C1&2 - Notes S12

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11 Operations and Productivity

Operations and Productivity

OPMG 310 – Spring 2012OPMG 310 – Spring 2012

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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

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Organizational ChartsOrganizational Charts

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

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MarketingSales promotionAdvertisingSalesMarket research

Organizational ChartsOrganizational Charts

OperationsFacilities Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and controlSupply-chain managementManufacturing Tooling; fabrication; assembly

Design Product development and design Detailed product specifications

Industrial engineering Efficient use of machines, space, and personnel

Process 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)

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What Operations What Operations Managers DoManagers Do

Planning

Organizing

Staffing

Leading

Controlling

Basic Management FunctionsBasic Management Functions

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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

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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

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OpportunitiesOpportunities

Figure 1.2

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Significant Events in OMSignificant Events in OM

Figure 1.3

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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

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Goods and ServicesGoods and ServicesAutomobile

Computer

Installed carpeting

Fast-food meal

Restaurant meal/auto repair

Hospital care

Advertising agency/investment management

Consulting service/teaching

Counseling

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

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

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Development of the Development of the Service EconomyService Economy

Figure 1.4 (C)

United States

Canada

France

Italy

Britain

Japan

W. Germany

1970 2010 (est)

| | | | |

40 50 60 70 80Percent

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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

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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

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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.

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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

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Productivity CalculationsProductivity Calculations

Productivity =Units produced

Labor-hours used

= = 4 units/labor-hour1,000

250

Labor ProductivityLabor Productivity

One resource input single-factor productivity

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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

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Collins Title wants to evaluate its labor and multi-factor productivity with a new computerized title-search system. The company has a staff of four, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400 per day. Collins processes and closes on 8 titles each day. The new computerized title-search system will allow the processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the overhead expenses are now $800 per day.

Collins Title ProductivityCollins Title Productivity

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Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day

Old System:Old System:

=Old labor

productivity8 titles/day

32 labor-hrs

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8 titles/day

32 labor-hrs=

Old labor productivity = .25 titles/labor-hr

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14 titles/day Overhead = $800/day

New System:New System:

8 titles/day

32 labor-hrs=

Old labor productivity

=New labor

productivity

= .25 titles/labor-hr

14 titles/day14 titles/day

32 labor-hrs32 labor-hrs

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8 titles/day

32 labor-hrs=

Old labor productivity = .25 titles/labor-hr

14 titles/day

32 labor-hrs=

New labor productivity = .4375 titles/labor-hr

% change : increase 75%%10025.0

25.04375.0 %100

old

oldnew

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=Old multifactor

productivity8 titles/day

$640 + 400

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8 titles/day

$640 + 400=

Old multifactor productivity = .0077 titles/dollar

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8 titles/day

$640 + 400=

Old multifactor productivity

=New multifactor

productivity

= .0077 titles/dollar

14 titles/day14 titles/day

$640 + 800$640 + 800

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8 titles/day

$640 + 400

14 titles/day

$640 + 800

=Old multifactor

productivity

=New multifactor

productivity



% change : increase 26%%1000077.0

0077.00097.0 %100

old

oldnew

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Productivity VariablesProductivity Variables

1.1. 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

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Productivity at Taco BellProductivity 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 BellProductivity 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

Results: Preparation time cut to 8 seconds

Management span of control increased from 5 to 30

In-store labor cut by 15 hours/day

Stores handle twice the volume with half the labor

Conserve 300 million gallons of water and Conserve 300 million gallons of water and 200 million KwH of electricity each year 200 million KwH of electricity each year saving $17 million annuallysaving $17 million annually

Problem 1

A company that makes shopping carts for supermarkets and other stores recently purchased some new equipment that reduces the labor content of the jobs needed to produce the shopping carts. Prior to buying the new equipment, the company used five workers, who produced an average of 80 carts per hour. Workers receive $10 per hour, and machine cost was $40 per hour. With the new equipment, it was possible to transfer one of the workers to another department, and equipment cost increased by $10 per hour while output increased by four carts per hour.

a) Compute labor productivity of the system. Use carts per worker per hour as the measure of labor productivity.

b) Compute the multifactor productivity under each system. Use carts per dollar cost (labor plus equipment) as the measure.

c) Comment on the changes in productivity according to the two measures, and on which one you believe is the more pertinent for this situation.

Problem 2

A company offers ID theft protection using leads obtained from client banks. Three employees work 40 hours a week on the leads, at a pay rate of $25 per hour per employee. Each employee identifies an average of 3,000 potential leads a week from a list of 5,000. An average of 4 percent actually sign up for the service, paying a one-time fee of $70. Material costs are $1,000 per week, and overhead costs are $9,000 per week. Calculate the multifactor productivity for this operation in fees generated per dollar input.

Problem 3

An operation has a 10 percent scrap rate (i.e. 10% of the pieces produced are discarded because of defects). As a result, 72 pieces per hour are produced. What is the potential increase in labor productivity that could be achieved by eliminating the scrap (i.e. 0% scrap rate)?

Question: What are effective ways to motivate hourly employees vs. salaried managers?

If productivity of these workers is below expectation, what are good and poor ways to try to motivate them?

What methods might work well with blue collar employees but not white collar employees, and vice-versa?

What methods might work well in the short run but not in the long run, and vice-versa?

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22 Operations Strategy in a Global Environment

Operations Strategy in a Global Environment

OPMG 310 OPMG 310

Fall 2011Fall 2011

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OutlineOutline Developing Missions And

Strategies Mission

Strategy

Achieving Competitive Advantage Through Operations Competing On Differentiation

Competing On Cost

Competing On Response

Ten Strategic OM Decisions

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Global StrategiesGlobal Strategies

Boeing – sales and production are worldwide

Benetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution

Sony – purchases components from suppliers in Thailand, Malaysia, and around the world

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Reasons to GlobalizeReasons to Globalize

Reasons to GlobalizeReasons to Globalize

1. Reduce costs (labor, taxes, tariffs, etc.)2. Improve supply chain3. Provide better goods and services4. Understand markets5. Learn to improve operations6. Attract and retain global talent

Tangible Reasons

Intangible Reasons

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Cultural and Ethical IssuesCultural and Ethical Issues

Cultures can be quite different

Attitudes can be quite different towards Punctuality

Lunch breaks

Environment

Intellectual property

Thievery

Bribery

Child labor

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Companies Want To ConsiderCompanies Want To Consider

National literacy rate

Rate of innovation

Rate of technology change

Number of skilled workers

Political stability

Product liability laws

Export restrictions

Variations in language

Work ethic

Tax rates

Inflation

Availability of raw materials

Interest rates

Population

Number of miles of highway

Phone system

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Developing Missions and Developing Missions and StrategiesStrategies

MissionMission statements tell an organization where it is going

The StrategyStrategy tells the organization how to get there

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MissionMission

Mission - where are you going? Organization’s

purpose for being

Answers ‘What do we provide society?’

Provides boundaries and focus

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Mission: Mission: AUC School of BusinessAUC School of Business

The School of Business strives to create an environment that fosters the development of principled and innovative business leaders and entrepreneurs who can make a difference.

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Mission of the Management Department

Our mission is to develop business leaders who are dedicated to the betterment of society by providing a high quality business education to top caliber students from all segments of Egyptian society as well as from other countries while focusing on continuous improvement and a commitment to excellence in learning, intellectual contributions and service.

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Benefit to Society

Mission

Factors Affecting MissionFactors Affecting Mission

Philosophy and Values

Profitability and GrowthEnvironment

Customers Public Image

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Sample MissionsSample Missions

Sample Company Mission

To manufacture and service an innovative, growing, and profitable worldwide microwave communications business that exceeds our customers’ expectations.

Sample Operations Management Mission

To produce products consistent with the company’s mission as the worldwide low-cost manufacturer.

Figure 2.3

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Sample MissionsSample Missions

Figure 2.3

Sample OM Department Missions

Product design To design and produce products and services with outstanding quality and inherent customer value.

Quality management To attain the exceptional value that is consistent with our company mission and marketing objectives by close attention to design, procurement, production, and field service operations

Process design To determine, design, and produce the production process and equipment that will be compatible with low-cost product, high quality, and good quality of work life at economical cost.

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Strategic ProcessStrategic Process

Marketing Operations Finance/ Accounting

Functional Area Missions

Organization’s Mission

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StrategyStrategy

Action plan to achieve mission

Functional areas have strategies

Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

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Strategies for Competitive Strategies for Competitive AdvantageAdvantage

Differentiation – better, or at least different Hard Rock Cafe – dining experience

Cost leadership – cheaper Southwest Airlines – secondary airports, no frills

service, efficient utilization of equipment

Response – rapid response McDonald’s

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OM’s Contribution to StrategyOM’s Contribution to Strategy

Product

Quality

Process

Location

Layout

Human resource

Supply chain

Inventory

Scheduling

Maintenance

DIFFERENTIATIONInnovative design … Safeskin’s innovative gloves Broad product line … Fidelity Security’s mutual

funds After-sales service … Caterpillar’s heavy equipment

service Experience … Hard Rock Café’s dining

experience

COST LEADERSHIP Low overhead … Franz-Colruyt’s warehouse-

type stores Effective capacity use … Southwest Airline’s

aircraft utilization Inventory management … Wal Mart’s sophisticated

distribution system

RESPONSE Flexibility … Hewlett-Packard’s response to

volatile world market Reliability … FedEx’s “absolutely,

positively, on time” Quickness … Pizza Hut’s 5-minute guarantee

at lunchtime

Figure 2.4

10 Operations CompetitiveDecisions Approach Example Advantage

Response(faster)

Cost leadership(cheaper)

Differentiation(better)

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(AUC Management Department)In support of this mission the department:-Provides a high quality contemporary-style business education that blends a global perspective with national cultures and is relevant to the business needs of Egypt and the region.-Provides programs that encourage the development of an entrepreneurial spirit that emphasizes creativity, innovation, individual initiative and teamwork-Provides a learning environment that fosters faculty/student communication and promotes lifelong learning and career development -Encourages faculty development activities that improve teaching, maintain competence and that keep faculty current with ideas and concepts in their field. -Seeks to develop a portfolio of intellectual contributions to learning and pedagogy, to practice, and to the theory and knowledge base of the disciplines. -Encourages the establishment of close partnerships with the business community through consultancies and service that enhance the intellectual and economic quality of Egypt while enriching the learning process.

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Managing Global Service Managing Global Service OperationsOperations

Capacity planning

Location planning

Facilities design and layout

Scheduling

Requires a different perspective on:Requires a different perspective on:

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Process DesignProcess Design

Low Moderate HighVolume

High

Moderate

Low

Var

iety

of

Pro

du

cts

Process-focusedJOB SHOPS

(Print shop, emergency room, machine shop,

fine-diningrestaurant)

Repetitive (modular) focus

ASSEMBLY LINE(Cars, appliances,

TVs, fast-food restaurants) Product focused

CONTINUOUS(Steel, beer, paper, bread, institutional

kitchen)

Mass CustomizationCustomization at high

Volume(Dell Computer’s PC,

cafeteria)

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Issues In Operations StrategyIssues In Operations Strategy

Resources view

Value Chain analysis

Porter’s Five Forces model

Operating in a system with many external factors

Constant change

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Product Life CycleProduct Life Cycle

Best period to increase market share

R&D engineering is critical

Practical to change price or quality image

Strengthen niche

Poor time to change image, price, or quality

Competitive costs become criticalDefend market position

Cost control critical

Introduction Growth Maturity Decline

Co

mp

an

y S

tra

teg

y/Is

sue

s

Figure 2.5

Internet search engines

Sales

Drive-through restaurants

CD-ROMs

Analog TVs

iPods

Boeing 787

LCD & plasma TVs

Twitter

Avatars

Xbox 360

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Product Life CycleProduct Life Cycle

Product design and development critical

Frequent product and process design changes

Short production runs

High production costs

Limited models

Attention to quality

Introduction Growth Maturity Decline

OM

Str

ate

gy

/Issu

es

Forecasting critical

Product and process reliability

Competitive product improvements and options

Increase capacity

Shift toward product focus

Enhance distribution

Standardization

Fewer product changes, more minor changes

Optimum capacity

Increasing stability of process

Long production runs

Product improvement and cost cutting

Little product differentiation

Cost minimization

Overcapacity in the industry

Prune line to eliminate items not returning good margin

Reduce capacity

Figure 2.5

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Strategy

Analysis

SWOT Analysis SWOT Analysis

Internal Strengths

Internal Weaknesses

External Opportunities

External Threats

Mission

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Strategy Development ProcessStrategy Development Process

Determine the Corporate Mission

State the reason for the firm’s existence and identify the value it wishes to create.

Form a Strategy

Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, after-

sale service, broad product lines.

Analyze the EnvironmentIdentify the strengths, weaknesses, opportunities, and threats.

Understand the environment, customers, industry, and competitors.

Figure 2.6

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Key Success FactorsKey Success Factors

Production/Operations

Figure 2.7

Marketing

ServiceDistributionPromotionChannels of distributionProduct positioning (image, functions)

Finance/Accounting

LeverageCost of capitalWorking capitalReceivablesPayablesFinancial controlLines of credit

Decisions Sample Options Chapter

ProductQualityProcessLocationLayoutHuman resourceSupply chainInventoryScheduleMaintenance

Customized, or standardizedDefine customer expectations and how to achieve themFacility size, technology, capacityNear supplier or near customerWork cells or assembly lineSpecialized or enriched jobsSingle or multiple suppliersWhen to reorder, how much to keep on handStable or fluctuating production rateRepair as required or preventive maintenance

56, S67, S7

89

1011, S11

12, 14, 1613, 15

17

Support a Core Competence and Implement Strategy by Identifying and Executing the Key Success Factors in the Functional Areas

C1&2 - Notes S12

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