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Operations Management
Chapter 1
Operations and
Productivity
Dr. Nguyen Thi Xuan Hoa
nguyenthixuanhoa1@gmail.com
0914343833
Learning Objectives (1 of 2)
1.1 Define operations management
1.2 Explain the distinction between goods and services
1.3 Explain the difference between production and
productivity
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Learning Objectives (2 of 2)
1.4 Compute single-factor productivity
1.5 Compute multifactor productivity
1.6 Identify the critical variables in enhancing productivity
What Is Operations Management?
Production is the creation of goods and services
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 Goods and Services
• Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the organization
is doing, pays bills, collects the money
Organizational Charts (1 of 3)
Figure 1.1 Organization Charts for Two Service Organizations and One
Manufacturing Organization
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Organizational Charts (2 of 3)
Figure 1.1 [continued]
Organizational Charts (3 of 3)
Figure 1.1 [continued]
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The Supply Chain
• A global network of organizations and activities that
supply a firm with goods and services
• Members of the supply chain collaborate to achieve high
levels of customer satisfaction, efficiency and competitive
advantage
Figure 1.2 Soft Drink Supply Chain
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. 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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Table 1.1 Options for Increasing
Contribution
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What Operations Managers Do
Basic Management Functions
• Planning
• Organizing
• Staffing
• Leading
• Controlling
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Ten Strategic Decisions
Table 1.2 Ten Strategic Operations Management Decisions
Decision Chapter(s)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity strategy 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17
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The Strategic Decisions (1 of 5)
1. Design of goods and services
– Defines what is required of operations
– Product design determines quality, sustainability and
human resources
2. Managing quality
– Determine the customer’s quality expectations
– Establish policies and procedures to identify and
achieve that quality
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The Strategic Decisions (2 of 5)
3. Process and capacity design
– How is a good or service produced?
– Commits management to specific technology, quality,
resources, and investment
4. Location strategy
– Nearness to customers, suppliers, and talent
– Considering costs, infrastructure, logistics, and
government
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The Strategic Decisions (3 of 5)
5. Layout strategy
– Integrate capacity needs, personnel levels,
technology, and inventory
– Determine the efficient flow of materials, people, and
information
6. Human resources and job design
– Recruit, motivate, and retain personnel with the
required talent and skills
– Integral and expensive part of the total system design
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The Strategic Decisions (4 of 5)
7. Supply chain management
– Integrate supply chain into the firm’s strategy
– Determine what is to be purchased, from whom, and
under what conditions
8. Inventory management
– Inventory ordering and holding decisions
– Optimize considering customer satisfaction, supplier
capability, and production schedules
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The Strategic Decisions (5 of 5)
9. Scheduling
– Determine and implement intermediate- and short-
term schedules
– Utilize personnel and facilities while meeting
customer demands
10.Maintenance
– Consider facility capacity, production demands, and
personnel
– Maintain a reliable and stable process
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Where Are the OM Jobs?
• Technology/methods
• Facilities/space utilization
• Strategic issues
• Response time
• People/team development
• Customer service
• Quality
• Cost reduction
• Inventory reduction
• Productivity improvement
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Opportunities
Figure 1.3 Many Opportunities Exist for Operations Managers
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Certifications
• APICS, the Association for Operations Management
• American Society for Quality (ASQ)
• Institute for Supply Management (ISM)
• Project Management Institute (PMI)
• Council of Supply Chain Management Professionals
• Charter Institute of Procurement and Supply (CIPS)
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Significant Events in OM
Figure 1.4 Significant Events in Operations Management
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The Heritage of OM (1 of 2)
• Division of labor (Adam Smith 1776; Charles
Babbage 1852)
• Standardized parts (Whitney 1800)
• Scientific Management (Taylor 1881)
• Coordinated 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 OM (2 of 2)
• 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)
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Eli Whitney
• Born 1765; died 1825
• In 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
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Frederick W. Taylor
• Born 1856; died 1915
• Known as ‘father of scientific management’
• In 1881, as chief engineer for Midvale Steel, studied how
tasks were done
– Began first motion and time studies
• Created efficiency principles
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Taylor’s Principles
Management Should Take More Responsibility for:
1. Matching employees to right job
2. Providing the proper training
3. Providing proper work methods and tools
4. Establishing legitimate incentives for work to be
accomplished
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Frank and Lillian Gilbreth
• Frank (1868-1924); Lillian (1878-1972)
• Husband and wife engineering team
• Further developed work measurement methods
• Applied efficiency methods to their home and 12 children!
• Book and Movie: “Cheaper by the Dozen,” “Bells on Their
Toes”
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Henry Ford
• Born 1863; died 1947
• In 1903, created Ford Motor Company
• 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!)
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W. Edwards Deming
• Born 1900; died 1993
• Engineer and physicist
• Credited with teaching Japan quality control methods in
post-WW2
• Used statistics to analyze process
• His methods involve workers in decisions
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Contributions from
• Industrial engineering
• Statistics
• Management
• Economics
• Physical sciences
• Information technology
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Operations for Goods and Services (1 of 2)
Services – Economic activities that typically produce an
intangible product (such as education, entertainment,
lodging, government, financial, and health services)
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Operations for Goods and Services (2 of 2)
• Manufacturers produce tangible product, services often
intangible
• Operations activities often very similar
• Distinction not always clear
• Few pure services
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Table 1.3 Differences between Goods and
Services
Characteristics of Services Characteristics of Goods
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory
produces a haircut that is consumed as it is produced (beauty care products)
Unique: Your investments and medical care are unique Similar products produced (iPods)
High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and medical Standard tangible product tends to make
services are hard to automate automation feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products
education, and medical services are easy to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value
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Productivity 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!
Important Note!
Production is a measure of output only and not a measure
of efficiency
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The Economic System
Figure 1.6 The Economic System Adds Value by
Transforming Inputs to Outputs
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Improving Productivity at Starbucks (1 of 2)
A team of 10 analysts continually
look for ways to shave time. Some
improvements:
Stop requiring signatures on Saved 8 seconds per
credit card purchases under $25 transaction
Saved 14 seconds per
Change the size of the ice scoop drink
Saved 12 seconds per
New espresso machines
shot
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Improving Productivity at Starbucks (2 of 2)
Operations improvements have helped Starbucks increase
yearly revenue per outlet by $250,000 to $1,000,000.
Productivity has improved by 27%, or about 4.5% per year.
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Productivity
Units produced
Productivity =
Input used
• Measure of process improvement
• Represents output relative to input
• Only through productivity increases can our standard of
living improve
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Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor - hours used
1,000
= = 4 units / labor - hour
250
One resource input single-factor productivity
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Multi-Factor Productivity
Output
Multifactor =
Labor + Material + Energy + Capital + Miscellaneous
• 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 Productivity (1 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
8 titles / day
Old labor productivity = = .25 titles / labor - hr
32 labor - hrs
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Collins Title Productivity (2 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
8 titles / day
Old labor productivity = = .25 titles / labor - hr
32 labor - hrs
14 titles / day
New labor productivity = = .4375 titles / labor - hr
32labor - hrs
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Collins Title Productivity (3 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
8 titles / day
Old multifactor productivity = = .0077 titles / dollar
$640 + 400
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Collins Title Productivity (4 of 4)
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
8 titles / day
Old multifactor productivity = = .0077 titles / dollar
$640 + 400
14 titles / day
New multifactor productivity = = .0097 titles / dollar
$640 + 800
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Measurement Problems
1. Quality may change while the quantity of inputs and
outputs remains constant
2. External elements may cause an increase or decrease
in productivity
3. Precise units of measure may be lacking
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Productivity Variables
1. Labor - contributes about 10% of
the annual increase
2. Capital - contributes about 38%
of the annual increase
3. Management - contributes about
52% of the annual increase
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Key Variables for Improved Labor
Productivity
1. Basic education appropriate for the labor force
2. Diet of the labor force
3. Social overhead that makes labor available
– Challenge is in maintaining and enhancing skills in
the midst of rapidly changing technology and
knowledge
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Labor Skills
Figure 1.7 About half of the 17-year-olds in the U.S. cannot
correctly answer questions of this type
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Capital
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Management
• Ensures labor and capital are effectively used to increase
productivity
– Use of knowledge
– Application of technologies
• Knowledge societies
– Labor has migrated from manual work to technical
and information-processing tasks
• More effective use of technology, knowledge, and capital
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Productivity in the Service Sector
• Productivity improvement in services is difficult because:
1. Typically labor intensive
2. Frequently focused on unique individual attributes or
desires
3. Often an intellectual task performed by professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality
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Productivity at Taco Bell (1 of 2)
• Improvements:
– Revised the menu
– Designed meals for easy preparation
– Shifted some preparation to suppliers
– Efficient layout and automation
– Training and employee empowerment
– New water and energy saving grills
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Productivity at Taco Bell (2 of 2)
• Results:
– Preparation time cut to 8 seconds
– Management span of control increased from 5 to 30
– In-store labor cut by 15 hours/day
– Floor space reduced by more than 50%
– Stores average 164 seconds/customer from drive-up to
pull-out
– Water- and energy-savings grills conserve 300 million
gallons of water and 200 million KwH of electricity each
year
– Green-inspired cooking method saves 5,800 restaurants
$17 million per year
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Current Challenges in OM
• Globalization
• Supply-chain partnering
• Sustainability
• Rapid product development
• Mass customization
• Lean operations
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Ethics, Social Responsibility, and
Sustainability (1 of 2)
Challenges facing operations managers:
• Develop and produce safe, high-quality green products
• Train, retrain, and motivate employees in a safe
workplace
• Honor stakeholder commitments
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Ethics, Social Responsibility, and
Sustainability (2 of 2)
Stakeholders
Those with a vested interest in an organization, including
customers, distributors, suppliers, owners, lenders,
employees, and community members.
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