1

Operations and
Productivity

Heizer, Render, Munson

Operations Management, Thirteenth Edition
Principles of Operations Management, Eleventh Edition

PowerPoint slides by Jeff Heyl

 What Is Operations Management?

• Production is the creation of goods and

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

Operations management (OM) is;

• a set of activities
• that creates value
• in the form of goods and services
• by transforming inputs into outputs
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
Organizing to Produce Goods
and Services
Operations is one of the
three functions that every
organization performs.

To create goods and services, all

organizations perform three functions.
These functions are the necessary
ingredients not only for production but also
for an organization’s survival.

1. Marketing , which generates the

demand, or at least takes the order for a
product or service (nothing happens until
there is a sale).
2. Production/operations , which creates,
produces, and delivers the product.
3. Finance/accounting , which tracks how
well the organization is doing, pays the
bills, and collects the money.

The areas in blue indicate the significant role

that OM plays in both manufacturing and
service firms.
The Supply Chain
• A global network of organizations and activities that
supplies 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
The Supply Chain
Why Study OM?
•
Any production of goods and services requires operations management.
Why Study OM?
1. OM is one of three major functions of any organization;
market (sell), finance (account), and produce (operate), thus 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. A large
percentage of the revenue of most firms is spent in the OM function.
Options for Increasing Contribution
Table 1.1

 Increasing sales 50% increases contribution by $7,500, or 71% (7,500/10,500).

 Reducing finance costs 50% increases contribution by $2,250, or 21% (2,250/10,500).
 Reducing production costs 20% increases contribution by $12,000, or 114%
(12,000/10,500).
What Operations Managers Do
Basic Management Functions
• Planning
• Organizing
• Staffing
• Leading
• Controlling

Operations managers apply this management process to the

decisions they make in the OM function.
The 10 strategic OM decisions are introduced in Table 1.2
Ten Strategic OM 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
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
OM Job Opportunities
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
• Chartered Institute of Procurement and Supply (CIPS)
Significant Events in OM

Figure 1.4
OM Relies on Contributions From
• Industrial engineering
• Statistics
• Management
• Analytics
• Economics
• Physical sciences
• Information technology
 Operations for Services
Services – Economic activities that typically produce an
intangible product (such as education, entertainment,
lodging, government, financial, and health services)
Services constitute the largest economic sector in postindustrial economy.
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
produces a haircut that is consumed as it is produced (beauty care products)

Unique: Your investments and medical care are unique Similar products produced (iPods)

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
services are hard to automate automation 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
and medical services are easy to evaluate (strength of a bolt)

Reselling is unusual: Musical concert or medical care Product often has some residual value
U.S. Agriculture, Manufacturing, and
Service Employment
Figure 1.5

The huge productivity increases in agriculture and manufacturing have allowed more
of our economic resources to be devoted to services.
Organizations in Each Sector
Table 1.4
Productivity Challenge

Productivity is the ratio of outputs (goods and services)

divided by the inputs (resources such as labor and capital)
Improving productivity means improving efficiency.
-------The objective is to improve productivity!

HOW TO IMPROVE PRODUCTIVITY or EFFICIENCY?

1) reducing inputs while keeping output constant
or
2) increasing output while keeping inputs constant.

Important Note!
Production is a measure of output only
and not a measure of efficiency
 Example: Productivity & Prices
-You run a bakery, currently baking 10 loaves a day.

- You find a way to bake 15 loaves using the same resources (flour, oven
time, effort).

- Result: Increased Productivity!

- Impact: Downward Pressure on Prices

Why?
- More goods (bread) available without spending extra on ingredients or
time.
- Outcome: Lower Prices
- Benefits: Affordable Goods for Consumers

In summary, increased productivity leads to lower prices, making our goods

more affordable for everyone! Only through increases in productivity can the
standard of living improve.
 Productivity of the service sector
Productivity of the service sector has proven difficult to
improve because service-sector work is:

1. Typically labor intensive (e.g., counseling, teaching).

2. Frequently focused on unique individual attributes or
desires (e.g., investment advice).
3. Often an intellectual task performed by professionals
(e.g., medical diagnosis).
4. Often difficult to mechanize and automate (e.g., a
haircut).
5. Often difficult to evaluate for quality (e.g., performance
of a law firm).
Service Productivity measurement:
“cases per labor-hour” or “cases per employee”
or convenience, speed, and safety
Productivity Variables
Productivity increases are dependent on
three 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
Key Variables for Improved Labor
Productivity
Key Variables for Improved Labor Productivity:
1. Basic education for an effective workforce.
2. Diet of the labor force.
3. Social overhead (e.g., transportation, sanitation).
4. Maintaining and enhancing the skills of labor
Capital
 Inflation and taxes increase the cost of capital, making capital investment
increasingly expensive.
 When the capital invested per employee drops, we can expect a drop in
productivity.
 Using labor rather than capital may reduce unemployment in the short run,
but it also makes economies less productive and therefore lowers wages in
the long run.
 Managers adapt their investment plans in response to changes in capital
costs and risk.
Management
• Management is responsible for ensuring that 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
Current Challenges in OM

• Globalization
• Supply-chain partnering
• Sustainability
• Rapid product development
• Mass customization
• Lean operations
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
Stakeholders: customers, distributors, suppliers, owners, lenders, employees,
and community members.
 The growth of world trade, global capital markets, and the
international movement of people.

 Increasing economic integration and interdependence of countries

—in a word, globalization.

 Organizations are rapidly extending their distribution channels and

supply chains globally.

 The result is innovative strategies where firms compete not just

with their own expertise but with the talent in their entire global
supply chain
Global Strategies

• Boeing – sales and supply chain are worldwide; France, Germany,

UK, Japan etc
• Sony – purchases components from suppliers in Thailand, Malaysia,
and around the world
• Volvo – considered a Swedish company, purchased by a Chinese
company, Geely. The current Volvo S40 is assembled in Belgium and
Malaysia on a platform shared with the Mazda 3 (built in Japan) and
the Ford Focus (built in six countries including the U.S.).
• Haier – A Chinese company, produces compact refrigerators (it has
one-third of the U.S. market) and wine cabinets (it has half of the U.S.
market) in South Carolina and other appliances in Kentucky.
 Reasons to Globalize

1. Improve the supply chain

2. Reduce costs and exchange rate risks
3. Improve operations
4. Understand markets
5. Improve products
6. Attract and retain global talent
 Reasons to Globalize
Improve the supply  Locating facilities closer to unique resources
chain  Auto design to California
 Perfume manufacturing in France

Reduce costs and  Risks associated with currency exchange rates

exchange rate risks  Reduce direct and indirect costs
 Trade agreements can lower tariffs
Improve operations Learn how business is handled in other countries;
• Japanese – inventory management
• Germans – robots
• Scandinavians – ergonomics
-International operations can improve response time and customer service
Understand markets • Interacting with foreign customers, suppliers, competition can lead to
new opportunities
• Cell phone design moved from Europe to Japan and India
• Extend the product life cycle
Improve products • Toyota and BMW manage joint research and development
• Reduced risk, state-of-the-art design, lower costs
• Samsung and Bosch jointly produce batteries
Attract and retain • Better growth opportunities and insulation against unemployment
global talent • Relocate unneeded personnel to more prosperous locations
 Globalize: Key Considerations
• National literacy rate • Work ethic
• Rate of innovation • Tax rates
• Rate of technology • Inflation
change
• Availability of raw materials
• Number of skilled
workers • Interest rates

• Political stability • Population

• Product liability laws • Transportation infrastructure

• Export restrictions • Communication system

• Variations in language
Strategies for Competitive Advantage
Strategies require managers to ;
• Develop action plan to achieve mission
• Ensure functional areas have supporting strategies
• Exploit opportunities and strengths, neutralize threats, and avoid weaknesses

Strategies for Competitive Advantage;

1. Differentiation – better, or at least different
2. Cost leadership – cheaper
3. Response – more responsive
 Competing on Differentiation
Uniqueness can go beyond both the physical
characteristics and service attributes to encompass
everything that impacts customer's perception of value
• Safeskin gloves – leading edge products
• Walt Disney Magic Kingdom – experience
differentiation
• Hard Rock Cafe – dining experience
Experience Differentiation
Engaging a customer with a product through imaginative use
of the five senses, so the customer “experiences” the
product
• Theme parks use sight,
sound, smell, and
participation
• Movie theatres use sight,
sound, moving seats,
smells, and mists of rain
• Restaurants use music,
smell, and open kitchens
Competing on Cost
Provide the maximum value as
perceived by customer. Does
not imply low quality.
• Southwest Airlines –
secondary airports, no frills
service, efficient utilization of
equipment
• Walmart – small overhead,
shrinkage, and distribution
costs
• Franz Colruyt – no bags, no
bright lights, no music
Competing on Response
Response is often thought of as flexible response, but it also refers to
reliable and quick response.

Flexibility is matching market changes in agile manufacturing and

supply chain, innovation and quick product development, global
presence and localization, service and support

Quickness in design,
production, and delivery
components for automotive,
industrial and medical
applications.
OM’s Contribution to Strategy
Figure 2.4
Issues In Operations Strategy
• Resources view
View on the financial, physical, human, and technological resources available and
ensuring that the potential strategy is compatible with those resources

• Value-chain analysis
to identify activities that represent strengths, or potential strengths, and may be
opportunities for developing competitive advantage.

• Porter’s Five Forces model

analysis of competitors - immediate rivals, potential entrants, customers, suppliers, and
substitute products.

• Operating in a system with many external factors

economic, to legal, to cultural -constant scanning of the environment.

• Constant change
from resources, to technology, to product life cycles is in flux. Changes are required
within the firm as its products move from introduction, to growth, to maturity, and to
decline.
Product Life Cycle
Figure 2.5
Strategy Development Process
Figure 2.6
Strategy Development and
Implementation
• Identify key success factors
• Integrate OM with other activities
• Build and staff the organization

The operations manager’s job is to implement an OM

strategy, provide competitive advantage, and increase
productivity
Key Success Factors
Figure 2.7
Implementing Strategic Decisions
(1 of 2)
Table 2.1 Operations Strategies of Two Drug Companies
Implementing Strategic Decisions
(2 of 2)
Table 2.1 Operations Strategies of Two Drug Companies
Strategic Planning, Core Competencies,
and Outsourcing (1 of 2)

• Outsourcing – transferring activities that have

traditionally been internal to external suppliers
• Accelerating due to
1) Increased technological expertise
2) More reliable and cheaper transportation
3) Rapid development and deployment of
advancements in telecommunications and
computers
Strategic Planning, Core Competencies,
and Outsourcing (2 of 2)

• Subcontracting - contract manufacturing

• Outsourced activities
– Legal services
– IT services
– Travel services
– Payroll
– Production
– Surgery
Theory of Comparative Advantage
• If an external provider can perform activities more
productively than the purchasing firm, then the external
provider should do the work
• Purchasing firm focuses on core competencies
• Drives outsourcing
Risks of Outsourcing
Table 2.2 Potential Advantages and Disadvantages of
Outsourcing
ADVANTAGES DISADVANTAGES

Cost savings Increased logistics and inventory

costs
Gaining outside expertise that Loss of control (quality, delivery, etc.)
comes with specialization
Improving operations and Potential creation of future
service competition
Maintaining a focus on core Negative impact on employees
competencies
Accessing outside technology Risks may not manifest themselves
for years
Global Operations Strategy Options
Figure 2.9