3.3 Understanding the Supply Chain

Production, the creation of products and services, is an essential function in every firm. Production turns inputs, such as natural resources, raw materials, human resources, and capital, into outputs, which are products and services. Managing this conversion process is the role of operations management.

With new oil reserves now available through “fracking,” the United States is challenging Saudi Arabia and is set to become a vast supplier of oil worldwide. Unlike the smooth petroleum that gushes from Arabian wells, however, America’s black gold in the Marcellus, Bakken, and other shale regions has to be drilled horizontally through new technology. The process is rigorous: oil and gas companies drill into the ground to extract crude oil and natural gas from the shale rock that lies thousands of feet under the ground. Once the formation is reached, gallons of water, sand, and an extensive list of man-made chemicals are injected into the well under high pressure. This combination inserted in the well will fracture the rock and release crude oil and natural gas. It is estimated that the gas within these rock formations could supply the United States for generations to come as technologies evolve to drill below the earth’s surface. 

The goal of customer satisfaction is an important part of effective production and operations. In the past, the manufacturing function in most companies was inwardly focused. Manufacturing had little contact with customers and didn’t always understand their needs and desires. In the 1980s, many U.S. industries, such as automotive, steel, and electronics, lost customers to foreign competitors because their production systems could not provide the quality customers demanded. As a result, today most American companies, both large and small, consider a focus on quality to be a central component of effective operations management.

The Challenge: Producing Quality Jetboards

The product development process can be complex and lengthy. It took sixteen years for Bob Montgomery and others at his company to develop the PowerSki Jetboard, and this involved thousands of design changes. It was worth it, though: the Jetboard was an exciting, engine-propelled personal watercraft – a cross between a high-performance surfboard and a competition water-ski/wakeboard that received extensive media attention and rave reviews. It was showered with honours, including Time magazine’s “Best Invention of the Year” award.^[1] Stories about the Jetboard appeared in more than fifty magazines around the world, and it was featured in several movies, over twenty-five TV shows, and on YouTube.^[2] 

Montgomery and his team at PowerSki enjoyed taking their well-deserved bows for the job they did designing the product, but having a product was only the beginning for the company. The next step was developing a system that would produce high-quality Jetboards at reasonable prices. Before putting this system in place, PowerSki managers had to address several questions.

• What kind of production process should they use to make the Jetboards?
• How large should their production facilities be, and where should they be located?
• Where should they buy needed materials?
• What systems will be needed to control the production process and ensure a quality product?

Answering these and other questions helped PowerSki set up a manufacturing system through which it could accomplish the most important task that it had set for itself: efficiently producing quality Jetboards.

Like PowerSki, all manufacturers set out to perform the same basic function: to transform resources into finished goods. To perform this function in today’s business environment, manufacturers must continually strive to improve operational efficiency. They must fine-tune their production processes to focus on quality, to hold down the costs of materials and labour, and to eliminate all costs that add no value to the finished product.

The Supply Chain identifies the process of transforming a product idea into a finished product, and how the process will convert raw materials into goods or services as efficiently as possible. The Value Chain identifies how value is added throughout the creation of the final good or service produced and how operational activities costs represent a proportion of the final sale price of the good or service.