Ucebnice_en

contractors in 26 other countries. For an order of
10,000 garments, Ada might decide to buy yarn from a Korean producer, have it woven and dyed in
Taiwan, and then shipped to Thailand for production, along with zippers and buttons made by a
Japanese firm in China. For quicker delivery, the order may be divided across five factories in
Thailand. Five weeks after receipt of the order, 10,000 identical garments arrive in Gymboree stores
across the U.S. and Europe. Ada is the supply chain expert for Gymboree.
Operations management designs and operates productive systems--systems for getting work done.
The food you eat, the movies you watch, the stores in which you shop, and this book you are
reading are provided to you by the people in operations. Operations managers are found in banks,
hospitals, factories, and government. They design systems, ensure quality, produce products, and
deliver services. They work with customers and suppliers, the latest technology, and global
partners. They solve problems, reengineer processes, innovate, and integrate. Operations is more
than planning and controlling; it's doing. Whether it's superior quality, speed-to-market,
customization, or low cost, excellence in operations is critical to a firm's success.
5
Operations is often defined as a transformation process. As shown in Figure 1.1, inputs (such as
material, machines, labor, management, and capital) are transformed into outputs (goods and
services). Requirements and feedback from customers are used to adjust factors in the
transformation process, which may in turn alter inputs. In operations management, we try to ensure
that the transformation process is performed efficiently and that the output is of greater value than
the sum of the inputs. Thus, the role of operations is to create value. The transformation process
itself can be viewed as a series of activities along a value chain extending from supplier to
customer. Any activities that do not add value are superfluous and should be eliminated.
The input-transformation-output process is characteristic of a wide variety of operating systems. In
an automobile factory, sheet steel is formed into different shapes, painted and finished, and then
assembled with thousands of component parts to produce a working automobile. In an aluminum
factory, various grades of bauxite are mixed, heated, and cast into ingots of different sizes. In a
hospital, patients are helped to become healthier individuals through special care, meals,
medication, lab work, and surgical procedures. Obviously, "operations" can take many different
forms. The transformation process can be
physical, as in manufacturing operations;
locational, as in transportation or warehouse operations;
exchange, as in retail operations;
physiological, as in health care;
psychological, as in entertainment; or
informational, as in communications.
1.2. The Operations Function
Activities in operations management (OM) include organizing work, selecting processes, arranging
layouts, locating facilities, designing jobs, measuring performance, controlling quality, scheduling
work, managing inventory, and planning production. Operations managers deal with people,
technology, and deadlines. These managers need good technical, conceptual, and behavioral skills.
Their activities are closely intertwined with other functional areas of a firm.
6
As shown in Figure 1.2, the three primary functions of a firm are marketing, finance, and
operations. Marketing establishes the demand for goods or services, finance provides the capital,
and operations actually makes the goods or provides the service. Of the three functions, operations
typically employs the greatest number of people and requires the largest investment in assets. For
these reasons, management of the operations function has often been viewed as an opportunity to
improve a firm's efficiency and reduce costs. But operations can also be an avenue to increase sales,
gain market share, and eliminate the competition!

Operations can also be viewed as the technical core of an organization as depicted in Figure 1.3. In
this scenario, the organization exists to produce goods and services for its customers. Therefore,
operations is the central function or "hub" of the organization in contact with every other functional
area. For example, operations interacts with marketing to receive estimates of customer demand and
customer feedback on problems; with finance for capital investments, budgets, and stockholder
requirements; with personnel to train, hire, and fire workers; and with purchasing to order needed
materials for production.
1.3. A Brief History of Operations Management
Although history is full of amazing production feats--the pyramids of Egypt, the Great Wall of
China, the roads and aqueducts of Rome--the widespread production of consumer goods--and thus,
operations management--did not begin until the Industrial Revolution in the 1700s. Prior to that
time, skilled craftspersons and their apprentices fashioned goods for individual customers from
studios in their own homes. Every piece was unique, hand-fitted, and made entirely by one person, a
process known as craft production. Although craft production still exists today, the availability of
coal, iron ore and steam power set into motion a series of industrial inventions that revolutionized
the way work was performed. Great mechanically powered machines replaced the laborer as the
primary factor of production and brought workers to a central location to perform tasks under the
direction of an "overseer" in a place called a "factory." The revolution first took hold in textile
mills, grain mills, metalworking, and machine-making facilities.
7
Around the same time, Adam Smith's Wealth of Nations (1776) proposed the division of labor, in
which the production process was broken down into a series of small tasks, each performed by a
different worker. The specialization of the worker on limited, repetitive tasks allowed him or her to
become very proficient at those tasks and further encouraged the development of specialized
machinery.
The introduction of interchangeable parts by Eli Whitney (1790s) allowed the manufacture of
firearms, clocks, watches, sewing machines, and other goods to shift from customized one-at-a-time
production to volume production of standardized parts. This meant the factory needed a system of
measurements and inspection, a standard method of production, and supervisors to check the quality
of the worker's production.
Advances in technology continued through the 1800s. Cost accounting and other control systems
were developed, but management theory and practice were virtually nonexistent.
In the early 1900s an enterprising laborer (and later chief engineer) at Midvale Steel Works named
Frederick W. Taylor approached the management of work as a science. Based on observation,
measurement, and analysis, he identified the best method for performing each job. Once
determined, the methods were standardized for all workers, and economic incentives were
established to encourage workers to follow the standards. Taylor's philosophy became known as
scientific management. His ideas were embraced and extended by efficiency experts Frank and
Lillian Gilbreth and Henry Gantt, among others. One of Taylor's biggest advocates was Henry Ford.
Henry Ford applied scientific management to the production of the Model T in 1913 and reduced
the time required to assemble a car from a high of 728 hours to 1-1/2 hours. A Model T chassis
moved slowly down a conveyor belt with six workers walking along beside it, picking up parts from
carefully spaced piles on the floor and fitting them to the chassis.1 The short assembly time per car
allowed the Model T to be produced in high volumes, or "en masse," yielding the name mass
production.
American manufacturers became adept at mass production over the next fifty years and easily
dominated manufacturing worldwide. The human relations movement of the 1930s, led by Elton
Mayo and the Hawthorne studies, introduced the idea that worker motivation, as well as the
technical aspects of work, affected productivity. Theories of motivation were developed by
Herzberg, Maslow, McGregor, and others. Quantitative models and techniques spawned by the
operations research groups of World War II continued to develop and were applied successfully to
manufacturing and services. Computers and automation led still another upsurge in technological
advancements applied to operations. These events are summarized in Table 1.1.
8
From the Industrial Revolution through the 1960s, the United States was the world's greatest
producer of goods and services, as well as the major source of managerial and technical expertise.
Looking back, 1960 was probably the peak for American manufacturing. From then on, industry by
industry, U.S. manufacturing superiority was challenged by lower costs and higher quality from
foreign manufacturers, led by Japan.
In the 1970s, U.S. productivity rose an average of only 1.3 percent per year, and in the 1980s,
barely 0.2 percent (with many years negative), while foreign competitors boasted annual increases
of 4 percent and 5 percent. Several studies published during those years confirmed what the
consumer already knew--U.S.-made products of that era were inferior and could not compete on the
world market. Table 1.2 compares the product performance of U.S. versus Japanese automobiles,
semiconductors, air conditioners, and color televisions of the 1970s and 1980s.
9
Early rationalizations that the Japanese success in manufacturing was a cultural phenomenon were
disproved by the successes of Japanese-owned plants in the United States, such as the Matsushita
purchase of a failing Quasar television plant in Chicago from Motorola. Part of the purchase
contract specified that Matsushita had to retain the entire hourly work force of 1,000 persons. After
only two years, with the identical workers, half the management staff, and little or no capital
investment, Matsushita doubled production, cut assembly repairs from 130 percent to 6 percent, and
reduced warranty costs from $16 million a year to $2 million a year. You can bet Motorola took
notice. (Today Motorola is one of the success stories of American manufacturing.)
How did this come about? How did a country that dominated manufacturing for most of the
twentieth century suddenly become no good at it? Quite simply, U.S. companies weren't paying
attention. They thought mass production had solved the "problem" of production, so they delegated
the function of manufacturing to technical specialists (usually engineers) who ignored changes in
the consumer environment and the strategic importance of operations. Decisions were made based
on short-term financial goals rather than long-term strategic initiatives.
Mass production can produce large volumes of goods quickly, but it cannot adapt very well to
changes in demand. Today's consumer market is characterized by product proliferation, shortened
product life cycles, shortened product development times, changes in technology, more customized
products, and segmented markets. Mass production does not "fit" that type of environment. Using a
concept known as just-in-time, Japanese manufacturers changed the rules of production from mass
production to lean production. Lean production prizes flexibility (rather than efficiency) and quality
(rather than quantity). The total quality fervor has since spread across the globe and is the focus of
operations in many successful global enterprises.
The emphasis on quality and the strategic importance of operations is especially important today as
continuing advances in information technology have further increased competition and customer
expectations. Technology, together with changing political and economic conditions, have
prompted an era of industrial globalization in which companies compete worldwide for both market
access and production resources. Although both products and services are becoming more
customized in wider global markets, services, in many cases, are the key to competitiveness.

10
1.4. Globalization
Companies "go global" to take advantage of favorable costs (usually labor rates) in foreign
countries and to access foreign markets. Figure 1.4 shows the hourly wage rates in U.S. dollars for
production workers in six countries from 1975 to 1996. U.S. labor rates have remained remarkably
stable, while the labor rates of Japan, Germany, and the European Union have increased. Currently,
wage rates are 10 percent higher in Japan and 60 percent higher in Germany than in the United
States. Labor rates in Mexico and in the newly industrialized economies (NIEs) of Asia remained at
low levels--$1.50 an hour in Mexico and $.48 an hour in Sri Lanka, for example. This data certainly
supports the trend toward foreign investments in Mexico and the Pacific Rim.
Ironically, more than 60 percent of American manufacturing investment has occurred in countries
with labor rates comparable to U.S. labor rates. Companies today may be more interested in
accessing new customers, technologies, and skills, rather than capitalizing on cheap labor. New
automotive plants in Thailand and Brazil, for example, produce cars to meet demand in those
markets rather than for export home.

11
Falling trade barriers and advances in information technology fuel the trend toward globalization.
More countries than ever before have opened their borders to trade and investment. Over the past
decade international trade has increased twice as fast as global output (see Figure 1.5). Fourteen
major trade agreements were enacted in the 1990s. Figure 1.6 shows their effect on U.S. imports
and exports. The creation of the World Trade Organization (WTO) in the 1990s brought tariffs on
manufactured goods down to 4 percent for most industrialized countries, opened up the heavily
protected industries of agriculture, textiles, and telecommunications, and extended the scope of
international trade rules to cover services, as well as goods.
American products and services are produced, as well as consumed, in every part of the globe.
Whirlpool makes the majority of its products in Mexico and Europe, General Electric is the biggest
private-sector employer in Singapore, and half of IBM's workforce is located outside of the United
States. Table 1.3 (on page 14 of your textbook) reveals the degree of foreign assets, sales, and
employment of selected multinational corporations. Notice that only three of the top ten
multinational corporations are based in the United States.
The expanding economies of East Asia, Latin America, and Eastern Europe constitute the major
growth opportunities in international trade. Competition in those markets is fierce, and local
production helps solidify trade. In 1995, nearly 60 percent of large capital investments in new
facilities ($200 million or more each) took place in the Asia-Pacific region.
The most active companies worldwide in terms of international expansion are General Motors,
Ford, General Electric, Motorola, and Daimler-Chrysler, which, in one year, built twenty-three new
facilities in the Asia-Pacific region and eleven in Europe. Automobile plants were opened in Brazil,
Romania, China, Spain, France, Thailand, and Vietnam. Semiconductor and microprocessor plants
sprang up in England, Ireland, Israel, Japan, China, Taiwan, and Indonesia. The toy, watch, and
garment industries of Hong Kong migrated to China, as did Taiwanese Nike and Adidas production,
and Korean electronics. Tiny Singapore gained "developed economy" status with $4.8 billion in
manufacturing investments.
Inexpensive and efficient telecommunications networks, from Internet to wireless to satellites,
allow firms to locate different parts of their production process in different countries while
maintaining close contact. The dramatic decrease in cost and increase in capacity has produced
global supply chains that truly reach around the world. With the Internet, producers and consumers
no longer need to be face-to-face. Distance becomes irrelevant. Developing software, selling airline
tickets, obtaining medical advice, even attending college can be handled online. Markets are more
12
transparent as buyers and sellers can comparison shop worldwide. Trade barriers are harder to erect
when transactions can take place electronically. Electronic commerce, expected to reach $3 trillion
by 2005, has spurred more international trade and increased foreign investment.
Despite the benefits of increased foreign trade and investment, globalization is not without risk. For
example, rapid economic growth in Asia has stretched its transportation infrastructure to the limit.
Bottlenecks in ports, road, and rail delay products from reaching their market. The markets
themselves are highly fragmented with distinct languages, customs, trade barriers, and levels of
development. In addition, distribution channels within regions are unorganized and inefficient. That
means operations must be customized to each country and logistics carefully planned. In Latin
America and the Eastern European countries, stability of the governments and poor economic
conditions continue to inhibit increased trade and localized operations. The economic crises of
Europe (1992-1993), Mexico (1994-1995), and Southeast Asia (1997-2000) significantly affected
investments, production, and markets worldwide.
1.5. Services
In the United States and other highly industrialized nations, the economy has shifted away from
manufacturing toward service industries. Nearly 80 percent of workers worldwide are employed in
services. Services account for 75 percent of the gross domestic product (GDP) for the United States,
and service jobs are expected to provide virtually the entire net gain in U.S. employment over the
next decade. The expansion in service jobs is primarily in high-tech firms, too, in contrast to the
predominantly low-pay, low-skilled service jobs of the past. U.S. service exports more than doubled
from 1988 to 1998, providing a healthy trade surplus and helping to reduce the overall trade deficit.
The foreign market for services, exceeding $1.2 trillion in 1996, has tremendous potential barely
tapped by U.S. firms.

Six of the top ten firms on Fortune's Global 500 list are services and eight of the top ten largest
employers are service firms. As services have grown in the worldwide economy, the distinction
between service operations and manufacturing operations has become increasingly blurred. The
preparation of hamburgers at McDonald's and the processing of packages at Federal Express look
remarkably like assembly work in a factory. For machine tool and heavy equipment manufacturers,
the installation and servicing of the equipment yields far greater returns than its physical
manufacture. IBM markets itself as a provider of computer solutions, rather than a manufacturer of
computers.

It is apparent that manufacturing and service operations go hand-in-hand. Manufacturing companies
cannot function without the support of services such as accounting, personnel, advertising,
transportation, financial and legal; and many services would not exist if the goods they support were
not produced. Television repair shops would be obsolete without televisions, and televisions would
be no good without broadcasting services! In this text, we provide plentiful examples of both
service and manufacturing operations, recognizing their common and unique concerns.
1.6. Competitiveness
A global marketplace for both products and services means more customers and more intense
competition. Competitiveness can be viewed from a national, industry, or firm perspective.
In the broadest terms, we speak of competitiveness in reference to other countries rather than to
other companies. That's because competitiveness affects the economic success of a nation and the
quality of life for its citizens. Competitiveness is "the degree to which a nation, can, under
demanding and rapidly changing market conditions, produce goods and services that meet the test
of international markets while simultaneously maintaining or expanding the real incomes of its
13
citizens."3 We measure a nation's competitiveness by its gross domestic product (GDP),
import/export ratio, and increases in productivity.
1.7. Productivity as a Measure of Competitiveness
Productivity, the most common measure of competitiveness, is calculated by dividing units of
output by units of input.
The predominant input in productivity calculations is labor hours. According to the Bureau of
Labor Statistics, even though labor is the only factor of production explicitly considered,
comparisons of productivity over time implicitly reflect the joint effects of many other factors,
including technology, capital investment, capacity utilization, energy use, and managerial skills.
Thus, productivity statistics provided in government reports typically measure changes in
productivity from month to month, quarter to quarter, year to year, or over a number of years.
Figure 1.7 shows annual percent changes in productivity from 1990 to 1996 for the United States,
Germany, and Japan. Although productivity varied widely in