Operations and

Productivity 1

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 Outline
▶ What Is Operations Management?
▶ Organizing to Produce Goods and Services
▶ The Supply Chain
▶ Why Study OM?
▶ What Operations Managers Do
▶ The Heritage of Operations Management
▶ Operations for Goods and Services
▶ The Productivity Challenge
▶ Current Challenges in Operations Management
▶ Ethics, Social Responsibility, and Sustainability
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 Learning Objectives
When you complete this chapter
you should be able to:
1.1 Define operations management
1.2 Explain the distinction between goods and services
1.3 Explain the difference between production and
productivity
1.4 Compute single-factor productivity
1.5 Compute multifactor productivity
1.6 Identify the critical variables in enhancing productivity

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 What Is Operations
Management?
Production is the creation of goods
and services
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs

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 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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 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

Farmer Syrup Bottler Distributor Retailer

producer

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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

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 Options for Increasing
Contribution
TABLE 1.1
FINANCE/
MARKETING ACCOUNTING
OPTION OPTION OM OPTION
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost 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 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

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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 strategy 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 quality, sustainability and human
resources
2. Managing quality
▶ Determine the customer’s quality expectations
▶ Establish policies and procedures to identify and achieve that
quality
3. Process and capacity design
▶ How is a good or service produced?
▶ Commits management to specific technology, quality,
resources, and investment

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 The Strategic Decisions
4. Location strategy
▶ Nearness to customers, suppliers, and talent
▶ Considering costs, infrastructure, logistics, and government
5. Layout strategy
▶ Integrate capacity needs, personnel levels, technology, and
inventory
▶ Determine the efficient flow of materials, people, and
information
6. Human resources and job design
▶ Recruit, motivate, and retain personnel with the required
talent and skills
▶ Integral and expensive part of the total system design
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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

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 Where are the OM Jobs?
▶ Technology/methods
▶ Facilities/space utilization
▶ Strategic issues
▶ Response time
▶ People/team development
▶ Customer service
▶ Quality
▶ Cost reduction
▶ Inventory reduction
▶ Productivity improvement
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 Opportunities
Figure 1.3

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 Certifications
▶ APICS, the Association for Operations
Management
▶ American Society for Quality (ASQ)
▶ Institute for Supply Management (ISM)
▶ Project Management Institute (PMI)
▶ Council of Supply Chain Management
Professionals
▶ Charter Institute of Procurement and Supply
(CIPS)

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 Significant Events in OM

Figure 1.4
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 The Heritage of OM
▶ Division of labor (Adam Smith 1776; Charles
Babbage 1852)
▶ Standardized parts (Whitney 1800)
▶ Scientific Management (Taylor 1881)
▶ Coordinated assembly line (Ford/ Sorenson 1913)
▶ Gantt charts (Gantt 1916)
▶ Motion study (Frank and Lillian Gilbreth 1922)
▶ Quality control (Shewhart 1924; Deming 1950)

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 The Heritage of OM
▶ Computer (Atanasoff 1938)
▶ CPM/PERT (DuPont 1957, Navy 1958)
▶ Material requirements planning (Orlicky 1960)
▶ Computer aided design (CAD 1970)
▶ Flexible manufacturing system (FMS 1975)
▶ Baldrige Quality Awards (1980)
▶ Computer integrated manufacturing (1990)
▶ Globalization (1992)
▶ Internet (1995)

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 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 and 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 and 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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 Contributions From

▶ Industrial engineering
▶ Statistics
▶ Management
▶ Economics
▶ Physical sciences
▶ Information technology

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 Operations for
Goods and Services
Services – Economic activities that typically produce an
intangible product (such as education, entertainment,
lodging, government, financial, and health services)
▶ Manufacturers produce tangible product, services often
intangible
▶ Operations activities often very similar
▶ Distinction not always clear
▶ Few pure services
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 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 Product can usually be kept in inventory (beauty care
salon produces a haircut that is consumed as it is products)
produced
Unique: Your investments and medical care are Similar products produced (iPods)
unique
High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and Standard tangible product tends to make automation
medical 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, Many aspects of quality for tangible products are easy
education, 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

100 -

80 –
Percent of Workforce

60 –

40 –

20 –

| | | | | | | | |
0 .
1825 1875 1925 1975 2025 (est.)
1800 1850 1900 1950 2000

Agriculture Services Manufacturing

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 Organizations in Each Sector
TABLE 1.4
PERCENT OF
SECTOR EXAMPLE ALL JOBS
Service Sector
Education, Medical, Other San Diego State University, Arnold Palmer
Hospital 15.3
Trade (retail, wholesale), Walgreen's, Walmart, Nordstrom, Alaska
Transportation Airlines
Information, Publishers, Broadcast IBM, Bloomberg, Pearson, ESPN 15.8

Professional, Legal, Business Snelling and Snelling, Waste Management, Inc., 85.2
Services, Associations American Medical Association, Ernst & Young
1.9
Finance, Insurance, Real Estate Citicorp, American Express, Prudential, Aetna
Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 13.6
Public Administration U.S., State of Alabama, Cook County

9.6

10.4

15.6
Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 8.6
Construction Sector Bechtel, McDermott 4.3
Agriculture King Ranch 1.4
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Mining Sector Homestake Mining .5
 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
Inputs Transformation Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs at and
management about an annual 2.5% increase services
in productivity per year. The
productivity increase is the
result of a mix of capital (38%
of 2.5%), labor (10% of 2.5%),
and management (52% of
2.5%).

Feedback loop

Figure 1.6

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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
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
Staff of 4 works 8 hrs/day 14 titles/day
Payroll cost = $640/day Overhead = $800/day

Labor productivity of both systems?

Multi-factor productivity of both systems?

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 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs = .4375 titles/labor-hr

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 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

productivity = = .0077 titles/dollar
$640 + 400

New multifactor 14 titles/day

productivity = = .0097 titles/dollar
$640 + 800
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 Problem 1.7
▶ Hokey Min’s Kleen Karpet cleaned 65 rugs in October,
consuming the following resources:
▶ Labor
Solvent
520 hours at $13 per hour
100 gallons at $5 per gallon
Machine rental 20 days at $50 per day

▶ a) What is the labor productivity per dollar?

▶ b) What is the multifactor productivity?

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 Measurement Problems
1. Quality may change while the
quantity of inputs and outputs remains
constant
2. External elements may cause an
increase or decrease in productivity
3. 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 increase
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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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 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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 Ethics, Social Responsibility,
and Sustainability
Stakeholders
Those with a vested interest in an
organization, including customers,
Challenges facing distributors, suppliers, owners,
lenders, employees, and
operations managers: community members.

▶ Develop and produce safe, high-quality

green products
▶ Train, retrain, and motivate employees
in a safe workplace
▶ Honor stakeholder commitments

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