Operations & Supply Chain
Management:
World Class Theory and Practice
Rohit Verma
School of Hotel Administration and The Johnson Graduate School of Management, Cornell University
Kenneth K. Boyer
Fisher College of Business, Ohio State University
*% SOUTH-WESTERN
• c> CENGAGE
Contents
Preface xvii
About the Authors xxix
PART I STRATEGIC OPERATIONS MANAGEMENT
CHAPTER
1 Operations and Supply Chain Strategy
• Kellogg's Company: They Taste Grrreat-AII Over the World! 1 • Sony-Electronics and Entertainment Provider to the World 2 • American Express-Financial Services Worldwide 4
Operations Strategy Within a Single Organization
Competitive Priorities versus Capabilities 6 Operations' Role Within Business Strategy 10 Operational Decision Areas 13
Services 15
Differences Between Services and Manufacturing Similarities Between Services and Manufacturing
Supply Chain Strategy 17
The Global Nature of Supply Chains 18 Supply Chain Within a Single Organization 18 Supply Chain Across Multiple Organizations 19
Organization of This Book 20
Part 1: Strategic Operations Management 23 Part 2: Tools and Tactical Issues 23
Part 3: The Extended Enterprise 23
SUMMARY 24 • QUESTIONS 2 5 , , • CASE STUDY: Natural Designs Inc. 26
15 17
Q | BEST PRACTICES IN OPERATIONS MANAGEMENT
Rolex: No Copying the Original 8
Q BEST PRACTICES IN OPERATIONS MANAGEMENT
Apple: Maintaining a Steady Supply of Innovation 10
| H TECHNOLOGY IN OPERATIONS MANAGEMENT
Supply Chain Challenges in Tracing '< Food 21
CHAPTER
2 Quality Management
27
B Many Facets of Quality Management at American Express 27Defining Quality 28
Why Firms Improve Quality 30
Cost Reduction 30
Customer Satisfaction Enhancement 31
Customer Loyalty, Word of Mouth, and Enhancement of the Firm's Reputation 32
Increase in Profitability and Market Share 32
Determinants of Quality 33
Quality of Goods 33 Service Quality 33
Customer Expectations 35
History of Quality Management 36
Early Development of Quality Management 36 Recent Advances in Quality Management 37
Contents
E | BEST PRACTICES IN OPERATIONS MANAGEMENT
The Evolving Definition of Quality at Ritz-Carlton 29
S 3 BEST PRACTICES IN OPERATIONS MANAGEMENT
Setting High Quality Standards for French Wine 45
H BEST PRACTICES IN OPERATIONS MANAGEMENT
Profile of a Baldrige Award Winner: IBM Rochester 48
Q | BEST PRACTICES IN OPERATIONS MANAGEMENT
Motorola and the Genesis of Six Sigma 50
CHAPTER
Teachings of Quality Gurus 37
W. Edwards Deming 38 Philip Crosby 39 Armand Feigenbaum 39 Kaoru Ishikawa 39 Joseph M. Juran 40 Genichi Taguchi 40 Walter Shewhart 40
Quality Management Frameworks 40
Total Quality Management 40 ISO 9000 and ISO 14000 Standards 42
Baldrige Framework for Performance Excellence 45
Six Sigma 50
The Conceptual Framework of Six Sigma 51 Implementing Six Sigma 56
SUMMARY 59 • SOLVED PROBLEMS 61 • PROBLEMS 62 © CASE STUDY: The Case of the Complaining Customer 63
New Product Development
67
Q l BEST PRACTICES IN OPERATIONS MANAGEMENT
Boutique Hotels by Joie de Vivre Hospitality 83
S TECHNOLOGY IN OPERATIONS MANAGEMENT
Mass Customization by Lands' End 84
H BEST PRACTICES IN OPERATIONS MANAGEMENT
Use of Quality Function Deployment in the Design, Development, and Production of Electrical Transformers 96 67 69 73 74 a Development of a New Pharmaceutical Drug
What Is New Product Development?
Why New Products Fail 70
Why Firms Develop New Products 71
The New Product Development Process
Tradeoffs in New Product Development Product Life Cycle 76
Time-Based Competition 77 Industry Clock Speed 78
Continuous, Radical, and Disruptive Innovation 78 Blue Ocean Strategy of New Product Innovation 80
Major Concepts in New Product Development so
Product Development for Enhanced Customer Experience 80 Mass Customization 81
Computer-Aided Design (CAD) and Virtual Reality 82
Design for Production (Manufacturability) and Rapid Prototyping Environmentally Friendly Designs 85
Modular Design 86
Concurrent Engineering 88 Product Platforms 88 Group Technology 88 Reverse Engineering 88
Analysis Tools for New Product Development
Customer Choice Analysis 89 Product Reliability Analysis 91 Product Complexity Index 91 Quality Function Deployment 91
SUMMARY 98 • QUESTIONS 99 © CASE STUDY: Boutique Hotels 100
85
Contents
CHAPTER
4 Process Design and Analysis
102
• Pop-Tart Production at Kellogg's 102
Service-Process Matrix 104
Service Factories 105 Service Shops 106 Mass Services 106 Professional Services 106
P a BEST PRACTICES IN OPERATIONS MANAGEMENT
Outsourcing Scallion Production-Efficient or Dangerous? 105
Q BEST PRACTICES IN OPERATIONS MANAGEMENT
Process Management at American Express 107
S TECHNOLOGY IN OPERATIONS MANAGEMENT
Electronic Check Processing 116
H BEST PRACTICES IN OPERATIONS MANAGEMENT
Filling Your Prescription 129
CHAPTER
Product-Process Matrix 109
Projects 109
Job Shop Processes 109 Batch Processes 110 Line Processes 111
Continuous Processes 111 ~
Using Technology to Move Off the Diagonal 112
Layout Types 112
Process Layout 112 ? Product Layout 113
Fixed-Position Layout 115 Hybrid Layouts 115
The Impact of Strategy and Technology on Process Choice
Process Strategy 115 Technology Impacts 116
Designing Processes 117
Break-Even Analysis 117 , Reengineering 118 ' Bottleneck Analysis 119Process Analysis Techniques 126
Process Selection-The Process Swamp 132
Self-Sourcing 132 Outsourcing 133
SUMMARY 134 • SOLVED PROBLEMS 135 • PROBLEMS 139 o CASE STUDY: Penn & Pat's Pretty Hot Pizza Pronto 142
115
Forecasting
144
144 146 • Special K = Special Challenges
Why We Need to Forecast
Principles of Forecasting 146
Forecasts Are Wrong 147
Forecasts Get Worse the Farther into the Future They Go 147 Aggregated Forecasts for Product or Service Groups Tend to Be More
Accurate 147
Forecasts Are Not a Substitute for Derived Values 147
Components of Demand and Forecasting Methods
Components of Demand 148 Forecasting Methods 149
Time-Series Analysis 149
Naive Forecast 149
Estimating the Average 149
XII Contents
J S | BEST PRACTICES IN OPERATIONS MANAGEMENT
Making Sure the Toy Is Under the Tree 160
Q£] BEST PRACTICES IN OPERATIONS MANAGEMENT
Statin Wars: Anticholesterol Drug Makers Estimate Sales 174
H TECHNOLOGY IN OPERATIONS MANAGEMENT
Wal-Mart's Application of RFID and CPFR: Sharing Data Across the Supply Chain to Maximize Forecast
Accuracy 176
Including a Trend 154 Including Seasonality 157
Measuring Errors and Selecting a Time-Series Method 164
Measures of Forecast Error 164 Mean Absolute Percentage Error 166
Additional Forecasting Methods 169
Qualitative Methods 170 Causal Methods 170 Linear Regression 170
Supply Chain Forecasting 175
Information Systems for Sharing Data Across the Supply Chain Building a Responsive Organization/Supply Chain 177
SUMMARY 179 • SOLVED PROBLEMS 180 • PROBLEMS 189 o CASE STUDY: Personal Care Grooming 194
175
CHAPTER 195
H TECHNOLOGY IN OPERATIONS MANAGEMENT
ERP Systems Manage Vital Health-Care Equipment 215
H I COMPANY ILLUSTRATION
Kellogg's Direct Store Delivery 216
1 1 COMPANY ILLUSTRATION
Preventing Stockouts from Turning Up the Heat on AC Repair 224
n The Wal-Mart Effect 195
Inventory Equilibrium 196
Reasons to Carry Inventory 196 Reasons to Reduce Inventory 197
Inventory Types 198
Cycle Inventory 199 Safety Stock Inventory 200 Anticipation Inventory 200 Pipeline Inventory 200
Work-in-Progress (WIP) Inventory 201
Remanufactured/Reconditioned Inventory 201 Independent versus Dependent Demand 201
Inventory Systems 202
Two Types of Systems 202
Continuous Review Systems 2 0 3 ' '
Special Cases of the Economic Order Quantity 210 Periodic Review Systems 214
Other Types of Inventory Systems 219 Inventory Accuracy 222
SUMMARY 224 • SOLVED PROBLEMS 225 o CASE STUDY: Dano's Drugstore 230
QUESTIONS 227
CHAPTER 233
a Dependent Demand at Kellogg's 233
History of Dependent Demand Planning 235 MRP Inputs 238
The Master Schedule 238 The Bill of Materials 240 Inventory Records 243
MRP Processing-Creating an Inventory Record for a Single Item
Developing Inventory Records for Single Items 244 Determining Planning Factors 247
Contents XIII
Q | BEST PRACTICES IN OPERATIONS MANAGEMENT
A Spicy Challenge for Horseradish Planning 256
£ TECHNOLOGY IN OPERATIONS MANAGEMENT
ERP-The Underpinnings of Under Armour's Success 262
H COMPANY ILLUSTRATION
The Systems Behind McDonald's Success 263
H TECHNOLOGY IN OPERATIONS MANAGEMENT
Improving Contact at RxAmerica 265
Multiple-Level Processing and Output Generation 253
MRP Explosion 253 Action Notices 254
MRP as a Dynamic System 256 Capacity Planning 257
Strategies for Dependent Demand Inventory 26i
Evolution of MRP to Enterprise Resource Planning 261 Service Resource Planning 262
Making MRP/ERP Work 264
SUMMARY 266 • SOLVED PROBLEMS 267 • QUESTIONS 271 o CASE STUDY: Doug's Dens 276
CHAPTER'
279
E l BEST PRACTICES IN OPERATIONS MANAGEMENT
The Project to Develop Affordable Blu-ray Video Players at Sony 297
^ TECHNOLOGY IN OPERATIONS MANAGEMENT
Project Management Software 306
Q BEST PRACTICES IN OPERATIONS MANAGEMENT
Project Management at American Express Service Center 309
n Animated Movie Projects at Pixar 279
Elements of Project Management 28i
What Is a Project? 281
What Is Project Management? 282 The Project Manager 284
Project Management Tools and Techniques 284
Work Breakdown Structure 284
Precedence Relationship and Time Estimates 285 Gantt Chart 286
Network-Diagram 287
Critical Path Method (CPM) 289 Cost and Time Tradeoff Analysis 298
Program Evaluation and Review Technique (PERT) 299 Resource Management 307
Success Factors in Project Management 310
Why Do Projects Fail? 310 Project Risk Management 311 Why Do Projects Succeed? .313
SUMMARY 316 • SOLVED PROBLEMS 317 • PROBLEMS 320 o CASE STUDY: Global Textbook Publishers 322
CHAPTER
324
| H BEST PRACTICES IN OPERATIONS MANAGEMENT
Scheduling Operating Rooms at Mount Sinai Hospital by Integer Linear Programming 332
S TECHNOLOGY IN OPERATIONS MANAGEMENT
PLATO Helps Athens Win Gold During 2004 Summer Olympic Games 337
H BEST PRACTICES IN OPERATIONS MANAGEMENT
VOLCANO Saves $187 Million for UPS 344
B TECHNOLOGY IN OPERATIONS MANAGEMENT
Simulation of the Mix of Tables for a Restaurant 347
H f TECHNOLOGY IN OPERATIONS MANAGEMENT
Computer Simulation of Check Processing Operations 351
o Linear Programming Helps Kellogg's Optimize Production, Inventory, and Distribution 324
Linear Programming 325
Formulation of a Linear Programming Problem 326
Solution of a Linear Programming Problem by a Graphical Method 328 Solution of a Linear Programming Problem Using Microsoft Excel
Solver 333
Other Decision-Making Applications of Linear Programming in Operations Management 338
Simulation Modeling 345
Numerical Simulation 345 Discrete-Event Simulation 346 Building Simulation Models 348
SUMMARY 355 • SOLVED PROBLEMS 355 • PROBLEMS 360 o CASE STUDY: Multiperiod Inventory Management at Zeta 362
XIV Contents
CHAPTER
Capacity Planning
363
g j BEST PRACTICES IN OPERATIONS MANAGEMENT
Capacity at American Express 369
B J BEST PRACTICES IN OPERATIONS MANAGEMENT
Blockbuster and Netflix: Where Does Growth Stop? 372
Q BEST PRACTICES IN OPERATIONS MANAGEMENT
Grand Luxor Hotel Applies Yield Management to Smooth Demand and Increase Revenue 380
B | TECHNOLOGY IN OPERATIONS MANAGEMENT
Self-Checkout at Home Depot: Reducing Costs While Improving Service 386
a Postmarked Gone 363
Capacity Management and Its Relationship to Value 364
Capacity Measures 364 Capacity Factors 366
Capacity Strategies 368
Wait and See 369
Aggressive Expansion 370
Capacity Cushion 371
Evaluating Capacity Alternatives 374
Incorporating Flexibility 374 Accounting for Life-Cycle Stage 374 Looking at the Big Picture 375
Dealing with Capacity Increments 377 Smoothing Out Capacity Requirements 377
Systematic Capacity Planning 382
Step 1. Estimating Requirements 383 Step 2. Identifying Gaps 386
Step 3. Developing Alternatives 387 Step 4. Choosing Alternatives 389
Service Capacity 392
Time 392 Location 393
Volatility of Demand 393
Capacity Utilization and Service Quality 393
Wrap-Up 395
SUMMARY 396 • SOLVED PROBLEMS 398 o CASE STUDY: Carl's Sandwiches 404
PROBLEMS 401
CHAPTER
11 Quality Improvement Methods
405
• Two Scoops of Raisins in a Box of Kellogg's Raisin Bran 405
Sources of Quality Improvement Ideas 407
Customer Feedback 407 Benchmarking 408 Employee Feedback 410
Qualitative Quality Improvement Tools 411
Brainstorming 411 Affinity Diagram 412
Interrelationship Diagram 414 Tree Diagram 414
Process Decision Program Chart (PDPC) 415 Flowchart 415
Cause-and-Effect, Fishbone, or Ishikawa Diagram Failure Modes and Effects Analysis (FMEA) 416 Mistake-proofing, Fail-safing, or Poka-Yoke 417
Quantitative Quality Improvement Tools 418
Inspection and Sampling 418 Check Sheet 420
Contents xv
H TECHNOLOGY IN OPERATIONS MANAGEMENT
American Express Shares Benchmarked Quality Reports with Its Travel Service Clients 409
S 3 BEST PRACTICES IN OPERATIONS MANAGEMENT
Recovering from Quality Mistakes: Sony Batteries in Dell Computers 417
Pareto Analysis and Bar Charts 421 Histogram 421
Scatter Diagram 422
Process Capability Analysis 423 Run Chart 424
Statistical Process Control Charts 424
SUMMARY 436 • SOLVED PROBLEMS 437 • PROBLEMS 441 o CASE STUDY: Southtown Medical Center 443
PART III THE EXTENDED ENTERPRISE
CHAPTER
12 Lean Enterprise
447
B | BEST PRACTICES IN OPERATIONS MANAGEMENT
Lean Health Care at the Hospital for Sick Children (SickKids) 451
I S BEST PRACTICES IN OPERATIONS MANAGEMENT
Fast Fashion and Lean Thinking at Zara 456
E S BEST PRACTICES IN OPERATIONS MANAGEMENT
JIT II at Bose Corporation 463
• Toyota and Lean Thinking 447
Lean Production and Lean Thinking 449
What Is Lean Production? 449 Lean Thinking 449
Waste Elimination 452 >
Waste Resulting from Overproduction 453 Waste Resulting from Setup Time 453
Waste Occurring During Processing Time 453 Waste Resulting from Waiting Time 454 Waste Resulting from Transportation 454 Waste Resulting from Movement 454 Waste Resulting from Inventory 454 Waste Resulting from Poor Quality 454
Components of Lean Production Systems 455
- Pull Production System 455 Push Production System 455 Small Batch Sizes 457 Short Setup Times 457 Just-in-Time Inventory 46y0,
Uniform Production Planning 461 Continuous Improvement or Kaizen 462 Close Supplier Relationships 462
Multifunctional Work Force 464 Five S 464
Visual Controls 464 / Preventive Maintenance 465 Value Stream Mapping 465
New Advances in Lean Production 465
Technology in Lean Production 465
Lean Production and Six Sigma = Lean Six Sigma 468
SUMMARY 470 • SOLVED PROBLEMS 471 • PROBLEMS 473
XVI Contents
CHAPTER
13 Technology and Integrated Supply
Management
476
• American Express Pushes the Electronic Payment Envelope 476
Technology and Its Role in Improved Operations/Supply Chain
Management 478
Technology in Services 478 Manufacturing Technologies 482
Supply Chain Information Technologies 485
Linking Across Organizations 486 The Bullwhip Effect 491
Evaluating Technology Investments 496
Typical Benefits of New Technologies 497 Technology Adoption Risks 499
Factors That Support Technology Development and Implementation 502
Worker Training and Empowerment 502 Strategic Emphasis 502 i
SUMMARY 504 • QUESTIONS 506
• CASE STUDY: Online Purchasing at McDonald's 507
H TECHNOLOGY IN OPERATIONS MANAGEMENT
McDonald's Technology Evolution 480
Q BEST PRACTICES IN OPERATIONS MANAGEMENT
Computer Testing of Work Methods at Ford 484
H TECHNOLOGY IN OPERATIONS MANAGEMENT
ERP for Medical Equipment and ATMs 488
H BEST PRACTICES IN OPERATIONS MANAGEMENT
Using RFID to Combat Counterfeit Drugs 495
H BEST PRACTICES IN OPERATIONS MANAGEMENT
LEGO'S Custom Building Blocks 498
^ BEST PRACTICES IN OPERATIONS MANAGEMENT
UPS Improves Routing 500
CHAPTER
14 Global Supply Chain and Service
Integration
508
Bm BEST PRACTICES IN OPERATIONS MANAGEMENT
Made in the World by Toyota 517
• American Express-A Global Corporation 508
Globalization 510
What Is Globalization? 511 Why Globalize? 511
Brief History of Globalization 512
Global Production and Multinational Corporations 515
What Production Functions Are Globalized? 516 Classification of International Production Facilities 518 The World Is Flat 520
Outsourcing and Offshoring 523
Types of Outsourcing and Offshoring Activities 523 Risks Related to Offshoring and Outsourcing 525
SUMMARY 530 • QUESTIONS 530
• CASE STUDY: Customer Support Outsourcing @ eBay 531
Appendix Al References Rl Photo Credits Cl Index II
