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Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.
Chapter 1Chapter 1
Introduction to Introduction to Operations and Operations and CompetitivenessCompetitiveness
To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.
Copyright 2010 John Wiley & Sons, Inc.Copyright 2010 John Wiley & Sons, Inc.
Welcome to ISQS 5343Welcome to ISQS 5343
Instructor: Dr. BurnsInstructor: Dr. Burns
Summer II 2013 SEMESTERSummer II 2013 SEMESTER
Telephone: 834-1547Telephone: 834-1547
Email: Email: [email protected]
Off hrs: 9:30-10:00 Tues., Th.Off hrs: 9:30-10:00 Tues., Th.
And by appointment And by appointment
Website: burns.ba.ttu.eduWebsite: burns.ba.ttu.edu
Copyright 2011 John Wiley & Sons, Inc.Copyright 2011 John Wiley & Sons, Inc. 1-1-33
My web siteMy web site
http://burns.ba.ttu.edu
Copyright 2011 John Wiley & Sons, Inc.Copyright 2011 John Wiley & Sons, Inc. 1-1-44
PrerequisitesPrerequisites
STATISTICSSTATISTICS ISQS 5345: Basic Statistical ConceptsISQS 5345: Basic Statistical Concepts
COMPUTER LITERACYCOMPUTER LITERACY MS ExcelMS Excel MS WordMS Word
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-55
SeatingSeating
The seat you sit in on the second The seat you sit in on the second session of class will be your seat for the session of class will be your seat for the duration of the classduration of the class
A seating chart will be ‘made-up’ thenA seating chart will be ‘made-up’ then
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-66
SurveySurvey
I will hand it out…I will hand it out…
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-77
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-88
Requirements/PedagogyRequirements/Pedagogy
4 homework sets4 homework sets Collected the day before we do our reviewCollected the day before we do our review TO GET US READY TO TAKE THE EXAMSTO GET US READY TO TAKE THE EXAMS
3 EXAMS and a FINAL3 EXAMS and a FINAL Term ProjectTerm Project
1-1-99
Term Project--Consists of six partsTerm Project--Consists of six parts
Part 1 is due 7-15-2013Part 1 is due 7-15-2013 Part 2 is due 7-17-2013Part 2 is due 7-17-2013 Part 3 is due 7-19-2013Part 3 is due 7-19-2013 Part 4 is due 7-30-2013Part 4 is due 7-30-2013 Part 5 is due 8-5-2013Part 5 is due 8-5-2013 Part 6 is due 8-9-2013Part 6 is due 8-9-2013 PROJECT IN TOTAL IS due 8-9-2013PROJECT IN TOTAL IS due 8-9-2013
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1010
Term ProjectTerm Project
Part 1—design the firm & its products/ servicesPart 1—design the firm & its products/ services Part 2—design of the quality systemPart 2—design of the quality system Part 3—design of the internal processesPart 3—design of the internal processes Part 4—design of the external processesPart 4—design of the external processes Part 5—design of the inventory system/design Part 5—design of the inventory system/design
for leannessfor leanness Part 6—design of the startup projectPart 6—design of the startup project TEAM SIZES: 3-4 TEAM SIZES: 3-4
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1111
GradingGrading
The homework is worth a total of 16%The homework is worth a total of 16% Each EXAM is worth 13%Each EXAM is worth 13%
{There are three EXAMS}{There are three EXAMS}
The FINAL is worth 15%The FINAL is worth 15% The PROJECT is worth 30%The PROJECT is worth 30%
Each project part (there are six) is worth 4%Each project part (there are six) is worth 4% The final project report is worth 6%The final project report is worth 6%
Copyright 20011 John Wiley & Sons, Inc.Copyright 20011 John Wiley & Sons, Inc. 1-1-1212
GradesGrades
90-100---A90-100---A 80-89.999---B80-89.999---B 70-79.999---C70-79.999---C
97.5-on up---A+97.5-on up---A+ 92.5-97.4999---A92.5-97.4999---A 90-92.4999—A-90-92.4999—A-
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1313
Class PedagogyClass Pedagogy
Won’t show any moviesWon’t show any movies Video clips are OK, howeverVideo clips are OK, however PowerPointPowerPoint Simulations, where possibleSimulations, where possible Lectures--more informalLectures--more informal Interactive DiscussionsInteractive Discussions
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1414
How Long does it take you to How Long does it take you to do stuff?do stuff?
Do you know?Do you know? Suppose your employer assigns a task to Suppose your employer assigns a task to
you and asks you how long it will take you you and asks you how long it will take you to do it? Could you tell him/her?to do it? Could you tell him/her?
For your benefit, I want you to estimate For your benefit, I want you to estimate how long its going to take you to do each how long its going to take you to do each project step and then record how long it project step and then record how long it actually took youactually took you
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1515
Five ‘hot’ jobs right now—Five ‘hot’ jobs right now—according to Yahoo.according to Yahoo.
http://hotjobs.yahoo.com/career-articles-five_hot_business_careers_no_mba_needed-276
Event Planning--$20--$40/hrEvent Planning--$20--$40/hr Public Relations--$43,830/yr (median)Public Relations--$43,830/yr (median) Advertising--$40,300/yr (median)Advertising--$40,300/yr (median) Web Designer--$60,000/yr (median)Web Designer--$60,000/yr (median) Search Engine Optimization--$40,000 (med.)Search Engine Optimization--$40,000 (med.) Project manager--$50,000 to $80,000 to startProject manager--$50,000 to $80,000 to start
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1616
QuestionsQuestions
How big is the U.S. economy in terms of How big is the U.S. economy in terms of GDP? What is the world-wide GDP?GDP? What is the world-wide GDP?
How big is the U.S. population in relation How big is the U.S. population in relation to the rest of the world?to the rest of the world?
What percentage of worldwide What percentage of worldwide nonrenewable resources are consumed nonrenewable resources are consumed just in the U.S. alone?just in the U.S. alone?
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1717
More questionsMore questions
Is the U.S. leadership in terms of material Is the U.S. leadership in terms of material standard of living sustainable?standard of living sustainable? What does it take to make it sustainable?What does it take to make it sustainable?
What is causing the devaluation of the What is causing the devaluation of the dollar? Will that devaluation continue?dollar? Will that devaluation continue?
Is there anything good that comes from Is there anything good that comes from devaluation of the dollar?devaluation of the dollar?
What’s bad about the $ devaluation?What’s bad about the $ devaluation?
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1818
What are some of the biggest What are some of the biggest problems our country (U.S.A.) problems our country (U.S.A.) faces?faces?
The war on terrorThe war on terror Mexican border out of controlMexican border out of control The national debt; the budget and trade deficitsThe national debt; the budget and trade deficits Contributions to global warmingContributions to global warming High energy costsHigh energy costs Health care is too expensiveHealth care is too expensive Major employers like banks tankingMajor employers like banks tanking
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-1919
What solutions do you foresee to What solutions do you foresee to America’s problems?America’s problems?
Massive Jobs growth (particularly high-value jobs) and Massive Jobs growth (particularly high-value jobs) and Immigration of tax-paying, foreign professionals Immigration of tax-paying, foreign professionals
Strong productivity growthStrong productivity growth Sell Resources owned by the Federal Gov.Sell Resources owned by the Federal Gov.
Oil on Federally-owned landsOil on Federally-owned lands Gas Gas on Federally-owned landson Federally-owned lands Coal Coal on Federally-owned landson Federally-owned lands Uranium Uranium on Federally-owned landson Federally-owned lands Electricity (solar and wind farms on federally-owned land)Electricity (solar and wind farms on federally-owned land)
BUY AMERICANBUY AMERICAN
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2020
The National DebtThe National Debt
Officially, $ 16,455,325,678,402.07 as of today Officially, $ 16,455,325,678,402.07 as of today accumulating at the rate of $3.5 billion per day--accumulating at the rate of $3.5 billion per day--$139,250 per taxpayer$139,250 per taxpayer
According to Kotlikoff, the fiscal gap is a stunning According to Kotlikoff, the fiscal gap is a stunning $65.9 trillion—that is more than twice the total net $65.9 trillion—that is more than twice the total net worth of the entire countryworth of the entire country
Social Security and Medicare liabilities are Social Security and Medicare liabilities are estimated at $40 trillionestimated at $40 trillion
No plans for accommodation of the retirements in No plans for accommodation of the retirements in 77 million baby boomers beginning now, but 77 million baby boomers beginning now, but becoming substantial after 2014becoming substantial after 2014
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2121
Can we increase tax rates, really?Can we increase tax rates, really?
Tax RevenuesGov expenditures
Tax Rate
GDP
SS & Medicare
debt service
Interest rate
NationalDebt
Deficit
<Other FederalRevenues>
Tax base
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2222
The Federal Government must The Federal Government must become an entrepreneurbecome an entrepreneur
Other FederalRevenues
Sale of oil and gas offof Federal lands
Sale of uranium off ofFederal lands
Sale of solar and windpower off of federal lands
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2323
Solutions--KotlikoffSolutions--Kotlikoff
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2424
CompetitivenessCompetitiveness
The opportunities are hugeThe opportunities are huge There will be massive changeThere will be massive change You can exploit that change to create You can exploit that change to create
wealthwealth
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2525
Competitiveness
Standard of Living
Jobs
ProductivityCycle Time
Quality
Operations
Creativity Innovation Improvement Design
Cost
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2626
What are some OM entry-level What are some OM entry-level titles?titles?
PROJECT MANAGERPROJECT MANAGER BUSINESS PROCESS ANALYSTBUSINESS PROCESS ANALYST INVENTORY ANALYSTINVENTORY ANALYST PROJECT COORDINATORPROJECT COORDINATOR UNIT SUPERVISORUNIT SUPERVISOR SUPPLY CHAIN ANALYSTSUPPLY CHAIN ANALYST MATERIALS MANAGERMATERIALS MANAGER QUALITY ASSURANCE SPECIALISTQUALITY ASSURANCE SPECIALIST PRODUCTION SCHEDULERPRODUCTION SCHEDULER LOGISTICS PLANNERLOGISTICS PLANNER
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2727
Competitiveness, Productivity, Competitiveness, Productivity, Leanness, Agility and MaturityLeanness, Agility and Maturity
That’s what this course is aboutThat’s what this course is about Creating wealth through production of Creating wealth through production of
goods and servicesgoods and services
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2828
Potential Project TopicsPotential Project Topics
Products/services that help us conserve Products/services that help us conserve energy/waterenergy/water ResidentialResidential CommercialCommercial
Products that help the retiring baby boom Products that help the retiring baby boom generation—77 million of them in the U.S. alonegeneration—77 million of them in the U.S. alone
Products/processes that reduce the cost of Products/processes that reduce the cost of health care?health care?
Products/services that help us become Products/services that help us become GREEN GREEN ANDAND
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-2929
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3030
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3232
Lecture OutlineLecture Outline
What Operations and Supply Chain What Operations and Supply Chain Managers DoManagers Do
Operations FunctionOperations Function Evolution of Operations and Supply Chain Evolution of Operations and Supply Chain
ManagementManagement Globalization and CompetitivenessGlobalization and Competitiveness OperationsOperations Learning Objectives for This CourseLearning Objectives for This Course
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3333
What Operations and What Operations and Supply Chain Managers DoSupply Chain Managers Do
What is Operations Management?What is Operations Management? design, operation, and improvement of productive design, operation, and improvement of productive
systemssystems What is Operations?What is Operations?
a function or system that transforms inputs into outputs of a function or system that transforms inputs into outputs of greater valuegreater value
What is a Transformation Process?What is a Transformation Process? a series of activities along a a series of activities along a value chain value chain extending from extending from
supplier to customersupplier to customer activities that do not add value are superfluous and activities that do not add value are superfluous and
should be eliminatedshould be eliminated
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3434
Physical: Physical: as in manufacturing operationsas in manufacturing operations Locational: Locational: as in transportation or as in transportation or
warehouse operationswarehouse operations Exchange: Exchange: as in retail operationsas in retail operations Physiological: Physiological: as in health careas in health care Psychological: Psychological: as in entertainmentas in entertainment Informational: Informational: as in communicationas in communication
Transformation ProcessTransformation Process
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3535
INPUT •Material•Machines•Labor•Management•Capital
TRANSFORMATIONPROCESS
OUTPUT •Goods•Services
Feedback & RequirementsFeedback & Requirements
Operations as a Operations as a Transformation ProcessTransformation Process
From Paradigms to ProductsFrom Paradigms to Products
ParadigmsParadigms PrinciplesPrinciples
PracticesPractices ProcessesProcesses
Products and ServicesProducts and Services
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3636
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3737
Operations FunctionOperations Function
OperationsOperations MarketingMarketing Finance and Finance and
AccountingAccounting Human Human
ResourcesResources Outside Outside
SuppliersSuppliers
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3838
How is Operations Relevant to my How is Operations Relevant to my Major?Major?
AccountingAccounting
Information Information TechnologyTechnology
ManagementManagement
““As an auditor you must As an auditor you must understand the fundamentals of understand the fundamentals of operations management.”operations management.”
““IT is a tool, and there’s no better IT is a tool, and there’s no better place to apply it than in operations.” place to apply it than in operations.”
““We use so many things you learn We use so many things you learn in an operations class—scheduling, in an operations class—scheduling, lean production, theory of lean production, theory of constraints, and tons of quality constraints, and tons of quality tools.”tools.”
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-3939
How is Operations Relevant to my How is Operations Relevant to my Major? (cont.)Major? (cont.)
EconomicsEconomics
MarketingMarketing
FinanceFinance
““It’s all about processes. I live It’s all about processes. I live by flowcharts and Pareto by flowcharts and Pareto analysis.”analysis.”
““How can you do a good job How can you do a good job marketing a product if you’re marketing a product if you’re unsure of its quality or delivery unsure of its quality or delivery status?”status?”
““Most of our capital budgeting Most of our capital budgeting requests are from operations, requests are from operations, and most of our cost savings, and most of our cost savings, too.”too.”
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4040
Evolution of Operations and Evolution of Operations and Supply Chain ManagementSupply Chain Management
Craft productionCraft production process of handcrafting products or services for process of handcrafting products or services for
individual customers in the craftsman’s shopindividual customers in the craftsman’s shop The Industrial Revolution brought:The Industrial Revolution brought:
Division of labor -- Adam SmithDivision of labor -- Adam Smith dividing a job into a series of small tasks each performed dividing a job into a series of small tasks each performed
by a different workerby a different worker Interchangeable parts – Eli WhitneyInterchangeable parts – Eli Whitney
standardization of parts initially as replacement parts; standardization of parts initially as replacement parts; enabled mass productionenabled mass production
Steam Engine – James WattSteam Engine – James Watt
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4141
Scientific managementScientific management systematic analysis of work methodssystematic analysis of work methods Mass productionMass production
high-volume production of a standardized product high-volume production of a standardized product for a mass marketfor a mass market
Lean productionLean production adaptation of mass production that prizes quality, adaptation of mass production that prizes quality,
flexibility and low costsflexibility and low costs
Evolution of Operations and Evolution of Operations and Supply Chain Management (cont.)Supply Chain Management (cont.)
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4242
Historical Events in Historical Events in Operations ManagementOperations Management
Era Events/Concepts Dates Originator
Industrial
Revolution
Steam engine 1769 James Watt
Division of labor 1776 Adam Smith
Interchangeable parts 1790 Eli Whitney
Scientific Management
Principles of scientific
management1911 Frederick W. Taylor
Time and motion studies 1911Frank and Lillian Gilbreth
Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4343
Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)
Era Events/Concepts Dates Originator
Human Relations
Hawthorne studies 1930 Elton Mayo
Motivation theories1940s Abraham Maslow1950s Frederick Herzberg1960s Douglas McGregor
Operations Research
Linear programming 1947 George DantzigDigital computer 1951 Remington RandSimulation, waiting
line theory, decision
theory, PERT/CPM
1950sOperations research groups
MRP, EDI, EFT, CIM1960s, 1970s
Joseph Orlicky, IBM
and others
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4444
Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)
Era Events/Concepts Dates Originator
Quality
Revolution
JIT (just-in-time) 1970s Taiichi Ohno (Toyota)TQM (total quality
management)1980s
W. Edwards Deming,
Joseph JuranStrategy and
operations1980s
Wickham Skinner,
Robert HayesBusiness process reengineering
1990sMichael Hammer,
James Champy
Six Sigma 1990s GE, Motorola
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4545
Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)
Era Events/Concepts Dates OriginatorInternet Revolution
Internet, WWW, ERP, supply chain management
1990s ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLEE-commerce 2000s Amazon, Yahoo,
eBay, Google, and others
Globalization WTO, European Union, and other trade agreements, global supply chains, outsourcing, BPO, Services Science
1990s
2000s
Numerous countries
and companies
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4646
Evolution of Operations and Evolution of Operations and Supply Chain Management (cont.)Supply Chain Management (cont.)
Supply chain managementSupply chain management management of the flow of information, products, and services across management of the flow of information, products, and services across
a network of customers, enterprises, and supply chain partnersa network of customers, enterprises, and supply chain partners
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4747
Globalization and Globalization and CompetitivenessCompetitiveness
Why “go global”?Why “go global”? favorable costfavorable cost access to international marketsaccess to international markets response to changes in demandresponse to changes in demand reliable sources of supplyreliable sources of supply latest trends and technologieslatest trends and technologies
Increased globalizationIncreased globalization results from the Internet and falling trade results from the Internet and falling trade
barriersbarriers
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4848
Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)
Hourly Compensation Costs for Production WorkersHourly Compensation Costs for Production WorkersSource:Source: U.S. Bureau of Labor Statistics, 2005. U.S. Bureau of Labor Statistics, 2005.
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-4949
Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)
World Population DistributionWorld Population DistributionSource:Source: U.S. Census Bureau, 2006. U.S. Census Bureau, 2006.
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5050
Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)
Trade in Goods as % of GDPTrade in Goods as % of GDP
(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5151
Productivity and Productivity and CompetitivenessCompetitiveness
CompetitivenessCompetitiveness degree to which a nation can produce goods and services that degree to which a nation can produce goods and services that
meet the test of international marketsmeet the test of international markets Productivity – THE MEASURE OF Productivity – THE MEASURE OF
COMPETITIVENESSCOMPETITIVENESS ratio of output to inputratio of output to input
OutputOutput sales made, products produced, customers served, meals sales made, products produced, customers served, meals
delivered, or calls answereddelivered, or calls answered InputInput
labor hours, investment in equipment, material usage, or labor hours, investment in equipment, material usage, or square footagesquare footage
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5252
Measures of Productivity
Productivity and Productivity and Competitiveness (cont.)Competitiveness (cont.)
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5353
Productivity and Productivity and Competitiveness (cont.)Competitiveness (cont.)
Average Annual Growth Rates in Productivity, 1995-2005.Average Annual Growth Rates in Productivity, 1995-2005.Source: Source: Bureau of Labor Statistics. A Chartbook of Bureau of Labor Statistics. A Chartbook of
International Labor Comparisons. January 2007, p. 28.International Labor Comparisons. January 2007, p. 28.
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5454
Productivity and Productivity and Competitiveness (cont.)Competitiveness (cont.)
Average Annual Growth Rates in Output and Input, 1995-2005Average Annual Growth Rates in Output and Input, 1995-2005
Source:Source: Bureau of Labor Statistics. A Chartbook of International Bureau of Labor Statistics. A Chartbook of International Labor Comparisons, January 2007, p. 26.Labor Comparisons, January 2007, p. 26.
Dramatic Increase in Output w/ Decrease in
Labor Hours
Dramatic Increase in Output w/ Decrease in
Labor Hours
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5555
RetrenchingRetrenching productivity is increasing, but both output and input productivity is increasing, but both output and input
decrease with input decreasing at a faster ratedecrease with input decreasing at a faster rate
Assumption that more input would cause Assumption that more input would cause output to increase at the same rateoutput to increase at the same rate certain limits to the amount of output may not be certain limits to the amount of output may not be
consideredconsidered output producedoutput produced is emphasized, not is emphasized, not output soldoutput sold; ;
increased inventoriesincreased inventories
Productivity and Productivity and Competitiveness (cont.)Competitiveness (cont.)
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5656
StrategyStrategy Provides direction for achieving a missionProvides direction for achieving a mission
Five Steps for Strategy FormulationFive Steps for Strategy Formulation Defining a primary taskDefining a primary task
What is the firm in the business of doing?What is the firm in the business of doing? Assessing core competenciesAssessing core competencies
What does the firm do better than anyone else?What does the firm do better than anyone else? Determining order winners and order qualifiersDetermining order winners and order qualifiers
What qualifies an item to be considered for purchase?What qualifies an item to be considered for purchase? What wins the order? What wins the order?
Positioning the firmPositioning the firm How will the firm compete?How will the firm compete?
Deploying the strategyDeploying the strategy
Strategy and OperationsStrategy and Operations
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5757
Strategic PlanningStrategic Planning
Missionand VisionMission
and Vision
CorporateStrategy
CorporateStrategy
OperationsStrategy
OperationsStrategy
MarketingStrategy
MarketingStrategy
FinancialStrategyFinancialStrategy
Voice of theBusiness
Voice of theBusinessVoice of the
CustomerVoice of the
Customer
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5858
Order WinnersOrder Winnersand Order Qualifiersand Order Qualifiers
Source:Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan Betts, Betts, Operations and Process ManagementOperations and Process Management, Prentice Hall, 2006, p. 47, Prentice Hall, 2006, p. 47
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-5959
Positioning the FirmPositioning the Firm
CostCost SpeedSpeed QualityQuality FlexibilityFlexibility
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6060
Positioning the Firm: Positioning the Firm: CostCost
Waste eliminationWaste elimination relentlessly pursuing the removal of all wasterelentlessly pursuing the removal of all waste
Examination of cost structureExamination of cost structure looking at the entire cost structure for looking at the entire cost structure for
reduction potentialreduction potential Lean productionLean production
providing low costs through disciplined providing low costs through disciplined operationsoperations
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6161
Positioning the Firm:Positioning the Firm:SpeedSpeed
fast moves, fast adaptations, tight linkagesfast moves, fast adaptations, tight linkages InternetInternet
conditioned customers to expect immediate responsesconditioned customers to expect immediate responses Service organizationsService organizations
always competed on speed (McDonald’s, LensCrafters, and always competed on speed (McDonald’s, LensCrafters, and Federal Express)Federal Express)
ManufacturersManufacturers time-based competition: build-to-order production and time-based competition: build-to-order production and
efficient supply chainsefficient supply chains Fashion industryFashion industry
two-week design-to-rack lead time of Spanish retailer, Zaratwo-week design-to-rack lead time of Spanish retailer, Zara
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6262
Positioning the Firm: Positioning the Firm: QualityQuality
Minimizing defect rates or conforming to design Minimizing defect rates or conforming to design specifications; please the customerspecifications; please the customer
Ritz-Carlton - one customer at a timeRitz-Carlton - one customer at a time Service system is designed to “move heaven and Service system is designed to “move heaven and
earth” to satisfy customerearth” to satisfy customer Every employee is empowered to satisfy a guest’s Every employee is empowered to satisfy a guest’s
wish wish Teams at all levels set objectives and devise quality Teams at all levels set objectives and devise quality
action plansaction plans Each hotel has a quality leader Each hotel has a quality leader
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6363
Positioning the Firm:Positioning the Firm:FlexibilityFlexibility
ability to adjust to changes in product mix, ability to adjust to changes in product mix, production volume, or designproduction volume, or design
National Bicycle Industrial CompanyNational Bicycle Industrial Company offers 11,231,862 variationsoffers 11,231,862 variations delivers within two weeks at costs only 10% delivers within two weeks at costs only 10%
above standard modelsabove standard models mass customizationmass customization: the mass production of : the mass production of
customized partscustomized parts
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6464
Policy DeploymentPolicy Deployment
Policy deploymentPolicy deployment translates corporate strategy into measurable translates corporate strategy into measurable
objectivesobjectives
HoshinsHoshins action plans (small projects) generated from the action plans (small projects) generated from the
policy deployment processpolicy deployment process
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6565
Policy DeploymentPolicy Deployment
Derivation of an Action Plan Using Policy DeploymentDerivation of an Action Plan Using Policy Deployment
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-6666
Balanced ScorecardBalanced Scorecard
Balanced scorecardBalanced scorecard measuring more than financial performancemeasuring more than financial performance
financesfinances customerscustomers processesprocesses learning and growinglearning and growing
Key performance indicatorsKey performance indicators a set of measures that help managers evaluate a set of measures that help managers evaluate
performance in critical areasperformance in critical areas
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Balanced ScorecardBalanced ScorecardBalancedBalanced Scorecard WorksheetScorecard Worksheet
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Balanced ScorecardBalanced Scorecard
Radar ChartRadar Chart DashboardDashboard
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Operations StrategyOperations Strategy
ProductsProducts
ServicesServices ProcessProcess
andand
TechnologyTechnology
CapacityCapacity
HumanHuman
ResourcesResources QualityQuality
FacilitiesFacilities SourcingSourcing OperatingOperating
SystemsSystems
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Organization of This Text:Organization of This Text:Part I – Operations ManagementPart I – Operations Management
Intro. to Operations andIntro. to Operations andSupply Chain Management:Supply Chain Management: Chapter 1Chapter 1
Quality Management:Quality Management: Chapter 2Chapter 2 Statistical Quality Control:Statistical Quality Control: Chapter 3Chapter 3 Product Design:Product Design: Chapter 4Chapter 4 Service Design:Service Design: Chapter 5Chapter 5 Processes and Technology:Processes and Technology: Chapter 6Chapter 6 Facilities:Facilities: Chapter 7Chapter 7 Human Resources:Human Resources: Chapter 8Chapter 8 Project Management:Project Management: Chapter 9Chapter 9
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Supply ChainSupply ChainStrategy and Design:Strategy and Design: Chapter 10Chapter 10
Global Supply ChainGlobal Supply ChainProcurement and Distribution:Procurement and Distribution: Chapter 11Chapter 11
Forecasting:Forecasting: Chapter 12Chapter 12 Inventory Management:Inventory Management: Chapter 13Chapter 13 Sales andSales and
Operations Planning:Operations Planning: Chapter 14Chapter 14 Resource Planning:Resource Planning: Chapter 15Chapter 15 Lean Systems:Lean Systems: Chapter 16Chapter 16 Scheduling:Scheduling: Chapter 17Chapter 17
Organization of This Text:Organization of This Text:Part II – Supply Chain ManagementPart II – Supply Chain Management
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Learning Objectives of Learning Objectives of this Coursethis Course
Gain an appreciation of strategic importance of Gain an appreciation of strategic importance of operations and supply chain management in a operations and supply chain management in a global business environmentglobal business environment
Understand how operations relates to other Understand how operations relates to other business functionsbusiness functions
Develop a working knowledge of concepts and Develop a working knowledge of concepts and methods related to designing and managing methods related to designing and managing operations and supply chainsoperations and supply chains
Develop a skill set for quality and process Develop a skill set for quality and process improvementimprovement
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Copyright 2009 John Wiley & Sons, Inc.Copyright 2009 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without of the 1976 United States Copyright Act without express permission of the copyright owner is express permission of the copyright owner is unlawful. Request for further information should unlawful. Request for further information should be addressed to the Permission Department, be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only make back-up copies for his/her own use only and not for distribution or resale. The Publisher and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, assumes no responsibility for errors, omissions, or damages caused by the use of these or damages caused by the use of these programs or from the use of the information programs or from the use of the information herein. herein.
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THIS IS AS FAR AS YOU NEED THIS IS AS FAR AS YOU NEED TO GO!!TO GO!!
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Lecture OutlineLecture Outline
What Do Operations Managers Do?What Do Operations Managers Do? Operations FunctionOperations Function Evolution of Operations ManagementEvolution of Operations Management Operations Management and E–BusinessOperations Management and E–Business Globalization and CompetitivenessGlobalization and Competitiveness Primary Topics in Operations ManagementPrimary Topics in Operations Management Learning Objectives for this CourseLearning Objectives for this Course
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What Do Operations What Do Operations Managers Do?Managers Do?
What are Operations?What are Operations? a function, a function, processprocess or system that transforms inputs into or system that transforms inputs into
outputs of greater valueoutputs of greater value What is a Transformation Process?What is a Transformation Process?
a series of activities along a a series of activities along a value chain value chain extending from extending from supplier to customersupplier to customer
activities that do not add value are superfluous and activities that do not add value are superfluous and should be eliminatedshould be eliminated
What is Operations Management?What is Operations Management? design, operation, and improvement of productive design, operation, and improvement of productive
systemssystems
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Physical: Physical: as in manufacturing operationsas in manufacturing operations Locational: Locational: as in transportation operationsas in transportation operations Exchange: Exchange: as in retail operationsas in retail operations Physiological: Physiological: as in health careas in health care Psychological: Psychological: as in entertainmentas in entertainment Informational: Informational: as in communicationas in communication
Transformation ProcessTransformation Process
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INPUT •Material•Machines•Labor•Management•Capital
TRANSFORMATIONPROCESS
OUTPUT •Goods•Services
FeedbackFeedback
Operations as a Operations as a Transformation ProcessTransformation Process
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Operations FunctionOperations Function
OperationsOperations MarketingMarketing Finance and Finance and
AccountingAccounting Human Human
ResourcesResources Outside Outside
SuppliersSuppliers
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How is Operations Relevant to my How is Operations Relevant to my Major?Major?
AccountingAccounting
Information Information TechnologyTechnology
ManagementManagement
““As an auditor you must As an auditor you must understand the fundamentals of understand the fundamentals of operations management.”operations management.”
““IT is a tool, and there’s no better IT is a tool, and there’s no better place to apply it than in operations.” place to apply it than in operations.”
““We use so many things you learn We use so many things you learn in an operations class—scheduling, in an operations class—scheduling, lean production, theory of lean production, theory of constraints, and tons of quality constraints, and tons of quality tools.”tools.”
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How is Operations Relevant to my How is Operations Relevant to my Major?Major?
EconomicsEconomics
MarketingMarketing
FinanceFinance
““It’s all about processes. I live It’s all about processes. I live by flowcharts and Pareto by flowcharts and Pareto analysis.”analysis.”
““How can you do a good job How can you do a good job marketing a product if you’re marketing a product if you’re unsure of its quality or delivery unsure of its quality or delivery status?”status?”
““Most of our capital budgeting Most of our capital budgeting requests are from operations, requests are from operations, and most of our cost savings, and most of our cost savings, too.”too.”
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Typical entry-level Positions for Typical entry-level Positions for Operations Management MajorsOperations Management Majors
Business process Business process analystanalyst
Inventory analystInventory analyst Project coordinatorProject coordinator Project ManagerProject Manager Unit supervisorUnit supervisor Supply chain analystSupply chain analyst
Materials ManagerMaterials Manager Quality assurance Quality assurance
specialistspecialist Production schedulerProduction scheduler Logistics plannerLogistics planner
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Evolution of Operations Evolution of Operations ManagementManagement
Craft productionCraft production process of handcrafting products or process of handcrafting products or
services for individual customersservices for individual customers Division of laborDivision of labor
dividing a job into a series of small tasks dividing a job into a series of small tasks each performed by a different workereach performed by a different worker
Interchangeable partsInterchangeable parts standardization of parts initially as standardization of parts initially as
replacement parts; enabled mass replacement parts; enabled mass productionproduction
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Scientific managementScientific management systematic analysis of work methodssystematic analysis of work methods
Mass productionMass production high-volume production of a standardized high-volume production of a standardized
product for a mass marketproduct for a mass market
Lean productionLean production adaptation of mass production that prizes adaptation of mass production that prizes
quality and flexibilityquality and flexibility
Evolution of Operations Evolution of Operations Management (cont.)Management (cont.)
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Historical Events in Historical Events in Operations ManagementOperations Management
Era Events/Concepts Dates Originator
Industrial
Revolution
Steam engine 1769 James Watt
Division of labor 1776 Adam Smith
Interchangeable parts 1790 Eli Whitney
Scientific Management
Principles of scientific
management1911 Frederick W. Taylor
Time and motion studies 1911Frank and Lillian Gilbreth
Activity scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford
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Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)
Era Events/Concepts Dates Originator
Human Relations
Hawthorne studies 1930 Elton Mayo
Motivation theories1940s Abraham Maslow1950s Frederick Herzberg1960s Douglas McGregor
Operations Research
Linear programming 1947 George DantzigDigital computer 1951 Remington RandSimulation, waiting
line theory, decision
theory, PERT/CPM
1950sOperations research groups
MRP, EDI, EFT, CIM1960s, 1970s
Joseph Orlicky, IBM
and others
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Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)
Era Events/Concepts Dates Originator
Quality
Revolution
JIT (just-in-time) 1970s Taiichi Ohno (Toyota)TQM (total quality
management)1980s
W. Edwards Deming,
Joseph JuranStrategy and
operations1990s
Wickham Skinner,
Robert HayesBusiness process
reengineering1990s
Michael Hammer,
James Champy
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Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)
Era Events/Concepts Dates OriginatorGlobalization WTO, European Union,
and other trade agreements
1990s
2000s
Numerous countries
and companies
Internet Revolution
Internet, WWW, ERP, supply chain management
1990s ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE,
PeopleSoftE-commerce 2000s Amazon, Yahoo,
eBay, and others
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Continuum from Goods Continuum from Goods to Servicesto Services
Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.
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Operations Management Operations Management and E-Businessand E-Business
Categories of E-Commerce
Bu
sin
ess
Bu
sin
ess
Co
nsu
mer
Co
nsu
mer
BusinessBusiness ConsumerConsumer
B2BCommerceone.com
B2CAmazon.com
C2BPriceline.com
C2CeBay.com
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An Integrated Value ChainAn Integrated Value Chain
Value chain: Value chain: set of processes that create and set of processes that create and deliver products to customerdeliver products to customer
Manufacturer SupplierCustomer
Flow of information (customer order)Flow of information (customer order)
Manufacturer SupplierCustomer
Flow of information (customer order)Flow of information (customer order)
Flow of product (order fulfillment)Flow of product (order fulfillment)
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-9292
Impact of E-Business on Impact of E-Business on Operations ManagementOperations Management
Comparison shopping by customers
Direct contact with customers
Business processes conducted online
Customer expectations escalate; quality must be maintained and costs lowered
No more guessing about demand is necessary; inventory costs go down; product and service design improves; build to-order products and services is made possible
Transaction costs are lower; customer support costs decrease; e-procurement saves big bucks
Benefits of E-Business Impact on Operations
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Impact of E-Business on Impact of E-Business on Operations Management (cont.)Operations Management (cont.)
Access to customers worldwide
Middlemen are eliminated
Access to suppliers worldwide
Demand increases; order fulfillment and logistics become major issues; production moves overseas
Logistics change from delivering to a store or distribution center to delivering to individual homes; consumer demand is more erratic and unpredictable than business demand
Outsourcing increases; more alliances and partnerships among firms are formed; supply is less certain; global supply chain issues arise
Benefits of E-Business Impact on Operations
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Impact of E-Business on Impact of E-Business on Operations Management (cont.)Operations Management (cont.)
Online auctions and e-marketplaces
Better and faster decision making
Competitive bidding lowers cost of materials; supply needs can be found in one location
More timely information is available with immediate access by all stakeholders in decision-making process; customer orders and product designs can be clarified electronically; electronic meetings can be held; collaborative planning is facilitated
Benefits of E-Business Impact on Operations
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Impact of E-Business on Impact of E-Business on Operations Management (cont.)Operations Management (cont.)
IT synergy
Expanded supply chains
Productivity increases as information can be shared more efficiently internally and between trading partners
Order fulfillment, logistics, warehousing, transportation and delivery become focus of operations management; risk is spread out; trade barriers fall
Benefits of E-Business Impact on Operations
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Globalization and Globalization and CompetitivenessCompetitiveness
Favorable costFavorable cost Access to international Access to international
marketsmarkets Response to changes in Response to changes in
demanddemand Reliable sources of Reliable sources of
supplysupply 14 major trade 14 major trade
agreements in 1990sagreements in 1990s Peak: 26% in 2000Peak: 26% in 2000
World Trade Compared to World GDPSource: “Real GDP and Trade Growth of OECD Countries, 2001–03,” International Trade Statistics 2003, World Trade Organization, www.wto.org
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Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)
Hourly Wage Rates for Selected CountriesSource: “International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.
Germany: $26.18Germany: $26.18
USA: $21.33USA: $21.33
Taiwan: $5.41Taiwan: $5.41
Mexico: $2.38Mexico: $2.38
China: $0.50China: $0.50
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Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)
Trade with China: Percent of each country‘s trade Trade with China: Percent of each country‘s trade Source: Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,” “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”
International Trade Statistics 2003, World Trade Organization, www.wto.orgInternational Trade Statistics 2003, World Trade Organization, www.wto.org
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Risks of GlobalizationRisks of Globalization
Cultural differencesCultural differences Supply chain logisticsSupply chain logistics Safety, security, and Safety, security, and
stabilitystability Quality problemsQuality problems Corporate image Corporate image Loss of capabilitiesLoss of capabilities
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Competitiveness and Competitiveness and ProductivityProductivity
CompetitivenessCompetitiveness degree to which a nation can produce goods and degree to which a nation can produce goods and
services that meet the test of international services that meet the test of international marketsmarkets
ProductivityProductivity ratio of output to inputratio of output to input
OutputOutput sales made, products produced, customers sales made, products produced, customers
served, meals delivered, or calls answeredserved, meals delivered, or calls answered InputInput
labor hours, investment in equipment, material labor hours, investment in equipment, material usage, or square footageusage, or square footage
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Measures of Productivity
Competitiveness and Competitiveness and Productivity (cont.)Productivity (cont.)
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Changes in Productivity Changes in Productivity for Select Countriesfor Select Countries
Internet-enabled productivityInternet-enabled productivity
- Dot com bust- 9/11 terrorist attacks- Dot com bust- 9/11 terrorist attacks
Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004
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Become efficientBecome efficient output increases with little or no increase in inputoutput increases with little or no increase in input
ExpandExpand both output and input grow with output growing both output and input grow with output growing
more rapidlymore rapidly Achieve breakthroughsAchieve breakthroughs
output increases while input decreasesoutput increases while input decreases DownsizeDownsize
output remains the same and input is reducedoutput remains the same and input is reduced RetrenchRetrench
both output and input decrease, with input both output and input decrease, with input decreasing at a faster ratedecreasing at a faster rate
Productivity IncreaseProductivity Increase
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Competitiveness and Competitiveness and ProductivityProductivity
Productivity as a Function of Inputs and Outputs, 2001–2002Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003
Breakthrough Performance
Breakthrough Performance
More EfficientMore Efficient
RetrenchRetrench
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Global Competitiveness Global Competitiveness RankingRanking
1.1. FinlandFinland2.2. United StatesUnited States3.3. SwedenSweden4.4. DenmarkDenmark5.5. TaiwanTaiwan6.6. SingaporeSingapore7.7. SwitzerlandSwitzerland8.8. IcelandIceland9.9. NorwayNorway10.10. AustraliaAustralia
Source: Global Competitiveness Report 2003–2004, World Economic Forum, January 2004, www.weforum.org
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Economies of ScaleEconomies of Scale Capital InvestmentCapital Investment Access to Supply and Distribution Access to Supply and Distribution
ChannelsChannels Learning CurveLearning Curve
Operations–Oriented Operations–Oriented Barriers to EntryBarriers to Entry
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Primary Topics in Primary Topics in Operations ManagementOperations Management
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Primary Topics in Operations Primary Topics in Operations Management (cont.)Management (cont.)
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Learning Objectives of Learning Objectives of this Coursethis Course
Gain an appreciation of strategic importance of Gain an appreciation of strategic importance of operations in a global business environmentoperations in a global business environment
Understand how operations relates to other Understand how operations relates to other business functionsbusiness functions
Develop a working knowledge of concepts and Develop a working knowledge of concepts and methods related to designing and managing methods related to designing and managing operationsoperations
Develop a skill set for quality and process Develop a skill set for quality and process improvementimprovement
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-110110
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without of the 1976 United States Copyright Act without express permission of the copyright owner is express permission of the copyright owner is unlawful. Request for further information should unlawful. Request for further information should be addressed to the Permission Department, be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only make back-up copies for his/her own use only and not for distribution or resale. The Publisher and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, assumes no responsibility for errors, omissions, or damages caused by the use of these or damages caused by the use of these programs or from the use of the information programs or from the use of the information herein. herein.
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Introduction: The Growing Introduction: The Growing Federal Deficit—is it a real Federal Deficit—is it a real Problem?Problem?
Current deficit stands at 8.25 trillion dollarsCurrent deficit stands at 8.25 trillion dollars This does not take into account the amount the This does not take into account the amount the
government owes to Social Security and government owes to Social Security and MedicareMedicare
Taking this into account the real federal debt is Taking this into account the real federal debt is nearly $30 trillion or $100,000 for every man nearly $30 trillion or $100,000 for every man woman and child in the country.woman and child in the country.
If you are head of a household of four, you If you are head of a household of four, you owe the government $400,000owe the government $400,000
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An Assessment using a methodology An Assessment using a methodology that Assimilates Three World Viewsthat Assimilates Three World Views
Statistics/ForecastingStatistics/Forecasting Dynamic modeling/simulationDynamic modeling/simulation Systems ThinkingSystems Thinking
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A System Dynamics Model: A System Dynamics Model: Purpose Purpose
To address the question “Is our debt To address the question “Is our debt serviceable over the long haul?”serviceable over the long haul?”
To discern that, we constructed a model To discern that, we constructed a model that was able to forecast debt service that was able to forecast debt service and annual revenues to come up with a and annual revenues to come up with a ratio of debt service to revenuesratio of debt service to revenues
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Assumptions and Starting PointsAssumptions and Starting Points U.S. Population projections (‘mid-series’) by U.S. Population projections (‘mid-series’) by
Census Bureau Department of Commerce (2000) Census Bureau Department of Commerce (2000) are basis for population numbers.are basis for population numbers.
Only about 70% of population participates in Only about 70% of population participates in workforce (RAND, 2004)workforce (RAND, 2004)
Federal revenues are stabilizing at 19% of GDP Federal revenues are stabilizing at 19% of GDP over the past 50 years (Jones, 2003)over the past 50 years (Jones, 2003)
If present policies are continued federal deficit If present policies are continued federal deficit would rise from current 3% to 20% of GDP by the would rise from current 3% to 20% of GDP by the year 2075(Jones, 2003)year 2075(Jones, 2003)
Current avg interest rate on National Debt is 4.8% Current avg interest rate on National Debt is 4.8% p.a. (Bureau of Public Debt, 2006)p.a. (Bureau of Public Debt, 2006)
Avg GDP growth rate has been 3% for the period Avg GDP growth rate has been 3% for the period 1994-2003 (IMF, 2004)1994-2003 (IMF, 2004)
AAAS predicts a decline in the federal Deficit by AAAS predicts a decline in the federal Deficit by the year 2015 (AAAS, 2005)the year 2015 (AAAS, 2005)
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Basic Simplified StructureBasic Simplified Structure
NationalFederal
Debt
annual federaldeficit
annual debt service
Assumed aggregateannual interest rate
GDP
GDP growth rate
federal revenues
ratio of debtservice to revenues
GDP growth norm
Fract of GDP that isfederal revenue
deficit as a fractionof GDP
budget deficitlookup
<Time>
normalizing factor
GDP look up <Time>
GDP Gr switch
budget deficitlookup2
turn around switch
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About the Structure AboveAbout the Structure Above
Obviously, persistent Federal deficits are Obviously, persistent Federal deficits are accumulated within the National Debtaccumulated within the National Debt
The model starts on January 1, 2005 The model starts on January 1, 2005 with an assumed national debt of 7.596 with an assumed national debt of 7.596 trillions (Bureau of Public Debt, 2006)trillions (Bureau of Public Debt, 2006)
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-120120
Debt Service to Federal RevenuesDebt Service to Federal Revenuesratio of debt service to revenues
0.8
0.6
0.4
0.2
0
2 2 2 2 2 2 2 22 2
22
2 22
22
2 22
22
22
2
2
2
2
1 1 1 1 1 1 1 1 1 1 1 1 11
1 11
11
1 11
11
11
11
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)
ratio of debt service to revenues : Debt1 Dmnl1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
ratio of debt service to revenues : Debt2 Dmnl2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
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What the Above Curves Don’t What the Above Curves Don’t ShowShow
The additional burdens to be brought to The additional burdens to be brought to bear upon the Federal governmentbear upon the Federal government
Retiring baby-boomers living longer, will Retiring baby-boomers living longer, will require more than the SSA can pay out require more than the SSA can pay out after the year 2025after the year 2025
Other entitlement programs coming into Other entitlement programs coming into full play—the military and civil service full play—the military and civil service pension programs, specificallypension programs, specifically
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More concerns leading to lower More concerns leading to lower federal revenuesfederal revenues
The Bush tax cutsThe Bush tax cuts Offshoring of jobsOffshoring of jobs Devaluation of the dollar leading to Devaluation of the dollar leading to
higher inflation, higher interest rates, and higher inflation, higher interest rates, and a slowing economya slowing economy
Higher energy pricesHigher energy prices Instability of foreign sources of oilInstability of foreign sources of oil
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Basic Demographic SectorBasic Demographic Sector
Pop: 0-15 yr Pop: 16-19 yr Pop: 20-39 yr Pop: 50-64 yr Pop: 65- andabovetr1 tr2 tr5
Immigration 1 Immigration 2 Immigration 3
dr1 dr2 dr3 dr5 dr6
fractional mortality 1 fractional mortality 2 fractional mortality 3 fractional mortality 4 fractional mortality 5 fractional mortality 6
transit fraction1 transit fraction2 transit fraction3 transit fraction4 transit fraction5
Pop: 40-49 yrtr3 tr4
Immigration 4
dr4
birth rate
BR NORMAL
IMMIGRATION NORMAL
TotalPopulation
pop tab
ratio of retirees toTotal Population
Immigration5
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Population CohortsPopulation CohortsPopulations
200 M
150 M
100 M
50 M
0
66
6 6 6 6 6 6 6 6 6 6 6
5 5 5 5 5 5 5 5 5 5 5 5 5
4 4 4 4 4 4 4 4 4 4 4 4 4 4
3 3 3 3 3 3 3 3 3 3 3 3 3 3
2 2 2 2 2 2 2 2 2 2 2 2 2 2
1 1 1 1 1 1 1 1 1 1 1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)
"Pop: 0-15 yr" : Debt1 People1 1 1 1 1 1 1 1 1 1 1
"Pop: 16-19 yr" : Debt1 People2 2 2 2 2 2 2 2 2 2 2
"Pop: 20-39 yr" : Debt1 People3 3 3 3 3 3 3 3 3 3 3
"Pop: 40-49 yr" : Debt1 People4 4 4 4 4 4 4 4 4 4 4
"Pop: 50-64 yr" : Debt1 People5 5 5 5 5 5 5 5 5 5 5
"Pop: 65- and above" : Debt1 People6 6 6 6 6 6 6 6 6 6 6
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Ratio of Retirees to Total Ratio of Retirees to Total PopulationPopulation
ratio of retirees to Total Population
0.2
0.175
0.15
0.125
0.1
1
1
1
1
1
1
11
11
11 1
11 1 1 1 1 1 1 1 1 1 1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)
ratio of retirees to Total Population : Debt1 Dmnl1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
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Workforce StructureWorkforce Structure
<Pop: BeginnerEarners 16-19 yr>
<Pop: Dissavers 65-and above>
<Pop: Early earners20-39 yr>
<Pop: Early Savers40-49 yr>
<Pop: Peak Savers50-64 yr>
beginnerparticipation rate
early earnerparticipation rate
early saversparticipation rate
peak saversparticipation rate
dissaversparticipation rate
beginnerworkforce
early earnerworkforce
early saverworkforce
peak saversworkforce
dissaversworkforce
total civilianworkforce
<Pop: Dissavers 65-and above> workforce to
retirees ratio
<TOTALPOPULATION>
populationparticipation rate
<Pop: YouthfulDependent 0-15 yr>
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Basic DemographicsBasic Demographics
What happens when we increase the What happens when we increase the average lifespan from 83 years to 90 average lifespan from 83 years to 90 years?years? This puts an even greater drain on Social This puts an even greater drain on Social
Security and MedicareSecurity and Medicare
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Workforce to Retirees Ratio, assuming Workforce to Retirees Ratio, assuming retirement ages of 65 and 70retirement ages of 65 and 70
workforce to retirees ratio
8
6
4
2
0
2
22
22
22 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 21
11
11 1
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)
workforce to retirees ratio : Debt1 Dmnl1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
workforce to retirees ratio : Debt3 Dmnl2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
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Workforce to Retirees Ratio, assumingWorkforce to Retirees Ratio, assuming average lifetime of 90average lifetime of 90
workforce to retirees ratio
6
5
4
3
2
6
66 6 6 6 6
5
55 5 5 5 5 5
4
44
4 4 4 4 4
3
33
3 3 3 3 3
2
2
22 2 2 2 2
1
1
11
1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)
workforce to retirees ratio : INTR9 Dmnl1 1 1 1 1workforce to retirees ratio : basecase Dmnl2 2 2 2 2workforce to retirees ratio : INTR8 Dmnl3 3 3 3 3workforce to retirees ratio : FDTRND Dmnl4 4 4 4 4workforce to retirees ratio : GDPDNG Dmnl5 5 5 5 5 5workforce to retirees ratio : Debt2 Dmnl6 6 6 6 6 6
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Workforce to Retirees Ratio, assuming Workforce to Retirees Ratio, assuming avgavg lifetime of 90 lifetime of 90
Now the steady-state ratio of workers to Now the steady-state ratio of workers to retirees is 2.2, as opposed to 2.7retirees is 2.2, as opposed to 2.7
workforce to retirees ratio
6
5
4
3
2
6
66 6 6 6 6
5
55 5 5 5 5 5
4
44
4 4 4 4 4
3
33
3 3 3 3 3
2
2
22 2 2 2 2
1
1
11
1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)
workforce to retirees ratio : INTR9 Dmnl1 1 1 1 1workforce to retirees ratio : basecase Dmnl2 2 2 2 2workforce to retirees ratio : INTR8 Dmnl3 3 3 3 3workforce to retirees ratio : FDTRND Dmnl4 4 4 4 4workforce to retirees ratio : GDPDNG Dmnl5 5 5 5 5 5workforce to retirees ratio : Debt2 Dmnl6 6 6 6 6 6
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Cumulative RatiosCumulative Ratios
<National FederalDebt>
<TotalPopulation>
cumulativeAVG Debt per
capita
avg Debt percapita
ar
cumulative DebtService to
revenue ratio
ar2
<ratio of debt serviceto revenues>
avg Debt Service torevenue ratio
cumulativeWorkforce toretirres ratio
ar3
<workforce toretirees ratio>
avg Workforce toretirees ratio
<normalizingfactor>
<normalizingfactor>
<Time>
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Table 1: Some ScenariosTable 1: Some ScenariosSettingsSettings Key metricsKey metrics
DatasetDataset InterestInterest
GDPGDPGrowthGrowthraterate
FederalFederalDeficit %Deficit %assumed assumed
RetirementRetirementage age
AverageAverageworkforceworkforceParticipationParticipationRateRate
DebtDebtServiceServiceToToRevenuesRevenuesratio inratio in20552055
NationalNationaldebtdebtper capitaper capita
WorkforceWorkforceTo retireesTo retireesratioratio
Base caseBase case 4.804.80 at 3.1%at 3.1% IncreasingIncreasing 6565 0.70.7 0.30450.3045 $94,320.00 $94,320.00 2.9932.993
GDPDNGGDPDNG 4.804.80
3.1% to 3.1% to 1%1%
by 2025by 2025 increasingincreasing 6565 0.70.7 0.38410.3841 $73,139.00 $73,139.00 2.9932.993
FDTRNDFDTRND 4.804.80 at 3.1%at 3.1%turned turned
aroundaround 6565 0.70.7 0.12390.1239 $31,053.00 $31,053.00 2.9932.993
HI INTRHI INTR 8.008.00 at 3.1%at 3.1% increasingincreasing 6565 .7.7 0.50760.5076 2.9932.993
GDPDNG= GDP does not continue to growGDPDNG= GDP does not continue to grow
FDTRND=Fed deficit turned aroundFDTRND=Fed deficit turned around
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Avg. Debt Service-to-Revenue RatiosAvg. Debt Service-to-Revenue Ratios
Avg Debt Service to revenue ratio
0.4
0.3
0.2
0.1
0
3 3 3 3 3 33
3 33
33
33
3
2 2 22 2
22
22
22
2
22
2
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
Time (Year)
avg Debt Service to revenue ratio : FDTRND Dmnl1 1 1 1 1 1
avg Debt Service to revenue ratio : GDPDNG Dmnl2 2 2 2 2 2
avg Debt Service to revenue ratio : basecase Dmnl3 3 3 3 3 3
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Avg Debt Per-capitaAvg Debt Per-capitaAvg Debt per capita
100,000
75,000
50,000
25,000
0
33 3
33
33
33
33
3
3
3
2 22 2
22
22
22
2
22
2
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055
Time (Year)
avg Debt per capita per year : FDTRND Dollars/People1 1 1 1 1
avg Debt per capita per year : GDPDNG Dollars/People2 2 2 2 2
avg Debt per capita per year : basecase Dollars/People3 3 3 3 3
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THE PROBLEM RevisitedTHE PROBLEM Revisited
Reduce the outflow (federal Reduce the outflow (federal expenditures) to a minimumexpenditures) to a minimum
Increase the inflow (federal revenues) Increase the inflow (federal revenues) to a maximum, without raising taxesto a maximum, without raising taxes
As some optimists predict (AAAS,2005) As some optimists predict (AAAS,2005) federal deficits must register a turn federal deficits must register a turn around in the trend and start to decline around in the trend and start to decline from the current 3+% of GDP down to a from the current 3+% of GDP down to a healthy 1%healthy 1%
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-136136
Possible Solutions to the Growing Possible Solutions to the Growing Deficit and National DebtDeficit and National Debt
Open up federal lands in Colorado, Open up federal lands in Colorado, Wyoming, Utah, Nevada and Alaska to Wyoming, Utah, Nevada and Alaska to oil exploration and productionoil exploration and production
Open up the outer continental shelf to Open up the outer continental shelf to aggressive oil explorationaggressive oil exploration
Export our hugely abundant uranium Export our hugely abundant uranium resources for energy usageresources for energy usage
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-137137
Action itemsAction items
Write your Congressperson and SenatorWrite your Congressperson and Senator Inform your friends that reducing the Inform your friends that reducing the
deficit and the national debt should be deficit and the national debt should be our country’s highest priorityour country’s highest priority
Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1-1-138138
SummarySummary
Debt service is growing; revenues aren’tDebt service is growing; revenues aren’t Our highest priority as a country should Our highest priority as a country should
be the reduction and pay-down of the be the reduction and pay-down of the national debtnational debt
To pay down the national debt, we must To pay down the national debt, we must stay focused on that national prioritystay focused on that national priority
The citizenry of a country are NOT The citizenry of a country are NOT FREE if that country is deeply in debtFREE if that country is deeply in debt
Ignore slides below this pointIgnore slides below this point
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Coal
U.S. Oil
Foreign Oil
U.S. Natural Gas
Foreign Natural Gas
Uranium
Solar, including Wind
Electric Utilities
Transportation
Residential/commercial
Industrial
SOURCES CONSUMPTION SECTORS
biofuels