Operations and Supply Chain Management

O PERATIONS AND S UPPLY C HAIN
M ANAGEMENT

T HE M CG RAW- H ILL E DUCATION S ERIES

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O PERATIONS AND S UPPLY C HAIN
M ANAGEMENT

fifteenth edition

F. R OBERT J ACOBS
Indiana University
RICHARD B. CHASE
University of Southern California

OPERATIONS AND SUPPLY CHAIN MANAGEMENT, FIFTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by
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Library of Congress Cataloging-in-Publication Data
Names: Jacobs, F. Robert, author. | Chase, Richard B., author.
Title: Operations and supply chain management / F. Robert Jacobs, Indiana
   University, Richard B. Chase, University of Southern California.
Other titles: Operations and supply management
Description: Fifteenth edition. | New York, NY: McGraw-Hill Education,
   [2018] | Previously published as: Operations and supply management. |
   Includes index.
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mheducation.com/highered

To my father, Forest

To my wife, Harriet, and to our children
Laurie, Andy, Glenn, Robb, and Christine

BRIEF TABLE OF
CONTENTS

SECTION ONE 16 Global Sourcing
and Procurement  402
STRATEGY, PRODUCTS,
AND CAPACITY SECTION FOUR

1 Introduction  2 SUPPLY AND DEMAND
2 Strategy  23 PLANNING AND CONTROL
3 Design of Products
17 Enterprise Resource Planning
and Services  42 Systems 426
4 Projects  73
5 Strategic Capacity 18 Forecasting  444
19 Sales and Operations
Management 110
6 Learning Curves  130 Planning 489
20 Inventory Management  515
SECTION TWO 21 Material Requirements

MANUFACTURING AND Planning 559
SERVICE PROCESSES 22 Workcenter Scheduling  590
23 Theory of Constraints  622
7 Manufacturing Processes  148
8 Facility Layout  168 SECTION FIVE
9 Service Processes  201
10 Waiting Line Analysis and SPECIAL TOPICS

Simulation 221 24 Health Care  656
11 Process Design and Analysis  265 25 Operations Consulting  671
12 Six Sigma Quality  298
13 Statistical Quality Control  317 APPENDICES

SECTION THREE A Linear Programming
Using the Excel
SUPPLY CHAIN PROCESSES Solver 691

14 Lean Supply Chains  350 B Operations Technology  711
15 Logistics, Distribution, and C Financial Analysis  718
D Answers to Selected Objective
Tr a n s p o r t a t i o n   3 7 8
Questions 734

vi

BRIEF TABLE OF CONTENTS vii

E Present Value Table  736 H Uniformly Distributed Random
Digits 739
F Negative Exponential Distribution:
Values of e–X  737 I Interest Tables  740

G Areas of the Cumulative Standard Index 744
Normal Distribution  738

CONTENTS

SECTION ONE Productivity Measurement  33
Concept Connections  35
STRATEGY, PRODUCTS, Solved Problem  37
AND CAPACITY Discussion Questions  37
Objective Questions  37
1 IN T R O D U C T I O N  2 Case: The Tao of Timbuk 40
Introduction—the Elements of OSCM  3 Practice Exam  41

What Is Operations and Supply Chain 3 DE S I G N O F PR O D U C T S A N D
Management? 3 SERVICES  42
Distinguishing Operations versus Supply Product Design  43
Chain Processes  4
Categorizing Operations and Supply Product Development Process  44
Chain Processes  6 Product Design Criteria  49
Differences Between Services and Goods  7
The Goods–Services Continuum  8 Designing for the Customer  49
Product–Service Bundling  9 Value Analysis/Value Engineering  51
Careers in OSCM 9 Designing Products for Manufacture
Chief Operating Officer  10 and Assembly  52
The Major Concepts that Define the Designing Service Products  56
OSCM Field 11 Economic Analysis of Product
Current Issues in Operations and Supply Development Projects  57
Chain Management  13 Build a Base-Case Financial
Efficiency, Effectiveness, and Value  14 Model 58
How Does Wall Street Evaluate Sensitivity Analysis to Understand
­Efficiency?  14 Project Trade-Offs  60
Concept Connections  18 Measuring Product Development
Discussion Questions  19 ­Performance  61
Objective Questions  20 Concept Connections  62
Analytics Exercise: C­ omparing Solved Problem  63
­Companies Using Wall Street Discussion Questions  66
­Efficiency Measures  21 Objective Questions  66
Practice Exam  22 Case: IKEA: Design and
Pricing 69
2 ST R AT E G Y  23 Case: Dental Spa 72
A Sustainable Operations Practice Exam  72
and Supply Chain Strategy  24
What Is Operations and Supply Chain 4 PR O J E C T S  73
Strategy? 25 What is Project Management?  74

Competitive Dimensions  27 Organizing the Project Team  75
The Notion of Trade-Offs  29 Pure Project  75
Order Winners and Order Qualifiers: The Functional Project  75
Marketing–Operations Link  29 Matrix Project  76
Strategies are Implemented Using Organizing Project Tasks  77
Operations and Supply Chain Network-Planning Models  78
­Activities—IKEA’s Strategy  30 Critical Path Method (CPM)  79
Assessing the Risk Associated with Oper- CPM with Three Activity Time
ations and Supply Chain S­ trategies  31 Estimates 83
Risk Management Framework  32 Time–Cost Models and Project
Crashing 86
viii

CONTENTS ix

Managing Projects  89 SECTION TWO
Earned Value Management
(EVM) 91 MANUFACTURING AND
SERVICE PROCESSES
Project Management Information
­Systems  94 7 MA N U F A C T U R I N G PR O C E S S E S
Concept Connections  95 148
Solved Problems  97 What are Manufacturing
Discussion Questions  101 Processes? 149
Objective Questions  102 How Manufacturing Processes
Analytics Exercise: Product Design are Organized 151
­Project  108
Practice Exam  109 Break-Even Analysis  153
Manufacturing Process
5 ST R AT E G I C CA PA C I T Y Flow Design  155
MANAGEMENT 110 Concept Connections  160
Capacity Management in Solved Problems  161
­Operations and Supply Chain Discussion Questions  162
Management 111 Objective Questions  163
Case: Circuit Board Fabricators,
Capacity Planning Concepts  112 Inc. 165
Economies and Diseconomies of Practice Exam  167
Scale 112
Capacity Focus  113 8 FA C I L I T Y LAY O U T   168
Capacity Flexibility  113 Analyzing the Four Most Common
Capacity Planning  114 ­Layout Formats  170
Considerations in Changing
Capacity 114 Workcenters (Job Shops)  170
Determining Capacity Requirements  115 Systematic Layout Planning  174
Using Decision Trees to Evaluate Assembly Lines  174
Capacity Alternatives  117 Assembly-Line Design  174
Planning Service Capacity  120 Splitting Tasks  178
Capacity Planning in Services versus Flexible and U-Shaped Line Layouts  179
Manufacturing 120 Mixed-Model Line Balancing  179
Capacity Utilization and Service Cells 181
Quality 121 Project Layouts  181
Concept Connections  122 Retail Service Layout  183
Solved Problem  123 Servicescapes 183
Discussion Questions  125 Signs, Symbols, and Artifacts  185
Objective Questions  125 Office Layout  185
Case: Shouldice Hospital—A Cut Concept Connections  186
Above 127 Solved Problem  187
Practice Exam  129 Discussion Questions  190
Objective Questions  191
6 LE A R N I N G CU R V E S   130 Advanced Problem  197
What are Learning Curves?  131 Analytics Exercise: Designing a
How are Learning Curves Manufacturing Process  198
Modeled? 132 Practice Exam  200

Logarithmic Analysis  133 9 SE R V I C E PR O C E S S E S  201
Learning Curve Tables  133 The Nature of Services  202
Estimating the Learning
Percentage 138 An Operational Classification of
How Long Does Learning Services 203
Go On?  138 Designing Service Organizations  203
In Practice, How Much Learning Structuring the Service Encounter: The
Occurs? 138 Service-System Design Matrix  205
Individual Learning  138 Managing Customer-Introduced
Organizational Learning  139 Variability 207
Concept Connections  141 Applying Behavioral Science to Service
Solved Problems  141 Encounters 207
Discussion Questions  142 Service Blueprinting and
Objective Questions  143 Fail-Safing 211
Practice Exam  146

x CONTENTS

Three Contrasting Service Designs  212 12 SI X SI G M A QU A L I T Y  298
The Production-Line Approach  212 Total Quality Management 299
The Self-Service Approach  213
The Personal-Attention Approach  213 Quality Specifications and Quality
Seven Characteristics of a Well-Designed Costs 300
Service System  215 Developing Quality Specifications  300
Cost of Quality  301
Concept Connections  216 Six Sigma Quality  303
Discussion Questions  217 Six Sigma Methodology  304
Objective Questions  218 Analytical Tools for Six Sigma  305
Case: Pizza USA: An Exercise in Trans- Six Sigma Roles and Responsibilities  308
lating Customer Requirements into The Shingo System: Fail-Safe
Process Design Requirements 218 Design 309
Practice Exam  220 ISO 9000 and ISO 14000  310
External Benchmarking for Quality
10 WA I T I N G LI N E AN A LY S I S A N D Improvement 311
SIMULATION 221 Concept Connections  312
The Waiting Line Problem  222 Discussion Questions  313
Objective Questions  314
The Practical View of Waiting Lines  222 Case: Tesla’s Quality Challenge 315
The Queuing System  223 Practice Exam  316
Waiting Line Models  230
Approximating Customer Waiting Time  236 13 STAT I S T I C A L QU A L I T Y CO N T R O L  317
Simulating Waiting Lines  239 Statistical Quality Control  318
Example: A Two-Stage Assembly Line  239
Spreadsheet Simulation  242 Understanding and Measuring Process
Simulation Programs and Languages  244 Variation 319
Concept Connections  246 Measuring Process Capability  321
Solved Problems  248 Statistical Process Control
Discussion Questions  251 Procedures 325
Objective Questions  251 Process Control with Attribute
Case: Community Hospital Evening M­ easurements: Using p-Charts  326
Operating Room 256 Process Control with Attribute
Analytics Exercise: Processing Cus- M­ easurements: Using c-Charts 328
tomer Orders  256 Process Control with Variable
Practice Exam  259 ­Measurements: Using X- and
R-Charts 329
11 PR O C E S S DE S I G N A N D AN A LY S I S  265 How to Construct X- and R-Charts  330
Process Analysis  266 Acceptance Sampling  333
Design of a Single Sampling Plan for
Example—Analyzing a Las Vegas Slot Attributes 333
Machine 266 Operating Characteristic Curves  334
Process Flowcharting  268 Concept Connections  336
Understanding Processes  270 Solved Problem  337
Buffering, Blocking, and Starving  270 Discussion Questions  340
Make-to-Stock vs. Make-to-Order  271 Objective Questions  340
Measuring Process Performance  273 Analytics Exercise: Hot Shot Plastics
Production Process Mapping and Little’s Company 345
Law 275 Analytics Exercise: Quality
Job Design Decisions  278 M a n a g e m e n t — To y o t a   3 4 6
Behavioral Considerations in Job Practice Exam  347
Design 278
Work Measurement and Standards  279 SECTION THREE
Process Analysis Examples  280
A Bread-Making Operation  280 SUPPLY CHAIN PROCESSES
A Restaurant Operation  281
Planning a Transit Bus Operation  283 14 LE A N SU P P LY CH A I N S  350
Process Flow Time Reduction  285 Lean Production  351
Concept Connections  287
Solved Problems  289 The Toyota Production System  352
Discussion Questions  291 Lean Supply Chains  353
Objective Questions  292 Value Stream Mapping  355
Case: Analyzing Casino Money-­ Lean Supply Chain Design Principles  357
Handling Processes 296
Practice Exam  297 Lean Concepts  358

CONTENTS xi

Lean Production Schedules  359 Routine Decision Making  428
Lean Supply Chains  363 How ERP Connects the Functional
Lean Services  364 Units 429
Concept Connections  366
Solved Problems  368 Finance 430
Discussion Questions  372 Manufacturing and Logistics  430
Objective Questions  372 Sales and Marketing  430
Case: Quality Parts Company 373 Human Resources  430
Case: Value Stream Mapping 375 Customized Software  431
Case: Pro Fishing Boats—A Value Data Integration  431
Stream Mapping Exercise 376 How Supply Chain Planning and Control
Practice Exam  377 Fits Within ERP  432
Simplified Example  432
15 LO G I S T I C S , DI S T R I B U T I O N , A N D SAP Supply Chain Management  433
TRANSPORTATION 378 SAP Supply Chain Execution  433
Logistics 379 SAP Supply Chain Collaboration  434
Decisions Related to Logistics  380 SAP Supply Chain Coordination  434
Performance Metrics to Evaluate Inte-
Transportation Modes  380 grated System Effectiveness  435
Warehouse Design 381 The “Functional Silo” Approach  435
Locating Logistics Facilities  381 Integrated Supply Chain Metrics  436
Plant Location Methods  383 Calculating the Cash-to-Cash Cycle
Centroid Method 387 Time 438
Locating Service Facilities 388 Concept Connections  440
Concept Connections  391 Solved Problems  441
Solved Problems  392 Discussion Questions  442
Discussion Questions  396 Objective Questions  442
Objective Questions  396 Practice Exam  443
Analytics Exercise: Distribution Center
Location 399 18 FO R E C A S T I N G  444
Practice Exam  401 Forecasting in Operations and Supply
Chain Management  445
16 GL O B A L SO U R C I N G A N D Quantitative Forecasting
PROCUREMENT 402 Models 446
Strategic Sourcing 403
Components of Demand  447
The Bullwhip Effect  404 Time Series Analysis  448
Supply Chain Uncertainty Framework  405 Forecast Errors  463
Outsourcing 408 Causal Relationship Forecasting  466
Logistics Outsourcing  408 Qualitative Techniques in
Framework for Supplier Relationships  409 Forecasting 468
Green Sourcing  411 Market Research  469
Total Cost of Ownership  414 Panel Consensus  469
Measuring Sourcing Performance  416 Historical Analogy  469
Concept Connections  418 Delphi Method  469
Discussion Questions  419 Web-Based Forecasting: Collaborative
Objective Questions  420 Planning, Forecasting, and Replenish-
Analytics Exercise: Global Sourcing ment (CPFR) 470
Decisions—Grainger: Reengineering the Concept Connections  471
China/U.S. Supply Chain  422 Solved Problems  473
Practice Exam  424 Discussion Questions  478
Objective Questions  478
SECTION FOUR Analytics Exercise: Forecasting
Supply Chain Demand—Starbucks
SUPPLY AND DEMAND Corporation 487
­PLANNING AND CONTROL Practice Exam  488

17 EN T E R P R I S E RE S O U R C E PL A N N I N G 19 SA L E S A N D OP E R AT I O N S
SYSTEMS 426 PLANNING 489
What is ERP?  427 What is Sales and Operations
Planning? 490
Consistent Numbers  427
Software Imperatives  428 An Overview of Sales and Operations
Planning Activities  490

xii CONTENTS Inventory Records  569
Performing the MRP Calculations  569
The Aggregate Operations Lot Sizing in MRP Systems  572
Plan 492 Lot-for-Lot 573
Aggregate Planning Techniques  496 Economic Order Quantity  573
A Cut-and-Try Example: The JC Least Total Cost  574
Company 496 Least Unit Cost  574
Aggregate Planning Applied to Ser- Choosing the Best Lot Size  576
vices: Tucson Parks and Recreation Concept Connections  576
Department 501 Solved Problems  577
Yield Management  503 Discussion Questions  583
Operating Yield Management Objective Questions  583
Systems 504 Analytics Exercise: An MRP Explosion—
Concept Connections  505 Brunswick Motors  587
Solved Problems  506 Practice Exam  589
Discussion Questions  509
Objective Questions  509 22 WO R KC E N T E R SC H E D U L I N G  590
Analytics Exercise: Develop- Workcenter Scheduling  591
ing an Aggregate Plan—Bradford
Manufacturing 512 The Nature and Importance of
Practice Exam  513 ­Workcenters  591
Typical Scheduling and Control
20 IN V E N T O R Y MA N A G E M E N T  515 Functions 593
Understanding Inventory Objectives of Workcenter Scheduling  594
Management 516 Job Sequencing  594
Priority Rules and Techniques  595
Purposes of Inventory  518 Scheduling n Jobs on One Machine  595
Inventory Costs  519 Scheduling n Jobs on Two Machines  598
Independent versus Dependent Scheduling a Set Number of Jobs on the
Demand 520 Same Number of Machines  599
Inventory Control Systems  521 Scheduling n Jobs on m Machines  601
A Single-Period Inventory Model  521 Shop-Floor Control  601
Multiperiod Inventory Systems  524 Gantt Charts  601
Fixed–Order Quantity Models  525 Tools of Shop-Floor Control  602
Fixed–Time Period Models  532 Principles of Workcenter Scheduling  604
Inventory Turn Calculation  534 Personnel Scheduling in Services  605
Price-Break Model  535 Scheduling Daily Work Times  605
Inventory Planning and Accuracy  538 Scheduling Hourly Work Times  606
ABC Classification  538 Concept Connections  607
Inventory Accuracy and Cycle Solved Problems  609
Counting 539 Discussion Questions  614
Concept Connections  541 Objective Questions  614
Solved Problems  543 Case: Keep Patients Waiting? Not in My
Discussion Questions  546 Office 619
Objective Questions  546 Practice Exam  621
Analytics Exercise: Inventory Manage-
ment at Big10Sweaters.com  555 23 TH E O R Y O F CO N S T R A I N T S   622
Practice Exam  557 Eli Goldratt’s Theory of
Constraints 623
21 MAT E R I A L RE Q U I R E M E N T S
PLANNING 559 The Goal of the Firm  625
Understanding Material Requirements Performance Measurements  625
Planning 560 Unbalanced Capacity  626
Bottlenecks, Capacity-Constrained
Where MRP Can Be Used  560 Resources, and Synchronous
Master Production Scheduling  561 Manufacturing 628
Material Requirements Planning Basic Manufacturing Building Blocks  628
System Structure  563 Methods for Synchronous Control  629
Demand for Products  563 Comparing Synchronous Manufacturing
Bill-of-Materials 563 (TOC) to Traditional Approaches  638
Inventory Records  565 MRP and JIT  638
MRP Computer Program  566 Relationship with Other Functional
An Example Using MRP 567 Areas 639
Forecasting Demand  567 Theory of Constraints—Problems About
Developing a Master Production What to Produce  640
Schedule 568
Bill-of-Materials (Product Structure)  568

CONTENTS xiii

Concept Connections  647 Data Analysis and Solution
Solved Problem  648 Development 682
Discussion Questions  649 Cost Impact and Payoff Analysis  683
Objective Questions  650 Implementation 684
Practice Exam  654 Business Process Reengineering
(Bpr) 684
SECTION FIVE Principles of Reengineering  685
Guidelines for Implementation  686
SPECIAL TOPICS Concept Connections  687
Discussion Questions  687
24 HE A LT H CA R E  656 Objective Questions  688
The Nature of Health Care Exercise: Quick Plant Assessment  688
Operations 657 Practice Exam  690

Classification of Hospitals  658 APPENDICES
Hospital Layout and Care Chains  659
Capacity Planning  660 A Linear Programming Using the
Workforce Scheduling  661 Excel Solver  691
Quality Management and Process
Improvement 661 B Operations Technology  711
Health Care Supply Chains  663
Inventory Management  664 C Financial Analysis  718
Performance Measures  665
Trends in Health Care  665 D Answers to Selected Objective
Concept Connections  667 Questions 734
Discussion Questions  668
Objective Questions  668 E Present Value Table  736
Case: Managing Patient Wait Times at a
Family Clinic 669 F Negative Exponential Distribution:
Practice Exam  670 Values of e–X 737

25 OP E R AT I O N S CO N S U LT I N G  671 G Areas of the Cumulative Standard
What Is Operations Consulting?  672 Normal Distribution  738

The Management Consulting Industry  673 H Uniformly Distributed Random
Economics of Consulting Firms  673 Digits 739
When Operations Consulting Is
Needed 674 I Interest Tables  740
The Operations Consulting
Process 676 INDEX  744
Operations Consulting Tool Kit  677
Problem Definition Tools  677
Data Gathering  679

PREFACE

Operations and supply chain management (OSCM) is a key element in the improvement in
productivity in business around the world. Establishing a competitive advantage through
operations requires an understanding of how the operations and supply chain functions con-
tribute to productivity growth. However, our intent in this book is to do more than just show
you what companies are doing to create a competitive advantage in the marketplace by con-
veying to you a set of skills and tools that you can actually apply.

Hot topics in business today that relate to operations and supply chain management are
reducing the cost of supply chain processes, integration and collaboration with customers and
suppliers, sustainability, and minimizing the long-term cost of products and processes. These
topics are studied in the book with up-to-date, high-level managerial material to clarify the
“big picture” of what these topics are and why they are so important to business today.

A significant feature of this book is the organization of each chapter by concise learning
objectives. Each objective relates to a block of knowledge that should be studied as a unit.
The objectives are carried through the end-of-chapter material that includes Concept Con-
nections, Discussion Questions, Objective Questions, and a Practice Exam. The material is
organized to ease understanding of each topic.

Success in OSCM requires a data-driven view of a firm’s business. Every chapter in the
book has analytic content that ties decisions to relevant data. Mathematical models are used
to structure the data for making decisions. Given the facts that are supported by data, success
in OSCM requires using a strategy that is consistent with the operations-related priorities of
a firm. Different approaches can often be used, and usually trade-offs related to cost-and-
flexibility-related criteria exist. Strategies are implemented through processes that define
exactly how things are done. Processes are executed over and over again as the firm conducts
business, so they must be designed to operate efficiently to minimize cost while meeting
quality-related standards. Great managers are analytic in their approach to decision making;
they understand and select the appropriate strategy, and then execute the strategy through
great processes. We develop this pattern throughout the topics in this book.

The reality of global customers, global suppliers, and global supply chains has made the
global firm recognize the importance of being both lean and green to ensure competitive-
ness. Applications that range from high-tech manufacturing to high-touch service are used
in the balanced treatment of the traditional topics of the field. Success for companies today
requires successfully managing the entire supply flow, from the sources of the firm, through
the value-added process of the firm, and on to the customers of the firm.

Each chapter includes information about how operations and supply chain–related prob-
lems are solved. There are concise treatments of the many decisions that need to be made in
designing, planning, and managing the operations of a business. Many spreadsheets are avail-
able from the book website to help clarify how these problems are quickly solved. We have
indicated those spreadsheets with an Excel icon in the margin.

OSCM should appeal to individuals who want to be directly involved in making products
or providing services. The entry-level operations specialist is the person who determines how
best to design, supply, and run the processes. Senior operations managers are responsible for
setting the strategic direction of the company from an operations and supply chain standpoint,
deciding what technologies should be used and where facilities should be located, purchasing
the resources needed, and managing the facilities that make the products or provide the ser-
vices. OSCM is an interesting mix of managing people and applying sophisticated technol-
ogy. The goal is to efficiently create wealth by supplying quality goods and services.
xiv

PREFACE xv

Features to aid in your understanding of the material include the following:
∙ OSCM at Work boxes provide short overviews of how leading-edge companies are

applying OSCM concepts today.
∙ Solved problems at the end of chapters to serve as models that can be reviewed prior to

attempting problems.
∙ Concept Connections section in each chapter that summarizes the concepts in each

learning objective, has definitions of the key terms, and lists the equations where
appropriate.
∙ Discussion questions that are designed to review concepts and show their applicability
in real-world settings. These are included in each chapter and organized by learning
objectives.
∙ Objective questions at the end of chapters that cover each concept and problem. These
are organized by the chapter learning objectives.
∙ Practice exam questions at the end of each chapter. These are special questions designed
to require a deeper understanding of the material in the chapter. They are similar to the
type of short-answer questions that might be given on a test.
∙ Answers to selected problems are in Appendix D.
∙ Available as a supplement to the book is the super-innovative Connect smart-learning
system. Connect includes LearnSmart, a study system that uses automated intelligent
drills to test and ensure your mastery of the material. Connect also includes PowerPoint
slide outlines of each chapter, Excel spreadsheets for the solved problems and other
examples, practice quizzes, ScreenCam tutorials, Internet links, and video segments that
illustrate the application of operations concepts in companies such as Xerox, Z­ appos,
Six Flags, Caterpillar, Burton Snowboards, Honda, Disney, Ford, and many others.
Our aim is to cover the latest and the most important issues facing OSCM managers, as
well as basic tools and techniques. We supply many examples of leading-edge companies and
practices and have done our best to make the book an interesting read and give you a competi-
tive advantage in your career.
We hope you enjoy it.

PLAN OF THE BOOK

This book is about methods to effectively produce and distribute the goods and services sold
by a company. To develop a better understanding of the field, this book is organized into five
major sections: Strategy, Products, and Capacity; Manufacturing and Service Processes; Sup-
ply Chain Processes; Supply and Demand Planning and Control; and Special Topics. In the
following paragraphs, we quickly describe the major topics in the book.

Strategy and sustainability are important and recurring topics in the book. Any company
must have a comprehensive business plan that is supported by a marketing strategy, operations
strategy, and financial strategy. It is essential for a company to ensure that the three strategies
support each other. Strategy is covered from a high-level view in Chapter 2 (Strategy), and
more details that relate to economies of scale and learning are covered in Chapters 5 and 6.

The lifeline of the company is a steady stream of innovative products that are offered to
the marketplace at the lowest cost possible. Design of Products and Services (Chapter 3)
includes a view of how products are designed in the context of having to actually produce and
distribute the product over its life cycle. The chapter includes material on how to manage and
analyze the economic impact of a stream of products that are developed over time. Projects
(Chapter 4) are used to implement change in a firm, be it a change in strategy, a new product
introduction, or a new process.

The second section of the book, titled Manufacturing and Service Processes, focuses on
the design of internal processes. Chapters 7 and 9 cover the unique characteristics of produc-
tion and service processes. Important technical material that relates to design activities is
covered in Chapters 8 (Facility Layout) and 10 (Waiting Line Analysis and Simulation).

xvi PREFACE
Chapter 11, Process Design and Analysis, is a nuts-and-bolts chapter on process flow

charting and static process analysis using some easily understood real-life examples.
An essential element of process design is quality. Six Sigma Quality is the topic of

­Chapter  12. Here we cover total quality management concepts, Six Sigma tools, and ISO
9000 and 14000. Technical details covering all the statistical aspects of quality are in Chapter
13 (Statistical Quality Control).

The third section of the book, titled Supply Chain Processes, expands our focus to the
entire distribution system from the sourcing of material and other resources to the distri-
bution of products and services. We discuss the concepts behind lean manufacturing and
just-in-time processes in Chapter 14. These are ideas used by companies throughout the
world and are key drivers for efficient and quick-responding supply systems. Many different
transformation processes are needed to put together a supply chain. There are critical deci-
sions such as: Where should we locate our facility? What equipment should we buy or lease?
Should we outsource work or do it in-house? These are the topics of Chapters 15 and 16 that
relate to sourcing, procurement, location of facilities, and distribution. All of these decisions
have a direct financial impact on the firm.

Section Four, titled Supply and Demand Planning and Control, covers the techniques
required to actually run the system. This is at the heart of OSCM. The basic building blocks
are Forecasting (Chapter 18), Sales and Operations Planning (Chapter 19), Inventory Man-
agement (Chapter 20), Material Requirements Planning (Chapter 21), and Workcenter
Scheduling (Chapter 22). These daily processes are often partially automated with computer
information systems. Coverage of Enterprise Resource Planning Systems is the topic of
Chapter 17.

In the final section of the book, titled Special Topics, we show how the concepts in the
book are applied to special business situations. Here we have selected two types of busi-
nesses, Health Care (Chapter 24) and Operations Consulting (Chapter 25). We know that
many of you may be interested in working for hospitals and similar specialized care facilities,
a growing segment of the world economy. In addition, we know that many of those interested
in OSCM are also interested in consulting as a profession.

Making fact-based decisions is what OSCM is all about, so this book features extensive
coverage of decision-making approaches and tools. One useful way to categorize decisions
is by the length of the planning horizon, or the period of time that the decision maker must
consider. For example, building a new plant would be a long-term decision that a firm would
need to be happy with for 10 to 15 years into the future. At the other extreme, a decision
about how much inventory for a particular item should be ordered for tomorrow typically has
a much shorter planning horizon of a few months or, in many cases, only a few days. Such
short-term decisions are usually automated using computer programs. In the intermediate
term are decisions that a company needs to live with for only 3 to 12 months. Often these
decisions correspond to yearly model changes and seasonal business cycles.

As you can see from this discussion, this material is all interrelated. A company’s strategy
dictates how operations are designed. The design of the operation dictates how it needs to be
managed. Finally, because businesses are constantly being presented with new opportunities
through new markets, products, and technologies, a business needs to be very good at manag-
ing change.

ACKNOWLEDGMENTS

Many very talented scholars have made major contributions to specific chapters in this edition
of the book. We are pleased to thank the following individuals:

Rhonda Lummus of Indiana University for her many ideas for improving the material in the
book. Ronny Richardson of Kennesaw State University and Matthew Drake of Duquesne
University, who spent countless hours checking problems and improving Connect.
Chris Albright, Goker Aydin, Doug Blocher, Kyle Cattani, Seb Hesse, Ash Soni, Gilvan
Souza, and Wayne Winston of the ODT department at the Kelley School of Business,
Indiana University, for all the time spent discussing ideas.
Supplements are a great deal of work to write, and we appreciate the efforts that make
teaching the course easier for everyone who uses the text. John Kros of East Carolina Uni-
versity created the Connect guided examples. P. Sundararaghavan of University of Toledo
updated the test bank. Ronny Richardson of Kennesaw State University updated the Power-
Point decks and revised Smartbook. 
We also want to thank former doctoral students who have contributed to the book
over the years, including Mahesh Nagarajan, University of British Columbia; Hiroshi
O­ chiumi, Wayne Johannson, and Jason Niggley, USC; Douglas Stewart, University of New
Mexico; Anderas Soteriou, University of Cyprus; Arvinder Loomba, University of Northern
Iowa; Deborah Kellogg, University of Colorado–Denver; Blair Berkeley, California State
University–Los Angeles; and Bill Youngdahl, Thunderbird American Graduate School of
International Management.
We also want to thank the following individuals for their thoughtful reviews of the previous
edition and suggestion for this text: Gladys Simpson, Florida International University; Scott
Swenseth, University of Nebraska; Mohsen El Hafsi, University of California Riverside; Joel
Wisner, University of Nebraska; Kim Roberts, Athens State University; Chris Kiscaden, Uni-
versity of New Mexico; Steven Yourstone, University of New Mexico; Mark Ippolito, Indiana
University; Frank Armstrong, Ferris State University and Lansing Community College. 
Thanks to the McGraw-Hill Education team who make this p­ ossible—Chuck Synovec,
director; Michele Janicek, lead product developer; Trina Maurer, senior marketing manager;
Kathryn Wright and Kristin Bradley, project managers; Mark Christianson, program man-
ager; Sandy Ludovissy, senior buyer; Egzon Shaqiri, designer; and Melissa Homer and Jacob
Sullivan, content licensing specialists.
Finally, I want to thank my past co-authors Dick Chase and Nick Aquilano for giving me
the opportunity to work with them on their book for the past 16 years. I had the opportunity
to work with Nick Aquilano on two editions of the book and with Dick Chase on six editions.
Both Nick and Dick have now retired from writing the book, but they are still engaged in
many creative activities. They have been an inspiration to me and are wonderful colleagues.
Enjoy your retirement, you both deserve it.

F. Robert Jacobs

xvii

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SmartBook’s adaptive technology provides precise,
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NOTE TO I NSTRUCTORS

DISCUSSION OF FIFTEENTH EDITION REVISIONS

The revisions to the fifteenth edition are a refinement of major changes made in the last
edition. Each chapter is organized around a short set of learning objectives. These learning
objectives define the major sections of each chapter. A complete set of Discussion Questions
together with Objective Questions, which include concepts and problems, are included. 

The many questions now included in each chapter are all available for use in Connect, the
automated assignment grading system available to adopters of the book.

Much work has been put into  Connect  to make it an easy to use and reliable tool. The
Objective Question problems are available and many have both static versions (these are iden-
tical to the problem in the book) and scenario versions. In the scenario versions of the prob-
lem, the parameters have been changed, but the problem is essentially the same, thus allowing
students to see different examples of the same problem. The instructor can select predefined
or set up custom problem sets that students can complete. These are automatically graded
with the results available in a spreadsheet that can be easily downloaded by the instructor.
There are many options for how these problem sets can be used, such as allowing the students
multiple tries, giving the students help, and timed exams.

In this edition, we have increased our focus on supply chain analytics. Supply chain analyt-
ics involve the analysis of data to better solve business problems. We recognize that this is
not really a new concept because data has always been used to solve business problems. But
what is new is the reality that there is so much more data now available for decision making.

In the past, most analysis involved the generation of standard and ad hoc reports that sum-
marized the current state of the firm. Software allowed query and “drill down” analysis to
the level of the individual transaction, useful features for understanding what happened in the
past. Decision making was typically left to the decision maker, based on their judgment or
simply because they were aware of the rules. The new “analytics” movement takes this to a
new level using statistical analysis, forecasting to extrapolate what to expect in the future, and
even optimization, possibly in real time, to support decisions.

In this edition, our goal is to capture this spirit of using integrated analytic and strategic
criteria in making operations and supply chain decisions. We have done this in two major
ways. First, we have reorganized the material in the book by integrating the strategic and
analytic material. Next, we have refined our series of 11 Analytics Exercises spread through-
out the chapters. In this edition, many small changes designed to increase clarity, simplify
assumptions, and make the exercises better learning tools have been made.

These new Analytics Exercises use settings that are modern and familiar to students taking
the course. They include Starbucks, cell phones, notebook computers, Taco Bell Restaurant,
Toyota, a retail website-based company, and industrial products that are sourced from China/
Taiwan and sold globally. The book has been reorganized into five major sections: Strategy,
Products, and Capacity; Manufacturing and Service Processes; Supply Chain Processes; Sup-
ply and Demand Planning and Control; and Special Topics. Our strategy is to weave analytics
into the managerial material so students see the important role of data analysis in making
operations and supply chain management decisions.

In the first section, Strategy, Products, and Capacity, our chapters cover Strategy, the
Design of Products and Services, Project Management, Strategic Capacity Management, and
Learning Curves. The key themes of operations strategy, product design to support the strat-
egy, and strategic capacity are a good foundation for learning about operations and supply
chain management. Because most strategic plans are implemented using projects, we include
this topic in the first section as well. In the project management chapter, we introduce a good
amount of material on product design through examples and exercises, emphasizing the stra-
tegic importance of these projects to the success of the firm.
xx

NOTE TO INSTRUCTORS xxi

The second section, Manufacturing and Service Processes, gets into the nuts and bolts of
operations management. The section introduces the ways manufacturing and service systems
are organized and includes new Analytics Exercises for assembly line design and queuing.
The Six Sigma and Statistical Quality Control chapters cover topics that would be appropri-
ate for a green-belt program and include good coverage of the popular value-stream mapping
technique.

The third section, Supply Chain Processes, discusses processes that source material
for internal operations and then distribute products to the customers. The analytic models
involved with location/transportation are included here. The topics are tied together in the
Lean Supply Chain chapter, which now stresses the cost versus disruption risk trade-offs that
are involved in such tactics as single sourcing and just-in-time inventory.

The fourth section, Supply and Demand Planning and Control, covers the techniques
typically implemented in Enterprise Resource Planning Systems. These include Forecasting,
Sales and Operations Planning, Inventory Management, Material Requirements Planning, and
Workcenter Scheduling. We also include a chapter on the Theory of Constraints, a set of
thought-provoking concepts.

Finally, the fifth section, titled Special Topics, covers two industries where operations and
supply chain management concepts are being applied with great success. The first is health
care, with the majority of our material on hospital and special care facilities. We also discuss
operations consulting because this is an area where many of our students find jobs.

The following are a list of the major revisions in selected chapters:
∙ Chapter 1  Introduction—The opening vignette has been changed to highlight “Effi-

ciency at Southwest Airlines.” Exhibit 1.4 the “Good-Services Continuum” has been
changed to make it more relevant to today. A number of new key terms were added that
relate to major concepts that define OSCM. These are from the timeline. Exhibit 1.7
has been updated and is now a comparison of Toyota, GM, and Ford.
∙ Chapter 2 Strategy—The new opening vignette features the innovative car company
Tesla Motors. Exhibit 2.2 “Formulating an Operations and Supply Chain Strategy” is
new. A new definition of the key term order winner now indicates that there can be
more than one order winner. Exhibit 2.4 “Risk Mitigation Strategies” has been updated.
∙ Chapter 3 Design of Products and Services—The opening vignette has been updated. It
still features IDEO but now captures their new process, Overlapping Thought Spaces.
Tesla has been added as an example of an innovative and highly successful company.
Exhibit 3.7 (“Process Alternatives for a Family Restaurant”) has been updated to be
more in tune with today. Exhibit 3.11 has been replaced with measures related to prod-
uct development success, focusing on the terms: time-to-market, productivity, and
quality. These terms have all been changed to keywords.
∙ Chapter 4 Project Management—The opening vignette that describes how a Chinese
construction company builds 30-story hotels in only 15 days was updated.
∙ Chapter 5 Strategic Capacity Management—The opening vignette was updated.
Rewrote Example 5.1 to explain how this planning example fits into a hierarchical plan-
ning process. Also, clarified some terminology.
∙ Chapter 6 Learning Curves—The opening vignette was updated.
∙ Chapter 8  Facility  Layout—The opening vignette was updated. The description of
assembly line task times was updated to reflect the usual focus on labor task time. Effi-
ciency calculation was also updated to reflect this. The Retail Service Layout section
was rewritten and updated to reflect current trends. The Analytic Exercise discussion
questions were updated for clarity.
∙ Chapter 9  Service Processes—The opening vignette was updated. Exhibit 9.4 was
updated to reflect current thought. Updated material on service guarantees. Updated
examples to reflect current times. The “Three Contrasting Service Design” section was
extensively rewritten to reflect current thought.
∙ Chapter 10 Waiting Line Analysis and Simulation—The opening vignette was completely
rewritten. The “Waiting Line Problem” section was rewritten. The new Exhibit 10.9

xxii NOTE TO INSTRUCTORS

for multi-server (Model 3) analysis now includes many more values. This is needed to
support the Connect scenario-based problems.  
∙ Chapter 11 Process Design and Analysis (title changed)—A new opening vignette was
added featuring Amazon Air Prime. In Example 11.2, the solution was rewritten and
clarified. The material describing cycle time and flow time was rewritten and clarified.
Object question 21 was rewritten to clarify assumptions.
∙ Chapter 12 Sigma Quality—Here, a new case “Tesla’s Quality Challenge” was added.
This replaced the old Toyota case. 
∙ Chapter 13 Statistical Quality Control—The notation for the standard deviation (Sc)
for the c-chart was changed from Sp to Sc to prevent any confusion with Sp, the stan-
dard deviation for the p-chart. The “Hot Shot Plastics Company” was changed to an
analytics exercise. “Quality Management—Toyota” was also changed to an analytics
exercise.
∙ Chapter 14 Lean Supply Chains—The section that describes “minimized setup time”
was rewritten.
∙ Chapter l5 Logistics, Distribution, and Transportation—The opening vignette was
rewritten to reflect the current status and thoughts related to the Panama Canal project.
Many other updates have been made to make the material up-to-date. The OSCM at
Work box about Boeing was rewritten.
∙ Chapter 16 Global Sourcing and Procurement—Exhibit 16.6 was rewritten and updated
to current thought. 
∙ Chapter 17 Enterprise Resource Planning Systems—Updated OSCM at Work box
titled Open Information Warehouse. Updated “Supply Chain Council” section to show
current association with APICS.
∙ Chapter 18 Forecasting—Changed the definition of MAPE and how it is calculated. It
is the average of the percent errors associated with each forecast. This does not impact
any problems, but it does impact the analytics exercise section (only slightly) at the end
of the chapter.
∙ Chapter 20 Inventory Management—Here the exhibits in Big10Sweaters were updated
to make them clearer.
∙ Chapters 23 Theory of Constraints—Updated Eli Goldratt’s Theory of Constraints sec-
tion to reflect current thinking. The Lahey Clinical OSCM at Work box was removed.
∙ Chapter 24  Health Care—Exhibit 24.2 was updated and Exhibit 24.6 was replaced
with better material. Exhibit 24.7 was updated. The description of DRGs was updated.
Exhibit 24.8 was removed and its material was inserted into the text.

F. Robert Jacobs
July 2016

TEGRITY CAMPUS: LECTURES 24/7

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Educators know that the more students can see, hear, and experience class resources, the
better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall key
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lecture
To learn more about Tegrity watch a 2-minute Flash demo at http://tegritycampus.mhhe.
com.

NOTE TO INSTRUCTORS xxiii

ASSURANCE OF LEARNING READY

Many educational institutions today are focused on the notion of assurance of learning, an
important element of some accreditation standards. Operations and Supply Chain Manage-
ment is designed specifically to support your assurance of learning initiatives with a simple,
yet powerful solution.

Each test bank question for Operations and Supply Chain Management maps to a specific
chapter learning objective listed in the text. You can use our test bank software, EZ Test and
EZ Test Online, or Connect Operations Management to easily query for learning objectives
that will directly relate to the learning objectives for your course. You can then use the report-
ing features of EZ Test to aggregate student results in a similar fashion, making the learning
of data simple and easy.

MCGRAW-HILL CUSTOMER CARE
CONTACT INFORMATION

At McGraw-Hill, we understand that getting the most from new technology can be chal-
lenging. That’s why our services don’t stop after you purchase our products. You can e-mail
our Product Specialists 24 hours a day to get product-training online. Or you can search our
knowledge bank of Frequently Asked Questions on our support website. For Customer Sup-
port, call 800-331-5094  or visit www.mhhe.com/support. One of our Technical Support
Analysts will be able to assist you in a timely fashion.

Walkthrough

The following section Rev. Confirming Pages
highlights the key features
developed to provide 7 Manufacturing
you with the best overall Processes
text available. We hope
these features give you Learning Objectives
maximum support to
learn, understand, and LO 7–1 Understand what a manufacturing process is.
apply operations concepts. LO 7–2 Explain how manufacturing processes are organized.
LO 7–3 Analyze simple manufacturing processes.
Chapter Opener
THREE-DIMENSIONAL PRINTING—THE
TECHNOLOGY COULD BE USED TO
MAKE PARTS THAT PERFORM BETTER
AND COST LESS

The technology for printing three-dimensional objects has existed for

decades, but its application has been largely limited to novelty items

and specialized custom fabrication, such as making personalized pros-

thetics. The technology has now improved to the mpaotienCrtioawnlshf,eiirnrmecluithndeginsgPe ages
printers can make intricate objects out of durable

ceramics and metals (such as titanium and aluminum), with a resolution

This ratchet wrench on the scale of tens of micrometers.
was made using a
The impact of advanced manufacturing technology on productiv-

3-D printer on the ity is dramatic. Every year, U.S. manufacturing firms invest millions of

International Space
Station in about four
hours.

© NASA/Sipa USA/

aPnrodcAesnsalDyseissign 11Newscom
dollars to convert manufacturing plants into computerized environments in an effort
to improve the firm’s competitive position. Companies in other major manufacturing
countries such as Germany, Japan, and South Korea are making similar investments.
Chinese companies, though, are the productivity leaders, with the country’s combina-
tion of advanced technology and low labor costs.

Opening Vignettes 148

Each chapter opens with a Learning Objectives
short vignette to set the stage
and help pique students’ LO 11–1 Exemplify a typical business process and how it can be analyzed.
interest in the material about LO 11–2 Compare different types of processes.
to be studied. A few examples LO 11–3 Explain how jobs are designed.
include: LO 11–4 Analyze manufacturing, service, and logistics processes to ensure the competitiveness of a firm.
∙ Boeing, Chapter 6
∙ United Parcel Service (UPS), AMAZON—THE MASTER OF EFFICIENCY
AND LOGISTICS
Chapter 11
∙ Starbucks, Chapter 18 How does the world’s largest online retailer run the fulfillment centers that process Amazon’s Prime Air
the thousands of orders received by the company each hour? They employ more than service may someday
xxiv 120,000 full-time and part-time workers around the world and use an optimized com- allow small packages
bination of humans and machines to efficiently process each order. to be delivered in 30
minutes.
The fulfillment centers use conveyor belts to transport items and employ machines © Polaris/Newscom
to print and stick mailing labels on them. The company’s computers track every item
using bar codes. All of this happens with 265
the assistance of workers who are as effi-
cient as the machines.

The company’s amazingly efficient pro-
cess allows them to offer free two-day
delivery for it’s Prime membership custom-
ers. In major cities, Amazon even offers
same day delivery to some areas.

Amazon is experimenting with the use
of drones that may someday deliver pack-
ages within 30 minutes. Amazon calls the
service Prime Air. With no human interven-
tion, a small plastic package containing
your items are loaded under the drone,
which then automatically flies to your home. It may be a few years before the Prime
Air is operational, but it offers an intriguing opportunity for Amazon.

This wildly efficient infrastructure is what sets Amazon apart and ahead of competi-
tors such as Walmart, Target, and the Chinese Alibaba.com.

Bob Ray

Perf. Confirming Pages Average
Time
Start Finish Wait Start Perf. Finish Wait Average Total Time in
Time 70 Time
50 Tim e Time RN Time time Time Time/Unit Time WSAyLsKtTeHmROUGH xxv
  0 30   70   0   0   70 10   80 70 80.0 80 80.0
  70 50 666 Special Topics
120 60 Section 5 170 40
170 40 120   0 44 120 50 85.0 100   90.0
230 60
290 60 150 20 72 170 60 230   0 76.7 110   96.7 OSCM at Work Boxes
330 50 OSCM AT WORK
400 50 220 10 35 230 40 270   0 67.5 100   97.5
460 40 Remote Doctor Consultation! The nurse comes in and asks how things are going. The boxes provide examples
510 10 or expansions of the topics
560 30 290You brok e 0your ankle p 2laying ten2nis9y0esterday1a0fternoon. S3h0e 0says the do2ct0or wants to talk6a0nd.0asks if I am up 7fo0r that. 92.0 presented by highlighting
610 10 “Sure,” I say, but I am still unsure how this can be done. “No 95.0 leading companies practicing
630 30 330bWohnaetsa. Tmh e e0ssd—octhtoer wsahyo8sle2thjoaitntitdmisilgo3hct3abte0edaanydeatrh7rbee0efobrerokyoeun 97.1 new, breakthrough ways to
690 50 p4ro0b0lem, I’ll be 3rig0ht in with the d6o6ct.o7r” says the n1ur1se0. T  he 95.0 run their operations. Examples
760 30 390aNroe pbaaicnkr1itgo0hnt onromwa,l.bYuot3uthr1esumrgeedriycaw4tiao0snp0ceormfoinrmgetdh4rlo0ausgt hnitghhatt. 95.6 include:
820 40 nurse rolls in a device like I had never seen before. It looks to 96.0
870 30 93.6
910 20 460tubeTchoenn d eo0cctteodr twoaynoteu1dr a3tromgmetaythbe4est6uhre0greeryasdoonnfe2orl0athsat tn. ight b4e4a0little over 5 f e0et high and has6a2co.9mputer monit1or1o0n t o p.
950 40 I hear a voice say, “Hi, how are you doing?” I look up
1000   50
1040   70 510psirniocre toheg ow 0iansg luenadvienrgt5hfoe3r kvnaicfea,tihoen5ae1sasr0ulyretdhisyomuo5trhn0aint ge.vJeurys-t a4n8d 0sure enoug2h 0there is my do6cto0r.o0n the screen. 8He0tells
1080   40
1130   50 me about how well the surgery went. He describes how he
1200   60
1260   30 560tmhoinrgninwgo. u H lde0ibs e70f0inemiale4nsd8awthaayt bhyenw5owo6u, s0ldo talk tcoo5uylod0uthiins the p5u6t a0plate in m3y a0nkle and seve6n 2sc.r2ews to hold e1ve0ry0th i ng
1310   40 how be?
1390   50 together. He explains that it is going to take time for all of this
1440   80
1480   t6o 1he0al and that a f t0er six months he6w1o.u0ld probably d1o 0an0ot h er
1530  
surgical procedure and take the plate and screws out. It is all

600 10 13 610 20 p6a3rt 0of the proce s s0. He said he w5ou7ld.3check in with m7e 0again

tomorrow morning and that it might be four or five days before

620 10 67 630 60 I6co9u0ld leave the h 0ospital. Also, I sh5o7ul.d5let the nurses k8n0ow if I 92.5 ∙ Efficiency: It’s the Details
95.4 That Count, Chapter 1
am feeling any pain. He assured me that he was connected to
97.9
660 30 91 690 70 t7he6g0adget throu g 0h an app and th5a8t th.5e nurses cou1ld3co0nt a ct
98.0 ∙ What’s It Like Working on an
him quickly, even better than if he were at the local office. 97.5 Assembly Line?, Chapter 8

700 60 76 760 60 820This type o  f0electronic phy5s8ici.a6n assistant 1giv3e0s  t he

doctor direct access to current data related to the patient—

790 30 41 820 40 h8e6ar0t rate, bloo d 0pressure, slee5p7a.n3d active per1io0ds0, a  nd

current drugs being administered. In many ways, this is even

870   0 34 870 40 b9e1tte0r than the 1old0way of doing 5ho6sp.9ital rounds. Eve9ry0thing

is at the doctor’s finger tips; the information is in real-time

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95.6 Initial Quality Study of New
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nication is now possible regardless of whether a physician
94.0
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93.8 ∙ Mr. Rounder Is On-Call
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95.2 Medical Center, Chapter 24
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done
mobile telemedicine unit that connects physicians and specialists
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1200w  ith patien t s0and other do7c0tors in rea1l t2im0e t0hr o ugh 60computers
equipped with cameras and microphones.

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1310     0 93 1310   80 1390     0 55.6 130   97.2

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1420   20
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1530     0
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98.6 where Excel templates are
ical record. These tablets also enable doctors and nurses to call up medical test records and 99.0 available on the text website.

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medical practices with handheld tablet PCs for medical records being sold by Walmart.

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umbers. The average time for two units is the average time of the sum of the 12/15/16 11:44 AM
units. The average time for threejac66107_ch24_655-670.indd 666 units is the average time for the sum of the
and so on. This display could have almost any starting shape, not necessarily
own. It all depends on the stream of random numbers. What we can be sure of
do oscillate for a while until they settle down as units are finished and smooth
B shows the average time that parts spend in the system. At the start, the
n increasing amount of time in the system. This can be expected because the
mpty and there are no interruptions for parts passing from Bob to Ray. Often,
ystem and may have to wait between stages as work-in-process; this causes
quent parts and adds to the waiting time. As time goes on, however, stability

dd 243 12/09/16 11:47 AM

xxvi WALKTHROUGH

Photos and Exhibits

Over 60 photos and 200
exhibits are included in the
text to enhance the visual
appeal and clarify text
discussions. Many of the
photos illustrate additional
examples of companies that
utilize the operations and
supply chain concepts in their
business.

Independent Manual 268 Section 2 High
Demand two-bin Manufacturing and Service Processes

Reorder point/equal Material tboetuTwnhedienenkrsitnaabdnoidvuitdthoueuarliOonagv(vbrceaseinotsmriktlaove)brltielytliipensrgooccraespsisrn.oocO.eMnssetahsneythoc
order period

requirements mrigsaRyhnnatacteghi-nreborantsohienudesocnaesionfo.thWesheact adsoinoyso?u think wo
planning Would gr

Dependent fthoeodpcloainssntuinongfptlheaesfaonot,d?tLhoIeswcsupseteodmoefr service im
will not ev
cthaesicnaosimnoaLkboewescmauosneeiyf the customers leave, t
High Transaction costs based on how long th

bling, the more money the casino makes. W
are too expensive, they might leave. So it is
they can be priced inexpensively. Many cas
to serve the customer quickly? Think about
Key Ideas sitting in the restaurant, they are not feedin
important because it impacts the revenue gen
Important points in the
text are called out and KEY IDEA Process Flowcharting
summarized in the margins.
Drawing a picture is Activities associated with a process often aff
always the first step in simultaneous performance of a number of a
analyzing a process. way to start analyzing a process is with a dia
Keep the drawing typically tasks, flows, and storage areas. T
simple to start with. and the storage of goods or other items as
process can be diverted in multiple direction
are depicted as a diamond, with the differen
Exhibit 11.1 displays examples of these sym
tal or vertical bands sometimes is useful bec
of the process. For example, with the slot m
be separated from the tasks performed by th

In the slot machine example, the level of a
black box that takes in silver dollars and e
ing each cycle. Viewing the slot machine as
to analyze how much the machine is expec
more activities are required to support the s

Solution

λ = 3, μ = 4

a. Utilization ρ = _μλ_ = _34_ = 75 %. WALKTHROUGH xxvii

b. Lq = ____λ_2___ = ____3_2___ = _94_ = 2.25 cars in line.
μ(μ − λ) 4(4 − 3)

Solved Problemsc._L_q
Wq = λ = _2_.32_5_ = 0.75 hour, or 45 minutes. Representative problems
are placed at the end of
d. Ws = _L_s = _μ_−λ__λ_╱λ = _4_−3__3_╱3 = 1 hour (waiting + lube). appropriate chapters. Each
λ large university. ofteinncludes a worked-out

SOLVED PROBLEM 2 Because students
American Vending Inc. (AVI) supplies vended food to a
kick the machines out of anger and frustration, management has a constant repair problem. Thseolution, giving students
Pmwooaircskhseoinrnegmsetbasnre$na1ek6r.dpDoeowrwhnnootuinrm.aOencnaoevsewtsroatrghkeeecorofcmathnpraesneeyrpv$eic2re5hmopuearrc,hhaoinnuderstphaeetrabmnreaaacvhkeidrnoaewg,eannrsadatereeaocdfhifsmitvreaibipnuetteerndhaoinnucrapea, rroebvlieemwsboenfotrheesirolovwinng.
distributed exponentially; two workers working together can service seven per hour, distributed
exponentially; and a team of three workers can do eight per hour, distributed exponentially.
What is the optimal maintenance crew size for servicing the machines?

Solution

Case I—One worker:
λ = 3/hour Poisson, μ = 5/hour exponential

The average number of machines in the system is

Ls = _μ_−λ__λ = __3__ = _32_ = 11⁄2 machines
5−3

Downtime cost is $25 × 1.5 = $37.50 per hour; repair cost is $16.00 per hour; and total cost
per hour for 1 worker is $37.50 + $16.00 = $53.50.

Downtime cost is 1.5 × $25 = $37.50 Confirming Pages
Labor (1 worker × $16) =   16.00

Concept Connections $53.50

Case II—Two workers:
2sdeTt4arhuac6edwheCsλlneo=stastn3ruca,ndeμiqepn=nutgSt7iCescoc’kotbiaonjatnenntce2edtncivtetiifeoofL.nensLDTc=staothob_μiwgMevo_−nrtλre_ahito(in_dλ2merru=egwfeamafaop_(c7e0rnt_apk−ur.37_ieierez5nir_3nnasa×g=c×rptsiea$o0$on2.a1i7wdn5n6t5)S)t hotme==sherf,ave$ nc kti31hchee28aienen..yp07Ped05pCrtoelcooyrefnmisnsceesgevs,petathrnyeCdcochfhnoaanrppemttceeutrril.oacTnsohsnfiogtseritnvoeto.sl
$50.75

Concept Connections

LO 10–1 Understand what a waiting line problem is.

107_ch10_221-264.indd 248 Summary 12/09/16 11:47 AM

∙ The study of waiting in line is the essence of this prob- ∙ Queuing theory assumes that customers arrive accord-
lem. Queuing theory is the mathematical analysis of ing to a Poisson arrival distribution and are served
the waiting line.  according to an exponential service time distribution.
These are specific probability distributions that often
∙ A queuing (or waiting line) system is composed of match well with actual situations.
three major parts: (1) the customers arriving to the
system, (2) the servicing of the customers, and (3) Exponential distribution A probability distribution asso-
how customers exit the system.  ciated with the time between arrivals.
Poisson distribution Probability distribution for the
Key Terms number of arrivals during each time period.
Service rate The number of customers a server can
Queues A line of waiting persons, jobs, things, or the handle during a given time period.
like.
Queuing system A process where customers wait in line Poisson distribution
for service. [10.2] PT(n ) = _(λ_T_)n_n!_e_−λ_T 
Arrival rate The expected number of customers that
arrive each period.

Key Formulas

Exponential distribution

[10.1] f(t ) = λ e−λt  

xxviii WALKTHROUGH

Practice Exams

The Practice Exams are designed to allow students to see how well they
understand the material using a format that is similar to what they might see
in an exam. This feature includes many straightforward review questions, but
also has a selection that tests for mastery and integration/apCpolnifciramtiinognPalegevsel
understanding, i.e., the kind of questions that make an exam challenging. The
practice exams include short answers at the bottom so students can see how
well they have answered the questions.

Waiting Line Analysis and Simulation Chapter 10 259

Practice Exam 6. In most cases, if a firm increases its service capac-
ity by 10 percent, it would expect waiting times to
Answer the following questions. Answers are listed at the be reduced by what percentage? Assume customer
end of this section. arrivals and service times are random.

1. The queuing models assume that customers are 7. An ice cream stand has a single window and one
served in what order? employee to serve customers. During their busy sea-
son, 30 customers arrive each hour, on average. It
2. Consider two identical queuing systems except for takes 1.5 minutes, on average, to serve a customer.
the service time distribution. In the first system, the What is the utilization of the employee?
service time is random and Poisson distributed. The
service time is constant in the second system. How 8. How long would customers have to wait in line, on
would the waiting time differ in the two systems? average, at the ice cream shop discussed in question 7?

3. What is the average utilization of the servers in a sys- 9. Random service times can be modeled by this.
tem that has three servers? On average, 15 custom- 10. A bank teller takes 2.4 minutes, on average, to serve
ers arrive every 15 minutes. It takes a server exactly
three minutes to wait on each customer. a customer. What would be the hourly service rate
used in the queuing formulas?
4. What is the expected waiting time for the system 11. There are three teller windows in the bank described
described in question 3? in the prior question. On average, 60 customers per
hour arrive at the bank. What will be the average
5. Firms that desire high service levels where custom- number of customers in line at the bank?
ers have short wait times should target server utiliza-
tion levels at no more than this percentage.

Answers to Practice Exam 1. First come, first served 2. Waiting time in the first system is two times the second. 3. 100% 4. Infinite
5. 70–80% 6. Greater than 10% 7. 75% 8. .075 hours, or 4.5 minutes 9. Exponential distribution 10. 25 customers per hour 11. 2.5888
(from Exhibit 10.9)

exh ibi t 1 0. 9 Excel: Expected Length

λ/μ M Lq P0 λ/μ M Lq P0 λ/μ M Lq P0
0.15 0.026 0.850 0.55  1 0.672 0.450 0.85 4.817 0.150
0.20  1 0.001 0.860 0.60  2 0.045 0.569  1 0.187 0.404
0.25  2 0.050 0.800 0.65  3 0.004 0.576 0.90  2 0.024 0.425
0.30  1 0.002 0.818 0.70  1 0.900 0.400  3 0.003 0.427
0.35  2 0.083 0.750 0.75  2 0.059 0.538 0.95  4 8.100 0.100
0.40  1 0.004 0.778 0.80  3 0.006 0.548  1 0.229 0.379
0.45  2 0.129 0.700  1 1.207 0.350 1.00  2 0.030 0.403
 1 0.007 0.739  2 0.077 0.509 1.10  3 0.004 0.406
0.50  2 0.188 0.650  3 0.008 0.521  4 18.050   0.050
 1 0.011 0.702  1 1.633 0.300  1 0.277 0.356
 2 0.267 0.600  2 0.098 0.481  2 0.037 0.383
 1 0.017 0.667  3 0.011 0.495  3 0.005 0.386
 2 0.368 0.550  1 2.250 0.250  4 0.333 0.333
 1 0.024 0.633  2 0.123 0.455  2 0.045 0.364
 2 0.002 0.637  3 0.015 0.471  3 0.007 0.367
 3 0.500 0.500  1 3.200 0.200  4 0.477 0.290
 1  2

Strategy, Products, SECTION
and Capacity
ONE

1. Introduction
2. Strategy
3. Design of Products and Services
4. Project Management
5. Strategic Capacity Management
6. Learning Curves

Twenty-First-Century Operations
and Supply Chain Manage me nt

Managing a modern supply chain involves special- In the first section of Operations and Supply
ists in manufacturing, purchasing, and distribution, Chain Management, we lay a foundation for under-
of course. However, today it is also vital to the work standing the dynamic field of operations and sup-
of chief financial officers, chief information officers, ply management. This book is about designing and
operations and customer service executives, and operating processes that deliver a firm’s goods
chief executives. Changes in operations and supply and services in a manner that matches customers’
management have been truly revolutionary, and the expectations.
pace of progress shows no sign of slowing.

1

1 Introduction

Learning Objectives

L O 1–1 Identify the elements of operations and supply chain management (OSCM).
L O 1–2 Know the potential career opportunities in operations and supply chain management.
L O 1–3 Recognize the major concepts that define the operations and supply chain management field.
LO 1–4 Evaluate the efficiency of a firm.

EFFICIENCY AT SOUTHWEST AIRLINES

Getting passengers on a plane quickly can greatly affect an airline’s cost. Southwest,
considered the fastest at turning a plane around, does not assign seats. For Southwest,
the goal is to have its airplanes in the air as much as possible. This is difficult, given the
multiple short flights that a Southwest jet flies each day.

On average, Southwest’s 550 jets fly about 3,400 flights a day. Without adjust-
ing for jets that are not flying for maintenance, this averages out to over 6 flights a

day per jet. Turning a jet around—from landing to takeoff—is critical to this
type of airline, and it has been estimated that Southwest can do this in 30 to
55 minutes, depending on the airport and plane. Think about this: Even at
45 minutes per turn, a Southwest jet still spends about 4.5 hours on the
ground each day. Those precious minutes Southwest can save in loading
passengers result in more flights for the airline.

Boarding a Southwest
Airlines flight: Quick
boarding with no
preassigned seats
is a key part of the
45-minute turnaround
process.
© F. Robert Jacobs

2

Introduction Chapter 1 3

INTRODUCTION—THE ELEMENTS OF OSCM

Really successful firms have a clear and focused idea of how they intend to make money. LO 1–1
Whether it be high-end products and services custom-tailored to the needs of a single customer
or generic and inexpensive commodities bought largely on the basis of cost, competitively Identify the elements of
producing and distributing these products is a major challenge. operations and supply
chain management
The chapter opening describes the importance of turning planes around quickly at South- (OSCM).
west Airlines. Keeping planes in the air each day is a key factor in the profitability of the
company. The process Southwest uses when their planes are on the ground was carefully Strategy
studied by OSCM (operations and supply chain management) specialists to make it as effi- Processes
cient as possible.
Analytics
In the context of major business functions, operations and supply chain management
involves specialists in product design, purchasing, manufacturing, service operations, logis-
tics, and distribution. These specialists are mixed and matched in many different ways
depending on the product or service. For a firm that sells televisions, like Sony, these are the
functions responsible for designing televisions, acquiring materials, coordinating equipment
resources to convert material to products, moving the product, and exchanging the final prod-
uct with the customer. Some firms are focused on services, such as a hospital. Here the con-
text involves managing resources, including the operating rooms, labs, and hospital beds used
to nurse patients back to health. In this context, acquiring materials, moving patients, and
coordinating resource use are keys to success. Other firms are more specialized, such as Ama-
zon. Here purchasing, website services, logistics, and distribution need to be carefully coor-
dinated for success. In our increasingly interconnected and interdependent global economy,
the process of delivering finished goods, services, and supplies from one place to another is
accomplished by means of mind-boggling technological innovation, clever new applications
of old ideas, seemingly magical mathematics, powerful software, and old-fashioned concrete,
steel, and muscle.

This book is about doing this at low cost while meeting the requirements of demand-
ing customers. Success involves the clever integration of a great operations-related strategy,
processes that can deliver the products and services, and analytics that support the ongoing
decisions needed to manage the firm. Our goal in this book is to introduce students to basic
operations and supply chain concepts so they understand how things should be done and the
importance of these functions to the success of the firm.

No matter what your major is in business, understanding OSCM is critical to your success.
If you are interested in the study of finance, you will find that all of the concepts are directly
applicable. Just convert all of those widgets to their value in the currency of your choice and
you will realize it is all about dollars and cents moving, being stored, and appreciating in
value due to exchanges. What you study in finance class is exactly the same, but we look at
things in very different ways due to the physical nature of goods and the intangible features of
services. The topics presented here are critical to a successful study of marketing, too. If the
product or service can’t be delivered to the customer at an acceptable cost, then no matter how
good your marketing, no one may buy it. Lastly, for those accountants keeping score, opera-
tions and supply chain processes generate most of the transactions used to track the financial
health of the firm. Understanding why these processes operate the way they do is important to
understanding the financial statements of the firm.

What Is Operations and Supply Chain Management? Operations and supply
chain management
Operations and supply chain management (OSCM) is defined as the design, operation, (OSCM)
and improvement of the systems that create and deliver the firm’s primary products and ser-
vices. Like marketing and finance, OSCM is a functional field of business with clear line The design, operation,
management responsibilities. OSCM is concerned with the management of the entire system and improvement of the
that produces a product or delivers a service. Producing an item such as the Men’s Nylon Sup- systems that create and
plex Parka, or providing a service such as a cell phone account, involves a complex series of deliver the firm’s primary
transformation processes. products and services.

4 Section 1 Strategy, Products, and Capacity

Courtesy of L.L.Bean, Inc. Exhibit 1.1 shows a supply network for a Men’s Nylon Supplex Parka sold on web-
sites such as L.L.Bean or Lands’ End. We can understand the network by looking
KEY IDEA at the four color-coded paths. The blue path traces the activities needed to produce
the Polartec insulation material used in the parkas. Polartec insulation is purchased
A good starting in bulk, processed to get the proper finish, and then dyed prior to being checked for
point for understanding consistency—or grading—and color. It is then stored in a warehouse. The red path
a supply chain is to traces the production of the nylon, Supplex, used in the parkas. Using a petroleum-
sketch out the network based polymer, the nylon is extruded and drawn into a yarnlike material. From here,
from start to finish. the green path traces the many steps required to fabricate the clothlike Supplex used
to make the parkas. The yellow path shows the Supplex and Polartec material coming
together and used to assemble the lightweight and warm parkas. The completed parkas
are sent to a warehouse, and then on to the retailer’s distribution center. Afterward, the
parkas are picked out and packed for shipment to individual customers. Think of the
supply network as a pipeline through which material and information flow. 
There are key locations in the pipeline where material and information are stored for future
use: Polartec is stored near the end of the blue pipeline; Supplex is stored near the end of the red
pipeline. In both cases, fabric is cut prior to merging with the yellow pipeline. At the beginning of
the yellow path, bundles of Supplex and Polartec are stored prior to their use in the fabrication of
the parkas. At the end of the yellow path are the distribution steps, which involve storing to await
orders, picking according to each customer order, packing, and finally shipping to the customer.
Networks such as this can be constructed for any product or service. Typically, each part of
the network is controlled by different companies, including the nylon Supplex producer, the
Polartec producer, the parka manufacturer, and the catalog sales retailer. All of the material is
moved using transportation providers—in this case, ships and trucks. The network also has a
global dimension, with each entity potentially located in a different country. For a successful
transaction, all of these steps need to be coordinated and operated to keep costs low and to
minimize waste. OSCM manages all of these individual processes as effectively as possible.

Distinguishing Operations versus Supply Chain Processes

Success in today’s global markets requires a business strategy that matches the preferences
of customers with the realities imposed by complex supply networks. A sustainable strategy
that meets the needs of shareholders and employees and preserves the environment is critical.
Concepts related to developing and analyzing this type of strategy are the topic of Section
One of this book (see Exhibit 1.2).

In the context of our discussion, the terms operations and supply chain take on special
meaning. Operations refers to manufacturing and service processes used to transform the
resources employed by a firm into products desired by customers. These processes are cov-
ered in Section Two. For example, a manufacturing process would produce some type of
physical product, such as an automobile or a computer. A service process would produce an
intangible product, such as a call center that provides information to customers stranded on
the highway or a hospital that treats accident victims in an emergency room. Planning the use
of these processes involves analyzing capacity, labor, and material needs over time. Ensuring
quality and making ongoing improvements to these processes are needed to manage these
processes. Concepts related to this are included in Section Two of this book as well.

Supply chain refers to processes that move information and material to and from the manu-
facturing and service process of the firm. These include the logistics processes that physically
move product and the warehousing and storage processes that position products for quick
delivery to the customer. Supply chain in this context refers to providing products and service
to plants and warehouses at the input end and also the supply of products and service to the
customer on the output end of the supply chain. Details concerning how these supply chain
processes work and are analyzed are covered in Section Three.

Section Four of the book is about planning the use of operations and supply chain
resources. Starting with a forecast of demand, resources are planned in increasingly shorter
increments of time to match supply inputs with the demand-driven outputs of the firm. These
planning activities are completed using integrated computer systems that capture the activi-
ties and current status of a firm’s resources.

exh ibi t 1.1 Process Steps for Men’s Nylon Supplex Parkas Introduction

Manufacturing Plant Spin Strip and Create
(Extrude, Inspect Pack Section
into Quads Beam
Draw,
& Wind) Draw In

Produce Do Receive, Palletize, Inspect/
Polymer and Store in Test
Warehouse Package
Warehouse Slash
Weave Stage
Batch
Scour
Store in Fabric Slit, Relax Dry, and Jet Store in
Staging Sew Fabric Rolls and Fold Dye Warehouse
Area Rolls Finish Fabric Scour and Extraction
Dye Test
Test and Grade Face and
Back Store
Shade Check Supplex
in Warehouse

Pack

Spread and Assemble Pack Heat Set
Cut Fabric Bundle Sew Outer On-Line
Shell Grade

Tag, Fold, Receive at Pick
and Pack Distribution
Store Polartec Parka Center
in Warehouse

Spread and Sew Inner Sew Chapter 1
Cut Fabric Lining Parka

Assemble
Bundle

Store in
Warehouse

Pack

The red path traces the production of the nylon, a raw material for the clothlike Supplex material. This is followed by the green path, where the nylon is made into Supplex. The blue path is 5
the steps needed to make Polartec, the insulating material in the parkas. The yellow path is where the Supplex and Polartec come together and the parkas are assembled. Completed
parkas are then distributed to retailers that sell the product.

6 Section 1 Strategy, Products, and Capacity

exhibit 1.2 Questions Answered in Each Section of the OSCM

II. Manufacturing and
Service Processes

How are processes that
transform resources into
products designed?

I. Strategy, Products, and III. Supply Chain Processes V. Special Topics
Capacity How are products moved How are these concepts
through the supply chain? used in special industries?
How does the firm’s strategy
impact its products and
processes?

IV. Supply and Demand
Planning and Control

How are OSCM processes
managed using computer
systems?

Process The final section of the book shows how these concepts are applied in more specialized
types of businesses such as health care and consulting. Part of understanding this material
One or more activities is seeing how the concepts can be directly applied to business processes that are not specifi-
that transform inputs into cally covered. In this book, in a relatively generic way, manufacturing, service, sourcing, and
outputs. logistics processes are studied. How these ideas are applied in the context of a few specific
businesses is the motivation of this section.

All managers should understand the basic principles that guide the design of transforma-
tion processes. This includes understanding how different types of processes are organized,
how to determine the capacity of a process, how long it should take a process to make a unit,
how the quality of a process is monitored, and how information is used to make decisions
related to the design and operation of these processes.

The field of operations and supply chain management is ever changing due to the dynamic
nature of competing in global business and the constant evolution of information technology.
So while many of the basic concepts have been around for years, their application in new and
innovative ways is exciting. Internet technology has made the sharing of reliable real-time
information inexpensive. Capturing information directly from the source through such sys-
tems as point-of-sale, radio-frequency identification tags, bar-code scanners, and automatic
recognition has shifted the focus to understanding both what all the information is saying and
also how good the decisions that can be made using it are.

Categorizing Operations and Supply Chain Processes

Operations and supply chain processes can be conveniently categorized, particularly from the
view of a producer of consumer products and services, as planning, sourcing, making, deliv-
ering, and returning. Exhibit 1.3 depicts where the processes are used in different parts of a
supply chain. The following describes the work involved in each type of process.

1. Planning consists of the processes needed to operate an existing supply chain strategi-
cally. Here a firm must determine how anticipated demand will be met with available
resources. A major aspect of planning is developing a set of metrics to monitor the
supply chain so that it is efficient and delivers high quality and value to customers.

2. Sourcing involves the selection of suppliers that will deliver the goods and
services needed to create the firm’s product. A set of pricing, delivery, and pay-
ment processes are needed, along with metrics for monitoring and improving the

Introduction Chapter 1 7

exhibit 1.3 Supply Chain Process

Making

Sourcing Planning Delivering

Returning

relationships between partners of the firm. These processes include receiving ship- KEY IDEA
ment, verifying them, transferring them to manufacturing facilities, and authorizing
supplier payments. Companies are
3. Making is where the major product is produced or the service provided. The step positioned in different
requires scheduling processes for workers and the coordination of material and other places in the supply
critical resources such as equipment to support producing or providing the service. chain. Within the
Metrics that measure speed, quality, and worker productivity are used to monitor context of their
these processes. position, they all require
4. Delivering is also referred to as logistics processes. Carriers are picked to move planning, sourcing,
products to warehouses and customers, coordinate and schedule the movement of making, delivering, and
goods and information through the supply network, develop and operate a network of returning processes.
warehouses, and run the information systems that manage the receipt of orders from
customers and the invoicing systems that collect payments from customers.
5 . Returning involves processes for receiving worn-out, defective, and excess products
back from customers and support for customers who have problems with delivered
products. In the case of services, this may involve all types of follow-up activities
required for after-sales support.

To understand the topic, it is important to consider the many different players that need to
coordinate work in a typical supply chain. The aforementioned steps of planning, sourcing,
making, delivering, and returning are fine for manufacturing and can also be used for the
many processes that do not involve the discrete movement and production of parts. In the case
of a service firm such as a hospital, for example, supplies are typically delivered on a daily
basis from drug and health care suppliers and require coordination between drug companies,
local warehouse operations, local delivery services, and hospital receiving. Patients need to
be scheduled into the services provided by the hospital, such as operations and blood tests.
Other areas, such as the emergency room, need to be staffed to provide service on demand.
The orchestration of all of these activities is critical to providing quality service at a reason-
able cost.

Differences Between Services and Goods

There are five essential differences between services and goods. The first is that a service
is an intangible process that cannot be weighed or measured, whereas a good is a tangible
output of a process that has physical dimensions. This distinction has important business
implications, because a service innovation, unlike a product innovation, cannot be patented.

8 Section 1 Strategy, Products, and Capacity

KEY IDEA Thus, a company with a new concept must expand rapidly before competitors copy its pro-
cedures. Service intangibility also presents a problem for customers because, unlike with a
The things physical product, customers cannot try it out and test it before purchase.
produced by a service
are intangible. Service The second is that a service requires some degree of interaction with the customer for it
processes tend to be to be a service. The interaction may be brief, but it must exist for the service to be complete.
highly variable and time Where face-to-face service is required, the service facility must be designed to handle the
dependent compared customer’s presence. Goods, on the other hand, are generally produced in a facility separate
to goods-producing from the customer. They can be made according to a production schedule that is efficient for
processes. the company.

The third difference is that services, with the big exception of hard technologies (such as
ATMs) and information technologies (such as answering machines and automated Internet
exchanges) are inherently heterogeneous—they vary from day to day and even hour to hour as
a function of the attitudes of the customers and the servers. Thus, even highly scripted work,
such as found in call centers, can produce unpredictable outcomes. Goods, in contrast, can be
produced to meet very tight specifications day-in and day-out with essentially zero variability.
In those cases where a defective good is produced, it can be reworked or scrapped.

The fourth difference is that services as a process are perishable and time dependent, and
unlike goods, they can’t be stored. You cannot “come back last week” for an air flight or a day
on campus.

And fifth, the specifications of a service are defined and evaluated as a package of features
that affect the five senses. These four features are:

∙ Supporting facility (location, decoration, layout, architectural appropriateness, support-
ing equipment)

∙ Facilitating goods (variety, consistency, quantity of the physical goods that go with the
service; for example, the food items that accompany a meal service)

∙ Explicit services (training of service personnel, consistency of service performance,
availability and access to the service, and comprehensiveness of the service)

∙ Implicit services (attitude of the servers, atmosphere, waiting time, status, privacy and
security, and convenience)

The Goods–Services Continuum

Almost any product offering is a combination of goods and services. In Exhibit 1.4, we show
this arrayed along a continuum of “pure goods” to “pure services.” The continuum captures
the main focus of the business and spans from firms that just produce products to those that
only provide services. Pure goods industries have become low-margin commodity busi-
nesses, and in order to differentiate, they are often adding some services. Some examples are

exhibit 1.4 The Goods–Services Continuum

Pure Goods Core Goods Core Services Pure Services
Food products Appliances Hotels University
Automobiles Airlines Medical
Chemicals Data storage systems Investment
Mining Internet service
providers

Goods Services

Introduction Chapter 1 9

providing help with logistical aspects of stocking items, maintaining extensive information
databases, and providing consulting advice.

Core goods providers already provide a significant service component as part of their busi-
nesses. For example, automobile manufacturers provide extensive spare parts distribution ser-
vices to support repair centers at dealers.

Core service providers must integrate tangible goods. For example, your cable television
company must provide cable hookup and repair services and also high-definition cable boxes.
Pure services, such as those offered by a financial consulting firm, may need little in the way
of facilitating goods, but what they do use—such as textbooks, professional references, and
spreadsheets—are critical to their performance.

Product–Service Bundling Product–service
bundling
Product–service bundling refers to a company building service activities into its product
offerings for its customers. Such services include maintenance, spare part provisioning, train- When a firm builds
ing, and, in some cases, total systems design and R&D. A well-known pioneer in this area is service activities into its
IBM, which treats its business as a service business and views physical goods as a small part product offerings to create
of the “business solutions” it provides its customers. Companies that are most successful in additional value for the
implementing this strategy start by drawing together the service aspects of the business under customer.
one roof in order to create a consolidated service organization. The service evolves from a
focus on enhancing the product’s performance to developing systems and product modifica-
tions that support the company’s move up the “value stream” into new markets. This type of
strategy might not be the best approach for all product companies, however. A recent study
found that while firms that offer product–service bundles generate higher revenues, they tend
to generate lower profits as a percent of revenues when compared to focused firms. This is
because they are often unable to generate revenues or margins high enough to cover the addi-
tional investment needed for service-related costs.

CAREERS IN OSCM

So what do people who pursue careers in OSCM do? Quite simply, they specialize in manag- LO 1–2
ing the planning, production, and distribution of goods and services. Jobs abound for people
who can do this well since every organization is dependent on effective performance of this Know the potential career
fundamental activity for its long-term success. opportunities in operations
and supply chain
It is interesting to contrast entry-level jobs in OSCM to marketing and finance jobs. Many management.
marketing entry-level jobs focus on actually selling products or managing the sales of prod-
ucts. These individuals are out on the front line trying to push product to potential customers. KEY IDEA
Often, a significant part of their income will depend on commissions from these sales. Entry-
level finance (and accounting) jobs are frequently in large public accounting firms. These jobs OSCM jobs focus on
involve working at a desk auditing transactions to ensure the accuracy of financial statements. delivering the goods
Other assignments involve the analysis of transactions to better understand the costs associ- on-time and at low cost.
ated with the business. They are interesting,
people-oriented jobs.
Contrast the marketing and finance jobs to OSCM jobs. The operations and supply chain
manager is out working with people to figure out the best way to deliver the goods and ser-
vices of the firm. Sure, they work with the marketing folks, but rather than being on the sell-
ing side, they are on the buying side: trying to select the best materials and hiring the greatest
talent. They will use the data generated by the finance people and analyze processes to figure
out how to deliver that good or service. OSCM jobs are hands-on, working with people and
figuring out the best way to do things.

The following are some typical jobs in OSCM:

∙ Plant manager—Oversees the workforce and physical resources (inventory, equipment,
and information technology) required to produce the organization’s product.

∙ Hospital administrator—Oversees human resource management, staffing, supplies, and
finances at a health care facility.

10 Section 1 Strategy, Products, and Capacity

∙ Branch manager (bank)—Oversees all aspects of financial transactions at a branch.
∙ Department store manager—Oversees all aspects of staffing and customer service

at a store.
∙ Call center manager—Oversees staffing and customer service activities at a call center.
∙ Supply chain manager—Negotiates contracts with vendors and coordinates the flow

of material inputs to the production process and the shipping of finished products to
customers.
∙ Purchasing manager—Manages the day-to-day aspects of purchasing, such as invoicing
and follow-up.
∙ Logistics manager—Oversees the movement of goods throughout the supply chain.
∙ Warehouse/distribution manager—Oversees all aspects of running a warehouse, includ-
ing replenishment, customer order fulfillment, and staffing.
∙ Business process improvement analyst—Applies the tools of lean production to reduce
cycle time and eliminate waste in a process.
∙ Quality control manager—Applies techniques of statistical quality control, such as
acceptance sampling and control charts, to the firm’s products.
∙ Lean improvement manager—Trains organizational members in lean production and
continuous improvement methods.
∙ Project manager—Plans and coordinates staff activities, such as new-product develop-
ment, new-technology deployment, and new-facility location.
∙ Production control analyst—Plans and schedules day-to-day production.
∙ Facilities manager—Ensures that the building facility design, layout, furniture, and
other equipment are operating at peak efficiency.

Chief Operating Officer

So how far can you go in a career in OSCM? One goal would be to become the chief oper-
ating officer of a company. The chief operating officer (COO) works with the CEO and
company president to determine the company’s competitive strategy. The COO’s ideas are
filtered down through the rest of the company. COOs determine an organization’s loca-
tion, its facilities, which vendors to use, and the implementation of the hiring policy. Once
the key decisions are made, lower-level operations personnel carry them out. Operations
personnel work to find solutions and then set about fixing the problems. Managing the
supply chain, service, and support are particularly challenging aspects of a chief operating
officer’s job.

Career opportunities in OSCM are plentiful today as companies strive to improve prof-
itability by improving quality and productivity and reducing costs. The hands-on work of
managing people is combined with great opportunities to leverage the latest technologies in
getting the job done at companies around the world. No matter what you might do for a final
career, your knowledge of OSCM will prove to be a great asset.

OSCM AT WORK

Operations and Supply Chain Management APICS, the Association for Operations Management,
Professional Societies www.apics.org.

If you are interested in career opportunities in operations Council of Supply Chain Management Professionals
and supply chain management, you can learn more about (CSCMP), www.cscmp.org.
the field through the following professional societies. These
groups provide industry-recognized certification programs Institute for Supply Management (ISM), www.ism.ws.
and ongoing training for those seeking to work in the field.
The Project Management Institute (PMI), www.pmi.org.

Introduction Chapter 1 11

THE MAJOR CONCEPTS THAT DEFINE THE OSCM FIELD

Our purpose in this section is not to go through all the details of the history of OSCM; that LO 1–3
would require us to recount the entire Industrial Revolution. Rather, the focus is on the major
operations-related concepts that have been popular since the 1980s. Exhibit 1.5 will help clar- Recognize the major
ify the dates as you read about the concepts. Where appropriate, how a supposedly new idea concepts that define the
relates to an older idea is discussed. (We seem to keep rediscovering the past.) operations and supply
chain management field.

Manufacturing Strategy Paradigm 
The late 1970s and early 1980s saw the development of the manufacturing strategy para- Manufacturing strategy
digm, which emphasized how manufacturing executives could use their factories’ capabilities Emphasizes how a
as strategic competitive weapons. Central to this thinking was the notion of manufacturing factory’s capabilities could
trade-offs among such performance measures as low cost, high quality, and high flexibility. be used strategically to
gain advantage over a

Lean Manufacturing, JIT, and TQC competing company.

The 1980s saw a revolution in the management philoso-
phies and technologies by which production is carried out.
Just-in-time (JIT) production was the major breakthrough in
manufacturing philosophy. Pioneered by the Japanese, JIT is
an integrated set of activities designed to achieve high-vol-
ume production using minimal inventories of parts that arrive
exactly when they are needed. The philosophy—coupled with
total quality control (TQC), which aggressively seeks to
eliminate causes of production defects—is now a cornerstone
in many manufacturers’ production practices, and the term
lean manufacturing is used to refer to the set of concepts.
Of course, the Japanese were not the first to create a highly
integrated, efficient production system. In 1913, Henry Ford
developed an assembly line to make the Model-T automo-
bile. Ford developed a system for making the Model-T that
was constrained only by the capabilities of the workforce and
existing technology. Quality was a critical prerequisite for Source: Library of Congress/ [LC-DIG-det-4a27966]

exhibit 1.5 Time Line Depicting When Major OSCM Concepts Became Popular Just-in-time (JIT)
An integrated set of
Manufacturing strategy developed activities designed to
achieve high-volume
Late 1970s production using minimal
inventories of parts that
Early 1980s Just-in-time (JIT) production arrive exactly when they
pioneered by the Japanese are needed.

Mid 1980s Service quality and productivity Total quality control
(TQC)
Total Quality Management Early 1990s Six Sigma Quality Aggressively seeks
(TQM) and Quality to eliminate causes of
Certification programs Mid 1990s production defects.

Business Process Late 1990s Supply Chain Lean manufacturing
Reengineering (BPR) Management (SCM) To achieve high customer
service with minimum
Electronic Commerce Early 2000s Service Science levels of inventory
investment.
Mid 2010s

Business Analytics

Source: F. Robert Jacobs

12 Section 1 Strategy, Products, and Capacity

Ford: The line could not run steadily at speed without consistently good components. On-time
delivery was also critical for Ford; the desire to keep workers and machines busy with materi-
als flowing constantly made scheduling critical. Product, processes, materials, logistics, and
people were well integrated and balanced in the design and operation of the plant.

Service Quality and Productivity
The unique approach to quality and productivity pioneered by McDonald’s has been so suc-
cessful that it stands as a reference point in thinking about how to deliver high-volume stan-
dardized services.

Total quality Total Quality Management and Quality Certification
management (TQM) Another major development was the focus on total quality management (TQM) in the late
1980s and 1990s. Helping the quality movement along was the Baldrige National Quality
Managing the entire Award, started in 1987 under the direction of the National Institute of Standards and Technol-
organization so it excels in ogy. The Baldrige Award recognizes companies each year for outstanding quality manage-
all dimensions of products ment systems.
and services important to
the customer. The ISO 9000 certification standards, created by the International Organization for Stan-
dardization, now play a major role in setting quality standards for global manufacturers.
Many companies require that their vendors meet these standards as a condition for obtaining
contracts.

Business process Business Process Reengineering
reengineering (BPR) The need to become lean to remain competitive in the global economic recession in the 1990s
pushed companies to seek innovations in the processes by which they run their operations.
An approach to improving The business process reengineering (BPR) approach seeks to make revolutionary changes
business processes as opposed to evolutionary changes (which are commonly advocated in TQM). It does this by
that seeks to make taking a fresh look at what the organization is trying to do in all its business processes, and
revolutionary changes as then eliminating non-value-added steps and computerizing the remaining ones to achieve the
opposed to evolutionary desired outcome.
(small) changes. Six Sigma Quality
Originally developed in the 1980s as part of total quality management, Six Sigma in the
Six Sigma 1990s saw a dramatic expansion as an extensive set of diagnostic tools was developed. These
tools have been taught to managers as part of “Green and Black Belt Programs” at many cor-
A statistical term to porations. The tools are now applied not only to the well-known manufacturing applications,
describe the quality goal of but also to nonmanufacturing processes such as accounts receivable, sales, and research and
no more than 3.4 defects development. Six Sigma has been applied to environmental, health, and safety services at
out of every million units. companies and is now being utilized in research and development, finance, information sys-
Also refers to a quality tems, legal, marketing, public affairs, and human resource processes.
improvement philosophy
and program.

Mass customization Supply Chain Management
The ability to produce a The central idea of supply chain management is to apply a total system approach to managing
unique product exactly the flow of information, materials, and services from raw material suppliers through factories
to a particular customer’s and warehouses to the end customer. Trends such as outsourcing and mass customization are
requirements. forcing companies to find flexible ways to meet customer demand. The focus is on optimizing
core activities to maximize the speed of response to changes in customer expectations.
Electronic commerce Electronic Commerce
The use of the Internet as The quick adoption of the Internet and the World Wide Web during the late 1990s was
an essential element of remarkable. The term electronic commerce refers to the use of the Internet as an essential
business activity.   element of business activity. The use of Web pages, forms, and interactive search engines
has changed the way people collect information, shop, and communicate. It has changed the
way operations managers coordinate and execute production and distribution functions.

Introduction Chapter 1 13

Sustainability and the Triple Bottom Line  Sustainability
Sustainability is the ability to maintain balance in a system. Management must now consider The ability to meet current
the mandates related to the ongoing economic, employee, and environmental viability of the resource needs without
firm (the triple bottom line). Economically, the firm must be profitable. Employee job secu- compromising the ability of
rity, positive working conditions, and development opportunities are essential. The need for future generations to meet
nonpolluting and non-resource-depleting products and processes presents new challenges to their needs.
operations and supply managers. Triple bottom line
Business Analytics  A business strategy that
Business analytics involves the analysis of data to better solve business problems. Not that includes social, economic,
this is something new: Data has always been used to solve business problems. What is new is and environmental criteria.
the reality that so much more data is now captured and available for decision-making analysis
than was available in the past. In addition, mathematical tools are now readily available that Business analytics
can be used to support the decision-making process. The use of current
business data to solve
In the past, most analysis involved the generation of stan- business problems using
dard and ad hoc reports that summarized the current state of mathematical analysis.
the firm. Software allowed querying and “drill down” analy-
sis to the level of the individual transaction, useful features for
understanding what happened in the past. Decision making
was typically left to the decision maker based on judgment or
simple alerting rules. The new “analytics” movement takes
this to a new level using statistical analysis, forecasting to
extrapolate what to expect in the future, and even optimiza-
tion, possibly in real time, to support decisions. These math-
ematical results can be used either to support the decision
maker or to automate decision making.

Take, for example, an airline manager presented with the
task of setting price points for tickets on a flight. Real-time
demand data, historic demand patterns, and powerful math- © Monty Rakusen/Getty Images RF
ematical models can now be applied to setting price points for
different classes of tickets. As it is closer to the time of depar-
ture for a particular flight, these price points can be adjusted
based on how sales are going. These decisions have a major impact on the utilization of air-
craft capacity, which impacts both revenue and costs for the airlines. These decisions can even
be made using criteria related to weather conditions, fuel prices, crew schedules, and other
flights to maximize the profit of the firm.

Current Issues in Operations and Supply Chain
Management

OSCM is a dynamic field, and issues arising in global enterprise present exciting new chal-
lenges for operations managers. Looking forward to the future, we believe the major chal-
lenges in the field will be as follows:

1. Coordinating the relationships between mutually supportive but separate orga-
nizations. Recently, there has been a dramatic surge in the outsourcing of parts and
services as companies seek to minimize costs. Many companies now even outsource
major corporate functions, such as information systems, product development and
design, engineering services, and distribution. The ability to coordinate these activi-
ties is a significant challenge for today’s operations and supply chain manager.

2. Optimizing global supplier, production, and distribution networks. The imple-
mentation of global enterprise resource planning systems, now common in large
companies, has challenged managers to use all of this information. Operations and
supply chain analytics involves leveraging this information for making decisions
related to resources such as inventory, transportation, and production.

14 Section 1 Strategy, Products, and Capacity

3. Managing customer touch points. As companies strive to cut costs, they often
scrimp on the customer support personnel (and training) required to effectively staff
service departments, help lines, and checkout counters. This leads to the frustrations
we have all experienced, such as being placed in call center limbo seemingly for
hours, getting bad advice when finally interacting with a company rep, and so on.
The issue here is to recognize that making resource utilization decisions must capture
the implicit costs of lost customers as well as the direct costs of staffing.

4 . Raising senior management awareness of OSCM as a significant competitive
weapon. Many senior executives entered the organization through finance, strategy,
or marketing, built their reputations on work in these areas, and as a result often take
OSCM for granted. As we will demonstrate in this book, this can be a critical mis-
take when we realize how profitable companies such as Amazon, Apple, Taco Bell,
and Southwest Airlines are. These are companies where executives have creatively
used OSCM for competitive advantage.

EFFICIENCY, EFFECTIVENESS, AND VALUE

LO 1–4 Compared with most of the other ways managers try to stimulate growth—technology
investments, acquisitions, and major market campaigns, for example—innovations in oper-
Evaluate the efficiency of ations are relatively reliable and low cost. As a business student, you are perfectly posi-
a firm. tioned to come up with innovative operations-related ideas. You understand the big picture
of all the processes that generate the costs and support the cash flow essential to the firm’s
Efficiency long-term viability.
A ratio of the actual output
of a process relative to Through this book, you will become aware of the concepts and tools now being employed
some standard. Also, being by companies around the world as they craft efficient and effective operations. Efficiency
“efficient” means doing means doing something at the lowest possible cost. Later in the book, we define this more
something at the lowest thoroughly, but roughly speaking, the goal of an efficient process is to produce a good or
possible cost. provide a service by using the smallest input of resources. In general, these resources are the
material, labor, equipment, and facilities used in the OSCM processes.
Effectiveness
Doing the things that will Effectiveness means doing the right things to create the most value for the company. For
create the most value for example, to be effective at a grocery store it is important to have plenty of operating check-out
the customer. lines even though they may often stand idle. This is a recognition that the customer’s time is
valuable and that they do not like waiting to be served in the check-out line. Often, maximiz-
Value ing effectiveness and efficiency at the same time creates conflict between the two goals. We
The attractiveness of a see this trade-off every day in our lives. At the check-out lines, being efficient means using
product relative to its price. the fewest people possible to ring up customers. Being effective, though, means minimizing
the amount of time customers need to wait in line.

Related to efficiency and effectiveness is the concept of value, which can be abstractly
defined as quality divided by price. Here, quality is the attractiveness of the product, con-
sidering its features and durability. If you can provide the customer with a better car without
changing price, value has gone up. If you can give the customer a better car at a lower price,
value goes way up. A major objective of this book is to show how smart management can
achieve high levels of value.

How Does Wall Street Evaluate Efficiency?

Comparing firms from an operations and supply chain view is important to investors because
the relative cost of providing a good or service is essential to high earnings growth. When you
think about it, earnings growth is largely a function of the firm’s profitability, and profit can
be increased through higher sales and/or reduced cost. Highly efficient firms usually shine
when demand drops during recession periods because they often can continue to make a
profit due to their low-cost structure. These operations-savvy firms may even see a recession
as an opportunity to gain market share as their less-efficient competitors struggle to remain
in business.

Introduction Chapter 1 15

exhibit 1.6 The Impact of Reducing Raw Material Cost

Business Performance before Improvement Business Performance with 5% Reduction in Materials Cost

Operating Costs LABOR SALES NET INCOME PROFIT MARGIN Operating Costs LABOR SALES NET INCOME PROFIT MARGIN
$700 $5,000 $400 8% $700 $5,000 $515 10.3%

MATERIALS MINUS DIVIDED BY MULTIPLY MATERIALS MINUS DIVIDED BY MULTIPLY
$2,300 COGS SALES $2,185 COGS SALES
$3,800 $5,000 $3,685 $5,000
OVERHEAD OVERHEAD
$800 OTHER COSTS $800 OTHER COSTS
$800 $800

INVENTORY ROI INVENTORY ROI
$500 10.0% $475 13.0%

Assets RECEIVABLE Current Assets SALES Asset Turnover Assets RECEIVABLE Current Assets SALES Asset Turnover
$300 $1,100 $5,000 Ratio 1.25 $300 $1,075 $5,000 Ratio 1.26

CASH PLUS DIVIDED BY CASH PLUS DIVIDED BY
$300 Fixed Assets Total Assets $300 Fixed Assets Total Assets

$2,900 $4,000 $2,900 $3,975

An interesting relationship between the costs related to OSCM functions and profit is the Benchmarking
direct impact of a reduction of cost in one of these functions on the profit margin of the firm.
In Exhibit 1.6, we show data from a company’s balance sheet. The balance sheet on the left When one company
shows the return on investment (ROI) for the company prior to a reduction in raw material studies the processes
cost. The balance sheet on the right shows the same data, but with a reduction of 5 percent in of another company to
the cost of raw materials. The cost of raw materials affects the values throughout the supply identify best practices.
chain, including the cost of goods sold, inventory value, and total value of assets; therefore,
reducing raw material costs by 5 percent leads to nearly a 29 percent increase in profit mar-
gins and a 30 percent increase in the company’s ROI. Thus, there is an almost 6:1 leverage on
every dollar saved by reducing raw materials costs.

A common set of financial indicators that Wall Street tracks to benchmark companies are
called management efficiency ratios. Benchmarking is a process in which one company
studies the processes of another company (or industry) to identify best practices. You prob-
ably discussed these measures in one of your accounting classes. It is not our purpose to do
an in-depth review of this material, but it is important to recognize the significant impact the
operations and supply chain processes have on these ratios. A comparison of a few automobile
companies using the ratios is shown in Exhibit 1.7.

The following is a brief review of these ratios. Starting from basic financial data for the
firm, the simplest efficiency-related measures relate to the productivity of labor employed by
the firm. There are two of these ratios:

∙ Net income per employee
∙ Revenue (or sales) per employee

exhibit 1.7 A Comparison of Automobile Companies

Efficiency Measure Toyota (TM) General Motors (GM) Ford (F) Industry
Income per employee $60,266 $50,255 $17,037 $39,170
Revenue (or sales) per employee $770,465 $799,932
Receivables turnover $738,754 $1,949,113
Inventory turnover 3.3 6.4 1.6 3.2
Asset turnover 9.7 15.3 9.5
10.5 0.9 0.7
0.6 0.7

16 Section 1 Strategy, Products, and Capacity

These labor productivity measures are fairly crude since many employees are not directly
employed in operations and supply chain–related functions. Also, it is important to recog-
nize that the concepts described in this book are certainly applicable to the other functions
in the firm.

A third efficiency ratio measures the number of times receivables are collected, on aver-
age, during the fiscal year. This ratio is called the receivables turnover ratio, and it is calcu-
lated as follows:
​R​ eceivable Turnover = _ ​ A_ve_r_Aa_gnen_ u_Aa  _clc_  Co_ur_en_dt i_Rt _eS c_ae_liev_sa_b_le_ ​​ ​​[1.1]​
The receivables turnover ratio measures a company’s efficiency in collecting its sales on
credit. Accounts receivable represent the indirect interest-free loans that the company is pro-
viding to its clients. A higher receivables ratio implies either that the company operates on a
cash basis or that its extension of credit and collection methods are efficient. Also, a high ratio
reflects a short lapse of time between sales and the collection of cash, while a low number
means collection takes longer. The lower the ratio, the longer receivables are being held and
the higher the risk of them not being collected.

A ratio that is low by industry standards will generally indicate that the business needs to
improve its credit policies and collection procedures. If the ratio is going up, either collec-
tion efforts are improving, sales are rising, or receivables are being reduced. From an opera-
tions and supply chain perspective, the firm may be able to impact this ratio by such things
as the speed of delivery of products, accuracy in filling orders, and amount of inspection the
customer needs to do. Factors such as the outgoing quality of the product and how customer
orders are taken, together with other order-processing activities, may have a huge impact on
the receivables turnover ratio. This is particularly true when Internet catalogs are the main
interface between the customer and the firm.

Another efficiency ratio is inventory turnover. It measures the average number of
times inventory is sold and replaced during the fiscal year. The inventory turnover ratio
formula is:
I​​nventory Turnover = _  ​ A_veC_r_oasg_te_ o I_fn _Gv _eo n_ot_odrs_ y_S Vo_la_dl_ue_ ​ ​​ ​[​1.2]​
This ratio measures the company’s efficiency in turning its inventory into sales. Its purpose
is to measure the liquidity or speed of inventory usage. This ratio is generally compared
against industry averages. A low inventory turnover ratio is a signal of inefficiency, because
inventory ties up capital that could be used for other purposes. It might imply either poor
sales or excess inventory relative to sales. A low turnover ratio can indicate poor liquid-
ity, possible overstocking, and obsolescence, but it may also reflect a planned inventory
buildup in the case of material shortages or in anticipation of rapidly rising prices. A high
inventory turnover ratio implies either strong sales or ineffective buying (the firm may be
buying too often and in small quantities, driving up the buying price). A high inventory
turnover ratio can indicate better liquidity, but it can also indicate shortages or inadequate
inventory levels, which may lead to a loss in business. Generally, a high inventory turnover
ratio when compared to competitors’ is good. This ratio is controlled to a great extent by
operations and supply chain processes. Factors such as order lead times, purchasing prac-
tices, the number of items being stocked, and production and order quantities have a direct
impact on the ratio.

The final efficiency ratio considered here is asset turnover. This is the amount of sales
generated for every dollar’s worth of assets. The formula for the ratio is:
A​​sset Turnover = _  ​R_ev_Te_on_tuae_l  _(A o_sr s_ eS_tas_l e_s_ )​​  ​​[1.3]​
Asset turnover measures a firm’s efficiency at using its assets in generating sales revenue—
the higher the number, the better. It also indicates pricing strategy: Companies with low profit
margins tend to have high asset turnover, while those with high profit margins have low asset

Introduction Chapter 1 17
turnover. This ratio varies significantly by industry, so comparisons between
unrelated businesses are not useful. To a great extent, the asset turnover ratio
is similar to the receivables turnover and the inventory turnover ratio since
all three involve the investment in assets. Asset turnover is more general and
includes the plants, warehouses, equipment, and other assets owned by the
firm. Since many of these facilities are needed to support the operations and
supply chain activities, the ratio can be significantly impacted by investments
in technology and outsourcing, for example.

These ratios can be calculated from data in a firm’s annual financial state-
ments and are readily available on the Internet from websites such as AOL
Finance (http://www.aol.com/stock-quotes/).

Ford Fiestas on the assembly line at the Ford factory
in Cologne, Germany  © Oliver Berg/dpa/Corbis

EXAMPLE 1.1: Comparing the Management Efficiency of Companies in the Same
Industry Using Wall Street Measures
Building on the data in Exhibit 1.7, compare the Japanese automobile manufacturer Honda to
Toyota, General Motors, and Ford. Specifically address the following questions:

1. How does Honda (stock symbol HMC) differ relative to income per employee, rev-
enue per employee, receivables turnover, inventory turnover, and asset turnover?

2. Speculate on why Honda’s Wall Street efficiency measures are different from the other
automobile companies’. Be sure to consider the fact that Honda is a smaller company
compared to the others.

SOLUTION
The first step is to get comparable data on Honda. One Website that has these data is, again,
www.aol.com/stock-quotes/. Hyperlink to this site using your browser and then enter HMC in
the “Get Quote” block. Then, from the menu find Key Ratios, select Efficiency Ratios. Check
to see that you have the correct data.

Example data for Honda on the date this chapter was written were as follows:

Income per employee 30,203
Revenue per employee 585,647
Receivables turnover
Inventory turnover 4.9
Asset turnover 6.3
0.8

Next, we need to try to understand the data. It is probably good to start with asset turnover,
because this is the most comprehensive measure. Notice that GM is the highest in the group.
Recall that GM recently went bankrupt and was recapitalized, which could explain the higher
asset turnover. Honda, though, is fine compared to the industry average on this measure.

On net income per employee, revenue per employee and inventory turn, we see that
Honda appears, for the most part, to be stronger than Ford, but weaker than Toyota and Gen-
eral Motors. Ford is strongest in inventory turn. This is surprising because we might expect
Toyota to be strong here, given its reputation in managing inventory. It is interesting to see
how Ford is weakest in receivables turnover, which may relate to the amount of credit it is
giving customers in order to sell vehicles.

18 Section 1 Strategy, Products, and Capacity

Concept Connections

LO 1–1 Identify the elements of operations and supply chain management (OSCM).

Summary ∙ Analytics are used to support the ongoing decisions
needed to manage the firm.
∙ Processes are used to implement the strategy of the
firm. Product -service bundling  When a firm builds service
activities into its product offerings to create additional
Key Terms value for the customer.

Operations and supply chain management (OSCM) The
design, operation, and improvement of the systems that
create and deliver the firm’s primary products and services.
Process  One or more activities that transform inputs
into outputs.

LO 1–2 Know the potential career opportunities in operations and supply chain management.

Summary ∙ COOs determine an organization’s location, its facili-
ties, which vendors to use, and how the hiring policy
∙ OSCM people specialize in managing the production will be implemented.
of goods and services.

∙ OSCM jobs are hands-on and require working with
others and figuring out the best way to do things.

∙ The chief operating officer (COO) works with the
CEO and company president to determine the com-
pany’s competitive strategy.

LO 1–3 Recognize the major concepts that define the operations and supply chain management field.

Summary The focus of this book is on popular concepts developed
since the 1980s.
Many of the concepts that form the OSCM field have
their origins in the Industrial Revolution in the 1800s. Business process reengineering (BPR)  An approach to
improving business processes that seeks to make revolu-
These concepts include: tionary changes as opposed to evolutionary (small) changes.
Six Sigma  A statistical term to describe the quality goal of
Key Terms no more than 3.4 defects out of every million units. Also
refers to a quality improvement philosophy and program.
Manufacturing strategy  Emphasizes how a factory’s Mass customization  The ability to produce a unique
capabilities could be used strategically to gain advantage product exactly to a particular customer’s requirements.
over a competing company. Electronic commerce  The use of the Internet as an
Just-in-time (JIT)  An integrated set of activities designed essential element of business activity.
to achieve high-volume production using minimal inven- Sustainability  The ability to meet current resource
tories of parts that arrive exactly when they are needed. needs without compromising the ability of future gen-
Total quality control (TQC)  Aggressively seeks to elimi- erations to meet their needs.
nate causes of production defects.
Lean manufacturing  To achieve high customer service
with minimum levels of inventory investment.
Total quality management (TQM)  Managing the entire
organization so it excels in all dimensions of products
and services important to the customer.

Introduction Chapter 1 19

Triple bottom line  A business strategy that includes Business analytics  The use of current business data to
social, economic, and environmental criteria. solve business problems using mathematical analysis.

LO 1–4 Evaluate the efficiency of a firm. Value  The attractiveness of a product relative to its
price.
Summary Benchmarking  When one company studies the pro-
cesses of another company to identify best practices.
Criteria that relate to how well the firm is doing include:
∙ Efficiency
∙ Effectiveness
∙ Value created in its products and services

Key Terms

Efficiency  A ratio of the actual output of a process rela-
tive to some standard. Also, being “efficient” means
doing something at the lowest possible cost.
Effectiveness  Doing the things that will create the most
value for the customer.

Efficiency Measures:
Income per employee

Revenue (or sales) per employee
[​ 1.1]​ ​​Receivables turnover =  _ ​A_ve_r_aA_gne_n _au  c_acl_  oc_ur_end_tsi_ tr _se a_cle_eis_va_b_le_ ​​ ​ ​​
​[ 1.2]​ ​I​nventory turnover =  _ ​ A_ve_Cr_ao_gste_  o_inf_ v g_eo n_ot_dos_r y_s o_vla_dl_ue_ ​​ ​​
​[ 1.3]​ A​​sset turnover = _ ​ R_ev_Te_on_tua_el  _a(​ ​o_s rs_ es_tas_l e_s_)​ ​​​ 

Discussion Questions

LO1–1 1 . Using Exhibit 1.3 as a model, describe the source-make-deliver-return relationships in the
following systems:
LO1–2
LO1–3 a. An airline
b. An automobile manufacturer
c. A hospital
d. An insurance company
2. Define the service package of your college or university. What is its strongest element? Its

weakest one?
3 . What service industry has impressed you the most with its innovativeness?
4. What is product-service bundling, and what are the benefits to customers?
5 . What is the difference between a service and a good?
6. Look at the job postings at www.apics.org and evaluate the opportunities for an OSCM

major with several years of experience.
7 . Recent outsourcing of parts and services that had previously been produced internally is

addressed by which current issue facing operation management today?
8 . What factors account for the resurgence of interest in OSCM today?

20 Section 1 Strategy, Products, and Capacity

LO1–4   9. As the field of OSCM has advanced, new concepts have been applied to help companies
compete in a number of ways, including the advertisement of the firm’s products or ser-
vices. One recent concept to gain the attention of companies is promoting sustainability.
Discuss how you have seen the idea of sustainability used by companies to advertise their
goods or services.

1 0. Some people tend to use the terms effectiveness and efficiency interchangeably, though we’ve
seen they are different concepts. But is there any relationship at all between them? Can a firm
be effective but inefficient? Very efficient but essentially ineffective? Both? Neither?

1 1. Two of the efficiency ratios mentioned in the chapter are the receivable turnover ratio
and the inventory turnover ratio. While they are two completely separate measures, they
are very similar in one way. What is the common thread between these two?

Objective Questions

LO1–1 1 . What are the three elements that require integration to be successful in operations and sup-
LO1–2 ply chain management? (Answer in Appendix D)

2 . Operations and supply chain management is concerned with the design and management
of the entire system that has what function?

3 . Match the following OSCM job titles with the appropriate duties and responsibilities.

_____ Plant manager A.  Plans and coordinates staff activities such as new
_____ Supply chain manager product development and new facility location.
_____ Project manager
_____ Business process B.  Oversees the movement of goods throughout the
supply chain.
improvement analyst
_____ Logistics manager C.  Oversees the workforce and resources required to
produce the firm’s products.

D.  Negotiates contracts with vendors and coordinates
the flow of material inputs to the production
process.

E.  Applies the tools of lean production to reduce cycle
time and eliminate waste in a process.

LO1–3 4. What high-level position manager is responsible for working with the CEO and company
president to determine the company’s competitive strategy?

5. Order the following major concepts that have helped define the OSCM field on a time line.
Use 1 for the earliest concept to be introduced, and 5 for the most recent.

_____ Supply chain management
_____ Manufacturing strategy
_____ Business analytics
_____ Total quality management
_____ Electronic commerce

6. Which major OSCM concept can be described as an integrated set of activities designed to
achieve high-volume production using minimal inventories of parts that arrive at worksta-
tions exactly when they are needed?

7. Operations and supply chain _____________ leverages the vast amount of data in enter-
prise resource planning systems to make decisions related to managing resources.

8. Which current issue in OSCM relates to the ability of a firm to maintain balance in a sys-
tem, considering the ongoing economic, employee, and environmental viability of the firm?

Introduction Chapter 1 21

LO1–4   9. Consider the following financial data from the past year for Midwest Outdoor Equipment
Corporation. (Answers in Appendix D)

Gross income $25,240,000
Total sales 24,324,000
Total credit sales 18,785,000
Net income 2,975,000
Cost of goods sold 12,600,000
Total assets 10,550,000
Average inventory 2,875,000
Average receivables 3,445,000

a. Compute the receivable turnover ratio.
b. Compute the inventory turnover ratio.
c. Compute the asset turnover ratio.
1 0. A manufacturing company has entered into a new contract with a major supplier of raw

materials used in the manufacturing process. Under the new arrangement, called vendor
managed inventory, the supplier manages its raw material inventory inside the manufac-
turer’s plant, and only bills the manufacturer when the manufacturer consumes the raw
material. How is this likely to affect the manufacturer’s inventory turnover ratio?
11. What is the name of the process in which one company studies the processes of another
firm in order to identify best practices?
1 2. A company has recently implemented an automated online billing and payment process-
ing system for orders it ships to customers. As a result, it has reduced the average number
of days between billing a customer and receiving payment by 10 days. How will this
affect the receivables turnover ratio?

Analytics Exercise: Comparing Companies Using Wall Street Efficiency
Measures (LO 1–4)

The idea behind this exercise is for the class to generate per employee, receivables turnover, inventory turnover,
data comparing companies in many different industries. and asset turnover for each company. It may be necessary
These data will be used to compare these industries from to calculate the income per employee and revenue per
an operations and supply chain view to better understand employee ratios by taking the financial data and dividing
differences. Be prepared for a lively class discussion for by the number of company employees. For the other data,
this session. look for “efficiency ratios” on the Website.

Step 1: Pick an industry you find interesting. This Step 3: Compare the companies based on what you
may be driven by a company by which you would like to have found. Which company appears to have the most
be employed or by some other factor. Within the industry, productive employees? Which company has the best
identify three companies that compete with one another. operations and supply chain processes? Which com-
To find the data for this exercise two sites are suggested pany is most efficient in its use of credit? Which com-
http://www.aol.com/stock-quotes/ and http://www.msn. pany makes the best use of its facility and equipment
com/money/. These sites are updated frequently, and assets?
the data needed should be available for most companies
listed on the United States stock exchanges.  Step 4: What insights can you draw from your analy-
sis? What could your companies learn from benchmark-
Step 2: Collect data related to each company. At a ing each other?
minimum, try to find the income per employee, revenue