Transformational Properties of Operations Management

Manufacturing-factory-China

Last week, I ran into an old friend at the Oak Ridge Post Office. He was a retired professional who I had played noon basketball with in my early years in Oak Ridge. He mentioned that most of the guys had retired from their jobs.

However, he also mentioned that one of the most seasoned professionals had been laid off from this prestigious firm after working for this organization more than 20 years. It was noted that the work had dried up. In fact, most of the local businesses are seeing the budget tightening in the government sector which is critical to the survival of most businesses in the area. Sadly, the financial crisis is not over.

Globalization will continue to drive down prices and force businesses to make hard decisions which impact the basic quality of living. Companies will look to operations management to gain greater efficiency and effectiveness in their systems.

The underpinning thread is how they understand value creation and what it means to customers. In this context, value can be defined as the perceived experience and worth gained from a product or service.[1] Creating value is not easy. Creating value across an international base is almost impossibility for most companies. Therefore, understanding operations management and supply management is a necessity.

Global markets continue to shift the direction of today’s businesses. Companies must be astute to the ever changing value perspectives of customers. According to KPMG 2013 Global Manufacture Outlook, companies should be optimistic. This international report surveyed 335 senior executives in five industries: Aerospace and Defense, Automotive, Conglomerates, Engineering and Industrial Products, and Metals.[2]

KPMG notes, “Global manufacturers’ ability to optimize performance and cost in their entire supply chain will be key to helping them become more competitive and resilient…Global manufacturers are building closer relationships with their customers, who in turn expect more due to advances in manufacturing technology.” These organizations are seeking a competitive advantage in several ways:

  1. Increasing transaction activity to take advantage of growth opportunities in global markets, while reassessing operations and product portfolios to control costs.
  2. Viewing their ‘channel partners’ as more of a network and building closer working relationships with their suppliers and other partners to maximize responsiveness to changes in the market. More effective and efficient collaboration enables them to optimize inventory, logistics, and other operational costs.
  3. Improving visibility in supply chain optimization provides a major opportunity for many companies to boost performance, agility, and resilience.
  4. Increasingly placing the supply chain at the center of their strategies to innovate, as they begin to look at suppliers not just as a source of production and logistics but also of ideas.
  5. Investing in breakthrough and incremental innovation to stay competitive. Nearly a third of respondents whose firms are stepping up R&D say their company will invest in breakthrough innovation.

Individuals as well as organization must understand the transformation properties of operations management.  Transformation processes relate to utilizing resources to convert inputs to desired outputs.

For example, automobile manufacturers convert primary inputs (i.e. sheet metal, plastics, engine parts) into a desired output (i.e. high quality cars). Yet, products are not the only thing that has a transformation process. Services also follow this paradigm. In the hospital industry, primary inputs (i.e. patients) create a desired output too (i.e. healthy patients).

Robert Jacobs, Richard Chase, and Nicholas Aquilano, authors of Operations & Supply Management, argue the merits of well-constructed organizational systems, especially during global competition: “Transformation processes are used in all types of businesses…Operations and supply management is about learning how to design these transformation processes.” Companies that understand what customers want and the intrinsic value desired by them will need to effectively retool their transformation processes in a cost effective manner.

 

According to the Economic Policy Institute, there are roughly 5.1 fewer American manufacturing jobs than at the start of 2001.[3] In fact, organizations argue that American worker’s wages have tumbled due to China’s cheap labor (i.e. primary input in the transformation process).

Global competition demands that organizations focus on the ‘small stuff’ as well as the big picture and embrace the attractive properties of operations managements.

Discuss the concept of operations management for today’s organizations.

© 2013 by Daryl D. Green


[1]Relationship Selling by Johnston & Marshall

[2] KPMG 2013 Global Manufacture Outlook

[3] “Report: America lost 2.7 million jobs to China in 10 years” by Danielle Kurzleben

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26 thoughts on “Transformational Properties of Operations Management

  1. The supply chain is a critical area for a business or company. As stated above, the supply chain is an area that can be key in promoting change in an entity. Words like agility, logistics, and efficiency are used to describe the supply chain. The “meat and potatoes” of a business or service is the supply chain. It is the most significant part of the delivery of products or services from the business entity to the consumer. Therefore, it should operate in an efficient manner to ensure cost effectiveness as well as getting the product to the consumer in a timely fashion. Another point I liked was that companies encouraging ideas from the supply chain. Who is more fit to know what needs to be done/changed than those who are hands on in the production process? The people higher up in the company in the offices that aren’t involved in the process? No shot.

      • Supply chain management (SCM) falls under the umbrella that is operations management. SCM focuses more on the distribution or receiving of products and getting them in and out in a timely/efficient fashion. Operations management includes SCM but also involves the managing of the inputs and outputs of production of a good or service by that entity. I’d like to think of SCM as coordinating with associates of the business to streamline a quality product or service to the consumer in the most efficient way possible. Operations management is managing the internal functions that the business does to contribute to the process. In short, I feel that SCM is more external and operations management is internal.

        Volker, R. (n.d.) Business l Supply chain management and operations management: What’s the difference? para, 3-4. Retrieved 29 July 2013.

    • Ben
      Your reference to logistics caught my eye. Worldwide commerce is definitely a major focus area as materials and finished goods move across the world. With fuel and coal prices at critical levels, efficiencies in transit methods are key to cost effective delivery. The international shipping ports moving containers to trucks and rail add dollars to the consumer.

      IKEA focuses tremendous effort on their product movement. Referencing the IKEA home page, “IKEA home furnishings are produced by more than 1,000 supplies in 55 countries, and goods can be shipped by road, rail, sea, and combined transport. This commitment to ensuring efficient distribution is so
      important to the IKEA concept that there actually is a separate IKEA division responsible for the purchase of goods from suppliers and the importing and distribution to stores “. [1]

      With such a global presence, there is little wonder why IKEA’s success is hinged on finely executed supply management plans.

      [1] http://info.ikea-usa.com

    • Ben
      Your reference to logistics caught my eye. Worldwide commerce is definitely a major focus area as materials and finished goods move across the world. With fuel and coal prices at critical levels, efficiencies in transit methods are key to cost effective delivery. The international shipping ports moving containers to trucks and rail add dollars to the consumer.

      IKEA focuses tremendous effort on their product movement. Referencing the IKEA home page, “IKEA home furnishings are produced by more than 1,000 supplies in 55 countries, and goods can be shipped by road, rail, sea, and combined transport. This commitment to ensuring efficient distribution is so
      important to the IKEA concept that there actually is a separate IKEA division responsible for the purchase of goods from suppliers and the importing and distribution to stores “. [1]

      With such a global presence, there is little wonder why IKEA’s success is hinged on finely executed supply management plans.

      [1] http://info.ikea-usa.com

  2. Corporate structures are forced to focus on organization management to link the multiple facets of the organization into cohesive operational processes to succeed in highly competitive markets. Gaining efficiencies, delivering demand at lower cost, and satisfying consumer wants are constant challenges in our global market. Decisions regarding centralization and decentralization have to be balanced for efficiencies in this no boundary economy. Research in the cultural diversities must be part of today’s corporate success. Leveraging material availability and price are also key to process improvements and efficiencies.

    The globalized economy has created both business challenges and opportunities. Suppliers, markets and consumers are driving competition to a critical level for continued business success. Jim Shimp of Whirlpool said “Innovation and understanding our customer better are “our only hope” of remaining competitive as global product industries come under intense commoditization pressures [1]

    [1] Managing the Organizational Impact of Global Operations. Dartmouth.edu

    • Kim,

      Good insight on the global market!

      Perhaps, others will dig deeper into the global opportunities before us…as we consider operations management!

      Professor D. Green

  3. There is a need but sometimes I find it shocking that many supply chains would feed back information to other parts of the supply chain. Globalization and the need to reduce costs by each cent forces supply chains to operate to trim their fat up until a point that it becomes dangerous. Operations management and improving the bottom line can lead to supply chain abuse which causes companies and retailers to force their suppliers to cut their own profit in order to make products cheaper for their buyers. This downward push on the supply chain causes suppliers to place their burden on the company below them until one buckles.

    Good operations management as well as supply chain relationships have each company taking the others in the supply chain under consideration each time they make a decision that could impact them all. The purpose of improving supply chains should be to create synergy throughout the network which helps create more insight for each company. Operations management is much more broad than just a supply chain. OM deals with the overall layout of production facilities, resource efficiency, and balancing costs with generating revenue.

  4. Supply chain management manages the flow of goods, and information and services, in order to deliver maximum value to the consumer, while minimizing the costs of the flow. The economic turmoil all over the world in the global supply chain has a serious impact, so difficult times require intelligent supply chain management, and executives should be always worried about how to build resilience in uncertain times. Supply chain management practices can decrease production lead times, reduce costs, speed product development, increase quality.
    Operations management is responsible for supplying the product or service of the organization and managing the conversion or transformation process that converts inputs into outputs, the operations function relates to the efficient and most effective use of personnel, machines, and other resources. Says Foster & Ogden “We found that those who identified themselves as supply chain managers utilized and emphasized quality tools and values to a greater extent than those who identified themselves as operations managers.”

    References
    Foster, S., & Ogden, J. (2008). On differences in how operations and supply chain managers approach quality management. International Journal Of Production Research, 46(24), 6945-6961.

  5. It is obvious that in today’s organizational environment that the market, no matter the business, continues to expand. Businesses are all dependent on the global system to survive. For a company, being able to keep up with how business is being conducting internationally relates directly to remaining competitive. Global companies’ operations are becoming more sophisticated, faster, and more efficient. It is a race to keep up with these quickly advancing companies and it is very easy to be left behind. Operations management is critical in keeping pace in the global system because it has become very apparent what happens to organizations that do not.
    According to Sree Rama Rao, a writer for the citeman, operations management is important to an organization’s managers for two reasons. “First, it can improve productivity, which improves an organization’s financial health. Second, it can help organizations meet customers’ competitive priorities.”[1] These are the two very obvious reasons why operations must be at the forefront of management priorities. Expensive, inefficient processes can kill a company in the long run, especially if they do not know it needs to be fixed. This is why operations managers are critical to an organization’s health.

    [1] The Importance of Operations Management by Sree Rama Rao

    • Gordon,
      I like your points about the operations management and global system. Operation management is a huge part of any business especially in companies that have a manufacturing part because it’s mainly about designing business operations.
      In the current time with an increasingly competitive global marketplace, to the success of your business you need to shift operations flexibly between countries and your ability to operate profitably in diverse geographic markets facing the problems like countries’ laws on tax, pensions, business practices and human resources, and it is very important to continuing advances in information and communications technology especially with shorter product life cycles and increased focus on multichannel.
      “Obstacles facing companies in today’s hyper-competitive global markets are seemingly more complex than ever, to the point that managers must rethink many of the basic principles of good operations management “. [1].

      [1] Operations and the Competitive Edge by Martha Lagace

      • Oday,
        First of all, thank you for the kind words. You are absolutely right about being able to function in the global marketplace, moreover having the knowledge necessary to be able to move your company past international barriers. Hasim Deari writes, “Culture can influence the business in different ways. Language problems, pricing difficulties and culture collisions are not uncommon, especially in the beginning.”[1]. It can also be helpful to a business to gain global experience and work outside the confines of their main space because it can expose them to new production techniques as well as new negotiation practices. Operations management is changing all the time all over the planet and clients are always wanting the product from the ones who can get it to them the quickest. Continually evaluating processes is critical.

        [1] “Effects of cultural differences in international business and price negotiation.” by Hasim Deari

  6. “Create jobs,” buy products only made in America! Sounds like a great idea, however it is not as easy as it sounds. Shortly after World War II the United States manufactured the majority of goods and services provided to the world. The success we found was attributed to several key factors including an educated workforce, readily available natural resources, and most importantly cheap labor. Things have certainly changed. Sure, we still have an abundance of resources, and a highly skilled workforce so what’s the problem? Well, many countries have well educated workers, many whom have studied in the United States. The answer is simple it is our labor cost. Our workers demand higher incomes on average than most foreign workers do. Our labor cost make up approximately 70% of the total production cost whereas most foreign labor cost make up about 30%. In New Delhi 2,500 young college-educated workers process claims for major U.S. insurance companies and they do it at a cost that is 60% cheaper that their U.S. competitors. As MBA students, we should strive to lower operational cost so we can improve our competitive position. I would love to buy items only “made in America,” however for now, “made in America,” just means you paid too much for it!
    Engardio, P., Bernstein, A., Kripalani, M., Balfour, F., Grow, B., & Greene, J. (2003). IS YOUR JOB NEXT? (cover story). Businessweek, (3818), 50-60.

    • Daniel
      Interesting spin regarding US wage levels and the relative percent of total product cost. There are left to right contradictory opinions about the effect of US wages on product cost. I think we have to examine multiple factors to determine whether or not US wages are grossly out of alignment with foreign labor cost. National economy, cost of living, health care cost, pensions and retiree benefits, average retirement ages, and even national life expectancies. The average factory worker in the US was earning $23.32/hour in March 2012. Interesting productivity measurements (March 2012) in the US, Taiwan, and Germany were $73.45/hour, $34.06/hour, and $55.21/hour respectively. [1] I’m not convinced that the American worker is grossly overpaid. I am convinced that the US corporate profits are making a smaller population of investors extremely wealthy at the expense of our available workforce.

      [1] Kavoussi, B. (2012). Average Cost of a Factory Worker In the US, China, and Germany. The Huffington Post. Retrieved 8, July from http://www.huffingtonpost.com/2012/03/08/average-cost-factory-worker_n_1327413.html.

    • Daniel-

      I am replying to the statement at the end of your post – I would love to buy items only “made in America,” however for now, “made in America,” just means you paid too much for it!

      According to the article “Why Buy American?” (2013), if every American spent an extra $3.33 on U.S.-made products, it would create almost 10,000 new jobs. In addition to that, if every builder used just 5 percent more U.S.-made products, it would create 220,000 new jobs.

      While I do not restrict my buying to just that of American made products, I do not feel we should buy from other countries just because they are cheaper. I believe while it may be more expensive to purchase American made only products, it is well worth the cost to keep our unemployment rate down and the unfortunates that come with having a high unemployment rate.

      Why Buy American?. (2013). Retrieved on July 13, 2013 from http://www.madeintheusa.com/why-buy-american.php

  7. The optimistic perspective of American manufacturing is characterized by a statement made by Lawrence Summer, Dec. 2010, “Technology is accelerating productivity in mass production”; and in The Economist, “the shrinkage of industrial jobs—is wrongly perceived as a symptom of economic decline, when it is really a stage of economic development”.

    The Information Technology and Innovation Foundation (ITIF) takes the opposing position and states that US manufacturing output has decreased by 11% and manufacturing jobs have decreased 33% since 2000. There are 6,000,000 less manufacturing jobs since 2002 according to Deloitte and a skills gap of 600,000 jobs for machinists, operators, craft workers, distributors, and technicians that are going unfilled according to the Manufacturing Institute.

    More labor is required to bring output to its optimal point in the US – along with more efficient operations management.

    The Manufacturing Institute. (2011). 2011 Skills Gap Report. Washington, DC 20001. Web accessed 7/8/13. http://www2.itif.org/2012-american-manufacturing-decline.pdf

    Deloitte. (2012). Manufacturing opportunity. Deloitte Development LLC. Web accessed 7/8/13. http://www.deloitte.com/assets/Dcom

    Atkinson, R.; Stewart L.A. (Mar. 2012). Worse than the Great Depression: What experts are missing about American Manufacturing Decline. The Information Technology and Innovation Foundation. Web accessed 7/9/13. http://www2.itif.org/2012-american-manufacturing-decline.pdf

      • Sam & Professor Green
        I found your comments and the article on American Manufacturing very interesting. I believe in a free market. I also believe that as foreign labor cost increase, American manufacturing will increase and vice versa. I think that both perspectives have merit and that the truth most likely lies somewhere in the middle. I still believe the overwhelming factor in American manufacturing is the cost of the labor. I find it difficult to answer the question, “why are manufacturing jobs moving oversees” with any response other than “cheap labor.” If skilled labor positions are not paid too much, perhaps foreign workers are paid to little. As a manager, I have to consider my span of control and what I can affect. Is it more reasonable for me to think I can demand other countries pay their workers more so that U.S. manufacturing can compete? I think the skills gap is related to the labor cost directly. U.S. companies offer positions at what they can afford to pay to remain competitive, and they simply cannot find any Americans who are willing to do the work for that price. There certainly is not a skills gap in foreign manufacturing.

      • Adam,

        Great points!

        All,
        If manufacturing today is all about ‘cheap labor,’ isn’t it impossible for U.S. businesses to compete with underdeveloped countries in this situation?

        Professor Green

      • Professor Green
        When I came to united state of America before four years ago I was expecting to see (made in USA) in most products here, but quite the contrary, most of the products are made outside the United States,. All the questions that I have gone after I know the cost of labor here in United stated. When I conducted a search on the topic of wage labor inside and outside the United States and found that the main factor is the wages of labor but it is do not tell the complete story when deciding where to locate a manufacturing plant, and labor costs in other countries have risen quickly, in some countries, these costs have risen faster than productivity. , “Foreign hourly labor costs are but one factor to consider in the overall labor cost equation. When deciding whether it is better to manufacture outside the United States, companies should also consider rising wages, lower productivity, difficulty with turnover, and relatively high labor market risks. Looking at the entire labor cost equation demonstrates the soundness of manufacturing in the United States. “. [1]
        [1] http://acetool.commerce.gov/labor-costs

  8. Dr. Green-

    Holistic Approach – Cheap + High Skilled
    In regards to “cheap labor”, and considering the points made by the Manufacturing Institute and ITIF cited above, a holistic approach, i.e. increasing both cheap labor and high-skilled labor, is likely required to increase total output. In other words, to make up the ITIF reported 11% drop in total manufacturing output since 2002, a good place to start would be filling the 600,000 high skilled labor vacancies. But also, hiring cheap labor (unskilled to mid-level skilled) jobs might be the very next step.

    Hiring Strategy
    Since more production per dollar spent will likely be found by hiring high skilled workers, 100% of the 600,000 high skilled vacancies should be filled. Then, hiring 25-75% of the 6,000,000 “cheap labor” vacancies should be filled. Employment wise, and in terms of technology + operations management focus, this hiring strategy would result in a streamlined and efficient version of pre-2002 numbers.

    (References found above in, “sam stone, july 9” post.)

  9. The idea of placing the suppliers in a higher regard strikes me as a beneficial solution to a company while also remaining cost efficient. When I think to the improvements of a supply chain, my mind goes to the popular show Undercover Boss. In this show, a top executive wears a disguise and attempts to see where their company is coming up short. They also gain feedback from their employees on areas where they can improve their product/service. As previously said by Ben, who knows what problems are there better than the employees right in the middle?
    The supply chain is how the consumers are able to get the product, so their abilities and skills are instrumental in the company’s success or failure. The supply chain is changing as time evolves. The consulting firm known as IDHASOFT (2013) describes the change in the supply chain by saying “it is not simply a tool for reducing cost, but also a tool for increasing sales and generating higher levels of value faster and better than the competition”[1]. Companies need to be more willing to take advantage of this tool and reap the benefits.

    1.IDHASOFT. (2013). Supply chain management. Retrieved from http://www.idhasoft.com/business-services-supply-chain-management

  10. Dr. Green – Responsibility of Government and Society:

    As noted in the Economist, jobless college graduates didn’t major in Basket Weaving or Puppetry, but rather, are among the 2 million unemployed or underemployed college graduates who majored in architecture, engineering, computer administration management, and international business (WSJ)(Economist, 2011). But also, higher average unemployment rates for college graduates can be found in the Arts (WSJ).

    To some degree, it is known that colleges are not teaching the skills needed by industry as made apparent by the “skills gap” in the United States, i.e. 600,000 vacancies that companies can’t hire due to lack of appropriately trained and educated workers (MI, 2011). So then of responsibility becomes, does the government have a responsibility to stop funding loans for underperforming degrees and instead fund loans to fill known market needs?

    The Economist. (Nov. 2011). “Those silly young people”. R.A. Washington. Free Exchange. Web Accessed.
    http://www.economist.com/blogs/freeexchange/2011/11/unemployment

    Wall Street Journal. (Not specified). “From College Major to Career”. Source:
    Georgetown University Center on Education and the Workforce. Web accessed.
    http://graphicsweb.wsj.com/documents/NILF1111/#term=Engineering

    The Manufacturing Institute. (2011). 2011 Skills Gap Report. Washington, DC 20001. Web accessed 7/8/13. http://www2.itif.org/2012-american-manufacturing-decline.pdf

  11. dacissna-

    While unemployment is correlated with cheap foreign labor, the skills-gap is a separate issue.

    The root cause of the skills gap according to the Manufacturing Institute is that 600,000 jobs remain unfilled simply because companies can’t find people with the right skills (MI, 2011).

    With that in mind, Germany, who pays their high-skilled laborers 10 times what China does, has held their share of global markets against China and other emerging countries (Theil, 2012). Germany has rising industrial employment and an unemployment rate of just 5.6 (Theil, 2012).

    The point is that Germany is competing with China despite significantly higher labor costs. China cannot compete with Germany on quality. In Germany, high-skilled employees are developed in vocational schools, and highly technical solutions and technology are developed in universities (Theil, 2012). Unlike Germany, companies in the U.S. report that the national education curriculum is not producing workers with the basic skills they need – a trend not likely to improve in the near term (MI, 2011).

    Theil, Stephan. (Sept. 2012). “The U.S. Could Learn from Germany’s High-Tech Manufacturing”. Scientific American. Web accessed 7/20/2013. http://www.scientificamerican.com/article.cfm?id=us-could-learn-germany-high-tech-manufacturing&page=2

    The Manufacturing Institute. (2011). 2011 Skills Gap Report. Washington, DC 20001. Web accessed 7/8/13. http://www2.itif.org/2012-american-manufacturing-decline.pdf

  12. Global competition brings various advantages like proprietary product technology, economies of scale, and comparative advantage. In globalization, the organization will have to deal with different business environments, different cultures, and government regulations. Institutional, managerial, and economic factors impede on the globalization process (Flaherty, 2012). In order for an organization to expand globally, it needs to change its approaches to management. The organization has to change its business operations strategy in the face of globalization. Because operations management is so important in the organization’s overall business strategy, operations managers will have to analyze various challenges and opportunities in the different countries they operate in, whereas accordingly developing new strategies. Operation strategies necessitated by globalization include the allocation of resources, technology choice, product development, and market selections (Flaherty, 2012).

    Flaherty, Therese. (2012). Global operations management. New York: McGraw-Hill.

  13. We know that companies have to make supply chain integration a key initiative if they want to have a successful globalization of their goods and services. The more important question to me is how to ensure supply chain business partners not only recognize but share in the vision and strategies set forth by the company? I think this is where the break down often happens.

    When I worked for a global beverage company we used a refrigeration company that also serviced many of our competitors. The company had a tough time being viewed by their supplier as a key partner. In many similar situations supply companies have many customers and also have their own organizational goals to adhere to. This means that companies have to increase their due diligence in the selection of suppliers to ensure that strategies align for both companies to reach their goals. One supply chain article states“ A successful strategic partnership must be based on extreme trust loyalty , a win-win relationship, sharing common goals and cooperation that includes willingness to assist and positive negotiations” Charu Chandra, Sameer Kumar, (2000). In the end companies have to look at suppliers like they are a part of the company and definitely a part of the bottom line.

    Charu Chandra, Sameer Kumar, (2000) “Supply chain management in theory and practice: a passing fad or a fundamental change?”, Industrial Management & Data Systems, Vol. 100 Iss: 3, pp.100 – 114

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