Richard L. Daft - Management. 9th ed., 2010

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PART 6 CONTROLLING570

management and control. First, we de ne operations management and supply chain

management, consider speci c operational design issues, such as facilities layout and

the use of technology in the production system, and take a close look at inventory man-

agement. The second part of the chapter explores the application of information tech-

nology, including management information and enterprise resource planning systems,

use of the Internet, and strategies for e-business.

THE ORGANIZATION AS A VALUE CHAIN

In Chapter 1, the organization was described as a system used for transforming inputs

into outputs. At the center of this transformation process is the technical core, which is

the heart of the organization’s production of its product or service.

In an automobile

company, the technical core includes the plants that manufacture automobiles. In a uni-

versity, the technical core includes the academic activities of teaching and research.

As illustrated in Exhibit 19.1, the organization can be thought of as a value chain

that receives inputs from the environment, such as raw materials and other resources,

and adds value by transforming them into products and services for customers. Inputs

into the technical core typically include materials and equipment, human resources,

land and buildings, and information. Outputs from the technical core are the goods

and services produced by the organization and sold or provided to customers and

clients. Operations strategy and control feedback shape the quality of outputs and

the ef ciency of operations within the technical core.

The topic of operations management pertains to the day-to-day management

of the technical core, as illustrated in Exhibit 19.1, including acquiring inputs,

transforming them, and distributing outputs. Operations management is formally

de ned as the  eld of management that specializes in the production of goods and

services and uses special tools and techniques for solving production problems.

In essence, operations managers are concerned with all the activities involved in

converting inputs into outputs, including decisions about matters such as how and

where to obtain raw materials, where to locate facilities and what equipment to

install in them, and how to get products or services to customers. For example,

PepsiCo has gotten into the farming business to get the raw materials it needs to

build its snack foods business in emerging markets. Sales of Western-style snack

foods are growing fast in China and other developing countries, and Pepsi wants

to be the global leader. However, getting the tens of millions of potatoes needed to

EXHIBIT 19.1 The Organization As a Value Chain

tec

hni

e or

’

s pr

its product or service

perat

ons mana

emen

ﬁ

management t

cuses on the physical produc

on of

oods or services and

ses specialized techniques

solvin

manufacturin

pro

ems

CHAPTER 19 MANAGING THE VALUE CHAIN, INFORMATION TECHNOLOGY, AND E-BUSINESS 571

Controlling

serve the Chinese market alone turned out to be a major problem. Today, Pepsi is

the largest private potato grower in China and also has potato programs in Russia,

South Africa, and Poland.

Pepsi’s operations managers also have to consider the

best location to manufacture snack foods for global markets, how to get raw mate-

rials to manufacturing facilities, and how to ef ciently produce products and get

them onto store shelves.

Manufacturing and Service Operations

Although terms such as production and operations seem to imply manu-

facturing, operations management applies to service organizations as

well. The service sector has increased three times as fast as the manu-

facturing sector in the North American economy. More than half of all

businesses in the United States are service organizations and two-thirds

of the U.S. workforce is employed in services, such as hospitals, hotels

and resorts, retail,  nancial services, information services, or telecom-

munications  rms. Exhibit 19.2 shows differences between manufactur-

ing and service organizations.

Manufacturing organizations are those that produce physical goods,

such as cars, video games, television sets, or golf balls. In contrast,

service organizations produce nonphysical outputs, such as medical,

educational, communication, or transportation services for customers.

Doctors, consultants, online auction companies, and the local barber all

provide services. Services also include the sale of merchandise. Although

merchandise is a physical good, the service company does not manufac-

ture it but merely sells it as a service to the customer.

Services differ from manufactured products in two ways. First, the

service customer is involved in the actual production process.

The

patient actually visits the doctor to receive the service, and it’s dif cult to

imagine a hairstylist providing services without direct customer contact.

The same is true for airlines, restaurants, and banks. Second, manufac-

tured goods can be placed in inventory, whereas service outputs, being

intangible, cannot be stored. Manufactured products such as clothes,

food, cars, or iPods all can be put in warehouses and sold at a later date.

However, a hairstylist cannot wash, cut, and style hair in advance and

leave it on the shelf for the customer’s arrival, nor can a doctor place

examinations in inventory. The service must be created and provided for

the customer exactly when he or she wants it.

Despite the differences between manufacturing and service  rms,

they face similar operational problems. First, each kind of organization is

concerned with scheduling. A medical clinic must schedule appointments

A doctor’s ofﬁ ce

is a classic example of a service operation, but

Dr. Rita Beckford doesn’t limit her practice of

medicine to the clinic. Her mission is to empower

people everywhere to take control of their own

health. Beckford didn’t need anyone to tell her that

her post-pregnancy weight of 210 pounds put her

at risk for the diabetes that killed her grandmother.

So she shed more than 80 pounds, became a certi-

ﬁ ed ﬁ tness instructor, and offered her services to

medical clinics, community centers, and churches.

Beckford’s popular exercise routines became the

core of a DVD, Home with Dr. B., and she also offers

her services as a motivational speaker.

EXHIBIT 19.2

Differences Between

Manufacturing and Service

Organizations

Manufacturing Organizations Service Organizations

Produce physical goods

Goods inventoried for later consumption

Quality measured directly

Standardized output

Production process removed from consumer

Facilities site moderately important to

business success

Capital intensive

Examples:

Automobile manufacturers

Steel companies

Soft-drink companies

Produce nonphysical outputs

Simultaneous production and consumption

Quality perceived and difﬁ cult to measure

Customized output

Consumer participates in production process

Facilities site crucial to success of ﬁ rm

Labor intensive

Examples:

Airlines

Hotels

Law ﬁ rms

SOURCES: Based on Richard L. Daft, Organization Theory and Design (Cincinnati, OH: South-Western, 2005), p. 256; and Byron J.

Finch and Richard L. Luebbe, Operations Management (Fort Worth, TX: Dryden Press, 1995), p. 50.

man

ufacturing organiza

n or

anization that

duces

sical

erv

ce organ

zat

or-

anization that produces non

sical outputs that require

r inv

not be stored in invento

ry.

PART 6 CONTROLLING572

so that doctors’ and patients’ time will be used ef ciently. Second, both manufactur-

ing and service organizations must obtain materials and supplies. Third, both types of

organizations are concerned with quality and productivity. Because many operational

problems are similar, operations management tools and techniques can and should be

applied to service organizations as readily as they are to manufacturing operations.

As a new manager, think about your team as part of a value chain that receives inputs,

adds value, and provides outputs to customers or clients. Help your team implement

operations techniques to achieve superior customer responsiveness, innovation, quality,

and efﬁ ciency.

Supply Chain Management

To operate ef ciently, innovate, and produce high-quality items that meet custom-

ers’ needs, the organization must have reliable deliveries of high-quality, reasonably

priced supplies and materials. It also requires an ef cient and reliable system for

distributing  nished products, making them readily accessible to customers. Opera-

tions managers therefore recognize that they need to manage the entire supply chain.

Supply chain management is the term for managing the sequence of suppliers and

purchasers covering all stages of processing from obtaining raw materials to distrib-

uting  nished goods to  nal consumers.

The most recent advances in supply chain management involve using Inter-

net technologies to achieve the right balance of low inventory levels and customer

responsiveness. An e-supply chain creates a seamless, integrated link that stretches

from customers to suppliers by establishing electronic linkages between the organi-

zation and these external partners for the sharing and exchange of data.

Dell’s inte-

grated supply chain, illustrated in Exhibit 19.3 provides an excellent example.

TakeaMoment

Contract

manufacturers,

Original design

manufacturers

Hardware and

Software

Suppliers

Component

Suppliers

System

Integrators

Repair and

Support

Companies

Logistics

Companies

Distributors

Dell

Physical Flows Information Flows

Customer

EXHIBIT 19.3 Dell Computer’s Integrated Supply Chain

SOURCE: Jason Dedrick and Kenneth L. Kraemer, “The Impacts of IT on Firm and Industry Structure: The Personal Computer Industry,”

California Management Review 47, no. 3 (Spring 2005): 132. Used with permission.

sup

ply chain management

ana

the sequence of sup

liers and purchasers, coverin

l sta

es of processin

from

tainin

raw materia

s to

tri

uting

ﬁ

nis

goo

s to

ﬁ

ﬁn

ﬁ

consumers

CHAPTER 19 MANAGING THE VALUE CHAIN, INFORMATION TECHNOLOGY, AND E-BUSINESS 573

Controlling

Dell has struggled in recent years due to poor strategic decisions, but it thrived for decades

because managers found the most efﬁ cient way to make, sell, and deliver personal

computers.

Dell is electronically connected to suppliers, contract manufacturers, and distributors,

as shown in Exhibit 19.3, so that everyone along the supply chain has almost completely

transparent information about sales, orders, shipments, and other data. That means, for

instance, that suppliers have data about orders and production levels and know what parts

Dell’s factories are going to need and when they’ll need them. Distributors know when com-

puters will be ready for shipment and where they’ll be going. At the end of the supply chain,

Dell develops close connections to customers through a range of channels, including online

sales and services, call centers, and a direct sales force and technical personnel serving larger

customers. Dell’s role in the supply chain is to manage the electronic information ﬂ ows and

physical connections among suppliers, partners, and customers.

Despite Dell’s recent problems, AMR Research still ranks it as the third best-

performing supply chain in the world, with Apple ranked at number 1, Nokia at num-

ber 2, Wal-Mart at number 6, and the British supermarket chain Tesco at number 12.

Enterprise integration through the use of electronic linkages is creating a level

of cooperation not previously imaginable for many organizations. Supplier rela-

tionships used to be based on an arm’s-length approach, in which an organization

spreads purchases among many suppliers and encourages them to compete with

one another. With integration, more companies are opting for a partnership approach,

which involves cultivating intimate relationships with a few carefully selected sup-

pliers and collaborating closely to coordinate tasks that bene t both parties.

Integrating every company along the supply chain also means a quicker response

to end consumers by reducing the time it takes to move critical data through the

information pipeline. Manufacturers have immediate access to sales data and can

deliver new products, even custom orders, as needed. An integrated supply chain

enables managers at fashion chain Zara stores to order hot selling items and have

them in stock two days later.

Ford Motor Company has been undergoing a supply-

chain makeover intended to enable the company to manufacture cars on a reasonable

build-to-order basis, so that customers no longer have to wait months for delivery of

the car of their dreams.

Managing a supply chain means asserting inﬂ uence and gaining cooperation without

having formal authority over suppliers, which requires interpersonal and political skills.

Take the New Manager Self-Test on page 574 to learn about your political skills.

Dell Inc.

Innovative Way

TakeaMoment

FACILITIES LAYOUT

Another important consideration for operations management is planning the facili-

ties layout for producing goods or services. The four most common types of layout

are process, product, cellular, and  xed-position, shown in Exhibit 19.4.

Process Layout

As illustrated in Exhibit 19.4(a), a process layout in a manufacturing  rm is one in

which all machines that perform a similar function or task are grouped together. In a

machine shop, the lathes perform a similar function and are located together in one

section. The grinders are in another section of the shop. Service organizations also

use process layouts. In a bank, the loan of cers are in one area, the tellers in another,

and the managers in a third.

The advantage of the process layout is that it has the potential for economies of

scale and reduced costs. For example, having all painting done in one spray-painting

area means that fewer machines and people are required to paint all products for

pro

cess layou

ili

out in which machines that

for

sam

unc

tio

oup

tog

eth

one

ati

on.

PART 6 CONTROLLING574

Political Skills

How good are you at inﬂ uencing people horizon-

tally across an organization? To learn something

about your skills, answer the questions that fol-

low. Please answer whether each item that follows

is Mostly True or Mostly False for you.

Mostly

True

Mostly

False

1. I am able to communi-

cate easily and effectively

with others.

2. I spend a lot of time at

work developing connec-

tions with people out-

side my area.

3. I instinctively know the

right thing to say or do

to inﬂ uence others.

4. I am good at using my

connections outside my

area to get things done

at work.

5. When communicating

with others, I am abso-

lutely genuine in what I

say and do.

6. It is easy for me to reach

out to new people.

7. I make strangers feel

comfortable and at ease

around me.

8. I am good at sensing the

motivations and hidden

agendas of others.

SCORING AND INTERPRETATION: Give your-

self one point for each item marked as Mostly

True. A score of six or higher suggests active politi-

cal skills and a good start for your career as a new

manager. If you scored three or less, you may want

to focus more on building horizontal relationships

as you progress in your career.

Political skills help a new manager build

personal and organizational relationships that

enhance the team’s outcomes. New managers

often learn task and people skills ﬁ rst. Political

skills tend to be subtle and are typically mastered

after gaining management experience.

SOURCE: Adapted from Gerald R. Ferris, Darren C. Treadway,

Robert W. Kolodinsky, Wayne A. Hochwarter, Charles J. Kacmer,

Ceasar Douglas, and Dwight D. Frink, “Development and

Validation of the Political Skill Inventory, Journal of Management

31 (February 2005): 126–152.

New ManagerSelf-Test

the organization. In a bank, having all tellers located in one controlled area provides

increased security. Placing all operating rooms together in a hospital makes it pos-

sible to control the environment for all rooms simultaneously.

The drawback to the process layout, as illustrated in Exhibit 19.4(a), is that the

actual path a product or service takes can be long and complicated. A product may

need several different processes performed on it and thus must travel through many

different areas before production is complete.

Product Layout

Exhibit 19.4(b) illustrates a product layout—one in which machines and tasks are

arranged according to the progressive steps in producing a single product. The auto-

mobile assembly line is a classic example, because it produces a single product start-

ing from the raw materials to the  nished output. Many fast-food restaurants use the

pro

duct layout

aci

lit

ies

nes an

sks are arran

ed accordin

e sequence o

steps in t

uction o

a sing

e pro

uct.

CHAPTER 19 MANAGING THE VALUE CHAIN, INFORMATION TECHNOLOGY, AND E-BUSINESS 575

Controlling

product layout, with activities arranged in sequence to produce hamburgers or fried

chicken, depending on the products available.

The product layout is ef cient when the organization produces or provides huge

volumes of identical products or services. Note in Exhibit 19.4(b) that two lines have

paint areas. This duplication of functions can be economical only if the volume is

high enough to keep each paint area busy working on specialized products.

EXHIBIT 19.4

Basic Production Layouts

SOURCES: Based on J. T. Black, “Cellular Manufacturing Systems Reduce Setup Time, Make Small Lot

Production Economical,” Industrial Engineering (November 1983): 36–48; and Richard J. Schonberger, “Plant

Layout Becomes Product-Oriented with Cellular, Just-in-Time Production Concepts,” Industrial Engineering

(November 1983): 66–77.

PART 6 CONTROLLING576

Cellular Layout

Illustrated in Exhibit 19.4(c) is an innovative layout, called cellular layout, based

on group-technology principles. In a manufacturing plant, all machines dedicated

to sequences of operations are grouped into cells, as shown in the exhibit. In a ser-

vice organization, all the people who work on a process, such as insurance claims

processing, are organized into cells where they can see and easily communicate

with one another. Work  ows from one station to another, similar to materials

movement in the manufacturing plant.

Grouping technology into cells provides

some of the ef ciencies of both process and product layouts. Even more important,

the U-shaped cells in Exhibit 19.4(c) provide ef ciencies in material and tool han-

dling and inventory movement. Employees work in clusters that facilitate team-

work and joint problem solving. Staf ng  exibility is enhanced because people are

cross-trained so that each worker can perform all the tasks, assisting coworkers

as needed.

Fixed-Position Layout

As shown in Exhibit 19.4(d), the  xed-position layout is one in which the product

remains in one location, and employees and equipment are brought to it. The  xed-

position layout is used to create a product or service that is either large or one of a

kind. Product examples include aircraft, ships, and buildings. The product cannot be

moved from function to function or along an assembly line; rather, the people, mate-

rials, and machines all come to the  xed-position site for assembly and processing.

London-based Imagination Ltd., Europe’s largest independent design and communi-

cations agency, provides an interesting service example.

Imagination Ltd. has made a name for itself by producing highly theatrical and award-

winning events and programs. Consider the event staged for the launch of the Harry

Potter and the Prisoner of Azkaban DVD and video. Eight hundred guests were invited to

Middle Temple, an historic London building where Imagination employees had recreated

four movie sets, among them the Great Hall at the Hogwarts School of Witchcraft and

Wizardry.

Getting the décor right was a top priority, but Imagination’s employees faced a challenge

because Middle Temple is a working dining room during the week. They had to work outside

regular dining hours and keep everything top-secret, not so easy to do when you’re suspend-

ing 200 battery-powered candles from the ceiling and making arrangements to transport

Harry Potter himself to the party. The event, designed to attract international media for client

Warner Home Video, was a resounding success and generated more than $9.5 million worth

of free advertising.

example.

The  xed-position layout is not good for high volume, but it is often necessary

for large, bulky products, special events, and custom orders like the one-of-a-kind

launch of the Harry Potter and the Prisoner of Azkaban DVD. Many manufacturers are

adapting the  xed-position layout to speed up production. Boeing now builds many

of its planes on a type of moving assembly line, which cut in half the time it takes

to assemble a single-aisle 737. Airbus uses assembly stations, moving the plane only

from one major workstation to the next, with the idea that a glitch in one plane won’t

slow a whole production line.

TECHNOLOGY AUTOMATION

A goal for many of today’s operations managers is to  nd the right combination of

technology and management to most ef ciently produce goods and services. Let’s

look at three advances in manufacturing and service operations.

Imagination Ltd.

Innovative Way

cel

lular layout

aci

ities

out

ich

chi

nes

ica

ted

que

nce

roduction are

rouped into

lls in accordance with

roup

princip

es.

ﬁ

xed-position layou

cilities la

out in which the

roduct remains in one locatio

d the required tasks and

uipment are

rou

t to it

CHAPTER 19 MANAGING THE VALUE CHAIN, INFORMATION TECHNOLOGY, AND E-BUSINESS 577

Controlling

Radio-Frequency Identiﬁ cation (RFID)

Radio-frequency identi cation (RFID) uses electronic tags that can identify and track

individual items such as books, jugs of laundry detergent, automobiles, or even peo-

ple. One of the best-known uses of RFID is OnStar, which is a satellite-based RFID

system used in automobiles. RFID tags emit radio signals that can be read remotely

by electronic readers and pro-

vide precise, real-time infor-

mation about the location of

speci c items, whether it be a

Cadillac with a dead battery, a

misplaced book in a bookstore,

or a pallet of merchandise in a

warehouse.

Although RFID

is also used by manufacturing

 rms, the technology has revo-

lutionized services. The biggest

names in retail, including Wal-

Mart, Home Depot, Carrefour,

and Tesco, are taking advantage

of the new technology. Dutch

bookseller Selexyz tags every

book on its shelves with RFID,

which increases pro ts and cuts

costs since there’s no more tak-

ing inventory by hand, fewer

lost books, and fewer returns

to publishers.

The potential of

RFID for streamlining inventory

management and cutting costs

for retailers is enormous, which

has prompted many companies

to require that suppliers use the

new technology.

Other service  rms use RFID as well. New York’s E-Z Pass and California’s FasTrak

both use RFID to speed cars through toll booths, for example.

The U.S. Department

of Defense requires suppliers to use RFID on shipping pallets and cases, enabling

the military to easily track shipments of combat-support goods and other items.

Amusement parks put RFID wrist bands on children so they can be quickly located

if they get separated from their parents.

The technology might even ameliorate the

age-old problem of lost luggage, which is maddening for passengers and costly for

airlines. An RFID baggage-tagging system in use at the Las Vegas McCarran Interna-

tional Airport reduced lost luggage by about 20 percent, and bags that do go astray

are located more quickly.

Flexible Manufacturing Systems

Advanced technology has also revolutionized manufacturing. The use of automated

production lines that can be quickly adapted to produce more than one kind of prod-

uct is called a  exible manufacturing system.

The machinery uses sophisticated

computer technology to coordinate and integrate the machines. Automated func-

tions include loading, unloading, storing parts, changing tools, and machining. The

computer can instruct the machines to change parts, machining, and tools when a

new product must be produced. Human operators make adjustments to the com-

puter, not the production machinery itself, dramatically cutting the time and expense

of making changes. This approach is a breakthrough compared with the traditional

assembly line in which a single line is restricted to a single product. With a  exible

ﬂ

ﬂ e

xible manufacturing s

ys-

mal

edi

siz

oma

ted

odu

cti

lin

at can

e a

apte

to pro

mor

e t

an one

uct

ine

Because its manufactured goods are too large and cumbersome to move

along a traditional assembly line, Boeing Corporation typically uses a ﬁ xed-position layout. Products,

such as this 787 Dreamliner, remain in one location, and employees, components, and equipment are

brought to them for assembly. To increase speed and ﬂ exibility, Boeing has begun implementing a hybrid

system for some of its products. After the wings and landing gear have been attached, a plane such as

the 737 is dragged toward the door at two inches a minute, with workers moving along it on a ﬂ oat-like

apparatus. Boeing’s goal is to push a 737 out the door in only ﬁ ve days.

PART 6 CONTROLLING578

manufacturing system, a single production line can be read-

ily adapted to small batches of different products based on

computer instructions.

At the Nissan factory in Canton, Mississippi, for exam-

ple, minivans, pickup trucks, and sport utility vehicles can

all be sent down the same assembly line. Robotic arms on

machines are programmed to weld in the spots needed for

different vehicles. Highly automated painting machines are

programmed to paint all kinds of vehicles one after another,

with no down time for recon guration.

Many of Matsu-

shita Electric’s Factories did away with assembly lines alto-

gether in favor of clusters of robots controlled by software

that can quickly shift gears to make the hottest electronic

gadgets and ease up on slow sellers.

Lean Manufacturing

Lean manufacturing, sometimes called lean production, com-

bines advanced technology with innovative management

methods, using highly trained employees who take a pains-

taking approach to problem solving at every stage of the

production process to cut waste and improve quality and

productivity. Lean manufacturing was pioneered by Toyota,

and the concept has spread around the world to both manu-

facturing and service organizations.

Technology plays a key role in lean manufacturing. Companies make full use of

 exible manufacturing systems, and equipment is often designed to stop automati-

cally so that a defect can be  xed. However, the heart of the process is not machines

or technology, but people.

For example, Toyota’s operations are admired worldwide

as a model of quality and ef ciency, but this success is not merely a result of using the

right machines or setting the right standards. Toyota’s system combines techniques,

systems, and management philosophy, such as commitment to employee empower-

ment and a creative culture. Besides installing the methodology for running an ef -

cient assembly line, such as just-in-time shipments of supplies, managers must instill

the necessary attitudes, such as concern for quality and a desire to innovate.

INVENTORY MANAGEMENT

Inventory is the goods the organization keeps on hand for use in the production

process. Most organizations have three types of inventory:  nished goods prior to

shipment, work in process, and raw materials.

Finished-goods inventory includes items that have passed through the entire

production process but have not been sold. This inventory is highly visible. The new

cars parked in the storage lot of an automobile factory are  nished-goods inventory,

as are the hamburgers and french fries stacked under the heat lamps at a McDonald’s

restaurant. Finished-goods inventory is expensive, because the organization has

invested labor and other costs to make the  nished product.

Work-in-process inventory includes the materials moving through the stages of

the production process that are not completed products. Work-in-process inventory

in an automobile plant includes engines, wheel and tire assemblies, and dashboards

waiting to be installed. In a fast-food restaurant, the french fries in the fryer and ham-

burgers on the grill are work-in-process inventory.

Raw materials inventory includes the basic inputs to the organization’s production

process. This inventory is cheapest, because the organization has not yet invested labor in

it. Steel, wire, glass, and paint are raw materials inventory for an auto plant. Meat patties,

buns, and raw potatoes are the raw materials inventory in a fast-food restaurant.

lea

n manufacturin

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turin

process usin

ine

mpl

oye

eve

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ces

cut

ste

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ove

lit

nventor

The

oods that th

anization keeps on hand fo

se in the production process

p to t

e point o

ﬁ

pro

ucts to customers

ﬁ

nished-goods inventory

ventor

consistin

of items

at have passed throu

h the

ete pro

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ave yet to

e so

ork-in-process inventor

ventor

composed of the

aterials that still are movin

rou

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aw materials inventory

ventor

consistin

of the bas

puts to the or

anization’s

uction process

At its East Liberty, Ohio, facility,

Honda can shift within minutes from making a Ridgeline truck to

making the subcompact Civic. A ﬂ exible manufacturing system

enables this quick-changeover and lets Honda build the Civic

Sedan, Civic GX (natural gas powered), Element, Honda CR-V,

and Ridgeline truck on the same assembly line with little disrup-

tion. As part of the system, the factory has 200-plus robots for

welding, which can be quickly reprogrammed by an operator as

they shift from one model to another. This ﬂ exibility helps Honda

respond faster than competitors to changing consumer interests

as gas prices ﬂ uctuate.

CHAPTER 19 MANAGING THE VALUE CHAIN, INFORMATION TECHNOLOGY, AND E-BUSINESS 579

Controlling

The Importance of Inventory

Inventory management is vitally important to organizations, because inventory sit-

ting idly on the shop  oor or in the warehouse costs money. Many years ago, a  rm’s

wealth was measured by its inventory. Today inventory is recognized as an unpro-

ductive asset in cost-conscious  rms. Dollars not tied up in inventory can be used in

other productive ventures. Keeping inventory low is especially important for high-

tech  rms, because so many of their products lose value quickly as they are replaced

by more innovative and lower-cost models. For example, the value of a completed

personal computer falls rapidly; even if shelf space for PCs were free, a company

would lose money on its PC inventory.

Service  rms are concerned with inventory

too, which is a big part of the reason for the growth of RFID, as described earlier.

The Japanese analogy of rocks and water describes the current thinking about the

importance of inventory.

As illustrated in Exhibit 19.5, the water is the inventory in

the organization. The higher the water, the less managers have to worry about the

rocks, which represent problems. In operations management, these problems apply

to scheduling, facilities layout, or quality. When the water level goes down, managers

see the rocks and must deal with them. When inventories are reduced, the problems

of a poorly designed and managed operations process also are revealed. The prob-

lems then must be solved. When inventory can be kept at an absolute minimum,

operations management is considered excellent.

As a new manager, recognize the importance of inventory management. Consider a just-

in-time inventory system to enhance productivity and efﬁ ciency. Go to the experiential

exercise on page 590 to gain some insight into your personal orientation toward

productivity improvements.

Just-in-Time Inventory

Just-in-time (JIT) inventory systems are designed to reduce the level of an organiza-

tion’s inventory and its associated costs, aiming to push to zero the amount of time

that raw materials and  nished products are sitting in the factory, being inspected, or

in transit.

Sometimes these systems are referred to as stockless systems, zero inventory

systems, or kanban systems. Each system centers on the concept that suppliers deliver

materials only at the exact moment needed, thereby reducing raw material inventories

to zero. Moreover, work-in-process inventories are kept to a minimum because goods

are produced only as needed to service the next stage of production. Finished-goods

inventories are minimized by matching them exactly to sales demand. Just-in-time sys-

tems have tremendous advantages. Reduced inventory level frees productive capital

for other company uses. In addition, JIT plays a crucial role in enhancing  exibility. A

study of manufacturing  rms in seven countries found that those that were performing

better in terms of  exibility ranked just-in-time as one of their top two improvement

initiatives, along with total quality management, as de ned in the previous chapter.

TakeaMoment

EXHIBIT 19.5 Large Inventories Hide Operations Management Problems

SOURCE: Based on R. J. Schonberger, Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity (New York: Free Press, 1982).

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