This Document Contains Chapters 1 to 3 CHAPTER 1 INTRODUCTION Discussion Questions 1. Using Exhibit 1.3 as a model, describe the source-make-deliver-return relationships in the following systems: a. An airline Source: Aircraft manufacturer, in-flight food, repair parts, computer systems Make: Aircraft and flight crew scheduling, ground services provided at airports, aircraft maintenance and repair Deliver: Outbound and arriving passenger service, baggage handling Return: Resolve any post-service issues such as lost or damaged luggage b. An automobile manufacturer Source: Suppliers of components and raw materials Make: Manufacturing of vehicles and components or subassemblies to be sold as spare parts Deliver: Delivery to and sales from dealerships, delivery of spare parts to the wholesale system Return: Warranty and recall repairs, trade-ins c. A hospital Source: Medical supplies, cleaning services, disposal services, food services, qualified personnel Make: Inpatient rooms, outpatient clinics, emergency room, operating rooms Deliver: Scheduling patients, providing treatment, ambulance service, family counseling Return: Billing errors, follow up visits d. An insurance company Source: Supplies needed for the office, underwriters, legal authority to operate Make: Establish policy guidelines and pricing, field agent/representative and facility network, develop Internet service capabilities, establish preferred vehicle repair service network Deliver: Meet with and advise clients, write policies, process and pay claims Return: refund of overpayments 2. Define the service package of your college or university. What is its strongest element? What is its weakest one? The categories with examples are: Supporting facility - location, buildings, labs, parking Facilitating goods – class schedules, computers, books, chalk Explicit services – classes with qualified instructors, placement offices Implicit services – status and reputation (e.g., Ivy League schools) At Indiana University and the University of Southern California, among their strongest elements are their business schools and their Operations Management programs (of course). Both also have very dedicated alumni networks. A weak element of Indiana University is its weak football program; for USC, weak elements are on-campus parking and housing. 3. What service industry has impressed you the most with its innovativeness? Our vote goes to cruise lines which have introduced such onboard innovations as wave machines for belly boarding and rock climbing walls, as well as all sorts of other amenities to keep cruisers involved. The industry is doing record business as well. Some of the standout companies in less innovative industries are Bank of America (has a formalized research program to try out new customer services/amenities such as video screens in next to teller lines), Intuit (e.g., putting Quicken money management software online), Ikea, JetBlue Airlines, and Progressive Insurance (discussed later in the book). 4. What is product-service bundling and what are the benefits to customers? Product-service bundling is adding Value-added services to a firm’s product offerings to create more value for the customer. This provides benefits in two areas. First, this differentiates the organization from the competition. Secondly, these services tie customers to the organization in a positive way. Alternatively, bundling can also involve adding products to a service, for example, adding the sale of convenience items and snacks at a hotel. 5. What is the difference between a service and a good? A service is an intangible process (you can’t hold it in your hands), while a good is the physical output of a process. 6. Look at the job postings at http://www.apics.org and evaluate the opportunities for an OSM major with several years of experience. There are pages and pages of these in the APICS Career Center. Here are some examples: Global Active Ingredient Supply Planner FMC Corporation US - PA - Philadelphia This is your opportunity to join the Agricultural Products Group (APG) and work on the team responsible for global active ingredient planning. You'll serve as a central Supply Planner working in tandem ... Sep-20-2011 Purchasing Manager (Buyer) Texas Dow Employees Credit Union (TDECU) US - TX - Lake Jackson - Nearest Metro area - South Houston Education Accredited university degree in Business or Marketing with certification in Purchasing, Inventory Management, or Logistics. Accredited Purchasing Practitioner (APP) or Certified Purchasing ... Sep-20-2011 Product Line Manager Cintas Corporation US - OH - Mason High School diploma or GED required, 4 year degree preferred Knowledge of and experience using Internet and Microsoft Office (Word, Excel, PowerPoint, and Email) 3 years management experience preferred ... Sep-20-2011 Director Purchasing Legendary Baking US - CO - Denver CERTIFICATIONS & LICENSES • Valid Driver’s License and car insurance. • Certified Purchasing Manager certification (C.P.M.) preferred. • Certified Food Purchasing Manager ... Sep-19-2011 Process Improvement Manager ARAMARK Corporation US - TX - Houston Bachelor's Degree required. Technical Engineering discipline within Industrial, Mechanical, Chemical, or Food Operations strongly preferred. • Minimum 5 years Lean manufacturing experience coupled ... Sep-19-2011 7. Recent outsourcing of parts and services that had previously been produced internally is addressed by which current issue facing operations and supply management today? The coordination of relationships between mutually supportive but separate organizations. 8. What factors account for the resurgence of interest in OSCM today? With companies facing competition on a global scale, and ever-advancing manufacturing and information technologies, firms realize the competitive advantage their OSCM functions can provide if properly managed. Many have found that the same old way of doing business leaves them unable to compete successfully. The 2011 tsunami in Japan has also brought to the forefront how important supply chains are, as well as the negative economic impact that disruptions in the supply chain can cause. 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 services. 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. There of course will be a number of examples that students will bring up, though they may need some prodding to jog their memories. Some examples to start with might be IBM’s “I’m an IBMer” campaign where they advertise how they are “building a smarter planet.” Bottled water manufacturers have reduced the amount of plastic used in many of their products, thus saving production and distribution costs, but also allowing them to advertise how the new bottles are better for the environment because they result in less waste. 10. 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? Firms can be anywhere on these two dimensions. It is possible for a firm to be the best at what they do in serving their market, but be very wasteful in doing so. Alternatively, a firm could squeeze every last dollar out of their processes but fail to deliver what the market expects and desires. Of course, the best firms will provide the goods and services that the market desires, exactly as the market desires, and do so at a minimum cost. Firms that are both inefficient and ineffective do not survive for long in any market. 11. 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? (There are a number of answers that students may come up with, from simplistic to more thoughtful. Following is one of the latter.) Both are measuring the average amount of a valuable asset that is not generating value for the company. Accounts receivable are an asset, but they do not create value for the firm until the money is received. Reducing the average amount of accounts receivable frees up that money for use by the company on a recurring basis. Inventory is another asset, but while inventory is being held by the company it is not making any money for the firm. Reducing inventory allows the firm to invest the money that would otherwise be spent on the inventory. Objective Questions 1. What are the three elements that require integration to be successful in operations and supply chain management? Strategy, Processes, and Analytics 2. Operations and supply chain management is concerned with the design and management of the entire system that has what function? Produces a product or delivers a service 3. Match the following OSCM job titles with the appropriate duties and responsibilities. A: Plans and coordinates staff activities such as new product C Plant manager development and new facility location B: Oversees the movement of goods throughout the supply D Supply chain manager chain C: Oversees the workforce and resources required to produce A Project manager the firm’s products Business process D: Negotiates contracts with vendors and coordinates the flow E improvement analyst of material inputs to the production process E: Applies the tools of lean production to reduce cycle time B Logistics manager and eliminate waste in a process 4. What high-level position manager is responsible for working with the CEO and company president to determine the company’s competitive strategy? Chief Operating Officer 5. Order the following major concepts that have helped define the OSCM field on a time line. Use 1 for the earliest to be introduced, and 5 for the most recent. 3 Supply chain management 1 Manufacturing strategy developed 5 Business analytics 2 Total quality management 4 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 workstations exactly when they are needed? Just-in-time (JIT) production 7. Operations and supply chain ___________________________ leverage the vast amount of data in enterprise resource planning systems to make decisions related to managing resources. analytics 8. Which current issue in OSCM relates to the ability of a firm to maintain balance in a system, considering the ongoing economic, employee, and environmental viability of the firm? Sustainability 9. Consider the following financial data from the past year for Midwest Outdoor Equipment Corporation. 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. Chapter 01 - Introduction c. Compute the asset turnover ratio. 10. 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 their raw material inventory inside the manufacturer’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? This will reduce the average amount of money the firm has invested in raw material, so the inventory turnover ratio should increase. 11. What is the name of the process in which one company studies the processes of another firm in order to identify best practices? Benchmarking 12. A company has recently implemented an automated online billing and payment processing 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? Quicker payments will reduce the average amount of accounts receivables, so the receivables turnover ratio will increase. Analytics Exercise: Comparing Companies Using Wall Street Efficiency Measures Each student is asked to pick an industry and compare three companies within that industry based on income per employee, revenue per employee, receivable turnover, inventory turnover, and asset turnover. The following is typical of what you might obtain: BP Shell ExxonMobil Oil Industry Management Efficiency Income/Employee 315,300 343,533 414,328 289,320 Revenue/Employee 4.6 Mil 5.2 mil 4.7 mil 3 Mil Receivable Turnover 9.38 6.29 13.17 13.5 Inventory Turnover 11.92 13.59 21.91 15.5 Asset Turnover 1.92 1.36 1.41 1.1 Students are then asked to identify which company appears to have the most productive employees. With this data we see that ExxonMobil does very well in generating $414,328 income per employee. Comparing Shell to ExxonMobil we can observe that ExxonMobil appears to be more efficient since it can generate more Income on lower revenue/employee, at least compared to Shell. The Inventory Turnover is highest for ExxonMobil indicating that the company is the most efficient from an operations and supply chain processes view. ExxonMobil also appears to do a good job in collecting receivables as well, thus supporting the idea that the company is very efficient. BP seems to do a little better in Asset Turnover, which relates to the use of its facility and equipment assets. But ExxonMobil is very good especially in comparison to the Oil Industry average. Overall, ExxonMobil appears to be the most efficient, so the other companies might find it valuable to benchmark the company’s processes. Of course, the data generated by each student will be different and an interesting interchange can be developed with students each presenting what they found from their research. It is very interesting to do comparisons across industries; retailers versus oil companies, and computer makes versus software companies, for example. CHAPTER 2 STRATEGY Discussion Questions 1. What is meant by a “triple-bottom-line” strategy? Give an example of a company that has adopted this type of strategy. A triple-bottom-line strategy places emphasis on a company’s environmental and social responsibilities as well as the traditional bottom line of economic prosperity. It recognizes that the long-term health of the firm is interdependent with the health of the environment and the betterment of society. There are many examples – one if Kraft Foods. For details see their 2010 report: http://www.kraftfoodscompany.com/SiteCollectionDocuments/pdf/kraftfoods_responsibility_rep ort.pdf 2. Find examples where companies have used features related to environmental sustainability to “win” new customers. Car companies use environmental concerns in marketing ads. The development of hybrid and flex-fuel cars is one way they have operationalized those concerns. Consumer goods companies display the “made with recycled material” logo on the packaging. Bottled water manufacturers are using and advertising bottles made with less plastic. 3. What are the major priorities associated with operations and supply chain strategy? How has their relationship to each other changed over the years? The four major imperatives are cost, quality, delivery, and flexibility. In the sixties, these four imperatives were viewed from a tradeoffs perspective. For example, this meant that improving quality would result in higher cost, and in many cases that was true. However, advances in manufacturing and information technologies since then have reduced the size of those tradeoffs, allowing firms to improve on several or all of these imperatives simultaneously, gaining greater competitive advantage than was possible 50 years ago. The problem now becomes one of prioritizing and managing towards orderly improvement. 4. Why does the “proper” operations and supply chain strategy keep changing for companies that are world-class competitors? The top three priorities have generally remained the same over time: make it good, make it fast, and deliver it on time. Others have changed. Part of this may be explained by realizing that world class organizations have achieved excellence in these three areas and are, therefore, focusing attention on some of the more minor areas to gain competitive advantage. The changes in the minor priorities may result from recognizing opportunities or from changes in customer desires or expectations. 5. What is meant by the expressions order winners and order qualifiers? What was the order winner(s) for your last purchase of a product or service? Order winners are dimensions that differentiate the product or service or services of one firm from another. Order qualifiers are dimensions that are used to screen a product or service as a candidate for purchase. Order qualifiers get a company’s “foot in the door.” Order winners are what make the sale. Obviously, answers will vary for the order winners from your last purchase. 6. Pick a company that you are familiar with and describe its operations strategy and how it relates to winning customers. Describe specific activities used by the company that support the strategy. Student answers will vary widely based on their experiences and views. It might be helpful for a classroom exercise to assign certain companies to a number of students/teams and compare their answers in class. 7. At times in the past, the dollar showed relative weakness with respect to foreign currencies, such as the yen, mark, and pound. This stimulated exports. Why would long-term reliance on a lower valued dollar be at best a short-term solution to the competitiveness problem? This approach is dependent on economic policies of other nations. This is a fragile dependency. A long-term approach is to increase manufacturing and service industry productivity in order to regain competitive advantage. At a national level, solutions appear to lie in reversing attitudes. At a firm level, competitive weapons are consistent quality, high performance, dependable delivery, competitive pricing, and design flexibility. 8. Identify an operations and supply chain - related "disruption" that recently impacted a company. What could the company have done to have minimized the impact of this type of disruption prior to it occurring? The March 2011 tsunami that struck Japan was geographically concentrated but had global impact on multiple firms, many of which had no physical presence at all in the affected area. Examples include firms that had sole source agreements with suppliers in the affected area. The tsunami left these companies scrambling to find new suppliers to feed into their supply chains. These firms could have reduced the impact of the tsunami by having a few high-quality, dependable suppliers located in different geographical regions. There are many other examples that could be taken from this one event. A simple Internet search will provide plenty of material for discussion. 9. What do we mean when we say productivity is a “relative” measure? For productivity to be meaningful, it must be compared with something else. The comparisons can be either intra-company as in the case of year-to-year comparisons of the same measure, or intercompany as in the case of benchmarking. Intercompany comparisons of single factor productivity measures can be somewhat tenuous due to differences in accounting practices (especially when comparing with foreign competitors) and the balance of labor to capital resources. Total factor productivity measures are somewhat more robust for comparison purposes. Objective Questions 1. Shell Oil Company’s motto “People, Planet and Profit” is a real-world implementation of what OSCM concept? Triple bottom line 2. A firm’s strategy should describe how it intends to create and sustain value for ________________________. its current shareholders 3. What is the term used to describe individuals or organizations that are influenced by the actions of the firm? Stakeholders 4. How often should a company develop and refine the operations and supply chain strategy. At least yearly 5. What is the term used to describe product attributes that attract certain customers and can be used to form the competitive position of a firm? Competitive dimensions 6. What are the two main competitive dimensions related to product delivery? Delivery speed and delivery reliability 7. What are the two characteristics of a product or service that define quality? Design quality and process quality 8. A diagram that shows how a company’s strategy is delivered by a set of supporting activities is called a _____________________________. activity-system map 9. In implementing supply chain strategy a firm must minimize its total cost without compromising the needs of its ____________________________. Customers 10. What is defined as the likelihood of disruption that would impact the ability of a company to continuously supply products or services? Supply chain risk 11. Risks caused by natural or manmade disasters, and therefore impossible to reliably predict, are called ______________________. Disruption risks 12. Match the following common risks with the appropriate mitigation strategy. E Country risks A: Detailed tracking, alternate suppliers Regulatory risk B: Carefully select and monitor suppliers Logistics failure C: Contingency planning, insurance Natural disaster D: Good legal advice, compliance Major quality failure E: Currency hedging, local sourcing 13. The assessment of the probability of a negative event against the aggregate severity of the related loss is called _____________________________. Risk mapping 14. As Operations Manager, you are concerned about being able to meet sales requirements in the coming months. You have just been given the following production report. JAN FEB MAR APR Units Produced 2300 1800 2800 3000 Hours per Machine 325 200 400 320 Number of Machines 3 5 4 4 Find the average of the monthly productivity figures (units per machine hour). To answer this we need to realize that the measure of hours given is per machine, so we have to multiply that by the number of machines in each period to get the total machine hours in each period. Those figures are used in the calculations below. Average productivity: (2300/975 + 1800/1000 + 2800/1600 + 3000/1280)/4 Average productivity (2.36+1.80+1.75+2.34)/4= 2.06 units per machine hour 15. Sailmaster makes high-performance sails for competitive windsurfers. Below is information about the inputs and outputs for one model, the Windy 2000. Units sold 1,217 Sale price each $1,700 Total labor hours 46,672 Wage rate $12/hour Total materials $60,000 Total energy $4,000 Calculate the productivity in sales revenue/labor expense. We have to do some interim calculations here. Sales revenue is calculated by multiplying units sold by the unit sales price. Labor expense is calculated by multiplying labor hours by the wage rate. (1217*1700) / (46672*12) = 3.69 16. Live Trap Corporation received the data below for its rodent cage production unit. Find the total productivity? Output Input 50,000 cages Production time 620 labor hours Sales price: $3.50 per unit Wages $7.50 per hour Raw materials (total cost) $30,000 Component parts (total cost) $15,350 Total productivity could be expressed two ways here based on how you express output: in units sold, or dollars of sales. Units sold: 50,000 / ((620 * $7.50) + 30,000 + 15,350) = 1.00 units sold per dollar input Dollars of sales: (50000*3.5) / ((620 * $7.50) + 30,000 + 15,350) = 3.5 dollars in sales per dollar input 17. Two types of cars (Deluxe and Limited) were produced by a car manufacturer last year. Quantities sold, price per unit, and labor hours follow. What is the labor productivity for each car? Explain the problem(s) associated with the labor productivity. QUANTITY $/UNIT Deluxe car 4,000 units sold $8,000/car Limited car 6,000 units sold $9,500/car Labor, Deluxe 20,000 hours $12/hour Labor, Limited 30,000 hours $14/hour Labor Productivity – units/hour Model Output in Units Input in Labor Hours Productivity (Output/Input) Deluxe Car 4,000 20,000 0.20 units/hour Limited Car 6,000 30,000 0.20 units/hour Labor Productivity – dollars Model Output in Dollars Input in Dollars Productivity (Output/Input) Deluxe Car 4,000($8,000)= $32,000,000 20,000($12.00)= $240,000 133.33 Limited Car 6,000($9,500)= 30,000($14.00)= 135.71 The labor productivity measure is a conventional measure of productivity. However, as a partial measure, it may not provide all of the necessary information that is needed. For example, increases in productivity could result from decreases in quality, and/or increases in material cost. 18. A U.S. manufacturing company operating a subsidiary in an LDC (less-developed country) shows the following results: U.S. LDC Sales (units) 100,000 20,000 Labor (hours) 20,000 15,000 Raw materials (currency) $20,000 FC 20,000 Capital equipment (hours) 60,000 5,000 a. Calculate partial labor and capital productivity figures for the parent and subsidiary. Do the results seem misleading? Labor Productivity Country Output in Units Input in Hours Productivity (Output/Input) U.S. 100,000 20,000 5.00 units/hour LDC 20,000 15,000 1.33 units/hour Capital Equipment Productivity Country Output in Units Input in Hours Productivity (Output/Input) U.S. 100,000 60,000 1.67 units/hour LDC 20,000 5,000 4.00 units/hour Yes. You might expect the capital equipment productivity measure to be higher in the U.S. than in a LDC. Also, the measures seem contradictory. Each plant appears to be far more productive than the other on one measure, but much worse on the other. b. Compute the multifactor productivity figures for labor and capital together. Do the results make more sense? Multifactor – Labor and Capital Equipment Country Output in Units Input in Hours Productivity (Output/Input) U.S. 100,000 20,000 + 60,000= 80,000 1.25 units/hour LDC 20,000 15,000 + 5,000= 20,000 1.00 units/hour Yes, labor and equipment can be substituted for each other. Therefore, this multifactor measure is a better indicator of productivity in this instance. c. Calculate raw material productivity figures (units/$ where $1 = FC 10). Explain why these figures might be greater in the subsidiary. Raw Material Productivity Country Output in Units Input in Dollars Productivity (Output/Input) U.S. 100,000 $20,000 5.00 units/$ LDC 20,000 FC 20,000/$10 = $2,000 10.00 units/$ The raw material productivity measures might be greater in the LDC due to a reduced cost paid for raw materials, which is typical of LDC’s, especially if there are local sources for the raw materials. 19. Various financial data for the past two years follow. Calculate the total productivity measure and the partial measures for labor, capital, and raw materials for this company for both years. What do these measures tell you about this company? Last Year This Year Output: Sales $200,000 $220,000 Input: Labor 30,000 40,000 Raw materials 35,000 45,000 Energy 5,000 6,000 Capital 50,000 50,000 Other 2,000 3,000 Total Productivity Year Output in Dollars Input in Dollars Productivity (Output/Input) Last Year $200,000 $30,000 + 35,000 + 5,000 + 50,000 + 2,000 = $122,000 1.64 This Year $220,000 $40,000 + 45,000 + 6,000 + 50,000 +3,000 = $144,000 1.53 Partial Measure – Labor Year Output in Dollars Input in Dollars Productivity (Output/Input) Last Year $200,000 $30,000 6.67 This Year $220,000 $40,000 5.50 Partial Measure – Raw Materials Year Output in Dollars Input in Dollars Productivity (Output/Input) Last Year $200,000 $35,000 5.71 This Year $220,000 $45,000 4.89 Partial Measure – Capital Year Output in Dollars Input in Dollars Productivity (Output/Input) Last Year $200,000 $50,000 4.00 This Year $220,000 $50,000 4.40 The overall productivity measure is declining, which indicates a possible problem. The partial measures can be used to indicate cause of the declining productivity. In this case, it is a combination of declines in both labor and raw material productivity, which were somewhat offset by an increase in the capital productivity. Further investigation should be undertaken to explain the drops in both labor and raw material productivity. An increase in the cost of both of these measures, without an accompanying increase in the selling price might explain these measures. 20. An electronics company makes communications devices for military contracts. The company just completed two contracts. The navy contract was for 2,300 devices and took 25 workers two weeks (40 hours per week) to complete. The army contract was for 5,500 devices that were produced by 35 workers in three weeks. On which contract were the workers more productive? Contract Output in Units Input in Hours Productivity (Output/Input) Navy 2300 25(2)40 = 2000 1.15 Army 5500 35(3)40 = 4200 1.31 The workers were more productive on the Army contract. 21. A retail store had sales of $45,000 in April and $56,000 in May. The store employs eight fulltime workers who work a 40-hour week. In April the store also had seven part-time workers at 10 hours per week, and in May the store had nine part-timers at 15 hours per week (assume four weeks in each month). Using sales dollars as the measure of output, what is the percentage change in productivity from April to May? Month Output in Dollars Input in Hours Productivity (Output/Input) Percentage Change April $45,000 (8(40)+7(10))*4 = 1560 28.85 May $56,000 1820 30.77 (30.77-28.85)/28.85 = 6.66% 22. A parcel delivery company delivered 103,000 packages last year, when its average employment was 84 drivers. This year the firm handled 112,000 deliveries with 96 drivers. What was the percentage change in productivity over the two years? Year Output in Packages Input in Drivers Productivity (Output/Input) Percentage Change Last 103,000 84 1226.2 This 112,000 96 1166.7 (1166.7 -1226.2)/1226.2 = - 4.85% 23. A fast-food restaurant serves hamburgers, cheeseburgers, and chicken sandwiches. The restaurant counts a cheeseburger as equivalent to 1.25 hamburgers and chicken sandwiches as 0.8 hamburger. Current employment is five full-time employees who work a 40-hour week. If the restaurant sold 700 hamburgers, 900 cheeseburgers, and 500 chicken sandwiches in one week, what is its productivity? What would its productivity have been if it had sold the same number of sandwiches (2,100), but the mix was 700 of each type? Part Output in Hamburger Equivalents Input in Hours Productivity (Output/Input) 700 Hamburgers 900 Cheeseburgers (1.25) 500 Chicken Sandwiches (.80) 2225 200 11.125 700 Hamburgers 700 Cheeseburgers (1.25) 700 Chicken Sandwiches (.80) 2135 200 10.675 CHAPTER 3 DESIGN OF PRODUCTS AND SERVICES Discussion Questions 1. Describe the generic product development process described in this chapter. How does this process change for technology push products? Products that are developed using the “technology push” would be more narrowly focused in phase 0 and phase 1 of Marketing. The focus would be narrower because you would only look at market segments that could benefit from the application of your technology. The rest of the generic process may be somewhat less complex as well since the technology of the product currently exists in your manufacturing facilities 2. How does the QFD approach help? What are some limitations of this approach? QFD helps to get the voice of the customer into the design process using interfunctional teams. The limitations of QFD relate to the culture of the organization. In the United States, we tend to be vertically oriented and try to promote breakthrough. This can work against interfunctional teamwork, which is needed for QFD success. If a breakthrough culture can be maintained with a continuous improvement mentality through interfunctional teams, this would lead to tremendous improvements in productivity. 3. Discuss the product design philosophy behind industrial design and design for manufacture and assembly. Which one do you think is more important in a customer-focused product development? Industrial design is concerned with designing a product from the end-user’s point of view, such as aesthetics and user-friendliness of the product. Design for manufacturability, on the other hand, makes the product design less complicated and easier to manufacture. Very often it results in fewer parts, smaller size, increased reliability, and lower cost. Both philosophies are equally important for a customer-focused product development. In order to attract customers, the product must be aesthetically pleasing and user-friendly (industrial design). However, to sustain customer interests, it should also have a lower cost and higher reliability (design for manufacturability). 4. Discuss design-based incrementalism, which is frequent product redesign throughout the product’s life. What are the pros and cons of this idea? Pro: enhanced function, higher quality, and lower cost through continuously advancing technology. Con: time and money spent on frequent product and process redesigns, low priority given in servicing the existing and older products. Consumer reaction to frequent changes may be negative. 5. Do the concepts of complexity and divergence apply to an online sales company such as Dell Computer? Due to the size of Dell and the number of market segments they serve, these concepts certainly apply. Consider as one example the technical support process for an existing customer. Service can vary from very simple like an individual customer needing a particular driver for her new computer to very complex in troubleshooting a network load problem in a server farm for an Internet service provider. In the first example there is a straightforward solution to the problem in emailing the customer a copy of the driver. In the latter, the service process may be quite divergent, with the process being adapted based on the symptoms of the problem and the skill of the customer’s technical workforce. For a pure sales company like Amazon, the complexity and divergence would be much less. 6. What factors must be traded off in the product development process before introducing a new product? The factors that need careful attention for new products are product performance, development speed, product cost, and development program expense. Smith and Reinertsen identify six pairs of trade-offs in their book. These include all possible pairs among the four factors noted above. 7. Coca-Cola is a well-established consumer products company with a strong position in the global market. The sales of their core soda products have remained relatively stable for decades, yet the company has continued to grow and has remained extremely profitable. Discuss Coca-Cola’s history in light of the statement that “generating a steady stream of new products to market is extremely important to competitiveness.” Does Coca-Cola’s success disprove that statement? Is the company an exception to the rule or an example of its application? By growing into a global company, one could argue they have been introducing new products into markets they never served before, even though the products are not new to the company. They have also grown by acquisition of other drink companies and introduction of new drink products outside of their core soda business. As the products are not subject to great innovation or technological advances, Coca-Cola has needed to expand their product lines and global reach to continue to grow. Objective Questions 1. Which phase of the generic development process involves construction and evaluation of multiple preproduction versions of the product? Testing and refinement 2. A process that emphasizes cross-functional integration and concurrent development of a product and its associated processes is known as _________________________. Concurrent engineering 3. Match the following product types to the appropriate product development description. Entail unusually large uncertainties about the technology or market. The B Technology-push products A: development process takes steps to address those uncertainties. A firm with a new proprietary technology seeks out a market where that E Platform products B: technology can be applied. Uses a repeated prototyping cycle. Results from one cycle are used to modify D Process-intensive products C: priorities in the ensuing cycle. The production process has an impact on the product properties. Therefore, A High-risk products D: product design and process design cannot be separated. Products are designed and built around a preexisting technological C Quick-build products E: subsystem. 4. Designing products for aesthetics and with the user in mind is generally called what? Industrial design 5. The first step in developing a house of quality is to develop a list of ______________________. customer requirements for the product 6. The purpose of value analysis/value engineering is to _________________________________. simplify products and processes 7. What is it about service processes that makes their design and operation so different from manufacturing processes? Direct customer involvement in the process 8. What are the three general factors that determine the fit of a new or revised service process? Service experience fit, operational fit, and financial impact. 9. Measures of product development success can be organized in what three categories? Time to market, productivity, quality. 10. Tuff Wheels Kiddy Dozer a. Base case Project Schedule Year 1 Year 2 Year 3 Year 4 Kiddy Dozer Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Development 333 333 333 Pilot Testing 100 100 Ramp-up 200 200 Marketing and Support 38 38 38 38 38 38 38 38 38 38 38 38 38 Production Volume 15 15 15 15 15 15 15 15 15 15 15 15 Unit Production Cost 100 100 100 100 100 100 100 100 100 100 100 100 Production Costs 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 Sales Volume 15 15 15 15 15 15 15 15 15 15 15 15 Unit Price 170 170 170 170 170 170 170 170 170 170 170 170 Sales Revenue 2550 2550 2550 2550 2550 2550 2550 2550 2550 2550 2550 2550 Period Cash Flow -333 -333 -633 -338 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 PV Year 1 r = 8 -333 -327 -609 -318 935 917 899 881 864 847 831 814 798 783 767 752 Project NPV 8503 b. The results are shown below for both scenarios. If sales are only 50,000 then the project is still worthwhile since the NPV decrease to $6,759,000. If Tuff Wheels has under estimated the sales and it ends up being 70,000 per year then NPV will increase from $8,503,000 base case to $10,247,000 with the higher sales rate. Sales Revised to 50,000 per Year Project Schedule Year 1 Year 2 Year 3 Year 4 Kiddy Dozer Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Development 333 333 333 Pilot Testing 100 100 Ramp-up 200 200 Marketing and Support 38 38 38 38 38 38 38 38 38 38 38 38 38 Production Volume 13 13 13 13 13 13 13 13 13 13 13 13 Unit Production Cost 100 100 100 100 100 100 100 100 100 100 100 100 Production Costs 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 Sales Volume 13 13 13 13 13 13 13 13 13 13 13 13 Unit Price 170 170 170 170 170 170 170 170 170 170 170 170 Sales Revenue 2125 2125 2125 2125 2125 2125 2125 2125 2125 2125 2125 2125 Period Cash Flow -333 -333 -633 -338 838 838 838 838 838 838 838 838 838 838 838 838 PV Year 1 r = 8 -333 -327 -609 -318 774 759 744 729 715 701 687 674 660 647 635 622 Project NPV 6759 Sales Revised to 70,000 per Year Project Schedule Year 1 Year 2 Year 3 Year 4 Kiddy Dozer Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Development 333 333 333 Pilot Testing 100 100 Ramp-up 200 200 Marketing and Support 38 38 38 38 38 38 38 38 38 38 38 38 38 Production Volume 18 18 18 18 18 18 18 18 18 18 18 18 Unit Production Cost 100 100 100 100 100 100 100 100 100 100 100 100 Production Costs 1750 1750 1750 1750 1750 1750 1750 1750 1750 1750 1750 1750 Sales Volume 18 18 18 18 18 18 18 18 18 18 18 18 Unit Price 170 170 170 170 170 170 170 170 170 170 170 170 Sales Revenue 2975 2975 2975 2975 2975 2975 2975 2975 2975 2975 2975 2975 Period Cash Flow -333 -333 -633 -338 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 PV Year 1 r = 8 -333 -327 -609 -318 1097 1076 1054 1034 1014 994 974 955 936 918 900 882 Project NPV 10247 c. The impact of changing the interest rate is shown below. There is still a positive NPV but it shrinks the interest rate increases. This would be expected since a higher the interest rate reduces the present value of future cash flows. Base Case 8% $8,503,043 9% $8,283,241 10% $8,069,666 11% $7,862,116 11. Perot Corporation Patay2 Chip. a. In the base case the Patay2 Chip Project has a very good NPV of $10,460,000, see below. Project Schedule Year 1 Year 2 Year 3 Year 4 Patay2 Chip 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half Development Cost 5,000 5,000 5,000 5,000 Pilot Testing Cost 2,500 2,500 Debug Cost 1,500 1,500 Ramp-up Cost 3,000 Advance Marketing Cost 5,000 Ongoing Marketing and Support 500 500 500 500 Production Volume 125 125 75 75 Unit Production Cost 655 655 545 545 Production Costs 81,875 81,875 40,875 40,875 Sales Volume 125 125 75 75 Unit Price 820 820 650 650 Sales Revenue 102,500 102,500 48,750 48,750 Period Cash Flow -5,000 -5,000 -9,000 -17,000 20,125 20,125 7,375 7,375 PV Year 1 r = 12 -5,000 -4,762 -8,163 -14,685 16,557 15,768 5,503 5,241 Project NPV 10,460 b. Additional 10 million for higher price is clearly worthwhile as it raises the NPV from $10.46 million to $16.654 million. See results below. Project Schedule Year 1 Year 2 Year 3 Year 4 Patay2 Chip 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half Development Cost 7,500 7,500 7,500 7,500 Pilot Testing Cost 2,500 2,500 Debug Cost 1,500 1,500 Ramp-up Cost 3,000 Advance Marketing Cost 5,000 Ongoing Marketing and Support 500 500 500 500 Production Volume 125 125 75 75 Unit Production Cost 655 655 545 545 Production Costs 81,875 81,875 40,875 40,875 Sales Volume 125 125 75 75 Unit Price 870 870 700 700 Sales Revenue 108,750 108,750 52,500 52,500 Period Cash Flow -7,500 -7,500 -11,500 -19,500 26,375 26,375 11,125 11,125 PV Year 1 r = 12 -7,500 -7,143 -10,431 -16,845 21,699 20,666 8,302 7,906 Project NPV 16,654 c. Reduced sales estimates have a significant impact on the NPV. It reduces the NPV all the way down to $10,000. The success of the Patay2 Chip is very dependent on the sales estimates. It would be wise for Perot to make sure that there is sufficient demand for Patay2 Chips. Project Schedule Year 1 Year 2 Year 3 Year 4 Patay2 Chip 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half Development Cost 5,000 5,000 5,000 5,000 Pilot Testing Cost 2,500 2,500 Debug Cost 1,500 1,500 Ramp-up Cost 3,000 Advance Marketing Cost 5,000 Ongoing Marketing and Support 500 500 500 500 Production Volume 100 100 50 50 Unit Production Cost 655 655 545 545 Production Costs 65,500 65,500 27,250 27,250 Sales Volume 100 100 50 50 Unit Price 820 820 650 650 Sales Revenue 82,000 82,000 32,500 32,500 Period Cash Flow -5,000 -5,000 -9,000 -17,000 16,000 16,000 4,750 4,750 PV Year 1 r = 12 -5,000 -4,762 -8,163 -14,685 13,163 12,536 3,545 3,376 Project NPV 10 12. Answers will vary based upon the product selected and the student. Issues that should be considered in the design and manufacture of a product include design process (traditional vs. concurrent engineering), customer needs and expectations, legal considerations (EPA, OSHA, etc.), service life, reliability, appearance, standardization, any industry standards that should be considered (e.g., television set and the type of signal received from stations), method of shipment, material cost and availability, stage of the product life cycle, design for manufacturability, design for assembly, packaging, environmental, unit cost, pricing, availability of purchased material, availability of capacity, availability of subcontractors, setup cost, manufacturing time, volume, and expected product life. 13. Answers may vary. Following is just one possible result. CASE: IKEA: Design and Pricing Questions: 1. What are IKEA”s competitive priorities? Probably the key priority is maximizing value to the customer in each product offered through their stores. Low cost is certainly a major priority as well. 2. Describe IKEA’s process for developing a new product. This is described in the case: (1) Pick a price, (2) Choose a manufacturer, (3) Design the product, (5) Ship it. The key here is to recognize that they pick a price point early in the product development process and then work with a manufacturer to ensure they can meet this price point. This is a very innovative approach to product design. 3. What are additional features of the IKEA concept (beyond their design process) that contribute to creating exceptional value for the customer? Customer can easily view the product in a setting similar to theirs (i.e. apartments) in the IKEA store. Also, the product can be easily brought home by the customer eliminating delivery and setup charges. This creates more value in the product by eliminating these costs. 4. What would be important criteria for selecting a site for an IKEA store? Need to be located in a high density area where many people live in smaller apartments where space is a premium. The IKEA products really appeal to young, affluent customers. CASE: Dental Spa Questions: 1. Which one of the three new service requirements would a dental spa least likely pass: service experience fit, operational fit, or financial impact? Why? The dental spa is least likely to have operational fit because new personnel must be hired and the layout of current operations must be changed in order to offer this new service. Although service experience fit might seem logical, distracting the patient from possible pain would improve the service experience of the core service, dentistry. Often the services are given away. Dental Associates must “buy in” to the new services and see the obvious patient comfort benefits to the dental business and experience. 2. What are some of the main areas of complexity and divergence in this kind of operation relative to the standard dental clinic? Complexity: By providing two services at once, the complexity is automatically increased. For example, if cleaning teeth requires two steps and a hand massage requires one, then together the new service at the dental spa would take three steps. Besides just being a combination of two services normally provided separately, timing or coordination issues could add extra steps to this new process. However some steps, such as billing, would be combined in comparison to two services and it might be simple addition (often these services are free and do not affect billing). Divergence: Any customer service that can possibly inflict pain, such as a visit to a dentist, requires a large degree of judgment on the part of the service provider of how best to deal with a painful situation. For example, some patients need empathy. Almost completely opposite, a visit to a spa can be like going to a psychiatrist as a customer tells their problems as they are getting their manicure. This allows for divergence as a customer service provider must decide how to react to hearing all of the issues in someone’s life. However, being at the dentist would limit this verbal interaction much like a dentist who only asks questions when he has instruments in the patients mouth preventing a real answer. Solution Manual for Operations and Supply Chain Management F. Robert Jacobs, Richard B. Chase 9780078024023, 9780077824921, 9781260238907, 9780077228934, 9781259666100
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