Operations and

1 Productivity

PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e

PowerPoint slides by Jeff Heyl

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 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

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 Organizational Charts
Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science Figure 1.1(B)
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 Organizational
Manufacturing
Charts
Operations Finance/ Marketing
Facilities accounting Sales
Construction; maintenance Receivables promotion
Production and inventory control Payables Advertising
Scheduling; materials control Sales
Quality assurance and control Funds Management
Market
Supply-chain management Money market research
International
Manufacturing exchange
Tooling; fabrication; assembly
Capital requirements
Design
Product development and design Stock issue
Detailed product specifications Bond issue
and recall
Industrial engineering
Efficient use of machines, space,
and personnel
Process analysis
Development and installation of
production tools and equipment Figure 1.1(C)
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 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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 Options for Increasing
Contribution
Finance/
Marketing Accounting OM
Option Option Option

Increase Reduce Reduce

Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods – 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
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Table 1.1
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 What Operations
Managers Do
Basic Management Functions
◆ Planning
◆ Organizing
◆ Staffing
◆ Leading
◆ Controlling
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 Ten Critical Decisions
Ten Decision Areas Chapter(s)
1. Design of goods and services 5
2. Managing quality 6, Supplement 6
3. Process and capacity 7, Supplement 7
design
4. Location strategy 8
5. Layout strategy 9
6. Human resources and 10
job design
7. Supply-chain 11, Supplement 11
management
8. Inventory, MRP, JIT 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17 Table 1.2
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 The Critical Decisions
1. Design of goods and services
◆ What good or service should we
offer?
◆ How should we design these
products and services?
2. Managing quality
◆ How do we define quality?
◆ Who is responsible for quality?

Table 1.2 (cont.)

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 The Critical Decisions
3. Process and capacity design
◆ What process and what capacity will
these products require?
◆ What equipment and technology is
necessary for these processes?
4. Location strategy
◆ Where should we put the facility?
◆ On what criteria should we base the
location decision?

Table 1.2 (cont.)

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 The Critical Decisions
5. Layout strategy
◆ How should we arrange the facility?
◆ How large must the facility be to meet
our plan?
6. Human resources and job design
◆ How do we provide a reasonable
work environment?
◆ How much can we expect our
employees to produce?

Table 1.2 (cont.)

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 Ex: Manufacturer Layout

Raw Operations Packaging Goods

Material inventory

Inventory

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 The Critical Decisions
7. Supply-chain management
◆ Should we make or buy this
component?
◆ Who should be our suppliers and how
can we integrate them into our strategy?
8. Inventory, material requirements
planning, and JIT
◆ How much inventory of each item
should we have?
◆ When do we re-order?
Table 1.2 (cont.)
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 The Critical Decisions
9. Intermediate and short–term
scheduling
◆ Are 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.)

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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 1.2

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 Significant Events in OM

Figure 1.3
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 The Heritage of OM
◆ 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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 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:
◆ Matching employees to right job
◆ Providing the proper training
◆ Providing proper work methods and
tools
◆ Establishing appropriate incentives
for work to be accomplished

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 Frank & 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!

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 Henry Ford
◆ Born 1863; died 1947
◆ In 1903, created Ford Motor
Company
◆ In 1913, first used moving assembly
line
◆ Paid workers very well for ($5/day!)

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 W. Edwards Deming
◆ Born 1900; died 1993
◆ Engineer and physicist
◆ Credited with teaching Japan
quality control methods
◆ Used statistics to analyze process
◆ His methods involve workers in
decisions

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 Contributions From
◆ Human factors
◆ Industrial engineering
◆ Management science
◆ Biological science
◆ Physical sciences
◆ Information technology

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 New Challenges in OM
From To
◆ Local or national focus ◆ Global focus
◆ Batch shipments ◆ Just-in-time
◆ Low bid purchasing ◆ Supply-chain
partnering
◆ Lengthy product ◆ Rapid product
development development,
alliances
◆ Standard products ◆ Mass
customization
◆ Job specialization ◆ Empowered
employees, teams
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 Characteristics of Goods
◆ Tangible product
◆ Production usually
separate from
consumption
◆ Can be inventoried
◆ Low customer
interaction
◆ Can be re-sell

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 Characteristics of Service
◆ Intangible product
◆ Produced and
consumed at same time
◆ Often unique
◆ High customer
interaction
◆ Often knowledge-based
◆ Can not re-sell

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 Industry and Services as
Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
Germany

UK

US
Hong Kong

Spain
Russian Fed
Czech Rep

Japan
China
Australia

Mexico
Canada

France

South Africa
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 Manufacturing and Service
Employment
120 –

Employment (millions) 100 –

80 – Service

60 –

40 –

Manufacturing
20 –

0– | | | | | | |
1950 1970 1990 2010 (est)
1960 1980 2000

Figure 1.4 (A)

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 Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Ethics and Public concern over High ethical and
regulations pollution, corruption, social
not at the child labor, etc. responsibility;
forefront increased legal
and professional
standards
Local or Growth of reliable, low Global focus,
national cost communication international
focus and transportation collaboration

Lengthy Shorter life cycles; Rapid product

product growth of global development;
development communication; CAD, design
Internet collaboration

Figure 1.5
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 Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Low cost Public sensitivity to Environmentally
production, environment; ISO 14000 sensitive
with little standard; increasing production; green
concern for disposal costs manufacturing;
environment; sustainability
free
resources
(air, water)
ignored
Low-cost Rise of consumerism; Mass
standardized increased wealth; customization
products individualism

Figure 1.5
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 Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Emphasis on Recognition of the Empowered
specialized, employee's total employees;
often manual contribution; knowledge enriched jobs
tasks society
“In-house” Rapid technological Supply-chain
production; change; increasing partnering; joint
low-bid competitive forces ventures,
purchasing alliances
Large lot Shorter product life Just-In-Time
production cycles; increasing need performance;
to reduce inventory

Figure 1.5
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 New Trends in OM
◆ Ethics
◆ Global focus
◆ Environmentally sensitive production
◆ Rapid product development
◆ Environmentally sensitive production
◆ Mass customization
◆ Empowered employees
◆ Supply-chain partnering
◆ Just-in-time performance
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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
Inputs Transformation Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs and
management at about an annual 2.5% services
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%).

Feedback loop

Figure 1.6

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 Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
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 Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped Starbucks
Stop requiring signatures increase
Saved yearly
8 seconds
revenue per outlet
on credit card purchases perby $200,000 to
transaction
under $25 $940,000 in six years.
Change the sizeProductivity
of the ice hasSaved
improved by 27%,
14 seconds
scoop or about 4.5% per
peryear.
drink
New espresso machines Saved 12 seconds
per shot
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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
Productivity =
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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 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

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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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 Investment and Productivity
10
Percent increase in productivity

0
10 15 20 25 30 35
Percentage investment

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 Service Productivity
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
5. Often difficult to evaluate for quality

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 Productivity at Taco Bell
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
Improvements:
Results:
 Preparation
◆ Revised the time
menucut to 8 seconds
 Management
◆ Designed meals forofeasy
span preparation
control increased
 from 5 to
Shifted 30 preparation to suppliers
some
◆
 In-store
Efficientlabor cut
layout by automation
and 15 hours/day
◆
 Stores
Traininghandle twice the empowerment
and employee volume with half
the labor
 New water and energy saving grills
◆ Conserve 300 million gallons of water and
200 million KwH of electricity each year
saving $17 million annually

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 Ethics and
Social Responsibility
Challenges facing
operations managers:
◆ Developing and producing safe,
quality products
◆ Maintaining a clean environment
◆ Providing a safe workplace
◆ Honoring stakeholder commitments

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