1 – 1 operations management chapter 1 – operations and productivity powerpoint presentation to...

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Operations ManagementOperations ManagementChapter 1 – Chapter 1 – Operations and Operations and ProductivityProductivity

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e

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What Is Operations What Is Operations Management?Management?

ProductionProduction is the creation of is the creation of goods and servicesgoods and services

Operations management (OM)Operations management (OM) is the set of activities that is the set of activities that

creates value in the form of creates value in the form of goods and services by goods and services by

transforming inputs into transforming inputs into outputsoutputs

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Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:Essential functions: Marketing – generates demandMarketing – generates demand

Production/operations – creates Production/operations – creates the productthe product

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

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Organizational ChartsOrganizational Charts

OperationsTeller SchedulingCheck ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

Figure 1.1(A)Figure 1.1(A)

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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)Figure 1.1(B)

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising

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MarketingSales promotionAdvertisingSalesMarket research


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)Figure 1.1(C)

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Why Study OM?Why Study OM?

OM is one of three major functions OM is one of three major functions (marketing, finance, and operations) (marketing, finance, and operations) of any organizationof any organization

We want (We want (and needand need) to know how ) to know how goods and services are producedgoods and services are produced

We want to understand what We want to understand what operations managers dooperations managers do

OM is such a costly part of an OM is such a costly part of an organizationorganization

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Options for Increasing Options for Increasing ContributionContribution

SalesSales $100,000$100,000 $150,000$150,000 $100,000$100,000 $100,000$100,000

Cost of Goods Cost of Goods –– 80,000 80,000 –– 120,000 120,000 –– 80,000 80,000 –– 64,000 64,000

Gross MarginGross Margin 20,00020,000 30,00030,000 20,00020,000 36,00036,000

Finance CostsFinance Costs –– 6,000 6,000 –– 6,000 6,000 –– 3,000 3,000 –– 6,000 6,000

SubtotalSubtotal 14,00014,000 24,00024,000 17,00017,000 30,00030,000

Taxes at 25%Taxes at 25% –– 3,500 3,500 –– 6,000 6,000 –– 4,250 4,250 –– 7,500 7,500

ContributionContribution $ 10,500$ 10,500 $ 18,000$ 18,000 $ 12,750$ 12,750 $ 22,500$ 22,500

Finance/Finance/MarketingMarketing AccountingAccounting OMOM

OptionOption OptionOption OptionOption

IncreaseIncrease ReduceReduce ReduceReduceSalesSales FinanceFinance ProductionProduction

CurrentCurrent Revenue 50%Revenue 50% Costs 50%Costs 50% Costs 20%Costs 20%

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What Operations What Operations Managers DoManagers Do

PlanningPlanning

OrganizingOrganizing

StaffingStaffing

LeadingLeading

ControllingControlling

Basic Management FunctionsBasic Management Functions

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Ten Critical DecisionsTen Critical DecisionsTen Decision AreasTen Decision Areas Chapter(s)Chapter(s)

Design of goods and servicesDesign of goods and services 55 Managing qualityManaging quality 6, Supplement 66, Supplement 6 Process and capacity Process and capacity 7, Supplement 77, Supplement 7

design design Location strategyLocation strategy 88 Layout strategyLayout strategy 99 Human resources and Human resources and 10, Supplement 1010, Supplement 10

job design job design Supply chain Supply chain 11, Supplement 1111, Supplement 11

management management Inventory managementInventory management 12, 14, 1612, 14, 16 SchedulingScheduling 13, 1513, 15 MaintenanceMaintenance 1717

Table 1.2Table 1.2

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The Critical DecisionsThe Critical Decisions

Design of goods and servicesDesign of goods and services What good or service should we What good or service should we

offer?offer? How should we design these products How should we design these products

and services? and services?

Managing qualityManaging quality How do we define quality?How do we define quality? Who is responsible for quality?Who is responsible for quality?

Table 1.2 (cont.)Table 1.2 (cont.)

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Process and capacity designProcess and capacity design What process and what capacity will What process and what capacity will

these products require?these products require?

What equipment and technology is What equipment and technology is necessary for these processes?necessary for these processes?

Location strategyLocation strategy Where should we put the facility?Where should we put the facility?

On what criteria should we base the On what criteria should we base the location decision?location decision?


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The Critical DecisionsThe Critical Decisions Layout strategyLayout strategy

How should we arrange the facility?How should we arrange the facility?

How large must the facility be to meet How large must the facility be to meet our plan?our plan?

Human resources and job designHuman resources and job design How do we provide a reasonable work How do we provide a reasonable work

environment?environment?

How much can we expect our How much can we expect our employees to produce?employees to produce?


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Supply chain managementSupply chain management Should we make or buy this component?Should we make or buy this component?

Who are our suppliers and who can Who are our suppliers and who can integrate into our e-commerce program?integrate into our e-commerce program?

Inventory, material requirements Inventory, material requirements planning, and JITplanning, and JIT How much inventory of each item should How much inventory of each item should

we have?we have?

When do we re-order?When do we re-order?Table 1.2 (cont.)Table 1.2 (cont.)

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Intermediate and shortIntermediate and short––term term schedulingscheduling Are we better off keeping people on Are we better off keeping people on

the payroll during slowdowns?the payroll during slowdowns?

Which jobs do we perform next?Which jobs do we perform next?

MaintenanceMaintenance Who is responsible for maintenance?Who is responsible for maintenance?

When do we do maintenance?When do we do maintenance?


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Characteristics of GoodsCharacteristics of Goods

Tangible productTangible product

Consistent product Consistent product definitiondefinition

Production usually Production usually separate from separate from consumptionconsumption

Can be inventoriedCan be inventoried

Low customer Low customer interactioninteraction

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Characteristics of ServiceCharacteristics of Service Intangible productIntangible product

Produced and Produced and consumed at same timeconsumed at same time

Often uniqueOften unique

High customer High customer interactioninteraction

Inconsistent product Inconsistent product definitiondefinition

Often knowledge-basedOften knowledge-based

Frequently dispersedFrequently dispersed

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

ServicesServices ManufacturingManufacturing

Au

stra

liaA

ust

ralia

Can

ada

Can

ada

Ch

ina

Ch

ina

Cze

ch R

epC

zech

Rep

Fra

nce

Fra

nce

Ger

man

yG

erm

any

Ho

ng

Ko

ng

Ho

ng

Ko

ng

Jap

anJa

pan

Mex

ico

Mex

ico

Ru

ssia

n F

edR

uss

ian

Fed

So

uth

Afr

ica

So

uth

Afr

ica

Sp

ain

Sp

ain

UK

UK

US

US

90 90 −

80 80 −

70 70 −

60 60 −

50 50 −

40 40 −

30 30 −

20 20 −

10 10 −

00 −

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Goods Versus ServicesGoods Versus Services

Table 1.3Table 1.3

Can be resoldCan be resold

Can be inventoriedCan be inventoried

Some aspects of quality Some aspects of quality measurablemeasurable

Selling is distinct from Selling is distinct from productionproduction

Product is transportableProduct is transportable

Site of facility important for costSite of facility important for cost

Often easy to automateOften easy to automate

Revenue generated primarily Revenue generated primarily from tangible productfrom tangible product

Attributes of GoodsAttributes of Goods(Tangible Product)(Tangible Product)

Attributes of ServicesAttributes of Services (Intangible Product) (Intangible Product)

Reselling unusualReselling unusual

Difficult to inventoryDifficult to inventory

Quality difficult to measureQuality difficult to measure

Selling is part of service Selling is part of service

Provider, not product, isProvider, not product, isoften transportableoften transportable

Site of facility important forSite of facility important forcustomer contactcustomer contact

Often difficult to automateOften difficult to automate

Revenue generated primarily Revenue generated primarily from the intangible servicefrom the intangible service

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

100%100% 7575 5050 2525 00 2525 5050 7575 100%100%|| || || || || || || || ||

Figure 1.4Figure 1.4

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120120 –

100 100 –

80 80 –

60 60 –

40 40 –

20 20 –

0 0 –| | | | | | |

19501950 19701970 19901990 2010 (est)2010 (est)19601960 19801980 20002000

Em

plo

ymen

t (m

illi

on

s)E

mp

loym

ent

(mil

lio

ns)

Manufacturing and Service Manufacturing and Service EmploymentEmployment

Figure 1.5 (A)Figure 1.5 (A)

ManufacturingManufacturing

ServiceService

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Manufacturing Employment Manufacturing Employment and Productionand Production

Figure 1.5 (B)Figure 1.5 (B)

40 40 –

30 30 –

20 20 –

10 10 –

0 0 – | | | | | | |19501950 19701970 19901990 2010 (est)2010 (est)

19601960 19801980 20002000

– 150150

– 125125

– 100100

– 7575

– 5050

– 2525

– 00

Em

plo

ymen

t (m

illi

on

s)E

mp

loym

ent

(mil

lio

ns)

In

dex

: 19

97 =

100

Ind

ex:

1997

= 1

00

Manufacturingemployment

(left scale)

Industrial Industrial productionproduction

(right scale)(right scale)

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Development of the Development of the Service EconomyService Economy

Figure 1.5 (C)Figure 1.5 (C)

United States

Canada

France

Italy

Britain

Japan

W. Germany

1970 2008 (est)

| | | | |

40 50 60 70 80Percent

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Productivity ChallengeProductivity Challenge

Productivity is the ratio of outputs (goods Productivity is the ratio of outputs (goods and services) divided by the inputs and services) divided by the inputs

(resources such as labor and capital)(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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FeedbackFeedback looploop

OutputsOutputs

Goods and

services

ProcessesProcesses

The U.S. economic system transforms inputs to outputs

at about an annual 2.5% increase in productivity per

year. The productivity increase is the result of a

mix of capital (38% of 2.5%), labor (10% of 2.5%), and

management (52% of 2.5%).

The Economic SystemThe Economic System

InputsInputs

Labor,capital,

management


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Measure of process improvementMeasure of process improvement

Represents output relative to inputRepresents output relative to input

Only through productivity increases Only through productivity increases can our standard of living improvecan our standard of living improve

ProductivityProductivity

Productivity =Productivity =Units producedUnits produced

Input usedInput used

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Productivity CalculationsProductivity Calculations

Productivity =Productivity =Units producedUnits produced

Labor-hours usedLabor-hours used

= = = = 44 units/labor-hour units/labor-hour1,0001,000

250250

Labor ProductivityLabor Productivity

One resource input One resource input single-factor productivity single-factor productivity

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Multi-Factor Productivity Multi-Factor Productivity

OutputOutput

Labor + Material + Energy Labor + Material + Energy + Capital + Miscellaneous+ Capital + Miscellaneous

Productivity =Productivity =

Also known as total factor productivityAlso known as total factor productivity

Output and inputs are often expressed Output and inputs are often expressed in dollarsin dollars

Multiple resource inputs Multiple resource inputs multi-factor productivity multi-factor productivity

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Collins Title ProductivityCollins Title Productivity

Staff of Staff of 44 works works 8 8 hrs/dayhrs/day 88 titles/day titles/dayPayroll cost = Payroll cost = $640$640/day/day Overhead = Overhead = $400$400/day/day

Old System:Old System:

==Old labor Old labor

productivityproductivity88 titles/day titles/day

3232 labor-hrs labor-hrs

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Staff of Staff of 44 works works 88 hrs/day hrs/day 88 titles/day titles/dayPayroll cost = Payroll cost = $640$640/day/day Overhead = Overhead = $400$400/day/day


88 titles/day titles/day

3232 labor-hrs labor-hrs==

Old labor Old labor productivityproductivity = = .25.25 titles/labor-hr titles/labor-hr

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Staff of Staff of 44 works works 8 8 hrs/dayhrs/day 88 titles/day titles/dayPayroll cost = Payroll cost = $640$640/day/day Overhead = Overhead = $400$400/day/day


1414 titles/day titles/day Overhead = Overhead = $800$800/day/day

New System:New System:



Old labor Old labor productivityproductivity

==New labor New labor

productivityproductivity

= .25 titles/labor-hr= .25 titles/labor-hr


3232 labor-hrs labor-hrs

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Old labor Old labor productivityproductivity = = .25.25 titles/labor-hr titles/labor-hr

14 14 titles/daytitles/day


New labor New labor productivityproductivity = = .4375.4375 titles/labor-hr titles/labor-hr

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==Old multifactor Old multifactor

productivityproductivity88 titles/day titles/day

$640 + 400$640 + 400

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$640 + 400$640 + 400==

Old multifactor Old multifactor productivityproductivity = = .0077.0077 titles/dollar titles/dollar

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$640 + 400$640 + 400==

Old multifactor Old multifactor productivityproductivity

==New multifactor New multifactor


= = .0077.0077 titles/dollar titles/dollar


$640 + 800$640 + 800

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$640 + 400$640 + 400


$640 + 800$640 + 800

==Old multifactor Old multifactor


==New multifactor New multifactor




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Measurement ProblemsMeasurement Problems

QualityQuality may change while the may change while the quantity of inputs and outputs quantity of inputs and outputs remains constantremains constant

External elementsExternal elements may cause an may cause an increase or decrease in productivityincrease or decrease in productivity

Precise unitsPrecise units of measure may be of measure may be lackinglacking

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Productivity VariablesProductivity Variables

LaborLabor - contributes - contributes about about 10%10% of the of the annual increaseannual increase

CapitalCapital - contributes - contributes about about 38%38% of the of the annual increaseannual increase

ManagementManagement - - contributes about contributes about 52%52% of the annual increaseof the annual increase

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Labor SkillsLabor Skills

About half of the 17-year-olds in the US cannot About half of the 17-year-olds in the US cannot correctly answer questions of this typecorrectly answer questions of this type


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Investment and Productivity Investment and Productivity

1010

88

66

44

22

00

Per

cen

t in

crea

se in

pro

du

ctiv

ity

Per

cen

t in

crea

se in

pro

du

ctiv

ity

Percentage investmentPercentage investment

1010 1515 2020 2525 3030 3535

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Service ProductivityService Productivity

Typically labor intensiveTypically labor intensive

Frequently focused on unique Frequently focused on unique individual attributes or desiresindividual attributes or desires

Often an intellectual task performed by Often an intellectual task performed by professionalsprofessionals

Often difficult to mechanizeOften difficult to mechanize

Often difficult to evaluate for qualityOften difficult to evaluate for quality

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Ethics and Social ResponsibilityEthics and Social Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing and producing safe, Developing and producing safe, quality productsquality products

Maintaining a clean environmentMaintaining a clean environment

Providing a safe workplaceProviding a safe workplace

Honoring community commitmentsHonoring community commitments

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