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11 Operations and Productivity

Operations and Productivity

P P i t t ti tP P i t t ti t

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

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e

PowerPoint slides by Jeff Heyl

OutlineOutlineGlobal Company Profile: Hard Rock CafeWhat Is Operations Management?


Organizing to Produce Goods and Services Why Study OM?What Operations Managers Do

Outline Outline -- ContinuedContinuedThe Heritage of Operations ManagementOperations in the Service Sector

Differences between Goods and


Differences between Goods and ServicesGrowth of ServicesService Pay

Exciting New Trends in Operations Management

Outline Outline -- ContinuedContinued

The Productivity ChallengeProductivity MeasurementProductivity Variables


Productivity and the Service Sector Ethics and Social Responsibility

Learning ObjectivesLearning Objectives

When you complete this chapter When you complete this chapter you should be able to:you should be able to:

1. Define operations management


2. Explain the distinction between goods and services

3. Explain the difference between production and productivity

Learning ObjectivesLearning Objectives

When you complete this chapter When you complete this chapter you should be able to:you should be able to:

4. Compute single-factor d ti it


productivity5. Compute multifactor productivity6. Identify the critical variables in

enhancing productivity

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The Hard Rock CafeThe Hard Rock Cafe

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

Rock music memorabilia


Creates value in the form of good food and entertainment3,500+ custom meals per day in OrlandoHow does an item get on the menu?Role of the Operations Manager

What Is Operations What Is Operations Management?Management?

ProductionProduction is the creation of goods and services


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

services by transforming inputs into outputs

Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:1.1. MarketingMarketing – generates 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

Organizational ChartsOrganizational Charts

OperationsTeller Scheduling

FinanceInvestmentsSecurity

MarketingLoans

Commercial

Commercial Bank


Check ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

Secu tyReal estate

Accounting

Auditing

Co e c aIndustrialFinancialPersonalMortgage

Trust Department

Figure 1.1(A)


OperationsGround support

equipmentMaintenance

Finance/ accountingAccounting

Payables

Airline

MarketingTraffic administration

Reservations


MaintenanceGround Operations

Facilitymaintenance

CateringFlight OperationsCrew schedulingFlyingCommunicationsDispatching

Management science

PayablesReceivablesGeneral Ledger

FinanceCash controlInternational

exchange

Figure 1.1(B)

ReservationsSchedulesTariffs (pricing)

SalesAdvertising

MarketingSales

promotionAdvertisingSales


OperationsFacilities

Construction; maintenanceProduction and inventory control

Scheduling; materials controlQuality assurance and control

Finance/ accountingDisbursements/

creditsReceivablesPayables

Manufacturing


Market research

Quality assurance and controlSupply-chain managementManufacturing

Tooling; fabrication; assemblyDesign

Product development and designDetailed product specifications

Industrial engineeringEfficient use of machines, space,

and personnelProcess analysis

Development and installation ofproduction tools and equipment

PayablesGeneral ledger

Funds ManagementMoney marketInternational

exchangeCapital requirements

Stock issueBond issue

and recall

Figure 1.1(C)

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

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

2 W t ( d d) t k h


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

3. We want to understand what operations managers do

4. OM is such a costly part of an organization

Options for Increasing Options for Increasing ContributionContribution

Finance/Marketing Accounting OM

Option Option Option

Increase Reduce ReduceSales Finance Production

Current Revenue 50% Costs 50% Costs 20%

1 - 14© 2011 Pearson Education, Inc. publishing as Prentice HallTable 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

Current Revenue 50% Costs 50% Costs 20%

What Operations What Operations Managers DoManagers Do

Planning

Basic Management FunctionsBasic Management Functions


OrganizingStaffingLeadingControlling

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 8


gy5. Layout strategy 96. Human resources and 10

job design 7. Supply-chain 11, Supplement 11

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

The Critical DecisionsThe Critical Decisions1. Design of goods and services

What good or service should we offer?How should we design these


How should we design these products and services?

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

Table 1.2 (cont.)

The Critical DecisionsThe Critical Decisions3. Process and capacity design

What process and what capacity will these products require?What equipment and technology is


q p gynecessary for these processes?

4. Location strategyWhere 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 designHow do we provide a reasonable work environment?How much can we expect our employees to produce?

Table 1.2 (cont.)

The Critical DecisionsThe Critical Decisions7. Supply-chain management

Should we make or buy this component?Who should be our suppliers and how can we integrate them into our strategy?


can we integrate them into our strategy?8. Inventory, material requirements

planning, and JITHow much inventory of each item should we have?When do we re-order?

Table 1.2 (cont.)

The Critical DecisionsThe Critical Decisions9. Intermediate and short–term

schedulingAre we better off keeping people on the payroll during slowdowns?


Which jobs do we perform next?10.Maintenance

How do we build reliability into our processes?Who is responsible for maintenance?

Table 1.2 (cont.)

Where are the OM Jobs?Where are the OM Jobs?Technology/methodsFacilities/space utilizationStrategic issuesResponse timeP l /t d l t


People/team developmentCustomer serviceQualityCost reductionInventory reductionProductivity improvement

OpportunitiesOpportunities


Figure 1.2

CertificationsCertificationsAPICS, the American Production and Inventory Control SocietyAmerican Society of Quality (ASQ)Institute for Supply Management (ISM)


Project Management Institute (PMI)Council of Supply Chain Management ProfessionalsCharter Institute of Purchasing and Supply (CIPS)

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Significant Events in OMSignificant Events in OM


Figure 1.3

The Heritage of OMThe Heritage of OMDivision of labor (Adam Smith 1776; Charles Babbage 1852)Standardized parts (Whitney 1800)Scientific Management (Taylor 1881)Coordinated assembly line (Ford/


Coordinated assembly line (Ford/ Sorenson 1913)Gantt charts (Gantt 1916)Motion study (Frank and Lillian Gilbreth 1922)Quality control (Shewhart 1924; Deming 1950)

The Heritage of OMThe Heritage of OMComputer (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)

Eli WhitneyEli Whitney

Born 1765; died 1825In 1798, received government contract to make 10,000 muskets


Showed that machine tools could make standardized parts to exact specifications

Musket parts could be used in any musket

Frederick W. TaylorFrederick W. Taylor

Born 1856; died 1915Known as ‘father of scientific management’


In 1881, as chief engineer for Midvale Steel, studied how tasks were done

Began first motion and time studiesCreated efficiency principles

Taylor’s PrinciplesTaylor’s Principles

Matching employees to right job

Management Should Take More Management Should Take More Responsibility for:Responsibility for:


Providing the proper trainingProviding proper work methods and toolsEstablishing legitimate incentives for work to be accomplished

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Frank & Lillian GilbrethFrank & Lillian GilbrethFrank (1868-1924); Lillian (1878-1972)Husband-and-wife engineering teamFurther developed work measurement methods


measurement methodsApplied efficiency methods to their home and 12 children! Book & Movie: “Cheaper by the Dozen,” “Bells on Their Toes”

Born 1863; died 1947In 1903, created Ford Motor CompanyIn 1913 first used moving assembly

Henry FordHenry Ford


In 1913, first used moving assembly line to make Model T

Unfinished product moved by conveyor past work station

Paid workers very well for 1911 ($5/day!)

W. Edwards DemingW. Edwards Deming

Born 1900; died 1993Engineer and physicistCredited with teaching Japan


g pquality control methods in post-WW2Used statistics to analyze processHis methods involve workers in decisions

Contributions FromContributions From

Human factorsIndustrial engineeringManagement science


Management scienceBiological sciencePhysical sciencesInformation technology

New Challenges in OMNew Challenges in OM

Global focusJust-in-timeSupply-chain

t i

ToToFromFromLocal or national focusBatch shipmentsLow bid purchasing


partneringRapid product development, alliancesMass customizationEmpowered employees, teams

Lengthy product development

Standard products

Job specialization

Characteristics of GoodsCharacteristics of GoodsTangible productConsistent product definitionProduction usually


Production usually separate from consumptionCan be inventoriedLow customer interaction

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Characteristics of ServiceCharacteristics of ServiceIntangible productProduced and consumed at same timeOften unique


High customer interactionInconsistent product definitionOften knowledge-basedFrequently dispersed

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

Services Manufacturing90 −80 −70 −60 −50 −


Aust

ralia

Can

ada

Chi

na

Cze

ch R

ep

Fran

ce

Ger

man

y

Hon

g K

ong

Japa

n

Mex

ico

Rus

sian

Fed

Sout

h Af

rica

Spai

n

UK US

50 40 −30 −20 −10 −

0 −

Goods and ServicesGoods and ServicesAutomobile

ComputerInstalled carpeting

Fast-food mealRestaurant meal/auto repair

Hospital care


Hospital careAdvertising agency/

investment managementConsulting service/

teachingCounseling

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

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

120 –

100 –

80 –m

illio

ns)

Manufacturing and Service Manufacturing and Service EmploymentEmployment

ServiceService


60 –

40 –

20 –

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

1960 1980 2000

Empl

oym

ent (

Figure 1.4 (A)

Manufacturing

Manufacturing Employment Manufacturing Employment and Productionand Production

– 150150

– 125125

– 100100

(mill

ions

)

= 10

0=

100

Industrial Industrial productionproduction

(right scale)(right scale)

1 - 41© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 1.4 (B)

40 –30 –20 –10 –

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

1960 1980 2000

– 7575

– 5050

– 2525

– 00

Empl

oym

ent (

Inde

x: 1

997

Inde

x: 1

997

Manufacturingemployment

(left scale)

Development of the Development of the Service EconomyService Economy

United StaCanFra

1 - 42© 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 1.4 (C)

ItBritJap

W. Germ

1970 2010 (est)

| | | | |

40 50 60 70 80Percent

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Organizations in Each SectorOrganizations in Each SectorService SectorService Sector ExampleExample

% of all % of all JobsJobs

Education, Legal, Medical, other

San Diego Zoo, Arnold Palmer Hospital

25.8


Trade (retail, wholesale)

Walgreen’s, Wal-Mart, Nordstrom’s

14.9

Utilities, Transportation

Pacific Gas & Electric, American Airlines

5.2

Professional and Business Services

Snelling and Snelling, Waste Management, Inc.

10.7

Table 1.3

Organizations in Each SectorOrganizations in Each SectorService SectorService Sector ExampleExample

% of all % of all JobsJobs

Finance, Information, Real Estate

Citicorp, American Express, Prudential, Aetna

9.6

F d L d i Oli G d M t l 6 W lt 8 5


Food, Lodging, Entertainment

Olive Garden, Motel 6, Walt Disney

8.5

Public Administration

U.S., State of Alabama, Cook County

4.6

Total 78.8

Table 1.3

Organizations in Each SectorOrganizations in Each Sector

Other SectorsOther Sectors ExampleExample% of all % of all

JobsJobs

Manufacturing Sector

General Electric, Ford, U.S. Steel, Intel

11.2

Construction Bechtel, McDermott 8.1


Sector

Agriculture Sector

King Ranch 1.4

Mining Sector Homestake Mining 0.5

Total 21.2

Table 1.3

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


standardsLocal 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


Reasons for Change

Current Challenge

Low cost production, with little concern for environment;

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

Environmentally sensitive production; green manufacturing; sustainability


free resources (air, water) ignoredLow-cost standardized products

Rise of consumerism; increased affluence; individualism

Mass customization

Figure 1.5


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” Rapid technological Supply chain


“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 OMEthicsGlobal focusRapid product developmentEnvironmentally sensitive production


Mass customizationEmpowered employeesSupply-chain partneringJust-in-time performance

Productivity ChallengeProductivity Challenge

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

(resources such as labor and capital)


The objective is to improve productivity!The objective is to improve productivity!

Important Note!Production is a measure of output

only and not a measure of efficiency

Outputs

Goods and

services

Transformation

The U.S. economic system transforms inputs to outputs

at about an annual 2.5% increase in productivity per

The Economic SystemThe Economic SystemInputs

Labor,capital,

management


Feedback loop

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%).

Figure 1.6

Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:


improvements:improvements:Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop

Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:


improvements:improvements:Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop

Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

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

ProductivityProductivity

Productivity =Units produced

Input used


Measure of process improvementRepresents output relative to inputOnly through productivity increases can our standard of living improve

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Productivity CalculationsProductivity Calculations

Productivity =Units produced

Labor-hours used

Labor ProductivityLabor Productivity


= = 4 units/labor-hour1,000250

One resource input single-factor productivity

MultiMulti--Factor Productivity Factor Productivity

OutputLabor + Material + Energy + Capital + Miscellaneous

Productivity =


Also known as total factor productivityOutput and inputs are often expressed in dollars

Multiple resource inputs multi-factor productivity

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 productivity

8 titles/day32 labor-hrs





8 titles/day32 labor-hrs=Old labor

productivity = .25 titles/labor-hr




14 titl /d O h d $800/dNew System:New System:


14 titles/day Overhead = $800/day


productivity

=New labor productivity

= .25 titles/labor-hr

14 titles/day14 titles/day32 labor32 labor--hrshrs









14 titles/day32 labor-hrs=New labor


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=Old multifactor productivity

8 titles/day$640 + 400







8 titles/day$640 + 400=Old multifactor

productivity = .0077 titles/dollar







8 titles/day$640 + 400=Old multifactor

productivity

=New multifactor productivity

= .0077 titles/dollar

14 titles/day14 titles/day$640 + 800$640 + 800







8 titles/day$640 + 400

14 titles/day$640 + 800

=Old multifactor productivity

=New multifactor productivity



Measurement ProblemsMeasurement Problems1.1. QualityQuality may change while the

quantity of inputs and outputs remains constant

22 E t l l tE t l l t


2.2. External elementsExternal elements may cause an increase or decrease in productivity

Precise unitsPrecise units of measure may be lacking

Productivity VariablesProductivity Variables1.1. LaborLabor - contributes

about 10% of the annual increase

22 CapitalCapital - contributes


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

Labor SkillsLabor SkillsAbout half of the 17About half of the 17--yearyear--olds in the U.S. cannot olds in the U.S. cannot correctly answer questions of this typecorrectly answer questions of this type


Figure 1.7

Investment and Productivity Investment and Productivity

10

8

6prod

uctiv

ity


6

4

2

0Perc

ent i

ncre

ase

in p

Percentage investment10 15 20 25 30 35

Service ProductivityService Productivity

1. Typically labor intensive2. Frequently focused on unique

individual attributes or desires3 Often an intellectual task performed by


3. Often an intellectual task performed by professionals

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

Productivity at Taco BellProductivity at Taco Bell

Improvements:Revised the menu Designed meals for easy preparationShifted some preparation to suppliers


Shifted some preparation to suppliersEfficient layout and automationTraining and employee empowermentNew water and energy saving grills

Productivity at Taco BellProductivity at Taco Bell

Improvements:Revised the menu Designed meals for easy preparationShifted some preparation to suppliers

Results:Preparation time cut to 8 secondsManagement span of control increased from 5 to 30


Shifted some preparation to suppliersEfficient layout and automationTraining and employee empowermentNew water and energy saving grills

In-store labor cut by 15 hours/dayStores handle twice the volume with half the laborConserve 300 million gallons of water and Conserve 300 million gallons of water and 200 million KwH of electricity each year 200 million KwH of electricity each year saving $17 million annuallysaving $17 million annually

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Ethics andEthics andSocial ResponsibilitySocial Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing and producing safe


Developing and producing safe, quality productsMaintaining a clean environmentProviding a safe workplaceHonoring stakeholder commitments


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,

recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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