Operations and productivity

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11 Operations and Productivity

Operations and Productivity

1 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall

The Hard Rock CafeThe Hard Rock Cafe

First opened in 1971 Now – 129 restaurants in over 40 countries

Rock music memorabilia

Creates value in the form of good food and entertainment

3,500+ custom meals per day in Orlando

How does an item get on the menu?

Role of the Operations Manager

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Learning ObjectivesLearning ObjectivesDefinition of Operations Management (OM)

Organizational Functions

Why Study OM?

A brief history of operations management

The future of the discipline

Goods Versus Services

Measuring productivity

Career opportunities in operations management

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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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Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:

1.1. MarketingMarketing – generates demand

2.2. Production/operationsProduction/operations – creates the product

3.3. Finance/accountingFinance/accounting – tracks how well the organization is doing, pays bills, collects the money

4.4. Human Resources Human Resources – provides labor, wage and salary administration and job evaluation

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Commercial Bank

Operations

Teller Scheduling

Check Clearing

Collection

Transaction processing

Facilities design/layout

Vault operations

Maintenance

Security

Finance

Investments

Security

Real estate

Accounting

Auditing

Marketing

Loans

Commercial

Industrial

Financial

Personal

Mortgage

Trust Department

Human Resources

Recruitment

Job evaluation

Performance evaluation

Wage and Salary Adm.

Personnel records

Organizational ChartsOrganizational Charts

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Manufacturing

Operations

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

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

MarketingSales promotionAdvertisingSalesMarket research

Human Resources

Recruitment

Job evaluation

Performance evaluation

Wage and Salary Adm.

Personnel records

Organizational ChartsOrganizational Charts

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Why Study OM?Why Study OM?1. OM is one of four major functions of

any organization, we want to study how people organize themselves for productive enterprise

2. We want (and need) to know how goods and services are produced

3. We want to understand what operations managers do

4. OM is such a costly part of an organization

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Options for Increasing Options for Increasing ContributionContribution

Table 1.1

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

Finance/Marketing Accounting OM

Option Option Option

Increase Reduce ReduceSales Finance Production

Current Revenue 50% Costs 50% Costs 20%

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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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The Critical DecisionsThe Critical Decisions

1. Design of goods and services What good or service should we

offer?

How should we design these products and services?

2. Managing quality How do we define quality?

Who is responsible for quality?

Table 1.2 (cont.)

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3. Process and capacity design What process and what capacity will

these products require? What equipment and technology is

necessary for these processes?

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

location decision?

Table 1.2 (cont.)

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The Critical DecisionsThe Critical Decisions5. Layout strategy

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

our plan?

6. Human resources and job design How do we provide a reasonable

work environment? How much can we expect our

employees to produce?

Table 1.2 (cont.)

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The Critical DecisionsThe Critical Decisions7. Supply-chain management

Should we make or buy this component?

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

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

should we have? When do we re-order?

Table 1.2 (cont.)

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9. Intermediate and short–term scheduling Are we better off keeping people on

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

10.Maintenance How do we build reliability into our

processes? Who is responsible for maintenance?

Table 1.2 (cont.)

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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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The Heritage of OMThe Heritage of OM Division of labor (Adam Smith 1776;

Charles Babbage 1852)

Standardized parts (Whitney 1800)

Scientific Management (Taylor 1881)

Assembly line (Ford/ Sorenson 1913)

Gantt charts (Gantt 1916)

Motion study (Frank and Lillian Gilbreth 1922)

Quality control (Shewhart 1924; Deming 1950)

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The Heritage of OMThe Heritage of OM First Digital Computer (Atanasoff 1938)

CPM/PERT (DuPont 1957, Navy 1958)

Material requirements planning (Orlicky 1960)

Computer aided design (CAD 1970)

Flexible manufacturing system (FMS 1975)

Baldrige Quality Awards (1980)

Computer integrated manufacturing (1990)

Globalization (1992)

Internet (1995)

Mass Customization (2000s)

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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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Characteristics of GoodsCharacteristics of Goods Tangible product

Consistent product definition

Production usually separate from consumption

Can be inventoried

Low customer interaction

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Characteristics of ServiceCharacteristics of Service Intangible product

Produced and consumed at same time

Often unique

High customer interaction

Inconsistent product definition

Often knowledge-based

Frequently dispersed

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

Services Manufacturing

Au

stra

lia

Can

ada

Ch

ina

Cze

ch R

ep

Fra

nce

Ger

man

y

Ho

ng

Ko

ng

Jap

an

Mex

ico

Ru

ssia

n F

ed

So

uth

Afr

ica

Sp

ain

UK

US

Tu

rkey

90 −

80 −

70 −

60 −

50 −

40 −

30 −

20 −

10 −

0 −

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Allocation of GDP by Sector, Turkey, 2010

Agriculture 8.8%

Industry 25.7%

Services 65.5%

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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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Changing ChallengesChanging ChallengesTraditional Approach

Reasons for Change

Current Challenge

Ethics and regulations not at the forefront

Public concern over pollution, corruption, child labor, etc.

High ethical and social responsibility; increased legal and professional standards

Local or national focus

Growth of reliable, low cost communication and transportation

Global focus, international collaboration

Lengthy product development

Shorter life cycles; growth of global communication; CAD, Internet

Rapid product development; design collaboration

Figure 1.5

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Reasons for Change

Current Challenge

Low cost production, with little concern for environment; free resources (air, water) ignored

Public sensitivity to environment; ISO 14000 standard; increasing disposal costs

Environmentally sensitive production; green manufacturing; sustainability

Low-cost standardized products

Rise of consumerism; increased affluence; individualism

Mass customization

Figure 1.5

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Reasons for Change

Current Challenge

Emphasis on specialized, often manual tasks

Recognition of the employee's total contribution; knowledge society

Empowered employees; enriched jobs

“In-house” production; low-bid purchasing

Rapid technological change; increasing competitive forces

Supply-chain partnering; joint ventures, alliances

Large lot production

Shorter product life cycles; increasing need to reduce inventory

Just-In-Time performance; lean; continuous improvement

Figure 1.5

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New Trends in OMNew Trends in OM Ethics

Global focus

Environmentally sensitive production

Rapid product development

Mass customization

Empowered employees

Supply-chain partnering

Just-in-time performance

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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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Efficiency Versus Efficiency Versus EffectivenessEffectiveness

The difference between efficient and effective is that efficiency refers to how well you do something, whereas effectiveness refers to how useful it is.

“Efficiency is doing things right; effectiveness is doing the right things.”

Doing the Right Things is More Important than Doing Things Right

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Efficiency Versus Efficiency Versus EffectivenesEffectivenes

For example, if a company is not doing well and they decide to train their workforce on a new technology. The training goes really well - they train all their employees in avery short time and tests show they have absorbed the training well. But overall productivity doesn't improve. In this case the company's strategy was efficient but not effective.

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Feedback loop

Outputs

Goods and

services

Transformation

Economic system transforms inputs to

outputs /CONVERSITION PROCESS

The Economic SystemThe Economic System

Inputs

Labor,capital,

management

Figure 1.6

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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 ProductivityCollins Title Productivity

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

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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



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Measurement ProblemsMeasurement Problems

1.1. QualityQuality may change while the quantity of inputs and outputs remains constant (HDTV, iphones)

2.2. External elementsExternal elements may cause an increase or decrease in productivity (using more reliable electric power system)

3.3. Precise unitsPrecise units of measure may be lacking

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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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Key Variables for Improved Key Variables for Improved Labor ProductivityLabor Productivity

1. Basic education appropriate for the labor force

2. Diet of the labor force

3. Social overhead that makes labor available such as transportation and sanitation

Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge

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Investment and Productivity Investment and Productivity

10

8

6

4

2

0

Per

cen

t in

crea

se in

pro

du

ctiv

ity

Percentage investment

10 15 20 25 30 35

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Service ProductivityService Productivity

1. Typically labor intensive (teaching, counseling)

2. Frequently focused on unique individual desires (customer representatives in banks)

3. Often an intellectual task performed by professionals

4. Often difficult to mechanize

5. Often difficult to evaluate for quality

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Ethics andEthics andSocial ResponsibilitySocial Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing and producing safe, quality products

Maintaining a clean environment

Providing a safe workplace

Honoring stakeholder commitments

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Entry-Level Jobs in OMEntry-Level Jobs in OMPurchasing planner/buyer

Production (or operations) supervisor

Production (or operations) scheduler/controller

Production (or operations) analyst

Inventory analyst

Quality specialist

Others …

Operations and productivity

Business

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