B7801 Operations Management
Class Ia: Introduction to course: Overview and objectives
7 August 1999
p. 1 Agenda
• Course requirements and administration
• What is this course about?
• Why is it important?
p. 2 Course requirements
• Readings – Casebook – The Goal • Class participation • Case assignments – 5 assignments – groups of 3 maximum – executive summary format (1 page + exhibits) • Midterm examination • Project
p. 3 Grading
Class Participation 15% Case Assignments 35% McDonald's/Burger King [8/20] National Cranberry Cooperative [8/21] Manzana Insurance [9/13] HP Desk Jet Supply Chain [9/25] Ritz-Carlton [10/9] Midterm Examination 25%
Project 25%
p. 4 Course administration
• Web syllabus – http://www.gsb.columbia.edu/faculty/nfraiman – “One-stop shopping” for ... • schedule of assignments • case questions • data sets • announcements • useful links – Bookmark it and check it often! • Office hours: Tuesdays 3:00 - 5:00 pm and by appointment – [email protected] – 854-2076 – 405A Uris Hall
p. 5 Course administration
• Teaching Assistant Elena Katz • [email protected]
• Administrative Assistant Wendy Himmelsbach • 5W Uris Hall • 854-8609
p. 6 What exactly are a firm’s operations ?
What are they? Why are we(you) studying it? How will we study it?
p. 7 Ex: Can of Coke
• Where did you buy it? How did it get there? • Where was it made? • What is it made of? Where did the materials come from? • When was it made? • Why did you buy it? • How did someone know you were going to buy it? • Is the quality OK? How do “they” know the quality is okay? • How many other units where made at the same time? • Does the plant produce other products? How many? • Do different plants produce different products? Why? • Why is this can of Coke produced and distributed this way? • Are there alternatives? • What decisions had to be made to make all this possible?
p. 8 Operations at “Coke” is the entire range of activities and processes involved in producing and distributing this can of Coke to us the end consumer.
p. 9 Coca-Cola Enterprises (CCE) (images and figures from www.cokecce.com)
• World’s largest bottler of nonalcoholic beverages, $12B 1997 revenue
• Markets, produces and distributes Coke and other soft drinks, waters and teas
• What do operations at CCE entail?
p. 10 Geographical market CCE serves
3.4 Billion cases distributed ‘97
67% of North America
All of Belgium, Great Britain, Luxembourg and The Netherlands
90% of France
p. 11 CCE Infrastructure
• 56,000 employees
• 400 production/distribution facilities
• 41,680 vehicles
• 1.6M vending machines/dispensers
p. 12 Typical facility distributes over 300 product/package combinations
North America: Products of The Coca-Cola Company: Coca-Cola classic, caffeine free Coca-Cola classic, diet Coke, caffeine free diet Coke, Sprite, diet Sprite, Cherry Coke, diet Cherry Coke, Barq's, Citra, Fanta, Fresca, Fruitopia, Hi-C fruit drinks, Mello Yello, Minute Maid and diet Minute Maid soft drinks, Minute Maid juices, Mr. PiBB, POWERaDE, SURGE, and TAB
Products of Other Companies: Canada Dry, Dr Pepper, Diet Dr Pepper, Evian, Mendota Springs, NAYA, Nestea, Cool from Nestea, diet Nestea, Schweppes, Seagrams, and Squirt
International markets: Aquarius, Buxton Mineral Water, caffeine free Coca-Cola, caffeine free Coca-Cola light, Canada Dry, Capri Sun, Cherry Coke, Coca-Cola, Coca-Cola light, caffeine free diet Coke, diet Coke, Dr Pepper, Fanta, Five Alive, Kia-Ora, Lilt, Malvern Waters, Minute Maid juices, Nestea, Oasis, Perrier Mineral Water, Schweppes, Sprite, Sprite light, and Vittel Water
p. 13 Process
p. 14 (cont.)
p. 15 A day in the life of CCE’s operations ...
In the early morning hours, U.S. warehouse employees finish filling sales orders from the day before, then place the products on delivery trucks for distribution to our customers by our employees. In Europe, where delivery systems to our customers vary, warehouse employees load trucks for bulk delivery to customer warehouses, or for local delivery. We deliver most of our products in Europe to customer warehouses rather than directly to stores.
Still early in the morning, sales managers, account representatives, merchandisers, and drivers across the Company convene at our sales centers to plan the day's efforts and discuss sales opportunities.
Local delivery drivers then check their already-loaded trucks, make sure loads are correct, and head to market using routes created the day before by dispatchers at each sales center. Each day, local delivery drivers routinely deliver and help merchandise 400 or more cases of product.
Sales personnel assemble marketing materials, organize their call lists, handle paperwork, then begin their work assisting customers. Account representatives will call on 15 or more customers each day, working with those customers as beverage experts to help them grow their business.
p. 16 Throughout the day, the production lines keep rolling, bottling the product needed to keep the pipeline full. Some lines operate 24 hours a day; most lines operate at least 20 hours. This continuous production helps assure product freshness, keeps inventories to a minimum, and helps keep costs down by making maximum use of our facilities. Generally, warehouses in Europe and North America completely turn over their inventory in seven days.
As local drivers deliver product to our customers, they record the deliveries on hand-held computers that help them reconcile their deliveries at the end of the day. In all of our territories, merchandisers then work in the stores to display our products attractively and correctly. As account managers call on customers, they send in new orders, electronically or by phone, keeping the cycle of sales, production, and delivery moving forward.
Information Systems personnel make certain that important Company operating and sales data are available to managers, generally within 24 hours. Managers and administrative employees work to provide front-line employees the tools they need. For example, they create marketing programs and strategies, plan fleet requirements, develop and conduct employee training programs, and provide overall local and company-wide leadership.
p. 17 Consider repeating this exercise for each product/service in the room!
• Products • Services – pencils – credit cards – paper – bank accounts – laptop computers – telephone service – cell phone – cell phone service – clothes – pager – shoes – ISP – contact lenses/eyeglasses – medical care – furniture – insurance – carpet – MBA education – food & beverage ......
p. 18 What is involved in operating this business? Manufacturing Services/Trade
• Plant Management • Center/Store Management • Product Development • Work Methods/Procedures • Purchasing • Facility Layout • Distribution • Site Selection • Quality Control • New Service Development • Process Engineering • Work force Planning • Facility Layout • • Production Planning Capacity Planning • Capacity Planning • Quality Control • Inventory Control • Order Processing • Order Processing • Vendor Relations • Service Parts / Repairs • Technology Planning • Vendor Relations
This is a wide range of activities -- How should we
begin thinking about them? p. 19 Operations Management Definition
Operations management may be defined as the
design, operation, and improvement of the
production system that creates the firm’s primary
products and services
p. 20 Operations Management
Marketplace
Corporate Strategy
Finance Strategy Operations Strategy Marketing Strategy
Operations management
Inputs: Outputs: People Systems Technology Processes Materials Products Customers Services Leadership
Production System p. 21 Why should any of this matter to you?
p. 22 The activities/processes involved in producing the firm’s outputs (products & services) retailers customers
suppliers plants distribution center
customer replenishment service orders orders/service requests
How does (or could) the firm’s work get done?
What is the business impact?
p. 23 How are operating results achieved? investment FIRM outputs quality plant variety customer equip. convenience inventory service
? revenue costs
materials labor energy value return
How do we structure what goes on inside the “black box” so that the firm creates value and provides superior returns?
p. 24 Some more processes..
A service process...
make ticketing airport in-flight collect reservations check-in services baggage
A product development process...
product product process sourcing production concept engineering engineering ramp-up
p. 25 OM Involves Managing Transformations
Transformation Input Process Output (Value Adding)
• Leadership Transformation is • People enabled by “LPPST” • Processes • Systems • Technology
p. 26 A process view provides significant insight
• How does work actually get done? – inputs – steps/stages – sequence – communication – linkages
• What effect does each organization have? – customers – sales/marketing – order processing – distribution – manufacturing – suppliers – customer support
p. 27 Transformations
• Physical--manufacturing
• Locational--transportation
• Exchange--retailing
• Storage--warehousing
• Physiological--health care
• Informational--telecommunications
p. 28 What about McDonald’s?
• Service or Manufacturing?
• The company certainly manufactures tangible products
• Why then would we consider McDonald’s a service business?
p. 29 Historical Development of OM
• Scientific Management – Frederick W. Taylor (early 1900s) – Frank and Lillien Gilbreth (1911) • Moving Assembly Line – Henry Ford (1913) • Activity Scheduling Chart – Henry L. Gantt (1914) • Economic Lot Size Model – F. W. Harris (1917)
p. 30 Historical Development of OM (continued)
• Statistical Quality Control & Sampling – Walter Shewhart (Bell Labs, 1931) • Hawthorne Studies – Elton Mayo (Western Electric, 1927-1933) • Activity Sampling for Work Analysis – Tippett (England, 1934) • Simplex Method of Linear Programming – George Dantzig, (US, 1947) • Proliferation of Operations Research – 1950s-1960s
p. 31 Historical Development of OM (continued)
• Computer OR Applications – 1970s • Manufacturing Strategy – HBS, 1980s • JIT, CAD/CAM, CIM, FMS, TQM, etc. – 1980s • Customer Loyalty, Business Process Reengineering, MBNQA, SCM – 1990s
p. 32 Operations impact business performance 1) Creating value for the customer price quality variety speed convenience service innovation
2) Returns to shareholders ROA
PROFIT ASSET FINANCIAL ROE = x x MARGIN TURNOVER LEVERAGE
Operations impact ROA ... … not financial leverage
p. 33 CCE’s 1997 ROA Where and how do operations impact performance?
1997 INCOME Net Operating Revenues 11,278 Cost of sales 7,096 Gross Profit 4,182 SG&A + Delivery 3,462 Operating Income 720
1997 ASSETS Accounts Receivable 1,007 Franchises 11,812 Inventory 462 Plant & Equipment 3,862 Other 344 Total Assets 17,487
Operating Income 720 = = 4.12% Total Assets 17,487
p. 34 Key operations drivers of ROA
• Revenue enhancement – better quality, service, speed, variety – product/service availability – supply-demand matching (markdowns/discounting) • Effective purchasing & sourcing • Scrap/waste reduction • Production & service delivery costs • Labor productivity • Facility and equipment utilization • Inventory turnover
p. 35 What if CCE improved operating performance a little?
1997 INCOME Net Operating Revenues 11,306 + 0.25% better availability/quality Cost of sales 7,078 - 0.25% supplier mgmt. & waste Gross Profit 4,228 SG&A + Delivery 3,453 -0.25% improved labor productivity Operating Income 775
1997 ASSETS Accounts Receivable 1,007 Franchises 11,812 Inventory 370 -20.0% better inventory mgmt. Plant & Equipment 3,669 -5.0% better utilization Other 344 Total Assets 17,202
Operating Income 775 = = 4.50% Total Assets 17,202 [4.12% base case]
p. 36 What if CCE’s operating performance declined a little?
1997 INCOME Net Operating Revenues 11,250 - 0.25% poor availability/quality Cost of sales 7,113 +0.25% supplier problems & waste Gross Profit 4,137 SG&A + Delivery 3,471 +0.25% poor labor productivity Operating Income 666
1997 ASSETS Accounts Receivable 1,007 Franchises 11,812 Inventory 554 +20.0% bad inventory mgmt. Plant & Equipment 4,055 +5.0% poor utilization Other 344 Total Assets 17,772
Operating Income 666 = = 3.75% Total Assets 17,772 [4.12% base case] p. 37 Summary: CCE
ROA Leverage1 ROE Poor operations 3.75% 4.3 16.1%
Base case 4.12% 4.3 17.7%
Improved operations 4.50% 4.3 19.4%
1) 1997 ratio of CCE long-term debt to shareholder’s equity p. 38 Stock price performance ...
p. 39 Where does knowing something about operations matter in your career?
• Managing a business • Justifying real investments – plant – equipment – product/process development • Restructuring initiatives – reengineering – outsourcing – consolidation • Mergers & acquisitions – evaluating cost savings – understanding economies of scale – New business planning
p. 40 “In order to maintain growth levels significantly in excess of industry rates, Coca-Cola Enterprises must invest in fleet, warehouse, and production capacity,” stated Henry Schimberg (COO).
“This capital spending plan will create the foundation for accelerated industry leadership and for consistent growth in our financial and operating results as we move into the next decade.”
7/22/98 Public Announcement
p. 41 “The burden of it all is on the shoulders of management. Labor works along under any system. There is little or no concern in the shop whether the best method is being used, whether the best results are being had from materials and from the motions of men; it is a day’s work just the same. The difference in a day’s work is in production value, and this is the business of management.”
Henry Ford Today and Tomorrow (1926)
p. 42 Some Current OM Challenges
• Speeding product development time
• Developing production systems to enable mass customization of products and services
• Managing global production networks
• Developing and integrating new process technologies into existing production systems
p. 43 Some Current OM Challenges (Continued)
• Achieving high quality quickly and maintaining it in the face of restructuring
• Managing an increasingly diverse workforce
• Conforming to environmental constraints, ethical standards, and government regulations
p. 44 Summary
• Our focus in this course is on the business impact of a firm’s operations – creating value for customers – providing returns to the firm • Operating performance throughout a myriad of activities of the firm combine to determine its ROA • Operations strategy provides the blueprint for achieving superior operating results – What do we need to provide? – How are we going to provide it? • Strategy and operational excellence are distinct but complimentary concepts; both are important.
p. 45