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GOODS, SERVICES, AND OPERATIONS MANAGEMENT. CHAPTER 1. DAVID A. COLLIER AND JAMES R. EVANS. 1-1 Explain the concept and importance of operations management. 1-2 Describe what operations managers do. 1-3 Explain the differences between goods and services.

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1-1 Explain the concept and importance of operations management.

1-2Describe what operations managers do.

1-3Explain the differences between goods and services.

1-4Describe a customer benefit package.

1-5Explain the role of processes in OM and identify three general types of processes.

1-6Summarize the historical development of OM.

1-7Describe current challenges facing OM.


“iwant to be a director of a museum like this one day,” Carol said to her mom as they walked through Chicago’s Museum of Science and Industry. Carol’s family had just finished a tour of the 1944 German submarine known as the U-505 that was captured during WWII. They had spent the day learning about coal mines, the science of the human body, Dr. Seuss, and much more. As they walked past the museum offices, Carol noticed a directory of eight departments:

  • Business Operations
  • Facilities
  • Food Service
  • Exhibit Maintenance
  • Guest Call Center
  • Guest Operations
  • Information Services
  • Protective Services 
  • She asked, “Dad, why does a museum need all these? All I really see are the exhibits!”
  • .

What do youthink?

Can you provide examples of the type of work activities and decisions that are made in each of these eight departments at the Chicago Museum of Science and Industry?


Operations management (OM) is the science and art of ensuring that goods and services are created and delivered successfully to customers.

    • Design of goods, services, and the processes that create them.
    • Day-to-day management of those processes.
    • Continual improvement of these goods, services, and processes.

What Do Operations Managers Do?

  • Forecasting
  • Supply chain management
  • Facility layout and design
  • Technology selection
  • Quality management
  • Purchasing
  • Resource and capacity management
  • Process design
  • Job design
  • Service encounter design
  • Scheduling
  • Sustainability

United Performance Metals: The Life of an Operations Manager

  • United Performance Metals (UPM), located in Hamilton, Ohio, is a supplier of stainless steel and high temperature alloys for the specialty metal market.
  • UPM’s primary production operations include slitting coil stock and cutting sheet steel to customer specifications with rapid turnaround times from order to delivery.

United Performance Metals: The Life of an Operations Manager

  • The Director of Operations and Quality is involved in a variety of daily activities that draw upon knowledge of not only OM and engineering, but also finance, accounting, organizational behavior, and other subjects.
  • While understanding specialty metals is certainly a vital part of the Director’s job, the ability to understand customer needs, apply approaches to continuous improvement, understand and motivate people, work cross-functionally across the business, and integrate processes and technology within the value chain define the job of an Operations Manager.

OM in the Workplace

  • Operations Managers have such titles as:
  • Chief Operating Officer
  • Hotel or Restaurant Manager
  • Vice President of Manufacturing
  • Customer Service Manager
  • Plant Manager
  • Field Services Manager
  • Supply Chain Manager

OM in the Workplace

Shelly Decker, an accounting and information systems major in college, and her sister created an entrepreneurial venture to manufacture and sell natural soaps and body products.


OM in the Workplace

  • Shelly uses OM skills every day:
  • Process design – When a new product is to be introduced, the best way to produce it must be determined.  This involves charting the detailed steps needed to make the product. 
  • Inventory management – Inventory is tightly controlled to keep costs down and to avoid production that isn't needed.  Inventory is taken every four weeks and adjusted in the inventory management system accordingly. 

OM in the Workplace

  • Scheduling – Production schedules are created to ensure that enough product is available for both retail and wholesale customers, taking into account such factors as current inventory and soap production capacity. 
  • Quality management – Each product is inspected and must conform to the highest quality standards. If a product does not conform to standard (for example, wrong color, improper packaging, improper labeling, improper weight, size, or shape), then it is removed from inventory to determine where the process broke down and to initiate corrective action.

OM in the Workplace

Brooke Wilson is a Process Manager for J.P. Morgan Chase in the Credit Card Division. He was an accounting major in college. Among his OM-related activities are:

  • Planning and budgeting: Representing the plastic card production area in all meetings, developing annual budgets and staffing plans, and watching technology that might affect the production of plastic credit cards.
  • Inventory management: Overseeing the management of inventory for items such as plastic blank cards, inserts such as advertisements, envelopes, postage, and credit card rules and disclosure inserts.

OM in the Workplace

    • Scheduling and capacity: Daily to annual scheduling of all resources (equipment, people, inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replacing old or damaged cards, and ones that are stolen.
    • Quality: Embossing the card with accurate customer information and quickly getting the card in the hands of the customer.

Understanding Goods and Services

  • A goodis a physical product that you can see, touch, or possibly consume. Examples of goods include: oranges, flowers, televisions, soap, airplanes, fish, furniture, coal, lumber, personal computers, paper, and industrial machines.
  • A durable goodis a product that typically lasts at least three years. Vehicles, dishwashers, and furniture are some examples of durable goods.

Understanding Goods and Services

  • A non-durable good is perishable and generally lasts for less than three years. Examples are toothpaste, software, shoes, and fruit.
  • A service is any primary or complementary activity that does not directly produce a physical product.

Similarities Between Goods and Services

  • Goods and services provide value and satisfaction to customers who purchase and use them.
  • They both can be standardized or customized to individual wants and needs.
  • A process creates and delivers each good or service, and therefore, OM is a critical skill.

Differences Between Goods and Services

  • Goods are tangible while services are intangible.
  • Customers participate in many service processes, activities, and transactions.
  • The demand for services is more difficult to predict than the demand for goods.
  • Services cannot be stored as physical inventory.
  • Service management skills are paramount to a successful service encounter.
  • Service facilities typically need to be in close proximity to the customer.
  • Patents do not protect services.

Understanding Goods and Services

  • Service management integrates marketing, human resources, and operations functions toplan, create, and deliver goods and services, and their associated service encounters.
  • Aservice encounter is an interaction between the customer and the service provider.

Understanding Goods and Services

  • Service encounters consist of one or moremoments of truth—any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression.
  • Examples:
    • A gracious welcome by an employee at a hotel check-in counter
    • A grocery store employee who seems too impatient to help
    • Trying to navigate a confusing Web site

Exhibit 1.1

How Goods and Services Affect Operations Management Activities


Customer Benefit Packages

  • A customer benefit package (CBP) is a clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences.
  • In simple terms, a CBP is some combination of goods and services configured in a certain way to provide value to customers.
  • A CBP consists of a primary good or service, coupled with peripheral goods and/or services.

Customer Benefit Packages

  • A primary good or service is the “core” offering that attracts customers and responds to their basic needs. For example, the primary service of a personal checking account is the capability to do convenient financial transactions.
  • Examples:
    • an airline flight
    • a checking account
    • a brief case
    • a football game
    • tax preparation advice

Customer Benefit Packages

  • Peripheral goods or services are those that are not essential to the primary good or service, but enhance it.
  • Examples for a personal checking account:
    • online access and bill payment
    • debit card
    • designer checks
    • paper or electronic account statement

Customer Benefit Packages

  • A variantis a CBP attribute that departs from the standard CBP and is normally location- or firm-specific.
  • Example:
    • a fishing pond or pool at an automobile dealership where kids can fish while the parents shop for vehicles

Buying More Than a Car

People usually think that when they buy a new car, they

are simply purchasing the vehicle. Far from it. Most automobiles, for example, bundle a good, the automobile, with many peripheral services. Such services might include the sales process, customized leasing, insurance, warranty programs, loaner cars when a major service or repair is needed, free car washes at the dealership, opportunities to attend a

manufacturer’s driving school, monthly newsletters sent by email, and Web-based scheduling of oil changes and other service requirements. Such bundling is described by the customer benefit package framework.6


Customer Benefit Packages

  • Many “goods” and “services” have a mixture of both goods and service content.

Exhibit 1.3

Examples of Goods and Service Content


Biztainment – (Huh?)

Why would someone pay, for example, to crush grapes with their feet? Might it be that the process of doing this is as valuable to the customer as the outcome itself? Entertainment is the act of providing hospitality, escapism, fun, excitement, and/or relaxation to people as they go about their daily work and personal activities. The addition of entertainment to an organization’s customer benefit package provides unique opportunities for companies to increase customer satisfaction and grow revenue.

Biztainmentis the practice of adding entertainment content to a bundle of goods and services in order to gain a competitive advantage.


Biztainment – (Huh?)

The old business model of just selling and servicing a physical vehicle is gone. For example, a BMW automobile dealership in Fort Myers, Florida, recently opened a new 52,000-square-foot facility that offers a putting green, private work areas, a movie theater, wireless Internet access, massage chairs, a golf simulator, and a café, so that customers have multiple entertainment options during their visits.

Build-A-Bear Workshop boasts an average of $600 per square foot in annual revenue, double the U.S. mall average, and Holiday Inns found that hotels with holidomes have a 20% higher occupancy rate and room rates are, on average, $28 higher.



  • A process is a sequence of activities that is intended to create a certain result.
  • Processes are the means by which goods and services—the components of a CBP—are produced and delivered.


  • Key business processes:
  • Value creationprocesses, focused on producing or delivering an organization’s primary goods or services, such as filling and shipping a customer’s order, assembling a dishwasher, or providing a home mortgage.
  • Support processes, such as purchasing materials and supplies used in manufacturing, managing inventory, installation, health benefits, technology acquisition, day care on-site services, and research and development.
  • General management processes,including accounting and information systems, human resource management, and marketing.


  • Nearly every major activity within an organization involves a process that crosses traditional organizational boundaries.
  • Networks of processes are called value chains, which we focus on in Chapter 2.

Pal’s Sudden Service

  • Pal’s Sudden Service is a small chain of mostly drive-through quick-service restaurants located in Northeast Tennessee and Southwest Virginia.
  • Pal’s competes against major national chains and outperforms all of them by focusing on important customer requirements such as speed, accuracy, friendly service, correct ingredients and amounts, proper food temperature, and safety.

Pal’s Sudden Service

  • Pal’s uses extensive market research to fully understand customer requirements: convenience; ease of driving in and out; easy-to-read menu; simple, accurate order-system; fast service; wholesome food; and reasonable price.

Pal’s Sudden Service

  • Pal’s value chain begins with raw materials and suppliers providing items such as meat, lettuce, tomatoes, buns, and packaging; uses intermediate processes for order-taking, cooking, and final assembly; and ends with order delivery and—hopefully—happy customers.
  • Every process is flowcharted and analyzed for opportunities for error, and then mistake-proofed, if at all possible.

Pal’s Sudden Service

  • Entry-level employees—mostly high school students in their first job—receive 120 hours of training on precise work procedures and process standards in unique self-teaching, classroom, and on-the-job settings, reinforced by a “Caught Doing Good” program that provides recognition for meeting quality standards and high performance expectations.
  • Pal’s collects performance measures such as complaints, profitability, employee turnover, safety, and productivity.

Exhibit 1.5 U.S. Employment by Major Industry

* Durable goods are items such as instruments, vehicles, aircraft, computer and office equipment, machinery, furniture, glass, metals, and appliances.

** Nondurable goods are items such as textiles, apparel, paper, food, coal, oil, leather, plastics, chemicals, and books.

Source: United States Bureau of Labor Statistics, October 2001,


Exhibit 1.5

U.S. Employment by Major Industry (continued)


Today, more than 90 percent of the jobs in the U.S. economy are in service processes (half of the jobs in goods-producing industries, or about 9%, plus 81% in service industries). Service involves designing and managing service-, information-, or entertainment-intensive processes.

Most people in the United States are working in the service sector or service processes such as health care and education, or in service-related aspects of manufacturing firms such as human resource management and accounting.



Sustainabilityrefers to an organization’s ability to strategically address current business needs and successfully develop a long-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations.



  • Environmental sustainabilityis an organization’s commitment to the long-term quality of our environment.
  • Social sustainabilityis an organization’s commitment to maintain healthy communities and a society that improves the quality of life.
  • Economic sustainabilityis an organization’s commitment to address current business needs and economic vitality, and to have the agility and strategic management to prepare successfully for future business, markets, and operating environments.

Exhibit 1.6

Examples of Sustainability Practices


Current Challenges in OM

  • Technology
  • Globalization
  • Changing customer expectations
  • Changing job designs
  • Quality
  • Global manufacturing

Zappos Case Study

  • Draw and describe the customer benefit package that Zappos provides. Identify and describe one primary value creation, one support, and one general management process you might encounter at Zappos.
  • Explain the role of service encounters and service management skills at Zappos. How does Zappos create superior customer experiences?
  • Describe how any three of the OM activities in the box “What Do Operations Managers Do?” impact the management of both the goods that Zappos sells and the services that it provides.
  • Explain how this case illustrates each of the seven major differences between goods-producing and service-providing businesses.