chapter 1 introduction

1 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall

1 Operations and Productivity


What Is Operations What Is Operations Management?Management?

ProductionProduction is the creation of goods and services

Operations management (OM)Operations management (OM) is the set of activities that create value in the form of

goods and services by transforming inputs into

outputs


Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:1.1. MarketingMarketing – generates demand2.2. Production/operationsProduction/operations – creates

the product3.3. Finance/accountingFinance/accounting – tracks how

well the organization is doing, pays bills, collects the money


Organizational ChartsOrganizational Charts

OperationsTeller SchedulingCheck ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

Figure 1.1(A)



OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science

Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange

Airline

Figure 1.1(B)

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising


MarketingSales promotionAdvertisingSalesMarket research


OperationsFacilities Construction; maintenanceProduction and inventory control Scheduling; materials controlQuality assurance and controlSupply-chain managementManufacturing Tooling; fabrication; assemblyDesign Product development and design Detailed product specificationsIndustrial engineering Efficient use of machines, space, and personnelProcess analysis Development and installation of production tools and equipment

Finance/ accountingDisbursements/ credits Receivables Payables General ledgerFunds Management Money market International exchangeCapital requirements Stock issue Bond issue and recall

Manufacturing

Figure 1.1(C)


Why Study OM?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


Options for Increasing Options for Increasing ContributionContribution

Table 1.1

Sales $100,000 $150,000 $100,000 $100,000Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000Gross Margin 20,000 30,000 20,000 36,000Finance Costs – 6,000 – 6,000 – 3,000 – 6,000Subtotal 14,000 24,000 17,000 30,000Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Finance/Marketing Accounting OM

Option Option Option

Increase Reduce ReduceSales Finance Production

Current Revenue 50% Costs 50% Costs 20%


What Operations What Operations Managers DoManagers Do

Planning Organizing Staffing Leading Controlling

Basic Management FunctionsBasic Management Functions


Ten Critical DecisionsTen Critical DecisionsTen Decision Areas Chapter(s)1. Design of goods and services 52. Managing quality 6, Supplement 63. Process and capacity 7, Supplement 7

design 4. Location strategy 85. Layout strategy 96. Human resources and 10

job design 7. Supply-chain 11, Supplement 11

management8. Inventory, MRP, JIT 12, 14, 169. Scheduling 13, 1510. Maintenance 17 Table 1.2


The Critical DecisionsThe Critical Decisions1. Design of goods and services

What good or service should we offer?

How should we design these products and services?

2. Managing quality How do we define quality? Who is responsible for quality?

Table 1.2 (cont.)


The Critical DecisionsThe Critical Decisions3. Process and capacity design

What process and what capacity will these products require?

What equipment and technology is necessary for these processes?

4. Location strategy Where should we put the facility? On what criteria should we base the

location decision?

Table 1.2 (cont.)


The Critical DecisionsThe Critical Decisions5. Layout strategy

How should we arrange the facility? How large must the facility be to meet

our plan?6. Human resources and job design

How do we provide a reasonable work environment?

How much can we expect our employees to produce?

Table 1.2 (cont.)


The Critical DecisionsThe Critical Decisions7. Supply-chain management

Should we make or buy this component?

Who should be our suppliers and how can we integrate them into our strategy?

8. Inventory, material requirements planning, and JIT How much inventory of each item

should we have? When do we re-order?

Table 1.2 (cont.)


The Critical DecisionsThe Critical Decisions9. Intermediate and short–term

scheduling Are we better off keeping people on

the payroll during slowdowns? Which jobs do we perform next?

10.Maintenance How do we build reliability into our

processes? Who is responsible for maintenance?

Table 1.2 (cont.)


Where are the OM Jobs?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


New Challenges in OMNew Challenges in OM

Global focus Just-in-time Supply-chain

partnering Rapid product

development, alliances

Mass customization

Empowered employees, teams

ToToFromFrom Local or national focus Batch shipments Low bid purchasing

Lengthy product development

Standard products

Job specialization


Characteristics of GoodsCharacteristics of Goods Tangible product Consistent product

definition Production usually

separate from consumption

Can be inventoried Low customer

interaction


Characteristics of ServiceCharacteristics of Service Intangible product Produced and

consumed at same time Often unique High customer

interaction Inconsistent product

definition Often knowledge-based Frequently dispersed


Industry and Services as Industry and Services as Percentage of GDPPercentage of GDP

Services Manufacturing

Aus

tral

ia

Can

ada

Chi

na

Cze

ch R

ep

Fran

ce

Ger

man

y

Hon

g K

ong

Japa

n

Mex

ico

Rus

sian

Fed

Sout

h A

fric

a

Spai

n

UK US

90 −80 −70 −60 −50 −40 −30 −20 −10 −

0 −


Goods and ServicesGoods and ServicesAutomobile

ComputerInstalled carpeting

Fast-food mealRestaurant meal/auto repair

Hospital careAdvertising agency/

investment managementConsulting service/

teachingCounseling

Percent of Product that is a Good Percent of Product that is a Service

100% 75 50 25 0 25 50 75 100%| | | | | | | | |


120 –

100 –

80 –

60 –

40 –

20 –

0 – | | | | | | |1950 1970 1990 2010 (est)

1960 1980 2000

Empl

oym

ent (

mill

ions

)

Manufacturing and Service Manufacturing and Service EmploymentEmployment

Figure 1.4 (A)

Manufacturing

ServiceService


New Trends in OMNew Trends in OM Ethics Global focus Environmentally sensitive production Rapid product development Environmentally sensitive production Mass customization Empowered employees Supply-chain partnering Just-in-time performance


Productivity ChallengeProductivity 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!The objective is to improve productivity!

Important Note!Production is a measure of output

only and not a measure of efficiency


Feedback loop

Outputs

Goods and

services

Transformation

The U.S. economic system transforms inputs to outputs

at about an annual 2.5% increase 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%).

The Economic SystemThe Economic SystemInputs

Labor,capital,

management

Figure 1.6


Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop

Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot


Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop

Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years.Productivity has improved by 27%, or about 4.5% per year.


Measure of process improvement Represents output relative to input Only through productivity increases

can our standard of living improve

ProductivityProductivity

Productivity =Units produced

Input used


Productivity CalculationsProductivity Calculations

Productivity =Units produced

Labor-hours used

= = 4 units/labor-hour1,000250

Labor ProductivityLabor Productivity

One resource input single-factor productivity


Multi-Factor Productivity Multi-Factor Productivity

OutputLabor + Material + Energy + Capital + Miscellaneous

Productivity =

Also known as total factor productivity Output and inputs are often expressed

in dollars

Multiple resource inputs multi-factor productivity


Measurement ProblemsMeasurement Problems1.1. QualityQuality may change while the

quantity of inputs and outputs remains constant

2.2. External elementsExternal elements may cause an increase or decrease in productivity Precise unitsPrecise units of measure may be

lacking


Productivity VariablesProductivity Variables1.1. LaborLabor - contributes

about 10% of the annual increase

2.2. CapitalCapital - contributes about 38% of the annual increase

3.3. ManagementManagement - contributes about 52% of the annual increase


Service ProductivityService Productivity

1. Typically labor intensive2. Frequently focused on unique

individual attributes or desires3. Often an intellectual task performed by

professionals4. Often difficult to mechanize5. Often difficult to evaluate for quality


The Hard Rock CafeThe Hard Rock Cafe

First opened in 1971 Now – 129 restaurants in over 40 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

chapter 1 introduction

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