B7801 Operations Management Introduction 18 August 2000 Nelson M. Fraiman p. 1 Outline • Course requirements and administration • What is this course about? • The role of operations and its impact on the firm’s performance • Begin operations strategy discussion p. 2 Course requirements • Readings – Casebook – The Goal • Class participation (20%) – Bring tent cards to every class • Case assignments (28%) – 4 assignments (see schedule) – groups of 3 max. – executive summary format (1 page + exhibits) • Midterm exam on 22 September 2000 (25%) • Project (27%) p. 3 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: W 5-6:30 pm and by appointment • Chatroom hours: W 6:30 – 7:30 pm [email protected] 212 854 2076 405A Uris Hall • TA:Srinivas Krishnamoorthy • [email protected] p. 4 What exactly are a firm’s operations ? p. 5 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. 6 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 okay? 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 not? • 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. 7 Operations at “Coke” is the entire range of activities and processes involved in producing and distributing this can of Coke to you the end consumer. p. 8 Coca-Cola Enterprises (CCE) (images and figures from www.cokecce.com) • World’s largest bottler of nonalcoholic beverages, $13.4B 1998 revenue • Markets, produces and distributes Coke and other soft drinks, waters and teas • What do operations at CCE entail? p. 9 Geographical market CCE serves 3.8 Billion cases distributed ‘98 72% of North America All of Belgium, Great Britain, Luxembourg and The Netherlands 90% of France p. 10 CCE Infrastructure • 66,000 employees • 444 production/distribution facilities • 47,235 vehicles • 1.9M vending machines/dispensers p. 11 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. 12 Process p. 13 (cont.) p. 14 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. 15 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. 16 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. 17 What is involved in operating this business? • Plant Management • Inventory Control • Product Development • Order Processing • Purchasing / Vendor Relations • Service Parts / Repairs • Distribution • Service Center Management • Quality Control • Work Methods/Procedures • Process Engineering • Site Selection • Facility Layout • New Service Development • Production Planning • Work Force Planning • Capacity Planning • Technology Planning This is a wide range of activities – How should we begin thinking about them? p. 18 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. 19 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. 20 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. 21 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. 22 OM Involves Managing Transformations Transformation Input Process Output (Value Adding) • Leadership Transformation is • People enabled by “LPPST” • Processes • Systems • Technology p. 23 Transformations • Physical--manufacturing • Locational--transportation • Exchange--retailing • Storage--warehousing • Physiological--health care • Informational--telecommunications p. 24 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. 25 CCE’s 1998 ROA Where and how do operations impact performance? 1998 INCOME Base Net Operating Revenues 13,414 Cost of sales 8,391 Gross Profit 5,023 SG&A + Delivery 4,154 Operating Income 869 1998 ASSETS Acct. Rec. 1,337 Franchises 13,956 Inventory 543 Plant & Equipment 4,891 Other 405 Total Assets 21,132 Oper. Inc. 4.11% ASSETS p. 26 Key operations drivers of ROA • Revenue – better quality, service, speed, variety – product/service availability – supply-demand matching (markdowns/discounting) • Cost of goods – effective purchasing & sourcing – scrap/waste reduction • S,G & A – production & service delivery costs – labor productivity • Asset turnover – facility and equipment utilization – inventory turnover p. 27 What if CCE improved operating performance a little? Explanation? 1998 INCOME Base Modified