Operations Management and Value Chains

CHAPTER I

OPERATIONS MANAGEMENT AND VALUE CHAINS

OVERVIEW OF CLASS MODULE

In this module, the concept and importance of operations

management, the other tasks of operations managers, differences between goods and services, and the
concept of value will be discussed. Respectively, the difference between value chains and supply chains,
the concept of customer benefit package, and the three general types of processes in a business will also
be tackled.

LEARNING OBJECTIVES

By the end of this module, the students should be able to:

1. Explain the concept and importance of operations management;

2. Describe what operations managers do;
3. Explain the differences between goods and services;
4. Define the concept of value and explain how the value of goods and services can be enhanced;
5. Describe a customer benefit package; and
6. Explain the difference between value chains and supply chains, and identify three general types of
processes in a business.

LEARNING CONTEXT

OPERATIONS MANAGEMENT
“Customer judge the value of a
It is the science and art of ensuring that goods and services are service and form perceptions
created and delivered successfully to the consumers. OM includes the through service encounters.”
design of goods, services, and the processes that create them; the day-
to-day management of those processes; and the continual improvement of these goods,
services, and processes.

The way in which goods and services, and the processes that create and support them, are
designed and managed can make the difference between a delightful or an unhappy customer
experience. That is what OM is all about. Operations Management is the only function by which
managers can directly affect the value provided to all stakeholders—customer, employee,
investors, and society

Why OM is important? Efficiency (a measure of how well resources are used in creating
outputs), the cost of operations, and the quality of goods and services that create customer satisfaction all
contribute to profitability and ultimately the long-run success of a company. A company cannot be
successful without people who understand how these concepts relate to each other, which is the essence
of OM, and who can apply OM principles effectively making decisions.

WHAT DO OPERATIONS MANAGERS DO?

Some key activities that operations managers perform include the following:

● Forecasting: predict the future demand for raw materials, finished goods, and services

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● Supply Chain Management: manage the flow of materials, information, people, and money from
suppliers to customers.

● Facility Layout and Design: determine the best configuration of machines, storage, offices, and
departments to provide highest levels of efficiency and customer satisfaction.

● Technology Selection: use technology to improve productivity and respond faster to customer.

● Quality Management: ensure that goods, services, and processes will meet customer expectations
and requirements.

● Purchasing: coordinate the acquisition of materials, supplies, and services.

● Resource and Capacity Management: ensure that the right amount of resources (labor, equipment,
materials, and information) is available when needed.

● Process Design: select the right equipment, information, and work methods to produce high-quality
goods and services effectively.

● Job Design: decide the best way to assign people to work tasks and job responsibilities.

● Service Encounter Design: determine the best types of interactions between service providers and
customers, and how to recover from service upsets.

● Scheduling: determine when resources such as employees and equipment should be assigned to
work.

● Sustainability: decide the best way to manage the risks associated with products and operations to
preserve resources for future generations.

OM IN THE WORKPLACE
The concepts and methods of OM can be used in any job, regardless of the functional area of
business or industry, to better create value for internal customers (within the organization) and for external
customers (outside the organization). OM principles are used in accounting, human resource management,
legal work, financial activities, marketing, environmental management, and every type of service activity.
Thus, everyone should understand OM and be able to apply its tools and concepts.

Following are examples of how the authors’ former students (who are not OM majors) are using OM in
their jobs:

● Process design: when a new product was to be introduced, the best way to produce it had to be
determined. This involved charting the detailed steps needed to make the product.

● Inventory management: inventory was tightly controlled to keep cost down and to avoid production
that wasn’t needed. Inventory was taken every four weeks and adjusted in the inventory
management system accordingly.

● Scheduling: production schedules were created to ensure that enough product was available for
both retail and wholesale customers, taking into account such factors as current inventory and soap
production capacity.

● Quality management: each product was inspected and had to conform to the highest quality
standards.

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 Operations Management and Value Chains

Brooke Wilson began as a process manager for JPMorgan Chase in the credit card division. After
several years of working as an operations analyst, he was promoted to a production supervisor position
overseeing “plastic card production.” Among his OM-related activities are:

● Planning and budgeting: representing the plastic card production area in all meetings, developing
annual budgets and staffing plans, and watching technology that might affect the production of
plastic credit cards.

● Inventory management: overseeing the management of inventory for items such as plastic blank
cards; inserts such as advertisements; envelopes, postage, and credit card rules and disclosure inserts.

● Scheduling and capacity: daily to annual scheduling of all resources necessary to issue new cards
and reissue cards that are up for renewal, replace old or damaged cards, as well as cards that are
stolen.

● Quality: embossing the card with accurate customer information and quickly getting the card in the
hands of the customer.

UNDERSTANDING GOODS AND SERVICES

Companies design, produce, and deliver a wide variety of goods and services that consumers
purchase. A good is a physical product that you can see, touch, or possibly consume. A durable good is
one that does not quickly wear out and typically lasts at least three years (e.g. vehicle, dishwashers, and
furniture). A nondurable good is one that is no longer useful once it’s used, or lasts for less than three years
(e.g. shoes, food, and toothpaste). Goods-producing firms are found in industries such as manufacturing,
farming, forestry, mining, construction, and fishing.

A service is any primary or complementary activity that does not directly produce a physical product.
It represents the nongoods part of a transaction between a buyer (customer) and seller (supplier). Service-
providing firms are found in industries such as banking, lodging, education, healthcare, and government.

Goods and services share many similarities. They are driven by customers and provide value and
satisfaction to customers who purchase and use them. They can be standardized for the mass market or
customized to individual needs.

Nevertheless, some very significant differences exist between goods and services that make the
management of service-providing organizations different from goods-producing organizations and create
different demands on the operations function:

1. Goods are tangible, whereas services are intangible. Goods are consumed, but services are
experienced. Goods-producing industries rely on machines and “hard technology” to perform work.
Goods can be moved, stored, and repaired, and generally require physical skills and expertise during
production.

2. Customers participate in many service processes, activities, and transactions. The higher the customer
participation, the more uncertainty the firm has with respect to service time, capacity, scheduling,
quality performance, and operating cost. A service encounter is an interaction between the customer
and the service provider (e.g. making hotel reservation, asking a grocery store employee where to
find a certain product, etc).

These service encounters consist of one or more moments of truth—any episodes, transactions,
or experiences in which a customer comes into contact with any aspect of the delivery system,
however remote, and thereby has an opportunity to form an impression (e.g. gracious welcome by
an employee at the hotel check-in counter, a grocery store employee who seems too impatient to
help, etc).

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3. The demand for services is more difficult to predict than the demand for goods. Customer arrival rates
and demand patterns for such service delivery systems as banks, airlines, supermarkets, call centers,
and courts are very difficult to forecast.

4. Services cannot be stored as physical inventory. In goods-producing firms, inventory can be used to
decouple customer demand from the production process or between stages of the production
process and ensure constant availability despite fluctuations in demand. Service firms do not have
physical inventory to absorb such fluctuations in demand.

5. Service management skills are paramount to a successful service encounter. Employees who interact
with customers require service management skills such as knowledge and technical expertise
(operations), cross-selling other products and services (marketing), and good human interaction skills
(human resources). Service management integrates marketing, human resources, and operations
functions to plan, create, and deliver goods and services, and their associated service encounters.
OM principles are useful in designing service encounters and supporting marketing objectives.

6. Service facilities typically need to be in close proximity to the customer. When customers must
physically interact with a service facility—for example, post offices, hotels, and branch banks—they
must be in a location convenient to customers.

7. Patents do not protect services. A patent on a physical good or software code can provide
protection from competitors. The intangible nature of a service makes it more difficult to keep a
competitor from copying a business concept, facility layout, or service encounter design.

THE CONCEPT OF VALUE

Value is the perception of the benefits associated with a good, service, or bundle of goods and
services in relation to what buyers are willing to pay for them. To decision to purchase a good or
service or a customer benefit package is based on an assessment by the customer of the perceived
benefits in relation to its price. The customer’s cumulative judgment of the perceived benefits leads to
either satisfaction or dissatisfaction. One of the simplest functional forms of value is:

Value = Perceived benefits

Price (cost) to the customer
If the value ratio is high, the good or service is perceived favorably by customers, and the
organization providing it is more likely to be successful.

.
CUSTOMER BENEFIT PACKAGES
“Bundling” goods, services, and digital content in a certain way
to provide value to customers not to only enhance what customers “Each good or service in the
customer benefit package
receive, but can also differentiate the product from competitors. Such a
requires a process to create
bundle is often called a customer benefit package—set of tangible and deliver it to customers.”
(goods-content) and intangible (service-content) features that the
customer recognizes, pays for, uses, or experiences. This CBP is a way to conceptualize and
visualize goods and services by thinking broadly about how goods and services are bundled and
configured together.

A CBP consists of a primary good or service coupled with peripheral goods and/or services,
and sometimes variants. Primary good or service is the “core” offering that attracts customers
and responds to their basic needs (e.g. primary service of a personal checking account is
convenient financial transactions. Peripheral goods or services are those that are not essential to
the primary good or service but enhance it. Finally, variant is a CBP feature that departs from the
standard CBP and is normally location or firm specific.

VALUE CHAINS

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A value chain is a network of facilities and processes that describes the flow of materials, finished
goods, services, information, and financial transactions from suppliers, through the facilities and processes
that create goods and services, and those that deliver them to the customer. Value chains involve all major
functions in an organization. This includes not only operations but also purchasing, marketing and sales,
human resource management, finance and accounting, information systems and technology, distribution,
and service and support.

A supply chain is the portion of the value chain that focuses primarily on the physical movement of
goods and materials, and supporting flows of information and financial transactions through the supply,
production, and distribution

Processes

It is a sequence of activities that is intended to create a certain result, such as a physical good, a
service, or information. Processes are the means by which goods and services are produced and delivered.
Key processes in business typically include:

1. Core processes. Focused on producing or delivering an organization’s primary goods or services

that create value for customers, such as filling and shipping a customer’s order, assembling a
dishwasher, or providing a home mortgage.

2. Support processes. Such as purchasing materials and supplies used in manufacturing, managing
inventory, installation, health benefits, technology acquisition, day care on-site services, and
research and development.

3. General management processes. Including accounting and information systems, human

resource management, and marketing.

It is important to realize that nearly every major activity within an organization involves a process that
crosses traditional organizational boundaries.

OM: A HISTORY OF CHANGE AND CHALLENGE

In the last century, operations management has undergone more changes than any other functional
area of business and is the most important factor in competitiveness. Exhibit 1.1 is a chronology of major
themes that have changed the scope and direction of operations management over the last half century.

● Focus on Efficiency

During the Industrial Revolution, many inventions came into being that allowed goods to be
manufactured with greater ease and speed, and led to the development of modern factories. In the
1940s, Toyota developed new ways of creating manufacturing efficiencies. The development of
computers and other forms of technology during the last 50 years has revolutionized operations.

● The Quality Revolution

After World War II, Japanese companies embarked on a massive effort to train the workforce,
using statistical tools developed at Western Electric and other innovative management tools to
identify causes of quality problems and fix them.
By the mid-1970s, the world discovered that Japanese goods had fewer defects, were more
reliable, and better met consumer needs than did American goods. Thereafter, quality become an
obsession with top managers of nearly every major company and continues to be so today.

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Exhibit 1.1 Seven Major Eras of Operations Management

● Customization and Design

As the goals of low cost and high product quality became “givens,” companies began to
emphasize innovative designs and product features to gain competitive edge. Inflexible mass-
production methods that produced high volumes of standardized goods and services using unskilled
or semiskilled workers and expensive, single-purpose equipment, though very efficient and cost-
effective, were inadequate for the new goals of increased goods and service variety and continual
product improvement.

● Time-Based Competition

As information technology matured, time became an important source of competitive

advantage. Quick response is achieved by continually improving and reengineering processes—that
is, fundamentally rethinking and redesigning processes to achieve dramatic improvements in cost,
quality, speed, and service.

● The Service Revolution

In 1955, about 50 percent of the US workforce was employed in goods-producing industries

and 50 percent in service-providing industries. Today, about four of every five US jobs are in service.

● Sustainability

It refers to the organization’s ability to strategically address current business needs and
successfully develop a long-term strategy that embraces opportunities and manages risks for all
products, systems, supply chains, and processes to preserve resources for future generations.
Sustainability can be viewed form three perspectives:

1. Environmental sustainability. It is an organization’s commitment to the long-term quality

of our environment.
2. Social sustainability. It is an organization’s commitment to maintain healthy communities
and a society that improves the quality of life.
3. Economic sustainability. it is an organization’s commitment to address current business
needs and economic vitality, and to have the agility and strategic management to
prepare successfully for future business, markets, and operating environments.

KEY TAKEAWAYS

In this module, you learned:

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● Operations Management is the science and art of ensuring that goods and services are created and
delivered successfully to the consumers that includes the design of goods, services, and the processes
that create them; the day-to-day management of those processes; and the continual improvement
of these goods, services, and processes.

● The key activities of an Operation Manager are as follow: forecasting, supply chain management,
facility layout and design, technology selection, quality management, purchasing, resource and
capacity management, process design, job design, service encounter design, scheduling, and
sustainability.

● A good is a physical product that you can see, touch, or possibly consume. A durable good is one
that does not quickly wear out and typically lasts at least three years (e.g. vehicle, dishwashers, and
furniture). A nondurable good is one that is no longer useful once it’s used, or lasts for less than three
years (e.g. shoes, food, and toothpaste).

● A service is any primary or complementary activity that does not directly produce a physical product.

● Value is the perception of the benefits associated with a good, service, or bundle of goods and
services in relation to what buyers are willing to pay for them.

● customer benefit package—set of tangible (goods-content) and intangible (service-content) features

that the customer recognizes, pays for, uses, or experiences. This CBP is a way to conceptualize and
visualize goods and services by thinking broadly about how goods and services are bundled and
configured together.

● Primary good or service is the “core” offering that attracts customers and responds to their basic
needs. Peripheral goods or services are those that are not essential to the primary good or service but
enhance it. Variant is a CBP feature that departs from the standard CBP and is normally location or
firm specific.

● A value chain is a network of facilities and processes that describes the flow of materials, finished
goods, services, information, and financial transactions from suppliers, through the facilities and
processes that create goods and services, and those that deliver them to the customer.

● Supply chain is the portion of the value chain that focuses primarily on the physical movement of
goods and materials, and supporting flows of information and financial transactions through the
supply, production, and distribution.

SOURCES

● Collier, D.A. et.al (2020). Operations Management and Total Quality Management. Chicago
Business Press. Philippine Edition. Cengage Learning Asia Pte Ltd.

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