operations management

Operations Management

Operations and Productivity

Operations

Operations are the activities involved in running a business for the purpose of producing a value for the stakeholders

What Is Operations Management?

Production is the creation of goods and servicesOperations management (OM) 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

Requires 3 essential functions: Marketing – generates demand Production/operations – creates the product Finance/accounting – tracks how well the

organization is doing, pays bills, collects the money

Organizational Charts

Operations•Teller Scheduling•Check Clearing•Collection•Transaction processing•Facilities design/layout•Vault operations•Maintenance•Security

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

Operations•Ground support equipment•Maintenance•Ground Operations• Facility maintenance Catering• Flight Operations• Crew scheduling Flying Communications Dispatching•Management science

Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange

Airline

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising


MarketingSales promotionAdvertisingSalesMarket research

Operations•Facilities Construction; maintenance•Production and inventory control Scheduling; materials control

•Quality assurance and control•Supply-chain management•Manufacturing 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


Why Study OM?

OM is one of three major functions (marketing, finance, and operations) of any organization (how people organize them selves to produce something)

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

We want to understand what operations managers do (which will help to develop the skills needed to be a successful manager)

OM is such a costly part of an organization

and represent a major opportunity to improve profitability and cut cost.

Options for Increasing Contribution

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%

What Operations Managers Do?

Planning Organizing Staffing Leading Controlling

Basic Management FunctionsBasic Management Functions

Ten Critical Decisions

Ten Decision AreasTen Decision Areas

Service and product designService and product design Quality managementQuality management Process and capacity Process and capacity

design design LocationLocation Layout designLayout design Human resources, Human resources,

job design job design Supply-chain Supply-chain

management management Inventory managementInventory management SchedulingScheduling MaintenanceMaintenance

The Critical Decisions

Service and product design What good or service should we offer? How should we design these products and

services? Quality management

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

Process and capacity design What process and what capacity will these

products require? What equipment and technology is necessary

for these processes?

Location Where should we put the facility? On what criteria should we base the location

decision?


Layout design How should we arrange the facility and material

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

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

environment? How much can we expect our employees to

produce?


Supply-chain management Should we make or buy this component? Who are our suppliers and who can integrate into

our e-commerce program? Inventory, material requirements planning,

and JIT How much inventory of each item should we

have? When do we re-order?


Intermediate and short–term scheduling Are we better off keeping people on the payroll

during slowdowns? Which jobs do we perform next?

Maintenance Who is responsible for maintenance? When do we do maintenance?


Significant Events in OM

Figure 1.3Figure 1.3

New Challenges in OM

Global focus Just-in-time Supply chain

partnering Rapid product

development, alliances

Mass customization Empowered

employees, teams

ToToFromFrom Local or national focusLocal or national focus

Batch shipmentsBatch shipments

Low bid purchasingLow bid purchasing

Lengthy product Lengthy product developmentdevelopment

Standard productsStandard products

Job specializationJob specialization

Characteristics of Goods

Tangible product Consistent product

definition Production usually

separate from consumption

Can be inventoried Low customer

interaction

Operations in the service Sector

Repair & maintenance Government Food & Lodging Transportation Insurance Financial Real Estate Education Legal Medical Entertainment

Characteristics of Service

Intangible product Produced and consumed

at same time Often unique High customer

interaction Inconsistent product

definition Often knowledge-based Frequently dispersed

Industry and Services as Percentage 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 −

Goods Versus Services

•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

Goods and Services

Automobile

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%|| || || || || || || || ||

ServicesServices

Manufacturing

Manufacturing

Development of the Service Economy

AgricultureAgriculture

100100

9090

8080

7070

6060

5050

4040

3030

2020

1010

00

18001800 18501850 19001900 19501950 20002000


30 30 –

25 25 –

20 20 –

15 15 –

10 10 –

5 5 –

0 0 –19501950 19701970 19901990 20102010

– 150150

– 125125

– 100100

– 7575

– 5050

– 2525

– 00

Em

plo

ymen

t (m

illi

on

s)E

mp

loym

ent

(mil

lio

ns)

In

dex

: In

dex

: 19

97 =

100

1997

= 1

00

Manufacturingemployment

Industrial production

Estimate


United States

Canada

France

Italy

Britain

Japan

W. Germany

1970 2005

| | | | |

40 50 60 70 80Percent

Local or national focus

Low-cost, reliable worldwide communication and transportation networks

Global focus

Batch (large) shipments

Short product life cycles and cost of capital put pressure on reducing inventory

Just-in-time shipments

Low-bid purchasing

Quality emphasis requires that suppliers be engaged in product improvement

Supply-chain partners, Enterprise Resource Planning, e-commerce

PastPast CausesCauses FutureFuture

New Trends in OM

Lengthy product development

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

Rapid product development, alliances, collaborative designs

Standardized products

Affluence and worldwide markets; increasingly flexible production processes

Mass customization with added emphasis on quality

Job specialization

Changing socio-culture milieu; increasingly a knowledge and information society

Empowered employees, teams, and lean production


New Trends in OM

Low-cost focus

Environmental issues, ISO 14000, increasing disposal costs

Environmentally sensitive production, green manufacturing, recycled materials, remanufacturing


New Trends in OM

Productivity 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 labour and capital)(resources such as labour and capital)

The objective is to improve this The objective is to improve this measure of efficiencymeasure of efficiency

Important Note!Production is a measure of output

only and not a measure of efficiency

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 System

InputsInputs

Labor,capital,

management

Figure 1.7Figure 1.7

Measure of process improvement Represents output relative to input Only through productivity increases can our

standard of living improve

Productivity

Productivity =Productivity =Units producedUnits produced

Input usedInput used

Productivity Calculations

Productivity =Productivity =Units producedUnits produced

Labor-hours usedLabor-hours used

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

250250

Labor ProductivityLabor 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

Example: Collins 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


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


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








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






==Old multifactor Old multifactor

productivityproductivity88 titles/day titles/day

$640 + 400$640 + 400







$640 + 400$640 + 400==

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







$640 + 400$640 + 400==

Old multifactor Old multifactor productivityproductivity

==New multifactor New multifactor


= = .0077.0077 titles/dollar titles/dollar


$640 + 800$640 + 800

Collins Title Productivity






$640 + 400$640 + 400


$640 + 800$640 + 800

==Old multifactor Old multifactor


==New multifactor New multifactor




Measurement 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

Productivity Variables

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

CapitalCapital - contributes about - contributes about 32%32% of the annual increaseof the annual increase

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

Key Variables for Improved Labor Productivity

Basic education appropriate for the Basic education appropriate for the labor forcelabor force

Diet of the labor forceDiet of the labor force

Social overhead that makes labor Social overhead that makes labor availableavailable

Maintaining and enhancing skills in the Maintaining and enhancing skills in the midst of rapidly changing technology midst of rapidly changing technology and knowledgeand knowledge

Investment and Productivity in Selected Nations

USUS UKUK

CanadaCanada

ItalyItaly

BelgiumBelgium

FranceFrance

NetherlandsNetherlands

JapanJapan

1010

88

66

44

22

00Per

cen

t in

crea

se in

mfg

pro

du

ctiv

ity

Per

cen

t in

crea

se in

mfg

pro

du

ctiv

ity

Percentage investmentPercentage investment

1010 1515 2020 2525 3030 3535

Service Productivity

Typically labor intensive (example Typically labor intensive (example counseling and teaching)counseling and teaching)

Frequently focused on unique individual Frequently focused on unique individual attributes or desires (investment advice)attributes or desires (investment advice)

Often an intellectual task performed by Often an intellectual task performed by professionals (medical diagnosis)professionals (medical diagnosis)

Often difficult to mechanize (haircut)Often difficult to mechanize (haircut)

Often difficult to evaluate for quality Often difficult to evaluate for quality (performance of a law firm)(performance of a law firm)

Productivity at Taco Bell

Improvements:Improvements: Revised the menu Revised the menu Designed meals for easy preparationDesigned meals for easy preparation Shifted some preparation to suppliersShifted some preparation to suppliers Efficient layout and automationEfficient layout and automation Training and employee empowermentTraining and employee empowerment

Productivity at Taco Bell

Improvements:Improvements:

Results: Preparation time cut to 8 seconds Management span of control

increased from 5 to 30 In-store labor cut by 15 hours/day Stores handle twice the volume with

half the labor Fast-food low-cost leader

Ethics and Social Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing safe quality productsDeveloping safe quality products

Maintaining a clean environmentMaintaining a clean environment

Providing a safe workplaceProviding a safe workplace

Honoring community commitmentsHonoring community commitments

operations management

Documents

critical decisionsintermediate

creation of goods

form of goods

capacity designwhat

product designwhat good

job designhow

major functions marketing

quality managementhow