Operations Management

Operations and ProductivityChapter 1

OutlinePROFILE: HARD ROCK CAFEWHAT IS OPERATIONS MANAGEMENT?ORGANIZING TO PRODUCE GOODS AND SERVICES WHY STUDY OM?WHAT OPERATIONS MANAGERS DOHow This Book Is OrganizedWHERE ARE THE OM JOBS?

Outline - ContinuedTHE HERITAGE OF OPERATIONS MANAGEMENTOPERATIONS IN THE SERVICE SECTORDifferences between Goods and ServicesGrowth of ServicesService PayEXCITING NEW TRENDS IN OPERATIONS MANAGEMENT

Outline - ContinuedTHE PRODUCTIVITY CHALLENGEProductivity MeasurementProductivity VariablesProductivity and the Service Sector THE CHALLENGE OF SOCIAL RESPONSIBILITY

Learning ObjectivesWhen you complete this chapter, you should be able to :Identify or Define:Production and productivityOperations Management (OM)What operations managers doServices

Learning Objectives - ContinuedWhen you complete this chapter, you should be able to :Describe or Explain:A brief history of operations managementCareer opportunities in operations managementThe future of the disciplineMeasuring productivity

The Hard Rock CafeFirst opened in 1971Now 110 restaurants in over 40 countriesRock music memorabiliaCreates value in the form of good food and entertainment3,500+ custom meals per day How does an item get on the menu?Role of the Operations Manager

What Is Operations Management?Production is the creation of goods and servicesOperations management is the set of activities that creates value in the form of goods and services by transforming inputs into outputs

Organizing to Produce Goods and Services

Organizing to Produce Goods and ServicesEssential functions:Marketing generates demandOperations creates the productFinance/accounting tracks organizational performance, pays bills, collects money

Organizational FunctionsMarketingGets customersOperationscreates product or serviceFinance/AccountingObtains fundsTracks money

Sample Organization Charts

Functions - Bank

Functions - Airline 1984-1994 T/Maker Co.

Functions - Manufacturer

Organizational Charts

Organizational ChartsAirlineOperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement scienceFinance & AccountingAccountingPayablesReceivablesGeneral LedgerFinanceCash controlInternational exchange ratesMarketingTraffic administrationReservationsSchedulesTariffs (pricing)SalesAdvertising

Organizational ChartsManufacturing

Why Study OM?

Why Study OM?OM is one of three major functions (marketing, finance, and operations) of any organization.We want (and need) to know how goods and services are produced.We want to understand what operations managers do.OM is such a costly part of an organization.

Options for Increasing Contribution

Marketing Option

Finance & Accounting Option

OM Option

Current

Sales Revenue : +50%

Finance Costs: -50%

Production Costs: -20%

Sales

$100,000

$150,000

$100,000

$100,000

Cost of Goods Sold

-80,000

-120,000

-80,000

-64,000

Gross Margin

20,000

30,000

20,000

36,000

Finance Costs

-6,000

-6,000

-3,000

-6,000

Net

Margin

14,000

24,000

17,000

30,000

Taxes @ 25%

-3,500

-6,000

-4,250

-7,500

Contribution

10,500

18,000

12,750

22,500

What Operations Managers DoPlan - Organize - Staff - Lead - Control

Ten Critical DecisionsService, product design..Quality managementProcess, capacity design..Location .Layout design ..Human resources, job design..Supply-chain managementInventory management .Scheduling Maintenance .Ch. 5Ch. 6, 6SCh. 7, 7SCh. 8Ch. 9Ch. 10, 10SCh. 11,11sCh. 12, 14, 16Ch. 3, 13, 15Ch. 17

The Critical DecisionsQuality managementWho is responsible for quality?How do we define quality?Service and product designWhat product or service should we offer?How should we design these products and services?

The Critical Decisions - ContinuedProcess and capacity designWhat processes will these products require and in what order?What equipment and technology is necessary for these processes?LocationWhere should we put the facilityOn what criteria should we base this location decision?

The Critical Decisions - ContinuedLayout designHow should we arrange the facility?How large a facility is required?Human resources and job designHow do we provide a reasonable work environment?How much can we expect our employees to produce?

The Critical Decisions - ContinuedSupply chain managementShould we make or buy this item?Who are our good suppliers and how many should we have?Inventory, material requirements planning, How much inventory of each item should we have?When do we re-order?

The Critical Decisions - ContinuedIntermediate, short term, and project schedulingIs subcontracting production a good idea?Are we better off keeping people on the payroll during slowdowns?MaintenanceWho is responsible for maintenance?When do we do maintenance?

Where are the OM Jobs

Where are the OM Jobs

Where Are the OM Jobs?Technology/methodsFacilities/space utilizationStrategic issuesResponse timePeople/team developmentCustomer serviceQualityCost reductionInventory reductionProductivity improvement

The Heritage of Operations Management

Significant Events in Operations Management

The Heritage of Operations Management

The Heritage of Operations Management - Continued

Eli WhitneyBorn 1765; died 1825In 1798, received government contract to make 10,000 musketsShowed that machine tools could make standardized parts to exact specificationsMusket parts could be used in any musket

Frederick W. TaylorBorn 1856; died 1915Known as father of scientific managementIn 1881, as chief engineer for Midvale Steel, studied how tasks were doneBegan first motion & time studiesCreated efficiency principles 1995 Corel Corp.

Taylor: Management Should Take More Responsibility forMatching employees to right jobProviding the proper trainingProviding proper work methods and toolsEstablishing legitimate incentives for work to be accomplished

Frank & Lillian GilbrethFrank (1868-1924); Lillian (1878-1972)Husband-and-wife engineering teamFurther developed work measurement methodsApplied efficiency methods to their home & 12 children! (Book & Movie: Cheaper by the Dozen, book: Bells on Their Toes)

Henry FordBorn 1863; died 1947In 1903, created Ford Motor CompanyIn 1913, first used moving assembly line to make Model TUnfinished product moved by conveyor past work stationPaid workers very well for 1911 ($5/day!)Make them all alike!

W. Edwards DemingBorn 1900; died 1993Engineer & physicistCredited with teaching Japan quality control methods in post-WW2Used statistics to analyze processHis methods involve workers in decisions

Contributions FromHuman factorsIndustrial engineeringManagement scienceBiological sciencePhysical sciencesInformation science

Significant Events in OMDivision of labor (Smith, 1776)Standardized parts (Whitney, 1800)Scientific management (Taylor, 1881)Coordinated assembly line (Ford 1913)Gantt charts (Gantt, 1916)Motion study (the Gilbreths, 1922)Quality control (Shewhart, 1924)

Significant Events - ContinuedCPM/PERT (Dupont, 1957) MRP (Orlicky, 1960)CADFlexible manufacturing systems (FMS)Manufacturing automation protocol (MAP)Computer integrated manufacturing (CIM)

New Challenges in OMLocal or national focusBatch shipmentsLow bid purchasing

Lengthy product development

Standard productsJob specializationGlobal focusJust-in-timeSupply chain partneringRapid product development, alliancesMass customizationEmpowered employees, teams From To

Operations in the Service Sector

Characteristics of GoodsTangible productConsistent product definitionProduction usually separate from consumptionCan be inventoriedLow customer interaction

Characteristics of ServiceIntangible productProduced & consumed at same timeOften uniqueHigh customer interactionInconsistent product definitionOften knowledge-basedFrequently dispersed

Service EconomiesProportion of Employment in the Service Sector

Chart1

50

52

55

58.5

60

62

62

62.5

63

63

63

66

68.5

70

71.5

72.5

72.5

73.5

73.5

73.5

74

76

Country

Percent of Total Employment

Sheet1

50525558.560626262.56363636668.57071.572.572.573.573.573.57476

PolandPortugalCzech Rep.HungaryGreeceItalySpainGermanyIrelandAustriaJapanFinlandSwitz.DenmarkFranceSwedenU.K.BelgiumNorwayLux.U.S.A.Neth.

Sheet2

Sheet3

Goods Versus ServicesCan be resoldCan be inventoried

Some aspects of quality measurableSelling is distinct from production

Reselling unusualDifficult to inventoryQuality difficult to measureSelling is part of service

Goods Service

Goods Versus Services - ContinuedProduct is transportableSite of facility important for cost

Often easy to automateRevenue generated primarily from tangible product

Provider, not product is transportableSite of facility important for customer contactOften difficult to automateRevenue generated primarily from intangible service.

Goods Service

Goods Contain Services / Services Contain GoodsAutomobileComputerInstalled CarpetingFast-food MealRestaurant MealAuto RepairHospital CareAdvertising AgencyInvestment ManagementConsulting ServiceCounselingPercent of Product that is a GoodPercent of Product that is a Service

Organizations in Each Sector Table 1.4

Organizations in Each Sector Table 1.4

Organizations in Each Sector Table 1.4

Organizations in Each Sector Table 1.4

Summary

Development of the Service Economy

Exciting New Challenges in Operations Management

Changing Challenges for the Operations Manager

Past

Causes

Future

Local or national focus

Low-cost, reliable worldwide communication and transportation networks

Global Focus

Batch (large) shipments

Cost of capital puts pressure on reducing investment in inventory

Just-in-time shipments

Low-bid purchasing

Quality emphasis requires that suppliers be engaged in product improvement

Supply-chain partners

Lengthy product development

Shorter life cycles, rapid international communication, computer-aided design, and international collaboration

Rapid product development, alliances, collaborative designs

Changing Challenges for the Operations Manager

Past

Causes

Future

Standardized products

Affluence and worldwide markets; increasingly flexible production processes

Mass customization

Job specialization

Changing sociocultural milieu. Increasingly a knowledge and information society.

Empowered employees, teams, and lean production

Low cost focus

Environmental issues, ISO 14000, increasing disposal costs

Environmentally sensitive production, Green manufacturing, recycled materials, remanufacturing

The Productivity Challenge

The Economic System Transforms Inputs to Outputs

Typical Impact of Quality ImprovementAs productivity improved Costs were pared Wages increased

ProductivityMeasure of process improvementRepresents output relative to inputOnly through increased productivity, our standard of living can improve

Multi-Product Productivity Productivity =

Output Labor + material + energy + capital + miscellaneous

Measurement ProblemsQuality may change while the quantity of inputs and outputs remains constantExternal elements may cause an increase or decrease in productivityPrecise units of measure may be lacking

Productivity VariablesLabor - contributes about 10% of the annual increaseCapital - contributes about 32% of the annual increaseManagement - contributes about 52% of the annual increase

Key Variables for Improved Labor ProductivityBasic education appropriate for the labor forceDiet of the labor forceSocial overhead that makes labor availableMaintaining and enhancing skills in the midst of rapidly changing technology and knowledge

Jobs in the U.S

Comparison of Productivity

Investment and Productivity in Selected Nations

Service ProductivityTypically labor intensiveFrequently individually processedOften an intellectual task performed by professionalsOften difficult to mechanizeOften difficult to evaluate for quality

The Challenge of Social ResponsibilityIncreasing emphasis on business and social responsibility