Chapter 1:
What is operations and supply chain management?
Operations and supply chain management (OSCM): The design, operation, and improvement of the
systems that create and deliver the firm’s primary products and services.
OSCM is concerned with the management of the entire system that produces a product or delivers a
service.
Success in today’s global markets requires a business strategy that matches the preferences of
customers with the realities imposed by complex supply networks. A sustainable strategy that meets
the needs of shareholders and employees and preserves the environment
is critical.
Operations refers to manufactur- ing and service processes that are used to transform the resources
employed by a firm into products desired by customers.
Supply chain refers to processes that move information and material to and from the manufacturing and
service processes of the firm. These include the logistics processes that physically move products, as
well as the warehousing and storage processes that position products for quick delivery to the
customer.
Process: One or more activities that transform inputs into outputs.
1. Planning consists of the processes needed to operate an existing supply chain strategically.
Here, a firm must determine how anticipated demand will be met with available resources.
a. developing a set of metrics to monitor the supply chain so that it is efficient and delivers
high quality and value to customers
2. Sourcing involves the selection of suppliers that will deliver the goods and services needed to
create the firm’s product.
a. A set of pricing, delivery, and payment processes are needed together with metrics for
monitoring and improving the relationships between partners of the firm
b. receiving shipments, verifying them, transferring them to manufacturing facilities, and
authorizing supplier payments
3. Making is where the major product is produced or the service is provided.
a. scheduling processes for workers and coordinating material and other critical resources
such as the equipment to support producing or providing the service
b. Metrics that measure speed, quality, and worker productivity are used to monitor these
processes.
4. Delivering is a logistics process.
a. Carriers are picked to move products to warehouses and customers, coordinate and
schedule the movement of goods and information through the supply network, develop
and operate a network of warehouses, and run the information systems that manage the
receipt of orders from customers and the invoicing systems that collect payments from
customers.
5. Returning involves processes for receiving worn-out, defective, and excess prod-ucts back from
customers and support for customers who have problems with delivered products.
a. May involve all types of follow-up activities that are required for after-sales support
1
,Difference between services and goods:
Service Goods
Intangible process that cannot be weighed Tangible output of a process that has
or measured physical dimensions
Requires some degree of interaction with Generally produced in a facility separate
the customer for it to be a service from the customer
Inherently heterogeneous—they vary from Very tight specifications day-in and day-out
day to day and even hour by hour as a with essentially zero variability
function of the attitudes of the customers
and the servers
-> unpredictable outcomes
Perishable and time dependent and can’t Can be stored
be stored.
A package of features that affect the five
senses
The Goods-Service Continuum:
Almost any product offering is a combination of goods and services
● Pure Goods: have become low-margin commodity businesses, and in order to differentiate, they
are often adding some services
● Core Goods: already provide a significant service component as part of their businesses
● Core Services: providers must integrate tangible goods
● Pure Services: may need little in the way of facilitating goods
Product-Service Bundling: When a firm builds service activities into its product offerings to create
additional value for the customers
-> Such services include maintenance, spare part provisioning, training, and in some cases, total
systems design and R&D
Efficiency: Doing something at the lowest possible cost / using the smallest input of resources
(material, labor, equipment, and facilities)
Effectiveness: Doing the right things to create the most value for the customer
!Often maximizing effectiveness and efficiency at the same time creates conflict between the two goals!
Value: The attractiveness of a product relative to its price (quality divided by price)
-> how smart manage- ment can achieve high levels of value
How does Wall Street evaluate efficiency?
The relative cost of providing a good or service is essential to high earnings growth. Earnings growth is
largely a function of the firm’s profitability, and profit can be increased through higher sales and/or
reduced cost.
2
, Highly efficient firms usually shine when demand drops during recession periods since they often can
continue to make a profit due to their low-cost structure. These operations-savvy firms may even see a
recession as an opportunity to gain market share as their less-efficient competitors struggle to remain
in business.
The cost of raw materials affects the values through- out the supply chain, including the cost of goods
sold, inventory value, and total value of assets
Benchmarking: When one company studies the processes of another company to identify best
practices
Cash conversion cycle
Company buys raw materials on credit, converts these materials into finished products, sells the
products to customers on credit, gets paid by customers in cash, and then reuses the cash to purchase
more raw materials
-> the quicker the cycle, the better for the company
Days sales outstanding is the number of days that it takes for a company to collect cash from
customers.
Days inventory is the number of days’ worth of inventory the company holds in opera- tion and supply
chain processes.
Payables period measure indicates how quickly suppliers are paid by a company.
Cash conversion cycle = Days sales outstanding + Days inventory − Payable period
-> the time it takes a company to convert the money that it spends for raw materials into the profit that it
receives for the products that are sold and use those raw materials
Receivables turnover measures the number of times receivables are collected, on aver- age, during
the fiscal year.
Receivables turnover = Annual credit sales / Average accounts receivable
Higher receivables ratio Low receivable ratio
● The company operates on a ● Collection of cash takes longer
cash basis or that its extension ● The business needs to improve its credit
of credit and collection methods policies and collection procedures
are efficient ● The lower the ratio, the longer
● Reflects a short lapse of time receivables are being held and the
between sales and the collection higher the risk of them not being
of cash collected
3
What is operations and supply chain management?
Operations and supply chain management (OSCM): The design, operation, and improvement of the
systems that create and deliver the firm’s primary products and services.
OSCM is concerned with the management of the entire system that produces a product or delivers a
service.
Success in today’s global markets requires a business strategy that matches the preferences of
customers with the realities imposed by complex supply networks. A sustainable strategy that meets
the needs of shareholders and employees and preserves the environment
is critical.
Operations refers to manufactur- ing and service processes that are used to transform the resources
employed by a firm into products desired by customers.
Supply chain refers to processes that move information and material to and from the manufacturing and
service processes of the firm. These include the logistics processes that physically move products, as
well as the warehousing and storage processes that position products for quick delivery to the
customer.
Process: One or more activities that transform inputs into outputs.
1. Planning consists of the processes needed to operate an existing supply chain strategically.
Here, a firm must determine how anticipated demand will be met with available resources.
a. developing a set of metrics to monitor the supply chain so that it is efficient and delivers
high quality and value to customers
2. Sourcing involves the selection of suppliers that will deliver the goods and services needed to
create the firm’s product.
a. A set of pricing, delivery, and payment processes are needed together with metrics for
monitoring and improving the relationships between partners of the firm
b. receiving shipments, verifying them, transferring them to manufacturing facilities, and
authorizing supplier payments
3. Making is where the major product is produced or the service is provided.
a. scheduling processes for workers and coordinating material and other critical resources
such as the equipment to support producing or providing the service
b. Metrics that measure speed, quality, and worker productivity are used to monitor these
processes.
4. Delivering is a logistics process.
a. Carriers are picked to move products to warehouses and customers, coordinate and
schedule the movement of goods and information through the supply network, develop
and operate a network of warehouses, and run the information systems that manage the
receipt of orders from customers and the invoicing systems that collect payments from
customers.
5. Returning involves processes for receiving worn-out, defective, and excess prod-ucts back from
customers and support for customers who have problems with delivered products.
a. May involve all types of follow-up activities that are required for after-sales support
1
,Difference between services and goods:
Service Goods
Intangible process that cannot be weighed Tangible output of a process that has
or measured physical dimensions
Requires some degree of interaction with Generally produced in a facility separate
the customer for it to be a service from the customer
Inherently heterogeneous—they vary from Very tight specifications day-in and day-out
day to day and even hour by hour as a with essentially zero variability
function of the attitudes of the customers
and the servers
-> unpredictable outcomes
Perishable and time dependent and can’t Can be stored
be stored.
A package of features that affect the five
senses
The Goods-Service Continuum:
Almost any product offering is a combination of goods and services
● Pure Goods: have become low-margin commodity businesses, and in order to differentiate, they
are often adding some services
● Core Goods: already provide a significant service component as part of their businesses
● Core Services: providers must integrate tangible goods
● Pure Services: may need little in the way of facilitating goods
Product-Service Bundling: When a firm builds service activities into its product offerings to create
additional value for the customers
-> Such services include maintenance, spare part provisioning, training, and in some cases, total
systems design and R&D
Efficiency: Doing something at the lowest possible cost / using the smallest input of resources
(material, labor, equipment, and facilities)
Effectiveness: Doing the right things to create the most value for the customer
!Often maximizing effectiveness and efficiency at the same time creates conflict between the two goals!
Value: The attractiveness of a product relative to its price (quality divided by price)
-> how smart manage- ment can achieve high levels of value
How does Wall Street evaluate efficiency?
The relative cost of providing a good or service is essential to high earnings growth. Earnings growth is
largely a function of the firm’s profitability, and profit can be increased through higher sales and/or
reduced cost.
2
, Highly efficient firms usually shine when demand drops during recession periods since they often can
continue to make a profit due to their low-cost structure. These operations-savvy firms may even see a
recession as an opportunity to gain market share as their less-efficient competitors struggle to remain
in business.
The cost of raw materials affects the values through- out the supply chain, including the cost of goods
sold, inventory value, and total value of assets
Benchmarking: When one company studies the processes of another company to identify best
practices
Cash conversion cycle
Company buys raw materials on credit, converts these materials into finished products, sells the
products to customers on credit, gets paid by customers in cash, and then reuses the cash to purchase
more raw materials
-> the quicker the cycle, the better for the company
Days sales outstanding is the number of days that it takes for a company to collect cash from
customers.
Days inventory is the number of days’ worth of inventory the company holds in opera- tion and supply
chain processes.
Payables period measure indicates how quickly suppliers are paid by a company.
Cash conversion cycle = Days sales outstanding + Days inventory − Payable period
-> the time it takes a company to convert the money that it spends for raw materials into the profit that it
receives for the products that are sold and use those raw materials
Receivables turnover measures the number of times receivables are collected, on aver- age, during
the fiscal year.
Receivables turnover = Annual credit sales / Average accounts receivable
Higher receivables ratio Low receivable ratio
● The company operates on a ● Collection of cash takes longer
cash basis or that its extension ● The business needs to improve its credit
of credit and collection methods policies and collection procedures
are efficient ● The lower the ratio, the longer
● Reflects a short lapse of time receivables are being held and the
between sales and the collection higher the risk of them not being
of cash collected
3
