
Technology plays an important role in both of these efforts.

LET’S GET REAL: MY RESPONSE

Andy Pothast
Plant Manager
Sargento Foods, Inc.
Hilbert, WI

In tackling expansion of Hyundia Industries’ technology to other facilities, Mr. Pothast

gives several things to think about:
• Is the technology compatible with other divisions?
• Should I start at any particular division?
• Are the other divisions receptive to this technology?
• What are the deliverables of this project?
• What types of technical resources are available from the other construction divisions
and from the division that just installed this technology?

After these types of questions are answered, a project team should be created to move
the project forward. This team should consist of technical and operations employees
who will be directly affected by this technology change. This will help with buy-in.

Answers to Review and Discussion Questions

1. What is operations management?

Operations management is the transformation process that converts resources into
finished goods and services.

2. Do you think that manufacturing or service organizations have the greater need for
operations management? Explain.
Both manufacturing and service organizations have a great need for operations
management. Productivity is a key concern for both manufacturing and service
organizations. Many of the concepts and techniques that have proven to be successful
in manufacturing industries are now being implemented in service organizations.
Because a service is often produced by a company and received by its customer
almost simultaneously, the effective and efficient management is a particular challenge
for service organizations.
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3. What is a value chain and what is value chain management? What is the goal of
value chain management? What are the benefits of value chain management?
The value chain is the sequence of organizational work activities that add value at each
step from raw materials to finished product. Value chain management is the process of
managing the sequence of activities and information along the entire product chain.
The goal of value chain management is to create a value chain strategy that meets and
exceeds customers’ needs and desires and allows for full and seamless integration
among all members of the chain. Value chain management provides four main benefits:
improved procurement, improved logistics, improved product development, and
enhanced customer order management.

4. What is required for successful value chain management? What obstacles exist to
successful value chain management?
The six main requirements for successful value chain management include
coordination and collaboration, investment in technology, organizational processes,
leadership, employees or human resources, and organizational culture and attitudes.
The obstacles to value chain management include organizational barriers (refusal to
share information, reluctance to shake up the status quo, or security issues),
unsupportive cultural attitudes, lack of required capabilities, and employees unwilling or
unable to do it.

5. How could you use value chain management in your everyday life?
Students’ responses to this question will naturally vary. You may begin discussion of
this question, which relates theory to practical application in the lives of your students,
by pointing out the “value chain” involved in the students’ preparing and submitting work
for this course and in the instructor’s evaluation of that work.

6. How does technology play a role in manufacturing?

Companies are looking at ways to harness technology to improve their operations
management by extensive collaboration and cost control.

7. What are ISO 9000 and Six Sigma?

ISO 9000 is a series of international quality management standards that set uniform
guidelines for processes to ensure that products conform to customer requirements. Six
Sigma is a quality standard that establishes a goal of no more than 3.4 defects per
million units or procedures.

8. Describe lean management and explain why it’s important.

Mass customization provides customers with a product when, where, and how they
want it. It requires flexible manufacturing techniques and continual customer dialogue.
A lean organization is one that understands what customers want, identifies customer
value by analyzing all activities required to produce products, and then optimizes the
entire process from the customer’s perspective.

9. How might operations management apply to other managerial functions besides

control?
Successful operations management is essential in the planning, organizing, and
leading functions of management, as well as in control. To establish realistic strategic
and operational plans that maximize available resources, managers on each level of
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the organization should have an understanding of operations management gained
through study and experience. In the organizing function, managers must develop
appropriate organizational structures for the management of their operations. In
leading, managers must consider the diversity of backgrounds, cultures, abilities, and
skills of their most important resource, the people who perform the operations in the
organization.

10. Which is more critical to success in organizations continuous improvement or

quality control? Support your position.
The choices of your students will likely vary, providing an excellent opportunity for class
debate. Give students several days in which to gather information on ways in which
different companies have implemented continuous improvement and quality control
programs. (Winners of the Malcolm Baldrige National Quality Award could serve as
benchmarking examples for both continuous improvement and quality control
initiatives.) Encourage students on opposing sides of this issue to justify their positions
with examples from the real world of business during the debate.

ETHICS DILEMMA

In this dilemma, students get a behind the scenes view of what makes Wal-Mart
one of the world’s leaders in low-cost retailing. By requiring RFID technology on its
products and taking over their lines of distribution, Wal-Mart requires a lot from its
suppliers. Students are asked if these practices present ethical issues or are they
just good business sense.
Students should see both sides of the issue. According to Wal-Mart, these
programs are aimed at helping reduce the costs to consumers. Suppliers, on the
other hand, argue that they are the ones made to sacrifice, not Wal-Mart. Wal-Mart
cannot make suppliers participate in their programs, however, doing so would mean
not getting their products on the shelves of the world’s largest retailer. Wal-Mart
leaves the choice is up to the supplier – and most choose to participate. However,
there are a growing numbers of companies who have opted out of Wal-Mart’s
distribution chain.

SKILLS EXERCISE: DEVELOPING YOUR

NEGOTIATING SKILLS

Negotiation is a process of bargaining in which two or more parties who have different
preferences must make joint decisions and come to an agreement. In this exercise,
students are given six skills used to facilitate negotiation. After reviewing the six skills
students are asked to practice their newly found skills using one or both of the two
exercises:
1. Find three people who have recently purchased new or used cars. Interview each to
learn which tactics, if any, they used to get a better deal (lower price, more car features,
and so forth). Write a short paper comparing your findings and relating it to the
negotiating behaviors presented in this section.
2. Research current business periodicals for two examples of negotiations. The
negotiations might be labor–management negotiations or they might be negotiations
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over buying and selling real estate or a business. What did the article say about the
negotiation process? Write down specific questions that each party to the negotiation
might have had. Pretend that you were a consultant to one of the parties in the
negotiation. What recommendations would you have made?

WORKING TOGETHER: TEAM EXERCISE

Students are asked to assess in small groups how they believe technology will change
the way colleges disseminate information to students a decade from now. Suggestions
could include the use of cell phones to receive class information and downloads for
textbooks. There are also some universities using video streaming and pod-casts of
lectures. Many of your students may be currently enrolled in classes delivered via the
Internet. Ask them to share how these online courses are helping to meet their
individual schedules, needs, and academic and career goals. In the future, it may be
possible that students receive very little face-to-face communication from faculty
members.

Your Turn to be a Manager

 Select a company with which you’re familiar and describe its value chain. Be as
specific as possible in your description. Evaluate how it “uses” the value chain to
create value.

 Find three examples of mass customization products. Describe them. Then try
describing what you think has to take place “behind the scenes” to create these
products. Focus on the operations management aspects.

 Go to the International Organization for Standardization Web site, at

www.iso.org, and look for information on the ISO 9000 standards. Write a report
describing the types of things organizations need to do to achieve ISO
certification.

 Choose two tasks that you do every week (for example, shop for groceries, host
a poker party, clean your house/apartment, do laundry). For each one, identify
how you could (1) be more productive in doing that task and (2) have higher-
quality output from that task.

 Interview two different managers, preferably one from a manufacturing

organization and one from a service organization. Ask them how they manage
operations, particularly from the aspects of being productive and producing
quality outputs.

 Steve’s and Mary’s suggested readings: Sydney Finkelstein, Why Smart

Executives Fail and What You Can Learn from Their Mistakes (Penguin
Portfolio, 2003); James L. Heskett, W. Earl Sasser, Jr., and Leonard A.
Schlesinger, The Value Profit Chain (The Free Press, 2003); William Joyce, Nitin

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 Nohria, and Bruce Roberson, What Really Works (Harper Business, 2003); and
Harvard Business Review’s Managing the Value Chain (Harvard Business
School Press, 2000).

 Go to the IndustryWeek Web site, at www.industryweek.com, and find

IndustryWeek’s rankings for the best plants and the 50 best manufacturing
companies. What criteria are used to select companies on these lists? Choose
two companies from each of these lists and describe what they’re doing. Put
this information into a written report.

 In your own words, write down three things that you learned in this chapter
about being a good manager.

 Self-knowledge can be a powerful learning tool. Go to mymanagementlab and

complete the self-assessment exercise What Time of Day Am I Most
Productive? Using the results of your assessment, identify personal strengths
and weaknesses. What will you do to reinforce your strengths and improve your
weaknesses?

Answers to Case Application Questions

Stirring Things Up
1. Would you describe Starbucks’ production/operations technology in its retail stores
as unit, mass, or process? Explain your choice. (Hint: You may need to review this
material found in Chapter 10.) How does its production/operations technology
approach affect the way products are produced?
Some of the products at Starbucks would be considered mass production – their coffee
mugs, packaged coffee beans (whole or ground), and their bakery items. Coffee that
people order at the counter or through the drive-through would be considered unit
production. Each cup is made for the customer when they place their order. However,
because most of the drinks start out as coffee or cappuccino as their base, orders
could be considered a form of mass customization.

2. What uncertainties does Starbucks face in its value chain? Can Starbucks manage
those uncertainties? If so, how? If not, why not?
Starbucks purchases one of its most important products, coffee, from suppliers around
the world. Every year the cost of coffee fluctuates depending upon weather, shipping
and logistics, technology, political instability, etc… Starbucks could reduce some of
these uncertainties by buying coffee plantations and growing its own product, however,
this may not be the best decision to control uncertainty. Many companies that attempt
backward vertical integration find that they do not know enough about the industry or
are simply not willing to assume more risk themselves.

3. Go the company’s Web site [www.starbucks.com] and find the information on the
company’s environmental activities from bean to cup. Select one of the steps in the
chain (or your professor may assign one). Describe what environmental actions it’s
taking. How might these affect the way Starbucks “produces” its products?

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On Starbucks’ website, students should go to the heading “Responsibility” and click to
see what plans the company has made toward improving the environment. Starbucks
breaks their programs to improve the environment into the following categories:
Recycling: Starbucks is committed to significantly reducing the waste their
stores generate.
Energy: By end of 2010 Starbucks aims to reduce energy use in new stores by
25% and to obtain 50% of their energy from renewable sources in all of our
company-owned stores.
Water: Starbucks is committed to reducing their water usage by 15% in
company-owned stores by 2012.
Green Building: Starbucks’ goal is to achieve LEED® certification globally for all
new, company-owned stores beginning in late 2010.
Climate Change : Starbucks is committed to supporting programs that facilitate
farmers’ access to carbon markets, allowing them to generate additional income
while helping to prevent deforestation.

4. Research further the concept of lean organizations. What benefits does “lean” offer?
How might a business like Starbucks further utilize the concepts of being lean?
Information on lean organizations can be found on several websites including:
www.lean.org and www.mamtc.com. Information can also be found using your
university’s online databases. Put simply, lean organizations means creating more
value for customers with less. In the case of Starbucks, there are opportunities to
create greater customer satisfaction with less waste and cost. This means finding more
efficient technology for improving customer orders and getting more from the supply
chain.

Smooth Ride

1. What has made Blue Bird’s quality initiative successful? Discuss how you think
each of the programs the company implemented contributed to what the
company is today.
After reading the case, students should be able to name several factors that
attributed to Blue Bird’s success. Which is the most important? Like any
company that implements a quality initiative, the ultimate success of the
program lies in management’s commitment to the program. Another important
key to their success is that the company did not attempt to improve just one part
of their organization. Blue Bird recognized that the entire organization must be
involved in improving quality.

2. How might value chain management concepts help Blue Bird become even
more productive? What would the company have to do to benefit from
managing its value chain?
Value chain management, as students have learned, is the process of
managing the sequence of activities and information along the entire product
chain. In contrast to supply chain management, which is internally oriented and
focuses on efficient flow of incoming materials, value chain management is
externally oriented and focuses on both incoming materials and outgoing
products and services. Supply chain management is efficiency oriented,
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 whereas value chain management is effectiveness oriented and aims to create
the highest value for the customer.
According to the case, Blue Bird is determined to measure everything in the
organization. This should help the company as they track products from the
beginning of the assembly line to customer satisfaction (even years after the
sale). Such a program can help correct quality issues and create product
improvements for new models.

3. Research the concept of lean manufacturing. What does it mean? What

benefits does “lean” offer?
Students will find a variety of definitions available on the internet for lean
manufacturing. The majority of these definitions focus on cutting down waste in
the manufacturing process and delivering products in a timely fashion. Student
comments on the benefits of lean will center on the issues of quality, costs, and
total time of production. These factors translate into costs savings for both the
manufacturer and the customer.

ADDITIONAL CHAPTER INFORMATION

ISO certification and Six Sigma are quality programs and initiatives that have been
deployed widely in global companies. The Baldrige Award and other “quality”
achievements are issues of contemporary interest as well. Emphasis on ISO,
particularly for domestic firms seeking to do business in Europe, is an excellent topic to
discuss with students.

The following Web sites provide information on the Baldrige Award, ISO, Six Sigma,
and other quality initiatives.

 The Malcolm Baldrige National Quality Award

http://www.quality.nist.gov/
 ISO 9000
http://www.iso.ch/
 Freeman Health Systems
http://www.freemanhospitals.org/
 NASA
http://www.nasawatch.com/iso.9000.html
 Six Sigma General Electric
http://www.ge.com/sixsigma/
 Motorola
http://www.motorola.com/content.jsp?globalObjectId=3049-11525

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