Introduction to Operations

1 Management
PowerPoint presentation to accompany
Heizer, Render, and Al-Zu’bi
Operations Management,
Arab World Edition
Original PowerPoints
by Jeff Heyl
Adapted by Zu’bi
Al-Zu’bi

© 2013 Pearson Education 1-1

Outline

• Company Profile: TcheTche Café

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

1-2
Outline - Continued

• The Evolution of Operations Management

• Operations in the Service Sector
• Differences between Goods and Services
• Growth of Services

1-3
Outline - Continued

• The Productivity Challenge

- Productivity Measurement
- Productivity Variables
- Productivity and the Service Sector

• Ethics and Social Responsibility

• Exciting New Trends in Operations

Management

1-4
Learning Objectives

When you complete this chapter

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

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Learning Objectives

When you complete this chapter

you should be able to:
4. Compute single-factor
productivity
5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity

1-6
TcheTche Cafe

 First opened in 1998

 Now 20 branches throughout the Middle
East
 Changed the image of normal Arabic
coffee shops
 Fusion of modern coffee shop and
traditional Arabic tradition (Sheesha)
 How does an item get on the menu?
 Role of the Operations Manager

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What Is Operations Management?

Operations management (OM)

is the set of activities that
oversees the creation of goods
and services.

Production is the creation of goods and

services

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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

Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security Figure 1.1(A)

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Organizational Charts

Airline

Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Figure 1.1(B)
Management science
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 Organizational Charts
Manufacturing

Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control
Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply-chain management research
Manufacturing Funds Management
Tooling; fabrication; assembly Money market
Design International
Product development and design exchange
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel
and recall
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,
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 Table 1.2
10. Maintenance 17
1 - 16
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.)

1 - 17
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.)
1 - 18
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.)

1 - 19
 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 • Customer service

• Facilities/space utilization • Quality

• Strategic issues • Cost reduction

• Response time • Inventory reduction

• People/team development • Productivity

improvement

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Opportunities

Figure 1.2

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Characteristics of Goods

 Tangible product
 Consistent product definition
 Production usually separate from
consumption
 Can be inventoried
 Low customer interaction

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 Characteristics of Services

 Intangible product
 Produced and consumed at same time
 Often unique
 High customer interaction
 Inconsistent product definition
 Often knowledge-based
 Frequently dispersed

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Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

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

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Organizations in Each Sector
% of all
Service Sector Example Jobs

Education, Legal, University of Cairo, Zu’bi Law 25.8

Medical, other Office-Jordan, The Specialty
Hospital

Trade (retail, Carrefour stores, Mango clothing 14.9

wholesale) chain

Utilities, Qatargas, Emirates Airlines 5.2

Transportation

Professional and Abu-Ghazaleh Consulting, United 10.7

Business Services Insurers.

Table 1.3

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Organizations in Each Sector

% of all
Service Sector Example Jobs

Finance, Information, Al Rajhi Bank, Batelco-Bahrain, 9.6

Emaar Properties
Real Estate

Food, Lodging, Al Tazaj Restaurants, Burj Al Arab 8.5

Entertainment Hotel, Ferrari City

Public Administration Bahrain Government, Greater 4.6

Municipality of Amman

Total 78.8

Table 1.3

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Organizations in Each Sector
% of all
Other Sectors Example Jobs

Manufacturing Almarai Foods-Saudi Arabia, 11.2

Sector Nasr Automobiles-Egypt

Construction Sector Arabtec, Emaar-UAE 8.1

Agriculture Sector Kassatly Chtaura-Lebanon 1.4

Mining Sector Aramco, Jordan Phosphates 0.5

Total 21.2
Table 1.3
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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 on credit Saved 8 seconds per
card purchases under $25 transaction

Change the size of the ice scoop Saved 14 seconds per

drink

New espresso machines Saved 12 seconds per

shot
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Improving Productivity at Starbucks

A team of 10 analysts continually Operations

look for ways to shave time. Some improvements
improvements: have helped
Starbucks
Stop requiring Saved 8
signatures on seconds increase yearly
credit card per revenue per
purchases transaction outlet by
under $25 $200,000 to
$940,000 in six
Change the Saved 14 years.
size of the ice seconds
scoop per drink
Productivity has
improved by
New espresso Saved 12
machines seconds 27%, or about
per shot 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

© 2013 Pearson Education 1 - 34

 Productivity Calculations

Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

© 2013 Pearson Education 1 - 35

 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

© 2013 Pearson Education 1 - 36

 Kuwaiti Publishing Mill (KPM) Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs

© 2013 Pearson Education 1 - 37

 Kuwaiti Publishing Mill (KPM) Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

© 2013 Pearson Education 1 - 38

 Kuwaiti Publishing Mill (KPM) Productivity

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

Old labor 8 titles/day

productivity = 32 labor-hrs
= .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs

© 2011 Pearson Education 1 - 39

 Kuwaiti Publishing Mill (KPM) Productivity

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

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

productivity = 32 labor-hrs = .4375 titles/labor-hr

© 2013 Pearson Education 1 - 40

 Kuwaiti Publishing Mill (KPM) Productivity

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

Old multifactor 8 titles/day

productivity = $640 + 400

© 2013 Pearson Education 1 - 41

 Kuwaiti Publishing Mill (KPM) Productivity

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

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

© 2013 Pearson Education 1 - 42

 Kuwaiti Publishing Mill (KPM) Productivity

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

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

New multifactor 14 titles/day

productivity = $640 + 800

© 2013 Pearson Education 1 - 43

 Kuwaiti Publishing Mill (KPM) Productivity

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

Old multifactor 8 titles/day

productivity = $640 + 400 = .0077 titles/dollar

New multifactor 14 titles/day

productivity = $640 + 800 = .0097 titles/dollar

© 2013 Pearson Education 1 - 44

 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
 Precise units of measure may be
lacking

© 2013 Pearson Education 1 - 45

 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

© 2013 Pearson Education 1 - 46

 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

© 2013 Pearson Education 1 - 47

 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

© 2012 Pearson Education 1 - 48

 Ethics and Social Responsibility

Challenges facing operations managers:

 Developing and producing safe,
quality products
 Keeping a sustainable environment
 Providing a safe workplace
 Honoring stakeholder commitments
 Paying fair prices to suppliers
 Sourcing ethically sound materials
© 2013 Pearson Education 1 - 49
 New Trends in OM

• Ethics
• Global focus
• Rapid product development
• Environmentally sensitive production
• Mass customization
• Empowered employees
• Supply-chain partnering
• Just-in-time performance

© 2011 Pearson Education 1 - 50

 Changing Challenges

Reasons for
Traditional Approach Current Challenge
Change

Ethics and Public concern over pollution, High ethical and social
regulations not at corruption, child labor, etc. responsibility; increased
the forefront legal and professional
standards

Local or national Growth of reliable, low cost Global focus, international

focus communication and transportation collaboration

Lengthy product Shorter life cycles; growth of Rapid product

development global communication; CAD, development; design
Internet collaboration

Figure 1.4
© 2011 Pearson Education 1 - 51
 Changing Challenges

Reasons for
Traditional Approach Current Challenge
Change

Low cost Public sensitivity to environment; Environmentally sensitive

production, with ISO 14000 standard; increasing production; green
little concern for disposal costs manufacturing;
environment; free sustainability
resources (air,
water) ignored
Low-cost Rise of consumerism; increased Mass customization
standardized affluence; individualism
products

Figure 1.4
© 2011 Pearson Education 1 - 52
 Changing Challenges

Reasons for
Traditional Approach Current Challenge
Change

Emphasis on Recognition of the employee's Empowered employees;

specialized, often total contribution; knowledge enriched jobs
manual tasks society

“In-house” Rapid technological change; Supply-chain partnering;

production; low- increasing competitive forces joint ventures, alliances
bid purchasing

Large lot Shorter product life cycles; Just-In-Time

production increasing need to reduce performance; lean;
inventory continuous improvement

Figure 1.4

© 2011 Pearson Education 1 - 53

 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
© 2013 Pearson Education 1 - 54
Assignment

• Read chapter 1
• Problems:1.1, 1.2, 1.4, 1.5, 1.6, 1.8, 1.9, 1.12

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