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B7801 Operations Management

Class Ia: Introduction to course:Overview and objectives

7 August 1999

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Agenda

• Course requirements and administration

• What is this course about?

• Why is it important?

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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

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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%

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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 byappointment

– nmf1@columbia.edu– 854-2076– 405A Uris Hall

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Course administration

• Teaching Assistant

Elena Katz• elenakatz@ibm.net

• Administrative Assistant

Wendy Himmelsbach• 5W Uris Hall• 854-8609

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What exactly are a firm’s operations ?

What are they?Why are we(you) studying it?How will we study it?

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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?

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Operations at “Coke” is the entire rangeof activities and processes involved inproducing and distributing this can ofCoke to us the end consumer.

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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 othersoft drinks, waters and teas

• What do operations at CCE entail?

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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

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CCE Infrastructure

• 56,000 employees

• 400 production/distribution facilities

• 41,680 vehicles

• 1.6M vending machines/dispensers

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Typical facility distributes over 300product/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 VittelWater

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Process

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(cont.)

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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.

A day in the life of CCE’s operations ...

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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.

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Consider repeating this exercise foreach product/service in the room!

• Products– pencils

– paper– laptop computers– cell phone

– clothes– shoes– contact lenses/eyeglasses– furniture

– carpet– food & beverage.

.

.

• Services– credit cards

– bank accounts– telephone service– cell phone service

– pager– ISP– medical care– insurance

– MBA education..

.

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What is involved in operating this business?

• Plant Management• Product Development• Purchasing• Distribution• Quality Control• Process Engineering• Facility Layout• Production Planning• Capacity Planning• Inventory Control• Order Processing• Service Parts / Repairs• Vendor Relations

• Center/Store Management• Work Methods/Procedures• Facility Layout• Site Selection• New Service Development• Work force Planning• Capacity Planning• Quality Control• Order Processing• Vendor Relations• Technology Planning

Manufacturing Services/Trade

This is a wide range of activities -- How should webegin thinking about them?

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Operations ManagementDefinition

Operations management may be defined as the

design, operation, and improvement of the

production system that creates the firm’s primary

products and services

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Operations Management

Marketplace

Corporate Strategy

Operations Strategy

Operations management

Marketing StrategyFinance Strategy

People Systems Technology Processes

Leadership

Production System

Inputs:MaterialsCustomers

Outputs:ProductsServices

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Why should any of this matter to you?

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The activities/processes involved inproducing the firm’s outputs(products & services)

suppliers plants distribution center

retailers

customers

customerservice

replenishmentorders

orders/service requests

How does (or could) the firm’s work get done?

What is the business impact?

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How are operating results achieved?

plantequip.inventory

materials labor energy

outputs quality variety convenience service

FIRM

customer

revenue

valuereturn

How do we structure what goes on inside the “black box” so that the firmcreates value and provides superior returns?

investment

?costs

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Some more processes..A service process...

makereservations

airportcheck-in

collectbaggage

in-flightservices

ticketing

A product development process...

productconcept

processengineering

productionramp-up

sourcingproductengineering

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OM Involves Managing Transformations

• Leadership• People• Processes• Systems• Technology

Input OutputTransformation

Process

(Value Adding)

Transformation isenabled by “LPPST”

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A process view provides significantinsight

• 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

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Transformations

• Physical--manufacturing

• Locational--transportation

• Exchange--retailing

• Storage--warehousing

• Physiological--health care

• Informational--telecommunications

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What about McDonald’s?

• Service or Manufacturing?

• The company certainly manufactures tangibleproducts

• Why then would we consider McDonald’s aservice business?

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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)

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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

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Historical Development of OM (continued)

• Computer OR Applications– 1970s

• Manufacturing Strategy– HBS, 1980s

• JIT, CAD/CAM, CIM, FMS, TQM, etc.– 1980s

• Customer Loyalty, Business ProcessReengineering, MBNQA, SCM– 1990s

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Operations impact business performance

ROE PROFIT MARGIN

ASSET TURNOVER

FINANCIAL LEVERAGE = x x

2) Returns to shareholders

1) Creating value for the customer

… not financial leverage

pricequalityvarietyspeedconvenienceserviceinnovation

ROA

Operations impact ROA ...

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CCE’s 1997 ROAWhere and how do operations impact performance?

Operating Income 720 Total Assets 17,487

= = 4.12%

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

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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

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What if CCE improved operatingperformance a little?

Operating Income 775 Total Assets 17,202

= = 4.50%

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

[4.12% base case]

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What if CCE’s operatingperformance declined a little?

Operating Income 666 Total Assets 17,772

= = 3.75%

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

[4.12% base case]

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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

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Stock price performance ...

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Where does knowing something aboutoperations 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

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“In order to maintain growth levels significantly inexcess of industry rates, Coca-Cola Enterprises mustinvest in fleet, warehouse, and production capacity,”stated Henry Schimberg (COO).

“This capital spending plan will create the foundation foraccelerated industry leadership and for consistentgrowth in our financial and operating results as we moveinto the next decade.”

7/22/98 Public Announcement

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“The burden of it all is on the shoulders ofmanagement. Labor works along under any system.There is little or no concern in the shop whether thebest method is being used, whether the best resultsare being had from materials and from the motionsof 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)

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Some Current OM Challenges

• Speeding product development time

• Developing production systems to enablemass customization of products andservices

• Managing global production networks

• Developing and integrating new processtechnologies into existing productionsystems

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Some Current OM Challenges (Continued)

• Achieving high quality quickly andmaintaining it in the face of restructuring

• Managing an increasingly diverseworkforce

• Conforming to environmental constraints,ethical standards, and governmentregulations

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Summary

• Our focus in this course is on the business impactof a firm’s operations

– creating value for customers– providing returns to the firm

• Operating performance throughout a myriad ofactivities of the firm combine to determine itsROA

• Operations strategy provides the blueprint forachieving superior operating results

– What do we need to provide?– How are we going to provide it?

• Strategy and operational excellence are distinctbut complimentary concepts; both are important.