Topic 1

Operations and Productivity

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 1
.
 Outline

• Global Company Profile: Hard Rock Cafe

• What Is Operations Management?
• Organizing to Produce Goods and Services
• The Supply Chain
• Why Study OM?
• What Operations Managers Do

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 Outline - Continued
• The Heritage of Operations Management
• Operations for Goods and Services
• The Productivity Challenge
• Current Challenges in Operations Management
• Ethics, Social Responsibility, and Sustainability

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 3

 Operations Management
at Hard Rock Cafe

• First opened in 1971

─ Now - 25 hotels,185 restaurants and 12 casinos
in over 74 countries
• Rock music memorabilia
• Creates value in the form of good food and
entertainment
• 3,500+ custom meals per day in Orlando
• How does an item get on the menu?
• Role of the Operations Manager
Copyright
© 2014©Pearson
2020, 2017,
Education,
2014 Pearson
Inc. Education, Inc. Slide 4
 What Is Operations Management?

• Production is the creation of goods and servies

• Operations management (OM) is the set of
activities that create value in the form of goods and
services by transforming inputs into outputs

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 5

 Organizing to Produce Goods and
Services

• Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the
organization is doing, pays bills, collects the money

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 Organizational Charts
Figure 1.1

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 Organizational Charts
Figure 1.1

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 Organizational Charts
Figure 1.1

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 The Supply Chain
• A global network of organizations and activities that
supply a firm with goods and services
• Members of the supply chain collaborate to achieve
high levels of customer satisfaction, efficiency and
competitive advantage.
Figure 1.2

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 Why Study OM?
1. OM is one of three major functions of any organization;
we want to study how people organize themselves for
productive enterprise
2. We want (and need) to know how goods and services
are produced
3. We want to understand what operations managers do
4. OM is such a costly part of an organization

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 11

Options for Increasing Contribution
Table 1.1
b
a FINANCE/
blank blank
MARKETING OPTION superscript a
ACCOUNTING OPTION
superscript b
OM OPTION c superscript c

blank
INCREASE SALES REVENUE REDUCE FINANCE COS REDUCE PRODUCTION C
CURRENT 50% TS 50% OSTS 20%
Sales $100,000 $100,000 $100,000 $100,000

Costs of goods −80,000 −120,000 −80,000 −64,000

Gross margin 20,000 30,000 20,000 36,000

Finance costs −6,000 −6,000 −3,000 −6,000

Subtotal 14,000 24,000 17,000 30,000

Taxes at 25% −3,500 −6,000 −4,250 −7,500

Contributiond
Contribution sup d
$ 10,500 $ 18,000 $ 12,750 $ 22,500

a Increasing sales 50% increases contribution by $7,500, or 71%  7,500 / 10,500  .

b Reducing finance costs 50% increases contribution by $2,250, or 21%  2,250 / 10,500  .
c Reducing production costs 20% increases contribution by $12,000, or 114% 12,000 / 10,500  .

d Contribution to fixed cost (excluding finance costs) and profit.

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 What Operations Managers Do

Basic Management Functions

• Planning
• Organizing
• Staffing
• Leading
• Controlling

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 Ten Strategic Decisions
TABLE 1.2
DECISION CHAPTER(S)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17

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 The Strategic Decisions

1. Design of goods and services

• Defines what is required of operations
• Product design determines cost, quality,
sustainability and human resources
2. Managing quality
• Determine the customer’s quality expectations
• Establish policies and procedures to identify
and achieve that quality

Table 1.2 (cont.)

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 The Strategic Decisions
3. Process and capacity design
• How is a good or service produced?
• Commits management to specific technology,
quality, human resources, and investments
4. Location strategy
• Nearness to customers, suppliers, and talent
• Considering costs, infrastructure, logistics, and
government

Table 1.2 (cont.)

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 The Strategic Decisions
5. Layout strategy
• Integrate capacity needs, personnel levels,
technology, and inventory
• Determine the efficient flow of materials, people, and
information
6. Human resources, job design and work
management
• Recruit, motivate, and retain personnel with the
required talent and skills
• Integral and expensive part of the total system design

Table 1.2 (cont.)

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 The Strategic Decisions
7. Supply-chain management
• Integrate supply chain into the firm’s strategy
• Determine what is to be purchased, from whom, and
under what conditions
8. Inventory management
• Inventory ordering and holding decisions
• Optimize considering customer satisfaction, supplier
capability, and production schedules

Table 1.2 (cont.)

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 The Strategic Decisions
9. Scheduling
• Determine and implement intermediate- and
short-term schedules
• Utilize personnel and facilities while meeting
customer demands
10. Maintenance
• Consider facility capacity, production demands,
and personnel
• Maintain a reliable and stable process

Table 1.2 (cont.)

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 Where are the OM Jobs?
• Introducing new technologies and methods
• Improving facility location and space utilization
• Defining and implementing operations strategy
• Improving response time
• Developing people and teams
• Improving customer service
• Managing quality
• Managing and controlling inventory
• Enhancing productivity

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 Opportunities
Figure 1.3

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Certifications
• Association for Supply Chain Management (ASC M/API CS)
• American Society for Quality (ASQ)
• Institute for Supply Management (ISM)
• Project Management Institute (PMI)
• Council of Supply Chain Management Professionals

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 22

 Significant Events in OM

Figure 1.4
Ford Model T https://www.youtube.com/watch?v=S4KrIMZpwCY
Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 23
 Eli Whitney

• Born 1765; died 1825

• In 1798, received government contract to make 10,000
muskets
• Showed that machine tools could make standardized
parts to exact specifications
─ Musket parts could be used in any musket

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 Frederick W. Taylor

• Born 1856; died 1915

• Known as ‘father of scientific management’
• In 1881, as chief engineer for Midvale Steel,
studied how tasks were done
─ Began first motion and time studies
• Created efficiency principles

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 Taylor’s Principles
Management Should Take More Responsibility for:
1. Matching employees to right job
2. Providing the proper training
3. Providing proper work methods and tools
4. Establishing legitimate incentives for work to be
accomplished

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 Frank & Lillian Gilbreth
• Frank (1868-1924); Lillian (1878-1972)
• Husband and wife engineering team
• Further developed work measurement methods
• Applied efficiency methods to their home and 12
children!
• Book & Movie: “Cheaper by the Dozen,” “Bells on Their
Toes”

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 Henry Ford
• Born 1863; died 1947
• In 1903, created Ford Motor Company
• In 1913, first used moving assembly line to make
Model T
─ Unfinished product moved by conveyor past
work station
• Paid workers very well for 1911 ($5/day!)

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 W. Edwards Deming

• Born 1900; died 1993

• Engineer and physicist
• Credited with teaching Japan quality control
methods in post-WW2
• Used statistics to analyze process
• His methods involve workers in decisions

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 OM Relies on Contributions From
• Industrial engineering
• Statistics
• Management
• Analytics
• Economics
• Physical sciences
• Information technology

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 30

Operations for Goods and Services

Services – Economic activities that typically produce an

intangible product (such as education, entertainment,
lodging, government, financial, and health services)

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Operations for Goods and Services

• Manufacturers produce tangible product, services often

intangible
• Operations activities are performed in both manufacturing
and services
• Distinction not always clear
• Few pure services

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 32

Differences Between Goods and
Services
TABLE 1.3
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory (beauty care
produces a haircut that is consumed as it is produced products)
Unique: Your investments and medical care are unique Similar products produced (iPods, earbuds)

High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance changes Product standardized (iPhone)
with age and type of car
Often knowledge based: Legal, education, and medical Standard tangible product tends to make automation
services are hard to automate feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, education, Many aspects of quality for tangible products are easy
and medical services to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value

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U.S. Agriculture, Manufacturing,
and Service Employment
Figure 1.5

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1 - 34
34
 Organizations in Each Sector
Table 1.4

Source: Bureau of Labor Statistics, 2020.

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 Service Pay
• Perception that services are low-paying
• 42% of service workers receive above average wages
• 14 of 33 service industries pay below average
• Retail trade pays only 61% of national average
• Overall average wage is 96% of the average

Copyright © 2020, 2017, 2014 Pearson Education, Inc. Slide 36

 Productivity Challenge
Productivity is the ratio of outputs (goods and services)
divided by the inputs (resources such as labor and capital)
The objective is to improve productivity!
Important Note! Production is a measure of output only and
not a measure of efficiency

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The Economic System

Figure 1.6

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Improving Productivity at Starbucks
A team of 10 analysts continually look for ways to shave
time. Some improvements:

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Improving Productivity at Starbucks
(continued)
A team of 10 analysts continually look for ways to shave
time. Some improvements:

Operations improvements have helped

Starbucks increase yearly revenue per
outlet by $250,000 to $1,000,000.
Productivity has improved by 27%, or about
4.5% per year.

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 Productivity
Units produced
Productivity =
Input used

• Measure of process improvement

• Represents output relative to input
• Only through productivity increases can our standard
of living improve

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 Productivity Calculations
Labor Productivity

Units produced
Productivity =
Labor  hours used
1,000
= = 4 units / labor  hour
250

One resource input  single-factor productivity

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Multi-Factor Productivity

Output
Multifactor =
Labor + Material + Energy +
Capital + Miscellaneous

• Also known as total factor productivity

• Output and inputs are often expressed in dollars

Multiple resource inputs  multi-factor productivity

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 Collins Title Productivity (1 of 4)

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 Collins Title Productivity (2 of 4)

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 Collins Title Productivity (3 of 4)

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 Collins Title Productivity (4 of 4)

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Measurement Problems
• Quality may change while the quantity of inputs and outputs
remains constant
• External elements may cause an increase or decrease in pr
oductivity
• Precise units of measure may be lacking

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 Productivity Variables
1. Labor - contributes about
10% of the annual increase
2. Capital - contributes about
38% of the annual increase
3. Management - contributes
about 52% of the annual in
crease

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Key Variables for Improved Labor
Productivity
1. Basic education appropriate for the labor force
2. Diet of the labor force
3. Social overhead that makes labor available
• Challenge is in maintaining and enhancing skills in the
midst of rapidly changing technology and knowledge

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Maintaining and Enhancing the Skills
of Labor

• Major challenge in developed nations

• About one-third of American job applicants tested for basic
skills were deficient in reading, writing, or math
• Implications for nation’s competitiveness
• Better utilized labor with a stronger commitment is necessa
ry

Slide 51
 Labor Skills
About half of the 17-year-olds in the U.S. cannot
correctly answer questions of this type

Figure 1.7
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 Capital
10
Percent increase in productivity

0
10 15 20 25 30 35
Percentage investment

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 Management
• Ensures labor and capital are effectively used to increase
productivity
─ Use of knowledge
─ Application of technologies
• Knowledge societies
─ Labor has migrated from manual work to technical and
information-processing tasks
• More effective use of technology, knowledge, and capital

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Productivity and the Service Sector
• Productivity improvement in services is difficult because:

1. Typically, labor intensive

2. Frequently focused on unique individual attributes
or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality

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Productivity at Taco Bell

Improvements:
• Revised the menu
• Designed meals for easy preparation
• Shifted some preparation to suppliers
• Efficient layout and automation
• Training and employee empowerment
• New water and energy saving grills

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Productivity at Taco Bell (continued)
Results:
• Preparation time cut to 8 seconds
• Management span of control increased from 5 to 30
• In-store labor cut by 15 hours/day
• Floor space reduced by more than 50%
• Stores average 164 seconds/customer from drive-up to pull-out
• Water- and energy-savings grills conserve 300 million gallons of
water and 200 million KwH of electricity each year
• Green-inspired cooking method saves 5,800 restaurants $17 mil
lion per year

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Current Challenges in OM
• Globalization
• Supply-chain partnering
• Sustainability
• Technological change
• Mass customization
• Lean operations

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Ethics, Social Responsibility, and
Sustainability
Challenges facing operations managers:
• Develop and produce safe, high-quality green
products
• Train, retrain, and motivate employees in a safe
workplace
• Honor stakeholder commitments

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Ethics, Social Responsibility, and
Sustainability (continued)

Stakeholders
Those with a vested interest in an organization,
including customers, distributors, suppliers, owners,
lenders, employees, and community members.

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