operations and project management - Philippine Army



ST –004


The information contained in this document is not to be communicated, either directly or indirectly to any person not authorized to receive it.





The Training and Doctrine Command, Philippine Army has long been conducting training for the Army’s personnel, mostly to strengthen their knowledge on ST - 004 Operation and Production Management. The demands of such doctrine have been increasing; hence the need for comprehensive reference material (RM) for the Army school could not be overemphasized.

We welcome the printing of this RM. This is the product of the fixing initiatives of our newly-invigorated Doctrine Center. This is expected to benefit the instructors and students of the Training and Doctrine Command as it discusses the salient features of General Information. More importantly, researchers and writers of military doctrines will also find this reference material useful. By being aware of the importance as well as the substance of its contents, the users will be able to properly utilize and employ them in order to exploit their useful implication in the Army’s operations. While the concepts and guidelines embodied in this RM have been thoroughly validated, these have been accredited by TRADOC for the use of all Army schools. This is to be further subjected to test and evaluation prior to the promulgation of CSAFP for widest dissemination. As such, we are soliciting your valued inputs and insights to make it more responsive and dynamic amidst the ever-changing operational environment.







ACKNOWLEDGMENT This reference material entitled Operations and Production Management is an adaptation of the readings on Operations Management which is being used by the PA Command and Staff College, TRADOC, PA. The accreditation of this reference material is part of the Army’s initiative of standardizing and regulating the training literatures that will be used by schools and training units of the Philippine Army. Any recommended corrections on the contents or modifications to this material shall be subject to the validation and accreditation procedure that will be facilitated by the Doctrine Center, Training & Doctrine Command, Philippine Army.









The purpose of this reference material is to provide Army personnel insights on Operations as they relate to productivity and efficiency in the context of military service. Such material could be used as additional reference in the conduct of instructions on Organizational Management and provide readers valuable lessons in the way Management interrelates with Leadership and enhances Command. 2.

Scope and Applicability

This reference material is most useful for those who seek to enhance their understanding on Operations Management as it reflects on the quality and effectiveness of an organization, especially in the accomplishment of its mission. It presents the operations functions within an organization, productive use of resources, strategy, and its impact to mission accomplishment. It also presents contemporary issues, development, other related and important lessons in operations management. This material can strengthen the administrative and operational competencies of Army managers. 3.

User Information

The proponent of this reference material is the Philippine Army Command and Staff School, TRADOC. However, Doctrine Center is responsible for the review and updating of this publication. Send comments and recommendations to Commander, TRADOC, PA, Camp O’Donnell, Brgy Sta Lucia, Capas, Tarlac, Attn: Doctrine Center. 4.


Unless this publication states otherwise, masculine nouns and pronouns do not refer exclusively to men.







CONTENTS Foreword Acknowledgment Preface Contents Section

2-1 2-2 2-3 2-4

i iii v vii Title






Operations Finance Marketing Other Functions

2-2 2-3 2-4 2-4


Designing and Operating Production Systems The Operations Manager and the Management Process

3-1 3-4

4-1 4-2

CHAPTER 4 – PRODUCTIVITY Factors that Affect Productivity Improving Productivity

4-3 4-4


Degree of Standardization Type of Operation Manufacturing Operations versus Service Operations Implications for Production Systems

5-1 5-1 5-2 5-4





CHAPTER 8 – STRATEGY 8-1 8-2 8-3

Japanese Versus US Strategy Mission Corporate Strategy

8-1 8-3 8-3






CHAPTER 10 – REVIEW 10-1 10-1

Summary Review and Discussion

10-1 10-1



Receding Target Big Shift Unfulfilled Promise Variety

11-1 11-2 11-3 11-4






To many people, the term production conjures up images of factories, machines, and assembly lines. Interestingly enough, the field of production management in the past focused almost exclusively on manufacturing management. Heavy emphasis was placed on methods and techniques that dealt with operating a factory. In recent years, the scope of production management has broadened considerably. Currently, production concepts and techniques are being applied to a wide range of activities and situations outside of manufacturing (i.e., in services) as well as in manufacturing. Among the services are health care, food service, recreation, banking, hotel management, retail sales, education, transportation, and government. Because of this broadened scope, the field has taken on the name “operations management,” which more closely reflects the diverse nature of activities to which its concepts and techniques are applied. Operations management is responsible for the management of productive systems, that is, systems that either create goods or provide services (or both). As an example of an operations management system, consider a luxury cruise ship. Most of the activities performed by the captain and crew during a cruise, or in preparation for the cruise,fall within the realm of operations management. Among those activities are running the ship, managing food service, providing medical services, supervision and training of the crew, overseeing activities of passengers, and housekeeping. Navigation, maintenance, and general repairs are required to keep the ship on course and in good operating condition. Food and beverages must be ordered, meals must be prepared and served in an appetizing manner, and eating areas must be kept clean. Medical supplies must be on hand and personnel sufficiently prepared to handle a wide range of illnesses and emergencies. Motivation, training, productivity, job assignments, and personal appearance of crew members are important. Passengers must be assigned to cabins, activities must be scheduled, trips ashore, ports of call must be arranged, and other needs must be attended to in order to maintain satisfactory customer relations. Of course, there are other activities involved in operating a luxury ship, but this gives you some idea of the nature and scope of operations management in that regard. Now consider managing a factory. Decisions have to be made on what raw materials to order, how much to order, and when to order; determination must be made as to what products to make and when and how much to make; work assignments have to be set; workers may have to be hired and trained; quality levels must be established and achieved; inventories of parts at supplies, raw materials, and finished goods must be maintained; work grievances must be dealt with; workers must be motivated; production bottle necks and equipment breakdowns must not be allowed to disrupt output; new equipment and production methods must be integrated with existing equipment and methods; and products must be periodically redesigned to RESTRICTED


RESTRICTED incorporate new features and to meet the competition. Moreover, in some cases, locations for new facilities must be found, new factories must be designed and built, and decisions must be made on the layout (arrangement) of department and equipment. Although on the surface it may appear that the managing of a cruise and the managing of a manufacturing facility are quite different, in reality they involve many of the same elements: facilities, work force, inventories, schooling, and quality assurance. Hence, as diverse as these two examples are, the both reflect activities that fall within the realm of production and operation management. The cruise ship involves services, the factory involves goods.





There are three primary functions in most business organizations: operation, finance, and marketing, as depicted in Figure l-1. The three circles suggest that these three functions overlap: they do not exist or function independent of each other. Rather, they interact to achieve the goals and objectives of organization; they are dependent on each other, and each has an import contribution to make. Often the success of an organization depends not only on how well each area performs but also on how well the areas interface with each other. For instance, in manufacturing, it is essential that production of marketing work together. Otherwise, marketing may attempt to promote goods that production cannot profitably produce, and production may produce items for which there is no demand. Similarly, unless finance and production people work closely, funds for expansion or new equipment may not be available when needed.




Figure 2.1

Aside from these three primary functions, there are a number of support functions in many organizations, such as personnel, accounting, and engaging. Obviously, the presence of these functions and the emphasis placed on each one depend on the type of business a firm is engaged in. Thus, non-manufacturing firms would be less apt to have an engineering department than manufacturing firms. Let's take a closer look at these functions, beginning with the three primary ones.



RESTRICTED Section 2-1 Operations

The operations function consists of all activities that are directly related to producing goods or providing services. The production function exists not only in manufacturing and assembly operations, which are goods-oriented, but also in such areas as health care, transportation, food handling, and retailing, which are primarily service-oriented. Table 2-1 provides some examples that illustrate the diversity of operations management settings. Table 2.1 Type of operation Physical Storage/transportation Exchange Entertainment Communication

Examples Farming, mining, construction, manufacturing, power generation Warehousing, trucking, mail service, moving, taxis, buses, hotels, airlines Retailing, wholesaling, banking, renting or leasing, library loans Films, radio and television, plays, concerts, recording Newspapers, radio and TV newscasts, telephone, satellites

The operations function is the core of most business organizations; operations is responsible for the creation of an organization's products or services. Inputs of labor, materials, energy, and time are used to obtain finished goods or services using one or more transformation processes (e.g., storing, transporting, and cutting), thereby adding value. To insure that the desired outputs are obtained, measurements are taken at various points in the transformation process (feedback) and then compared to previously established standards to determine if corrective action is needed (control). Figure 2-2 shows the conversion process. Table 2-2 provides some processes, and outputs.

examples of inputs,

Transformation or conversion






Figure 2.2 2-2




RESTRICTED Section 2-2 Finance

The finance function comprises activities related to securing monetary resources at favorable prices and allocating those resources throughout the organization. Finance and operations management personnel cooperate in exchange of information and expertise in such activities as: 1. Budgeting. Budgets must be periodically prepared in order to plan financial requirements. Budgets must sometimes be adjusted, and performance relative to budget must be evaluated. 2. Economic Analysis of Investment Proposals. Evaluation of alternative investments in plant and equipment requires inputs from both operations and finance people. 3. Provision of Funds. The necessary funding of operations and the amounts and timings of funding can be important and even critical when funds are tight. Careful planning can help avoid cash flow problems. Note that most for-profit firms obtain the majority of their funds through the revenues generated by sales of goods and services.

Inputs Human Physical Intellectual Raw materials Energy Water Chemicals Metals Lumber Fibers Other Technology Information Time

Table 2.2 Transformation Processes Cutting, drilling Storing Transporting Extracting Farming Teaching Assembling Equipment Machines Computers Typewriters Trucks Buses Facilities Factories Schools Hospitals Service garages Offices Retail stores Warehouses


Outputs Goods Houses Automobiles Textbooks Clothing Typewriters Machines Televisions Food Energy Furniture Services Health care Entertainment Car repair Car wash Transportation Delivery Gift wrapping Banking Education


RESTRICTED Section 2-3 Marketing

The marketing function's main concern is with selling the organization’s products or services. Primary marketing activities, in addition to selling, include advertising and promotion, generally developing and maintaining a market, and sales forecasting. Marketing is in a position to measure the needs and preferences of consumers, and marketing can be a valuable source of information relating to ideas for product or service improvement as well as for ideas for new products or services. One important piece of information which marketing needs from operations is manufacturing or service lead time so that customers can be given realistic estimates of how long it will take to fill their orders. Thus, marketing and operations need to interface on product and process design, forecasting, setting realistic schedules, quality and quantity decisions, and keeping each other informed on the other's strengths and weaknesses.

Section 2-4 Other Functions

There are a host of other supporting functions that interface with the main three. Among them are accounting and purchasing. In addition, depending on the nature of the organization, there may be personnel, product design and development, industrial engineering, and maintenance (see Figure 2-3). 4. Accounting. It has responsibility for preparing the financial statements, including the income statement and balance sheet. It also supplies cost data on labor, materials, and overhead and may provide reports on such items as scrap, downtime, and inventories. It must keep track of receivables, payables, and insurance costs and prepare tax statements for the firm. 5. Purchasing. It is charged with procurement of materials, supplies, and equipment. Close contact with operations is necessary to ensure correct quantities and timing of purchases. Also, the purchasing department is often called on to evaluate vendors for quality, reliability, service, price, and ability to adjust to changing demand. Purchasing also involves shipping, receiving, and inspecting the purchased goods. 6. Personnel. This department is concerned with recruitment and training of personnel, labor relations, contract negotiations, wage and salary administration, assisting in manpower projections, and ensuring the health and safety of employees. 7. Public Relations. It is responsible for building and maintaining the positive public image of the organization. This might involve sponsoring a little league team, donating to cultural events, giving public tours of facilities, 2-4


RESTRICTED sponsoring community affairs (e.g., marathons, bike races), and so on. Donating the use of facilities and providing public service messages and information about the organization, its employees, its products, and its services all fall under the heading of public relations. There are many potential benefits of good public relations. An obvious one is in the marketplace. Other potential benefits include being regarded as a good place to work (labor supply), improving chances of getting zoning change requests approved, getting community acceptance of expansion plans, and generating a positive attitude among employees. 8. Industrial Engineering, It is often concerned with scheduling, performance standards, work methods, quality control, and material handling. This function is typically found in manufacturing plants in medium and large firms. 9. Maintenance. It is responsible for general maintenance and repair of equipment, maintenance of buildings and grounds, heating and air conditioning, removing toxic wastes, parking, and perhaps security. The importance of production and operations management, both for organizations and for society, should be fairly obvious: The consumption of goods and services is an integral aspect of society as we know it. Production and operations management is responsible for creating those goods and services. Organizations exist primarily for the purpose of providing services or creating goods. Hence, production is the core function of an organization. Without this core, there would be no need for any of the other functions; the organization would have no purpose. Given the central nature of its function in our society, it is not surprising that more than half of all employed people in this country have jobs within the production/operations area. Furthermore, the operations function controls a major portion of the assets in most organizations.




Industrial engineering



Public relations




Figure 2.3





We have already noted that the operations manager is responsible for the creation of goods and services. This encompasses acquisition of resources and the conversion of their inputs into outputs using one or more transformation processes. This involves planning, coordinating, and controlling the elements that make up the process, including workers, equipment, facilities, allocation of resources, and work methods. It also includes product and/or service design. This is a vital, ongoing process that most organizations must do. It is an activity that operations perform in conjunction with marketing. As previously noted, marketing people can be a source of ideas concerning new products and services as well as improvements to existing products and services. Operations people can also be a source of new ideas for improvements related to the production aspect of the organization. These can include ideas on new procedures for fabrication and assembly as well as improved designs handling and storage procedures, and so on. From a practical standpoint, product and service design can be the lifeblood of a competitive organization. The main function of the operations manager is to guide the system through decision making. Generally speaking, there is a major emphasis on productive use of resources. There are various ways of classifying the decisions that an operations manager must make, such as qualitative versus quantitative, according to the management process (planning, staffing, etc.), and according to whether the decisions relate to systems design or systems operation. Each of these approaches has its merits. The approach used in this text indeed, the framework of the entire book is the latter approach: the material is arranged according to topics that relate primarily to design and according to topics that relate primarily to systems operation. The following section examines this approach in more detail.

Section 3-1 Designing and Operating Production Systems

Systems design involves decisions that relate to systems capacity, the geographic location of facilities, arrangement of departments and placement of equipment within physical structures, product and service planning, and acquisition of equipment. These are usually, but not always, decisions that require long-term commitments. Systems operation involves management of personnel, inventory planning and control, scheduling, project management, and quality assurance. In many instances, the operations manager is more involved in day-to-day operating decisions than with decisions relating to systems design. In fact, much of systems design lies in the province of top management. However, the operations manager has a vital stake in systems design because systems design essentially determines many of the RESTRICTED


RESTRICTED parameters of systems operation. For example, costs, space, capacities, and quality are all directly affected by design decisions. Even though the operations manager is not responsible for making certain design decisions, he or she can provide a wide range of information to decision makers, which will have a bearing on those decisions. A brief description of design and operating decisions is given in Table 3.1. Decision Area Forecasting Design Product and service selection Capacity (long range) Location Layout Product and service design Design of work systems

Table 3.1 Basic Questions How much will be demanded? When, and what products and services? What products and services should the organization offer? How much capacity will be needed? How can the organization best meet capacity requirements? What is a satisfactory location for a facility (factory, store, etc.)? What is a satisfactory location for a facility (factory, store, etc.)? How can products and services be improved? What is the best way to motivate employees? How can productivity be improved? How should work be measured? How can work methods be improved?

Operation Aggregate planning Inventory management Materials requirements planning Scheduling

Project management

Waiting lines


How much capacity will be needed over the intermediate range? How can capacity needs best be met? How much to order? When to reorder? Which items should get the most attention? What materials, parts, and subassemblies will be needed, and when? How can jobs best be scheduled? Who will do which job? Which equipment should be used? Which activities are the most critical to the success of a project? What are the goals of a project? What resources will be needed, and when will they be needed? How can bottlenecks be reduced? What is effective capacity?



Quality assurance

How can quality be improved? Are processes performing adequately? What standards should be used? Are standards being met?

These decisions are generally hierarchical in nature; plans and designs are usually sequential, and those at the lower levels are constrained to a certain extent by higher level plans and decisions. At the highest level are strategic decisions. These are broad in scope and involve a choice of products and services, new facilities and locations, and general policies of the organization. For the most part, strategic decisions have long-term implications for the organization. At the next level are tactical decisions. These are narrower in scope than the strategic decisions. Tactical decisions often involve allocating financial resources, equipment selection and use, and planning work force levels, output rates, and inventory levels. Tactical decisions are made within the framework established by strategic decisions. At the lowest level are operating decisions. These involve such activities as scheduling of equipment and personnel, adjusting production rates, and handling equipment breakdowns, absenteeism, shortages, inventory replenishment, and quality control. Operating decisions are made within the framework established by tactical decisions. The decision hierarchy is illustrated in Figure 3.2.

Figure 3.1



RESTRICTED Section 3-2 The Operations Manager and the Management Process

The operations manager is the key figure in the system: he or she has the ultimate responsibility for the creation of goods or services. As you might imagine, the kinds of jobs that operations managers oversee vary tremendously from organization to organization largely because of the differences in products or services different organizations are involved with. Thus, managing a banking operation obviously requires a different kind of expertise than managing a steel-making operation. However, in one very important respect, the jobs are the same: They are both essentially managerial. In fact, the same thing can be said for the job of any operations manager, regardless of the kinds of goods or services being created. In every case, the operations manager must coordinate the use of resources through the management process, which involves planning, organizing, staffing, directing, and controlling.

Table 3.2 Responsibilities of Operation Managers Planning Capacity Location Products and services Layout Projects Scheduling Controlling Inventory control Quality control

Organizing Degree of centralization Make or buy Subcontracting Staffing Use of overtime Hiring/laying off Directing Incentive plans Issuance of work orders Job assignments

1. Planning. This involves determining a future course of action. The planning process begins by deciding what is desired, then a way is designed for accomplishing that objective. 2. Organizing. This refers to the administrative structure of the organization. It involves putting the pieces of the system together in such a way that desired results can be achieved. It requires decisions regarding who, what, where, when, and how. 3. Staffing. This involves selection and training of the personnel who will operate the system. 4. Directing. This refers to the issuance of commands or orders, making suggestions, or otherwise motivating subordinates to perform their assigned duties in a timely and efficient manner. 3-4



5. Controlling. This involves measuring the results of operations, deciding if they are acceptable, and instituting corrective action, if need be. Examples of the responsibilities of operations managers according to these classifications are given in Table 3.2.








One of the primary responsibilities of an operations manager is to achieve productive use of resources. Productivity measures the relationship between outputs (goods or services) and inputs (labor, capital, materials, or other resources) used to produce them. Productivity is usually expressed as the ratio of quantity of output to quantity of input:

Output Productivity = Input Two types of productivity measurements are generally employed: labor productivity and multifactor productivity. Labor productivity reflects output relative to labor hours worked, and multifactor productivity reflects a combination of some or all of the resources used to obtain a certain output.

Yards of carpet installed = Yard per hour Labor hours Number of offices cleaned = Office per Shift Number of shifts Board feet of lumber cut = Feet per week Number of Weeks Similar examples can be listed for machine productivity (e.g., the number of pieces per hour turned out by a machine). Calculations of multifactor productivity involve measuring inputs and outputs using a common unit of measurement, such as cost or value. For instance, the measure might use cost of inputs and price of the output: Quantity of production at standard price Labor cost + Materials cost + Overhead In essence, productivity measurements serve as scorecards of the effective use of resources. Government leaders in every country are concerned with national productivity because there is a close relationship between productivity and the standard of living of a nation's people. High levels of productivity are largely responsible for the relatively high standards of living enjoyed by industrial nations. Moreover, wage and price increases RESTRICTED


RESTRICTED that are not accompanied by productivity increases create inflationary pressures on the economy. Business leaders are also concerned with productivity as a key factor in competitiveness. If two competing firms each have the same level of output, but one of the firms is able to achieve this with a lower level of input, that firm will be at an advantage; it can charge the same price for its output and achieve a higher level of profit than its less productive competitor, or it can charge a lower price and thereby increase its sales at the expense of its less productive competitor. U.S. productivity is the highest in the world. However, a significant portion of this relates to agricultural productivity; manufacturing productivity is closer to that of other industrial nations. Even so, there is serious concern on the part of the U.S. government and industrial leaders because U.S. productivity increases in many industries have lagged far behind those of other nations, particularly Japan and Korea. Figure 4.1 summarizes annual percentage changes in productivity ratios for 1981 to 1985 for selected countries. The obvious question is: How are certain nations, industries, or companies able to achieve productivity gains while others are not? Actually, there are many reasons cited by theorists and researchers. Among the most prominent are: a. A lower propensity to save and a higher propensity to consume in the United States and some other Western nations have slowed capital formation and attracted foreign goods. b. Increasing government regulations have added administrative (and nonproductive) burden of many companies.



c. Increased legal staffs are needed to handle product liability claims. There has been an increasing demand for services, which are generally less efficient than manufacturing operations. d. There is often emphasis on short-run performance (e.g., annual profits and sales), and this reduces the incentive to develop long-term solutions to problems. In addition, in periods of inflation and increased costs of borrowed money, managers are, perhaps understandably, hesitant to commit funds for long periods of time because it reduces their flexibility to take advantage of other opportunities that might arise in the meantime.




Figure 4.1 Many authorities place much of the responsibility for lagging productivity improvements on management. They point out that foreign competitors have had to deal with similar (or worse) conditions than their U.S. counterparts and yet have come out ahead on productivity improvements. It should be noted that some argue that most foreign competitors started out with productivity so low that the improvements merely reflect catching up to U.S. manufacturers. To a certain extent, that is true. Moreover, foreign competitors were able to learn much about quality and productivity improvements by studying Western methods. However, many of those companies have achieved productivity levels that equal or surpass those of their U. S. counterparts. It seems that they are using the lessons learned to go beyond their teachers. Some cite the inability of U.S. managers to successfully integrate technological improvements into the production process; a common complaint is that U. S. managers seem to be "throwing technology at the problem" rather than wisely analyzing their processes to see if and how technology can be used to gain competitive advantage.

Section 4-1 Factors that Affect Productivity

There are numerous factors that affect productivity. Among them are methods, capital, quality, technology, and management. Consider the student who plans to type a lengthy term paper. The student is an average typist and can turn out about three pages per hour. How could the student increase productivity (i.e., turn out more pages per hour)? One way would be to enroll in a short course offered by the college to improve RESTRICTED


RESTRICTED typing skills (method). Another possibility might be to replace a manual typewriter with a more expensive electric typewriter (capital) to gain the speed of automatic features. If quality (e.g., typing errors) is a problem, an even more expensive word processor (capital) that will allow errors to be corrected before they appear on the page could help. Still other productivity improvements might be achieved through improving organization and preparation for the actual typing (management). The incentive of receiving a good grade and the personal pride of doing a good job might also be important. The point is that all of these factors are potential sources of productivity, not only for typing papers but for any kind of work, and it is generally up to the manager to see to it that they are fully exploited. A commonly held misconception is that workers are the main determinant of productivity. According to that theory, the route to productivity gains involves getting employees to work harder. However, the fact is that many productivity gains in the past have come from technological improvements. Familiar examples include: Paint rollers Power lawn mowers Electronic typewriters Copying machines Microwave ovens Automatic washers, dryers, dishwashers, electric blenders

Long-distance direct dialing, pay-byphone, cellular phones Computerized billing and inventories Automation Calculators Computers, personal computers

However, as noted in the previous section, technology alone won't produce productivity gains; it must be used wisely and thoughtfully. In fact, without careful planning, technology can actually reduce productivity, especially if it leads to inflexibility, high costs, or mismatched operations.

Section 4-2 Improving Productivity

There are a number of key steps that a company or a department can take toward improving productivity: Develop productivity measures for all operations; measurement is the first step in managing and controlling an operation.




Operation Operation Operation

Bottleneck Operation


Figure 4.2

Look at the system as a whole in deciding which operations to concentrate on. It is overall productivity that is important. This concept is illustrated in Figure 4.2, which shows several operations feeding their output into a bottleneck operation. The capacity of the bottleneck operation is less than the combined capacities of the operations that provide input, so units queue up waiting to be processed; hence, the term bottleneck. Productivity improvements to any non-bottleneck operation will not affect the productivity of the system. Improvements in the bottleneck operation will lead to increased productivity, up to the point that the output rate of the bottleneck equals the output rate of the operations feeding it. Develop methods for achieving productivity improvements, such as soliciting ideas from workers (perhaps organizing teams of workers, engineers, and managers to work on this), studying how other firms have increased productivity and reexamining the way work is done. Establish reasonable goals for improvement. Make it clear that management supports and encourages productivity improvement. Consider incentives to reward workers for contributions. Measure improvements, and publicize them.








There are a number of ways to classify production systems. A brief discussion of some of these ways will help you to develop a better picture of the nature and scope of operations management. The three ways described here are: degree of standardization, type of operation, and manufacturing versus service operations.

Section 5-1 Degree of Standardization

Production systems produce output that ranges from highly standardized to highly customized. Standardized output means that there is a high degree of uniformity in goods or services. Examples of goods are radios, televisions, typewriters, newspapers, canned foods, automobile tires, pens, and pencils. Examples of services are automatic car washes, televised newscasts, taped lectures, and commercial airline service. Customized output means that the product or service is designed for a specific case or individual. Goods include eyeglasses, custom-fitted clothing, window glass (cut to order), and customized drapery. Examples of services are tailoring, taxi rides, and surgery. Systems with standardized output can generally take advantage of standardized methods, materials, and mechanization, all of which contribute to higher volumes and lower unit costs. With specialized systems, on the other hand, each job is different enough that workers must be more skilled, the work moves slower, and the work is less susceptible to mechanization.

Section 5-2 Type of Operation

The degree of standardization of a product or service and the volume of output influence the way that production is organized. On one end of the scale is a single, large-scale product or service such as the launching of a space shuttle (service) or the construction of a skyscraper (product). On the other end is a continuous process, such as oil refining. In between these extremes are small batches or individual units of output, such as custom-made furniture, lamps, special-purpose machines, and auto repair, all the way to mass production (high volume of output), such as automobiles, typewriters, and appliances. Let's take a closer look at these different types of operations: 1. A Project. It a set of activities directed toward a unique goal. Usually, projects are relatively large scale. Examples of situations in which a project RESTRICTED


RESTRICTED approach would be used are development of a new product, installation of a computerized production line, transfer of equipment to a new facility from a current one, and construction of a hospital. Sometimes the situations are of a more personal nature, such as planning for the visit of foreign dignitaries, planning an extended vacation that involves travel, and organizing a walk-forwater or other charitable activity. A key feature of all of these projects is their limited time frame. That is, they do not continue indefinitely; they have specific starting and ending points. 2. Unit or Batch. The production is typically performed by a job shop. A job shop maintains the ability to render certain types of production but generally is not responsible for specific products. Instead, it performs to customer specifications; jobs tend to vary according to the needs of customers. Examples of job shops are organizations that do repair work (on appliances, televisions, stereos, automobiles), health care, printing, and so on. Some of these are highly customized, while others offer a list of services or products of a more standardized nature from which customers can select. 3. Mass Production. On the other extreme of the scale of output volume is mass production. Organizations using this type of operation generally confine output to one or a relatively small number of similar products or services and function in such a way as to accomplish production as efficiently as possible. Both the work and the output tend to be highly standardized. Mass production systems are examples of repetitive production. This type of production lends itself to automation or other specialized equipment. 4. Continuous Processing. It is employed when a homogeneous product or service is produced or rendered. Processing of chemicals, photographic film, newsprint, and oil products are all examples of this type of operation. Machines often provide continuous services, such as air conditioning, heating, continuous cleaning, and monitoring systems.

Section 5-3 Manufacturing Operations versus Service Operations

Manufacturing implies production of a tangible output, such as an automobile, a clock radio, a golf ball, a refrigerator, or anything else that we can see or touch. Service, on the other hand, generally implies an act. A doctor’s examination, TV and auto repair, lawn care, and showing a film are examples of services. Manufacturing and service are often similar in terms of what is done but different in terms of how it is done. For example, both involve design and operating decisions. Manufacturers must decide how large a factory is needed, and service organizations (e.g., hospitals) must decide how large a building they need. Both must make location decisions, and both become involved in scheduling and controlling operations and allocating scarce resources.



RESTRICTED Most of the differences between manufacturing and service organizations relate to manufacturing being product-oriented and service being act-oriented. The differences involve the following: a.

The nature and consumption of output.


Uniformity of input.


Labor content of jobs.


Uniformity of output.


Measurement of productivity.

Let us briefly consider each of these differences: a. By its very nature, service involves a much higher degree of customer contact than manufacturing does. The performance of a service typically occurs at the point of consumption. That is, the two often occur simultaneously. For example, repairing a leaky roof must take place where the roof is, and surgery requires the presence of the surgeon and the patient. On the other hand, manufacturing allows a separation of production and consumption, so that manufacturing often occurs in an isolated environment, away from the consumer. This permits a fair degree of latitude in selecting work methods, assigning jobs, scheduling work, and exercising control over operations. Service operations, because of their contact with customers, can sometimes be much more limited in their range of options in these areas. Moreover, customers are sometimes a part of the system (e.g., self-service operations such as gas stations, shopping), so tight control is not possible. Then, too, product-oriented operations can build up inventories of finished goods, which enable them to absorb some of the shocks caused by varying demand. However, service operations cannot build up inventories of time, so service capacity is much more sensitive to demand variability. Thus, banks and supermarkets alternate between lines of customers waiting for service and idle tellers or cashiers waiting for customers. b. Service operations are subject to more variability of inputs than typical manufacturing operations are. Each patient, each lawn, and each TV presents a specific problem that often must be diagnosed before it can be remedied. There is often the ability in manufacturing to carefully control the amount of variability of inputs, so it is often possible to achieve low variability. Consequently, job requirements for manufacturing are generally more uniform than those for services. c. Because of the on-site consumption of services and because of the high degree of variation of inputs, services require a higher labor content, whereas manufacturing can be more capital-intensive (i.e., mechanized), although there are exceptions.



RESTRICTED d. High mechanization generates products with low variability, so manufacturing tends to be smooth and efficient; service activities sometimes appear to be slow and awkward, and output is more variable. e. Measurement of productivity is relatively straightforward in manufacturing due to the high degree of uniformity of most manufactured items. However, in many cases, variations in demand intensity, as well as variations in service requirements from job to job, make productivity measurement considerably more difficult. For example, the work load of two doctors might be compared. One may have had a large number of routine cases while the other does not, so their productivity would appear to differ unless a very careful analysis was made. Table 5.1 gives an overview of manufacturing and service operation differences. Although at times it may be convenient to think in terms of systems that are exclusively devoted to goods or services, most real systems are a blend of the two. For instance, maintenance and repair of equipment are two services performed by virtually every manufacturing firm. Similarly, most socalled service organizations typically sell goods that complement their services. Thus, a lawn care firm usually sells such goods as weed killers, fertilizers, and grass seed. Hospitals dispense medical and surgical supplies along with health services. Restaurants sell food. Movie theaters sell popcorn, candy, and beverages.

Characteristics Output Customer contact Labor content Uniformity of output Measurement of productivity

Table 5.1 Manufacturing Tangible Low Low High

Service Intangible High High Low



Section 5-4 Implications for Production Systems

These different ways of classifying production systems have important implications for designing and operating them. The degree of standardization of output, the type of operation, and whether the system involves mainly goods, mainly service, or some combination of goods and services have a bearing on capital requirements, choice of equipment, capacity planning, location planning, layout, inventory management, work force requirements, scheduling, and quality assurance. Management of a project is quite different from management of an assembly line, and managing a job shop operation is different from managing a project or a high-volume operation. Forecasting requirements are different 5-4


RESTRICTED for the three types of systems. A high-volume operation requires a steady rate of output, and it can be costly as well as difficult to vary that rate. Hence, a good forecast is necessary to adequately design the system. Conversely, a job shop has a great deal more flexibility, so forecasting is less crucial at the design stage. Inventory requirements for a job shop are different from those for a system making standard products. Job shops typically make products to order. Thus, they would have little or no finished goods inventories. They may carry raw materials and supplies for frequently used operations. In repetitive manufacturing systems, an inventory of both raw materials and finished goods generally exists. However, purchasing is standardized, as are most of the activities associated with the operations. Projects tend to be unique, and their requirements vary considerably. In terms of actual operation, repetitive systems exhibit the highest degree of certainty, job shops the next highest, and projects the lowest. Consequently, repetitive systems involve a more routine set of activities than do job shops, which involve a more routine set of activities than do projects. The differences among the systems and their implications for operations management will be elaborated on in the remainder of the book.








A number of important issues and recent developments in operations management are currently influencing managerial decision. This section presents a brief overview of the major ones, which are: a.



Government regulation


The international scope of operations


Foreign competition


Cost and quality




The increasing importance of service operations


Managerial attention to employee viewpoints




Operations strategy

1. Productivity. A key issue in all organizations is productivity. In many cases, it has become a key measure of the effectiveness of management. Moreover, as noted earlier in the chapter, a major objective of operations management is to improve productivity. Management has always been concerned with productivity. However, U.S. productivity gains in recent years have lagged behind those of foreign competitors, such as Japan and Korea. 2. Pollution Control. It has also had a tremendous impact on some industrial terms of design and operation, and the government continues to raise the standards on waste disposal and emission controls. When location state government regulations differ from national standards, business organizations have the burden of designing for both. For instance, California emission control requirements are more stringent than most other states, and automotive factories have been forced to create special designs and pricing policies to compare for them. 3. Consumer Awareness. Increasing consumer awareness, particularly in the area of product safety, emerged as a new force that must be reckoned with. Through pressures by government and concerned consumers, major manufacturer recalls have been made on TVs, hairdryers, tires, bicycles, medicines, canned foods, coffee, and other items. Designers and quality inspectors have had to reconsider these activities. RESTRICTED



Government regulations related to worker safety (OSHA) and hiring practices (EEO) have had an impact on the design of work systems. 4. Scope of Operation. The international scope of operation has increased opportunities to develop foreign markets, created additional sources for raw material and labor, and forced numerous organizations to reassess their strategies. It has brought an increase in multinational companies. It is becoming more and more common to encounter firms that obtain their raw materials in one country; fabricate parts in another, and assemble the final products in still another country. Managing such far-flung operations poses new challenges for managers as well as new opportunities. 5. Foreign Competition. It has made serious inroads in areas traditionally dominated by U.S. firms. West Germany, Japan, Taiwan, and Korea are notable examples of major foreign competitors. Some U.S. firms have suffered substantial losses in market share to these competitors. This is a continuing problem that must be dealt with in order to avoid even more serious consequences. Beyond that, members of the European Common Market have formed a closer trade alliance in 1992 called the European Economic Community. As part of that alliance, trade barriers among member nations were removed, making it more difficult for U.S. companies to compete in those markets. Part of the reason for the success of foreign competitors has been their ability to provide high quality goods at reasonable cost. This has led U.S. firms to place greater importance on quality and cost effectiveness because they are discovering that consumers are placing more importance on product quality and that foreign competitors can often provide this quality at a relatively lower cost than many U.S. companies. The implication is that foreign producers are able to produce at lower costs, that is, the costs of transforming inputs into outputs are lower. This emphasis on cost and quality has spread to service industries as well, to the point where it is now safe to say that there is a major emphasis on cost and quality that pervades thinking in production and operations management. Furthermore, quality, cost-effectiveness, and productivity are interrelated, making these topics among the most prominent in management today. 6. Technological changes. This is an increasingly important factor in operations management. New products and services are being developed as firms attempt to maintain competitiveness, and new production technologies are appearing that must be integrated into production systems. Robotics is an important example of this, particularly in the automotive industry (but also in other industries). Robots offer certain advantages in automation and have some of the benefits of flexibility not generally associated with automation. The increased use of computers has enlarged the decision-making capabilities of managers, enabling them to use more quantitative techniques in analyzing decisions, and its use has greatly enlarged information storage and handling capabilities.



RESTRICTED 7. Service Systems. As previously noted, service systems are becoming increasingly important in operations due to the growth in the number of such systems and because of the challenges that they present to the operations manager. In an effort to improve quality and productivity, managers are encouraging employee input in the form of suggestions, quality circles, and other vehicles. Although this input is quite small, some feel that it will become more important in the years ahead. The last two issues, competitiveness and strategy, are discussed in the following Chapters.








Business organizations compete with one another in a variety of ways. Key among them are through price, quality, product or service differentiation, flexibility, and delivery time. a. Price is the amount a customer must pay for the product or service. Generally, the price a buyer is willing to pay relates to the other factors involved (quality, delivery time, etc.) as well as to the price and features of competitors. Organizations that compete on price may settle for lower profit margins, but most focus on lowering production costs. b. Quality refers to materials and workmanship as well as design. Generally, it relates to the buyer's perceptions of how well the product or service will serve its intended purpose. c. Product differentiation refers to any special features (design, cost, quality, ease of use, convenient location, warranty, etc.) that cause a product or service to be perceived by the buyer as more suitable than a competitor's product or service. d. Flexibility refers to the ability to respond to changes. The better a company or department is able to respond to changes, the greater its competitive advantage over another company that is not as able to respond. The changes might relate to increases or decreases in volume demanded, changes in product mix, or to design changes in product or service features. e. Delivery time refers to the length of time between placing an order and receiving the product or service ordered. Obviously, short delivery times are preferred over longer times. Occasionally, the ability to schedule delivery (e.g., of furniture, appliance, or other household item repairs) is an important consideration. Although managers generally recognize some or all of these factors, they do not always use them for competitive advantage. One reason is that they are unsure of the mix off factors that matters most to buyers. This means that they must do a better job in carefully assessing buyers’ wants and needs. This is primarily the function of marketing research. Another reason is that they are unable to achieve desired levels of these factors. This is, primarily, the responsibility of production. Thus, if a firm is to compete effectively, it must understand its markets and be able to achieve suitable levels of quality, cost, delivery time, differentiation, and flexibility. It must also be aware of what its competitors are doing in these areas, and perhaps make some predictions about future behavior of competitors in order to have the necessary time to respond.








In 1960, Japan accounted for only 1 percent of the free world's output of automobiles, while the United States accounted for 51 percent. By 1980, Japan's share of the output had climbed all the way to 24 percent, while the U.S. share had fallen to 22 percent. Over the next decade, these shares both slipped a few percentage points as other foreign producers gained a foothold in automobile production. Furthermore, markets that were once dominated by U. S. manufacturers, such as for TVs, VCRs, cassette players, minor appliances, and cameras, have rapidly lost market share to foreign competitors, with a large share of those markets going to Japanese companies. How did this happen? In retrospect, it appears that many foreign producers had strategies that were superior to the strategies of U.S. producers. Strategic decisions have a long-range impact on the general direction and, on the basic character, of a company. In large measure, strategic decisions determine the ability of an organization to compete. In fact, strategic decisions and their results weighed heavily in the relative success of Japanese manufacturers. Let's take a look at how this happened.

Section 8-1 Japanese versus U.S. Strategy

As a nation, Japan is crowded and has little in the way of natural resources. After World War II, much of Japan's industrial base was in ruins. Japan sorely needed money from manufacturer exports to rebuild its economy. However, Japanese companies had a reputation as producers of shoddy goods. Japanese leaders agreed that a national priority was to overcome that reputation. In an unprecedented move, managers at all levels of Japanese manufacturing companies were schooled in U.S. quality control concepts and procedures. Next, marketing departments were asked to identify products that corresponded to manufacturing capabilities. The strategy was to identify products that were in mature stages of development (i.e., for which there was a high volume, stable market, with well-defined production technology, and with competition based on price and quality). This strategy avoided the need to invest in product and market development; the markets already existed, and no major product innovations were needed. This permitted Japanese firms to invest money in robots and automatic production equipment and in programs to reduce cost and improve quality. In addition, efforts were made to develop long-term relationships with suppliers and shippers. And, because of crowded conditions and scarcity of natural resources, it was important to reduce waste and minimize inventories. .



RESTRICTED Efforts to improve quality had tremendous benefits. Not only did market share increase, but the resulting reduction in scrap and rework improved productivity and reduced costs. The use of robots and automatic processing equipment also added to quality improvements. Meanwhile, inventory reductions and the now-famous just-in-time production methods contributed to improving work flow, cost reduction, and productivity. Now, consider the U.S. experience. During World War II, the war effort was the overwhelming national priority. Production reigned supreme. Marketing and finance took a back seat to manufacturing. Quality control concepts and techniques were developed and applied to a wide range of products. Efficiency was important. When the war ended, U.S. industries were basically intact. Manufacturing shifted from the production of war goods to the production of consumer goods. Unlike their Japanese counterparts, U.S. manufacturers had to deal with excess capacity. Marketing became important as companies focused on creating demand for their goods and services. This spilled over into education, where many students became marketing majors because that was where the glamour jobs were. Manufacturing became less important in strategic planning than marketing. Then, during the 1970s, finance and legal fields began to capture much of the attention as mergers and acquisitions became common. Often, mergers were made on a purely financial basis rather than for considerations based on similar or complementary operations. Many CEOs (chief executive officers) came from finance, law, or marketing, with little or no understanding of the operations side of their businesses. And, operation was often not even represented on the board of directors. Marketing and/or finance became the basis of corporate strategy, with operations playing a reactive role: once it was decided what was to be done, it was left to operations to decide how to do it. But because operations people had little or no input at the strategic level, operations capabilities were sometimes not well-suited to achieving the goals set by planners. For example, in the auto industry, it became fashionable to offer car buyers a wide range of options. The reasoning was that this made a company competitive without adding much labor cost to a car. Although that was true, and although car buyers seemed to appreciate "designing their own cars," this created an immense burden for manufacturing: scheduling became increasingly difficult, inventories to support all of the different options became necessary, and equipment needed to accommodate the options (e.g., different tools, dies, fixtures) as well as the variety of methods used proliferated, greatly adding to the indirect cost and negatively impacting productivity. Similar effects were felt in other industries, primarily due to the lack of input from operations at the strategic stages of decision making. Needless to say, there is currently a renewed interest in the United States in production and operations management as companies seek to maintain or regain their competitive edge in both foreign and domestic markets. An important element in these endeavors will be the strategic



RESTRICTED decisions that are made, and how well they serve the mission of the organization.

Section 8-2 Mission

Every organization has a mission. The mission describes the purpose of the organization, the reason for its existence. Thus, different organizations will have different missions. A medical research organization might have as its mission to make a contribution to finding a cure for cancer; a consulting firm might have as its mission providing consulting services for new businesses; and a construction firm might have as its mission the remodeling of existing residences. Of course, part of the mission of for-profit firms is to make a profit for the owners. A statement of mission should answer the question: What business are we in? The mission provides a general direction for an organization; it is the basis for organizational goals (e. g., increase market share at the rate of 5 percent a year for the next five years). Strategies must then be developed that will lead to the realization of the goals. Strategies are plans for accomplishing goals. By nature, they relate to the long term, providing focus for achieving the mission of the organization. Often, the success of an organization depends on how all the strategies match the organization's mission. However, in some organizations, the mission is not clearly defined, making it difficult for decision makers (or even owners) to develop good strategies. Hence, it is extremely important for management to have a clear understanding of the mission of the organization in order to have a basis for formulating company, or corporate, strategy.

Section 8-3 Corporate Strategy

Corporate strategy is the overall strategy of an organization. It provides the basis of the individual strategies of functional units (i.e., marketing, finance, and operations). Corporate strategy should take into account certain external and internal factors that might have an impact on the organization. Key external factors are: 1. Economic Conditions. These include the general health and direction of the economy, inflation and deflation, interest rates, tax laws, and tariffs. 2. Political Conditions. These include favorable or unfavorable attitudes toward business, political stability or instability, and wars. 3. Legal Environment. This includes antitrust laws, government regulations, trade restrictions, minimum wage laws, product liability laws and recent court experience, labor laws, and patents. RESTRICTED


RESTRICTED 4. Technology. This can include the rate at which product innovations are occurring, current and future process technology (equipment, materials handling), and design technology. 5. Competition. This includes the number and strength of competitors, the basis of competition (e.g., price, quality, special features), and the ease of market entry. 6. Markets. This includes size, location, brand loyalties, ease of entry, potential for growth, long-term stability, and demographics. Each of these external factors must be examined in the light of the organization mission and evaluated in terms of its potential for contributing to, or conflicting with, the mission. They must also be matched with certain internal factors. Possible internal factors relate to strengths and weaknesses of the organization and the potential for changing weaknesses and improving or retaining strengths. Among the key internal factors are: a. Human resources. This includes the skills and abilities of managers, workers, and staff personnel; special talents (e.g., creativity, designing, problem solving); loyalty to the organization; expertise; dedication; and experience. b. Facilities and equipment. Capacities, location, age, and cost to maintain or replace can have significant impact on operations. c. Financial resources. Cash flow, access to additional funding, existing debt, burden, and cost of capital are important considerations. d. Customers. Loyalty, existing relationships, and understanding of wants and needs are important. e. Products and services. This includes existing products and services as well as potential for new products and services. f. Technology. This includes existing technology, the ability to integrate new technology, and the probable impact of technology on current and future operations. g. Suppliers. Supplier relationships, dependability of suppliers, quality, flexibility, and service are typical considerations. h. Other. Other factors include patents, labor relations, company or product image, distribution channels, relationships with distributors, maintenance of facilities and equipment, access to resources, and access to markets.




Corporate strategy is based on mission and on external and internal conditions

External Conditions

Mission Goals

Corporate Strategy

Internal Conditions

Functional strategic

Figure 8.1

Finance Marketing Operations Other

Figure 8.1 portrays the relationships between mission, corporate strategy, and functional strategies. The implication is that the mission and the external and internal conditions combine to shape corporate strategy, which, in turn, shapes functional strategies. It is important to include inputs from functional areas in formulating corporate strategies; functional areas should be proactive rather then merely reactive. Otherwise, there is a significant risk that corporate strategies will not match functional capabilities and potential capabilities, thereby lessening the success of corporate strategies. Table 8.1 contains a list of decision areas of corporate strategy.



RESTRICTED Table 8.1 Decision areas included in corporate strategy Product and -service selection Location of facilities Capacity Process selection Layout Human resource policies Bases of competition Technology Organization type





Operations strategy can be a key element in achieving strategic corporate objectives. As noted earlier, it is essential to have input from all of the functional areas, including operations, in formulating corporate strategy. This increases the likelihood that corporate strategies will be matched with functional capabilities. Operations strategy should be formulated on the basis of corporate strategy. Strategic decisions in operations generally relate to cost, quality/reliability, flexibility, and availability. Cost reduction amid the elimination of wastage has been a successful strategy used by many Japanese competitors. And, Japanese companies have made quality a central part of their strategy. Reliability pertains both to the output and to equipment (e.g., breakdowns, ability to perform as required). High equipment reliability means fewer work disruptions. Flexibility can refer to the ability to respond to changing volume requirements, changing product or service requirements, or necessary changes in the mix of goods or services produced. Flexibility sometimes relates to the ability of an organization to make its products and services available on short notice. One way of ensuring availability is to maintain an inventory that can be drawn upon as needed. The last two decision areas, availability and flexibility, pertain to the time, which is the time needed to respond, say, to a change or to customer demand. In fact, recent literature on competition and operations strategy stresses time management. The implication is that operations managers can gain a different perspective on improving operations by focusing on reducing the time needed to accomplish each stage of the production process. The management seems destined to become an important aspect of operation strategy as a competitive factor. Operations areas that could stand improvement sometimes come to managers’ attention as problems; at other times, they are hidden and must be uncovered. It is a well-known axiom that relatively few factors account for a major share of the problems experienced and that improvements in a few areas will have much more of an impact than improvements in many other areas. This is referred to as the Pareto principle. It basically means that things are not all equal; some things (a few) will be very important in achieving an objective or solving a problem and other things (many) will not. The implication is that a manager should examine the situation, searching the few factors that will contribute the most to improvement, and the concentrate on those; little or nothing will be gained by focusing efforts other, less important factors. This is one of the most important and pervasive concepts in operations management. In fact, as you read through this book try to find a chapter or topic area where this concept does not apply. You may come to the conclusion that the concept can be applied at all levels of management and to every aspect of decision making, both professional and personal.








Section 10-1 Summary

The goal of this book is to present a broad conceptual framework for operations management. Operations, finance, and marketing are seen as the true primary functions of most business organizations. Although it has been traditionally regarded as primarily manufacturing-oriented, in recent years the scope of operations management has expanded greatly and it is currently applied to both manufacturing and service activities. Operations management oversees all activities that are directly related to making a product or providing a service. Operations management is charged with transforming inputs of people, materials, energy, money, and information into useful goods and services. There are two main decision areas within operations: system design and system operation. System design is concerned with decisions related to capacity, location, layout, and product and process design. System operation is concerned with human resources, scheduling, project management, inventory management, and quality assurance. One of the major responsibilities of the operations manager is productivity; much effort is typically devoted to maintaining and improving productivity. Current issues in operations management include an increased emphasis on service systems, operating under increasing and changing government regulations, foreign competition, and integrating technological changes into production systems. Increasing emphasis is being placed on cost, quality, flexibility, and lead times. In addition, there is a greater awareness of the importance of integrating operations.

Section 10-2 Review and Discussion

1. Briefly describe the three primary functions that exist within most business organizations. 2. What are the categories used to describe each of these: Inputs? Transformation? Outputs? 3. How does POM interface with marketing? How does it interface with finance? 4. Contrast system design and system operation. Give four examples of topics for each. 5.

What are five important differences between manufacturing and RESTRICTED


RESTRICTED service operations? 6. What is productivity, and why is it important? Who in the organization is primarily responsible for productivity? 7. What are some of the possible reasons offered in this chapter for the recent slump in productivity in some U.S. companies? 8. From time to time, various groups clamor for import restrictions on automobiles to help American manufacturers. In what ways might those restrictions be helpful? What disadvantages do you feel such restrictions might entail? 9. Much of the quality and productivity gain accomplished by the Japanese can be traced to their use of industrial robots. Assuming this is true, why do you feel that U.S. companies have not made more extensive use of robots?

10. The United States has the highest productivity in agriculture of any country in the world and also ranks among the highest in textiles. What are some of the reasons for this high productivity? 11. Most experts agree that American workers are not primarily responsible for productivity problems. Nonetheless, workers sometimes contribute to the problem. Outline some of the ways in which this can happen.



Why study operations management?


Comment on the drawing. What are its implications?


Describe the Pareto Principle and dictate why it is an important RESTRICTED

RESTRICTED factor. 15. What strategies did Japan adopt after WWII that became successful? 16.

List and briefly explain business organizations.


List the key external factors that affect corporate strategy.

18. What are some competitive strategies? What are their advantages and disadvantages?








Someone else, or something else, was always to blame: The big spenders in Congress had let the budget deficit get too large. The Federal Reserve Board had cranked interest rates up too far. The dollar had soared too high. The Japanese were dumping products in the U. S. but shutting American companies out of their market. Whatever the excuse, though, the facts were the same: The U.S. was losing its competitive edge and had a ballooning trade deficit to prove it. Then, as the dollar plunged and the deficits seemed intractable, the realization began to dawn: Was it possible that some of the blame lay right here? Maybe U.S. companies simply were not as productive, not as capable of turning out quality products at competitive prices as other industrial powers? Management consultants and investment bankers sprang into action. Manufacturing executives took the bait. They restructured, downsized, merged, and streamlined in a desperate attempt to cut costs and survive. They poured money into the latest manufacturing technologies. Last year alone, they added computers and new process-control equipment to the tune of $17 billion.

Section 11-1 Receding Target

The results: Labor productivity in goods-producing industries leaped, pushing the annual growth rate to an average 3.5% for this decade, up from the paltry 1.4% of 1973 to 1979. Exports are climbing at double-digit rates. U.S. manufacturing is humming again. On the face of it, things are going swimmingly. Look a little closer, though, and it's clear that a new paradox has emerged: The more that Corporate America tries to boost productivity, the more elusive that goal becomes. In the first three years of the expansion, productivity growth topped 5% (see the chart), but since then it has slowed down to its current 3% level. That's decent enough, but experts worry that it's an unsustainable rate and in danger of falling further. While a few companies have achieved astonishing results from carefully integrating automation into their operations, many that raced to spend on new technologies were burned. General Motors Corp. spent "more on automation than the gross national products of many countries," says Stephen G. Payne, chief executive of the PA Consulting group in Princeton, N.J., and had little to show for it. In April the No. l auto maker finally conceded that its market had shrunk, and it started downsizing. For GM and many other RESTRICTED


RESTRICTED companies, the productivity payoff from automation is nowhere in sight. Finally, the big catch is that despite the efficiency improvements, and despite cuts in unit labor costs, the U.S. still lags behind such nations as Japan, Britain, and France in productivity growth. And nations such as Korea and Taiwan are also logging big gains in productivity-enhancing their competitive position in world markets. All the fuss is because rising productivity is the lever of economic development and growth: It provides what economists call "costless" growth. When labor and capital, the two key factors of production, are most productive, the economy is getting the biggest bang for its buck-the most output for a given level of input. Wages can rise, profits can climb, and investments can be made--all without prices escalating--because work has been reorganized or innovations introduced. . How to capture those benefits? How to build on earlier gains and boost U.S. competitiveness? How best to invest? Indeed, how do you even measure this thing called productivity?

Section 11-2 Big Shift

The answers may come from a handful of companies that have developed a new math for productivity. They have tossed aside traditional cost accounting methods and made their capital investment decisions in novel ways. Instead of automating to cut costs, these executives invest to keep customers and win new ones. Instead of buying a new machine to save on labor, they buy it to cut lead times, boost quality, reduce inventories, and add flexibility. That approach marks a big shift from the early 1980s, when manufacturing executives on the defensive adopted slash-and-burn techniques to cut costs to the bone. Manufacturing employment plummeted from its peak of 21 million workers in 1979 to 18.4 million in 1983. Goodsproducing industries added workers very slowly in the following years; then stepped up the pace when export demand picked up in 1986 and 1987. Yet even today, at 19.5 million, manufacturing employment stands well below the post-World War II peak. At the same time as employers were cutting their work forces they were shuttering inefficient plants and drastically reducing capacity in the process. In the steel industry, capacity shrank by 25%, while capacity in the aluminum industry contracted 20%. The measures worked. From 1983 to 1985, white manufacturing output limped along, productivity shot up. But economists are skeptical that this marks any fundamental improvement. "If productivity goes up because industrial capacity was driven out, is that good?" asks Edward F. Denison, an economist at Brookings Institution.



RESTRICTED What's more, once the fat has been trimmed--a worthy enough objective--that method of boosting productivity is exhausted. Closing plants and laying off workers are "one-time shots," says, Lawrence Chimerine, chairman of the WEFA Group in BalaCynwyd, Pa. "These actions raise the level of productivity, but they don't improve its growth rate."

Section 11-3 Unfulfilled Promise

It's obvious in the more recent productivity numbers that the benefits of slimming down and restructuring are running out. Now that manufacturing output has picked up, producers are beginning to bump up against capacity constraints, and their typical response has been to add more workers. A case in point: In the fourth quarter of 1987, manufacturing employment rose at a 6.7% annual rate while output rose 7:5%. The difference, 0.8%, was the meager gain in productivity. That's only one quarter's number, of course, but it's a troubling example of the easy way to raise output by simply boosting employment. "The trick is to get more output without a surge in employment," says Cad G. Thor, president of the American Productivity Center in Houston. It's technology, of course, that should do the trick. So bring on automation, from office PCs to process-control devices. In theory, productivity should soar. In practice, the promise of technology hasn't been fulfilled. In the broadly defined service sector, from banks to health care clinics, capital spending on computers and office equipment has boomed over the last decade, and productivity has languished. This has dragged down the growth rate for productivity in the overall economy. The goods-producing sector, meanwhile, has had mixed success with .automation. Indeed, it's the computer industry itself that seems to have taken the greatest strides in improving productivity its own capacity to produce computers, that is. Martin N. Baily, an economist at the Brookings Instituti6n, calculates that all the years 1979 to 1985, productivity improvements in computers and related nonelectrical machinery account for a full percentage point of the "multifactor" productivity growth rate a concept that weights the relative input of labor and capital in calculating productivity.

Section 11-4 Variety

But the high-tech additions to capital don't seem to have had similar success in boosting output in other industries. One reason may be that changes in low tech must accompany the introduction of high tech. The way workers, supervisors, and managers interact may have to change at the same time as new manufacturing systems are adopted. Moreover, those new systems themselves aren't yet commonplace enough to make a difference in the overall productivity results. Says the American Productivity Center's Thor: "You need a decade's worth of that [kind of investment] to have an effect." RESTRICTED


RESTRICTED Eventually, though, they will have to. For now the dollar is weak and demand strong just the ticket for U. S. manufacturers. But if manufacturing executives want to ensure that they are competitive for the long haul, they should take this opportunity to invest more. Though capital spending is expected to jump 10% or so this year many fear that it's still not enough and worse yet not of the right variety to boost productivity. While some executives worry that demand may lag in the future, those concerns shouldn't deter them from investing. "These investments have nothing to do with demand," says Thor. "In fact, if there’s lower demand for your product, the investment might be your salvation." That's advice that more manufacturers should heed, even if the numbers don't crunch right or the rates of return don't seem to justify the spending. Otherwise, they may wind up correctly calculating the wrong way to go and lose more and more battles in the war to gain world markets.











Zachary Schiller

The Rust Belt is back. So say bullish observers as U.S. exports surge, long-moribund industries glow with newfound profits, and unemployment dips to lows not seen in a decade. But in the smokestack citadels, there's disquiet. Too many machine-tool and auto-parts factories are silent; too many U. S. industries still can't hold their own. What went wrong since the heyday of the 1960s? That’s the issue Max Holland, a contributing editor of The Nation, takes up in his nutsy-boltsy but fascinating study “When the Machine Stopped.” * The focus of the story is Burgmaster Corp., a Los Angeles-area machine-tool maker founded in 1944 by Czechoslovakian immigrant Fred Burg. Holland’s father worked there for 29 years, and the author interviewed 22 former employees. His shop floor view of this small company is a refreshing change from academic treatises on why America can't compete. The discussions of spindles and numerical control can be tough going. But Holland compensates by conveying the excitement and innovation of the company's early days and the disgust and cynicism accompanying its decline. Moreover, the fate of Burgmaster and .its brethren is crucial to the U.S. industrial economy: Any manufactured item is either made by a machine tool or by a machine made by a machine tool. Producing innovative turret drills used in a wide variety of metalworking tasks, Burgmaster was a thriving enterprise by 1963, when annual sales amounted to about $8 million. The company needed backing to expand, however, so it sold out to Buffalo-based conglomerate Houdaille Industries Inc. Houdaille was, in turn, purchased in a 1979 leveraged buyout led by Kohlberg Ktavis Roberts & Co. By 1982, when debt competition, and a sickly machine tool market had battered Burgmaster badly, Houdaille went to Washington with a petition to withhold the investment tax credit for certain Japanese-made machine tools. Thanks to deft lobbying, the Senate passed a resolution supporting Houdaille's position, but President Reagan refused to go along. Houdaille's subsequent attempt to link Burgmaster up with a Japanese rival also failed, and Burgmaster was closed. Holland uses Burgmaster's demise to explore some key issues of economic and trade policy. Houdaille's charge that a cartel led by the Japanese government had injured U.S. toolmakers, for example, became a rallying point for those who would blame a fearsome Japan Inc. for the RESTRICTED


RESTRICTED problems of U.S. industry. Holland describes the Washington wrangling over Houdaille in painful detail. But he does show that such government decisions are often made without much knowledge of what's going on in industry. He shows, too, that Japanese producers succeeded, less because of government help than because they made better, cheaper machines. For those who see LBOs as a symptom of what ails the U. S. economy, Holland offers plenty of ammunition. He argues persuasively that the LBO crippled Burgmaster by creating enormous pressure to generate cash. As Burgmaster pushed its products out as fast as possible, he writes, it routinely shipped defective machines. It promised customers features that engineers hadn’t yet designed. And although KKR disputes the claim, Holland concludes that the LBO choked off Burgmaster's investment funds just when foreign competition made them most necessary. As for Houdaille, it was recapitalized and sold to Britain's Tube Investments Group. But Burgmaster's problems had started even before the LBO. Holland's history of the company under Houdaille is a veritable catalog of modern management techniques that flopped. One of the most disastrous was a system for computerizing production scheduling that was too crude for complex machine-tool manufacturing. Holland gives a dramatic depiction of supply snafus that resulted in delays and cost increases. As an independent company, "Burgmaster thrived because the Burgs knew their business," Holland writes. Their departure, under Houdaille, was followed by an "endless and ultimately futile search for a better formula." But, he concludes: "No formula was a substitute for management involvement on the shop floor." In the end, however, Holland puts most of the blame for the industry's decline on government policy. He targets tax laws and macroeconomic policies that encourage LBOs and speculation instead of productive investment. He also criticizes Pentagon procurement policies for favoring exotic, custom machines over standard, low-cost models. “This adds up to an industrial policy,” Holland writes, “a bad one.” The point is well taken, but Holland gives it excessive weight. Like their brethren in Detroit and Pittsburg domestic tool-makers in the 19705 were too complacent when imports seized the lower end of the product line. The conservatism that had for years served them in their cyclical industry left them ill-prepared for change. Even now some of the largest U.S. tool-makers are struggling to restructure. Blame the government, yes. But blame the industry, too.



RESTRICTED Questions: 1.

How important are machine tools to manufacturing? Why?


How did the leveraged buyout affect Burgmaster?


Other than the LBO, what factors contributed to the firm's failure?







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