Introduction To Operation Managemet

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Operations ManagementOperations ManagementChapter 1 – Chapter 1 – Operations and Operations and ProductivityProductivity

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OutlineOutline

Global Company Profile: Hard Rock Global Company Profile: Hard Rock CafeCafe

What Is Operations Management?What Is Operations Management?

Organizing to Produce Goods and Organizing to Produce Goods and Services Services

Why Study OM?Why Study OM?

What Operations Managers DoWhat Operations Managers Do

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Outline - ContinuedOutline - Continued

The Heritage of Operations The Heritage of Operations ManagementManagement

Operations in the Service SectorOperations in the Service Sector Differences between Goods and Differences between Goods and

ServicesServices

Growth of ServicesGrowth of Services

Service PayService Pay

Exciting New Trends in Operations Exciting New Trends in Operations ManagementManagement

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Outline - ContinuedOutline - Continued

The Productivity ChallengeThe Productivity Challenge Productivity MeasurementProductivity Measurement

Productivity VariablesProductivity Variables

Productivity and the Service Sector Productivity and the Service Sector

Ethics and Social ResponsibilityEthics and Social Responsibility

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Learning ObjectivesLearning Objectives

When you complete this chapter When you complete this chapter you should be able to:you should be able to:

1.1. Define operations managementDefine operations management

2.2. Explain the distinction between Explain the distinction between goods and servicesgoods and services

3.3. Explain the difference between Explain the difference between production and productivityproduction and productivity

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Learning ObjectivesLearning Objectives

When you complete this chapter When you complete this chapter you should be able to:you should be able to:

4.4. Compute single-factor Compute single-factor productivityproductivity

5.5. Compute multifactor productivityCompute multifactor productivity

6.6. Identify the critical variables in Identify the critical variables in enhancing productivityenhancing productivity

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Efficiency: Details that CountEfficiency: Details that Count

Southwest Airlines says that its boarding Southwest Airlines says that its boarding times increased by 10 minutes per flight, it times increased by 10 minutes per flight, it would need 40 more planes at cost of $ 40 would need 40 more planes at cost of $ 40 million each to run the same number of million each to run the same number of flights, run currently.flights, run currently.

America West, working with researchers at America West, working with researchers at Arizona State University, has developed an Arizona State University, has developed an innovative boarding system called ‘reverse innovative boarding system called ‘reverse pyramid’.pyramid’.

First economy class passengers – window First economy class passengers – window seats in middle & rear of the planeseats in middle & rear of the plane

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Efficiency: Details that CountEfficiency: Details that Count

Further, America West, gradually fills in the Further, America West, gradually fills in the plane, giving priority to those with window plane, giving priority to those with window or rear seats, until it finally boards those or rear seats, until it finally boards those seated along aisles in the front.seated along aisles in the front.

This is in contrast to approach used by This is in contrast to approach used by many airlines of just boarding all seats, many airlines of just boarding all seats, starting from back of plane and moving starting from back of plane and moving forward.forward.

In mid 1960s, 20 passengers boarded plane In mid 1960s, 20 passengers boarded plane per minute, which is down to 9 per minute per minute, which is down to 9 per minute as carry on luggage is moreas carry on luggage is more

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What Is Operations What Is Operations Management?Management?

ProductionProduction is the creation of is the creation of goods and servicesgoods and services

Operations management (OM)Operations management (OM) is the set of activities that is the set of activities that

creates value in the form of creates value in the form of goods and services by goods and services by

transforming inputs into transforming inputs into outputsoutputs

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Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:Essential functions: Marketing – generates demandMarketing – generates demand

Production/operations – creates Production/operations – creates the productthe product

Finance/accounting – tracks how Finance/accounting – tracks how well the organization is doing, pays well the organization is doing, pays bills, collects the moneybills, collects the money

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Organizational ChartsOrganizational Charts

OperationsTeller SchedulingCheck ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

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MarketingSales promotionAdvertisingSalesMarket research

Organizational ChartsOrganizational Charts

OperationsFacilities Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and controlSupply chain managementManufacturing 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

Figure 1.1(C)Figure 1.1(C)

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Why Study OM?Why Study OM?

OM is one of three major functions OM is one of three major functions (marketing, finance, and operations) (marketing, finance, and operations) of any organizationof any organization

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

We want to understand what We want to understand what operations managers dooperations managers do

OM is such a costly part of an OM is such a costly part of an organizationorganization

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Ten Critical DecisionsTen Critical DecisionsTen Decision AreasTen Decision Areas

Design of goods and servicesDesign of goods and services Managing qualityManaging quality Process and capacity Process and capacity

design design Location strategyLocation strategy Layout strategyLayout strategy Human resources and Human resources and

job design job design Supply chain Supply chain

management management Inventory managementInventory management SchedulingScheduling MaintenanceMaintenance

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The Critical DecisionsThe Critical Decisions

Design of goods and servicesDesign of goods and services What good or service should we What good or service should we

offer?offer? How should we design these products How should we design these products

and services? and services?

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

Table 1.2 (cont.)Table 1.2 (cont.)

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Process and capacity designProcess and capacity design What process and what capacity will What process and what capacity will

these products require?these products require?

What equipment and technology is What equipment and technology is necessary for these processes?necessary for these processes?

Location strategyLocation strategy Where should we put the facility?Where should we put the facility?

On what criteria should we base the On what criteria should we base the location decision?location decision?


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The Critical DecisionsThe Critical Decisions Layout strategyLayout strategy

How should we arrange the facility?How should we arrange the facility?

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

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

environment?environment?

How much can we expect our How much can we expect our employees to produce?employees to produce?


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Supply chain managementSupply chain management Should we make or buy this component?Should we make or buy this component?

Who are our suppliers and who can Who are our suppliers and who can integrate into our e-commerce program?integrate into our e-commerce program?

Inventory, material requirements Inventory, material requirements planning, and JITplanning, and JIT How much inventory of each item should How much inventory of each item should

we have?we have?

When do we re-order?When do we re-order?Table 1.2 (cont.)Table 1.2 (cont.)

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Intermediate and shortIntermediate and short––term term schedulingscheduling Are we better off keeping people on Are we better off keeping people on

the payroll during slowdowns?the payroll during slowdowns?

Which jobs do we perform next?Which jobs do we perform next?

MaintenanceMaintenance Who is responsible for maintenance?Who is responsible for maintenance?

When do we do maintenance?When do we do maintenance?


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Characteristics of GoodsCharacteristics of Goods

Tangible productTangible product

Consistent product Consistent product definitiondefinition

Production usually Production usually separate from separate from consumptionconsumption

Can be inventoriedCan be inventoried

Low customer Low customer interactioninteraction

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Characteristics of ServiceCharacteristics of Service Intangible productIntangible product

Produced and Produced and consumed at same timeconsumed at same time

Often uniqueOften unique

High customer High customer interactioninteraction

Inconsistent product Inconsistent product definitiondefinition

Often knowledge-basedOften knowledge-based

Frequently dispersedFrequently dispersed

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Goods Versus ServicesGoods Versus Services

Table 1.3Table 1.3

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

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Goods and ServicesGoods and ServicesAutomobile

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

Figure 1.4Figure 1.4

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New Trends in OMNew Trends in OM

Local or Local or national national focusfocus

Reliable worldwide Reliable worldwide communication and communication and transportation networkstransportation networks

Global focus, Global focus, moving moving production production offshoreoffshore

Batch (large) Batch (large) shipmentsshipments

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

Just-in-time Just-in-time performanceperformance

Low-bid Low-bid purchasingpurchasing

Supply chain competition Supply chain competition requires that suppliers be requires that suppliers be engaged in a focus on the engaged in a focus on the end customerend customer

Supply chain Supply chain partners, partners, collaboration, collaboration, alliances, alliances, outsourcingoutsourcing


PastPast CausesCauses FutureFuture

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Lengthy Lengthy product product developmentdevelopment

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

Rapid product Rapid product development, development, alliances, alliances, collaborative collaborative designsdesigns

Standardized Standardized productsproducts

Affluence and worldwide Affluence and worldwide markets; increasingly markets; increasingly flexible production flexible production processesprocesses

Mass Mass customization customization with added with added emphasis on emphasis on qualityquality

Job Job specializationspecialization

Changing socioculture Changing socioculture milieu; increasingly a milieu; increasingly a knowledge and information knowledge and information societysociety

Empowered Empowered employees, employees, teams, and lean teams, and lean productionproduction



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Low-cost Low-cost focusfocus

Environmental issues, ISO Environmental issues, ISO 14000, increasing disposal 14000, increasing disposal costscosts

Environmentally Environmentally sensitive sensitive production, green production, green manufacturing, manufacturing, recycled recycled materials, materials, remanufacturingremanufacturing

Ethics not Ethics not at forefrontat forefront

Businesses operate more Businesses operate more openly; public and global openly; public and global review of ethics; opposition review of ethics; opposition to child labor, bribery, to child labor, bribery, pollutionpollution

High ethical High ethical standards and standards and social social responsibility responsibility expectedexpected



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Productivity ChallengeProductivity 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 labor and capital)(resources such as labor and capital)

The objective is to improve productivity!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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Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:

Stop requiring signatures Stop requiring signatures on credit card purchases on credit card purchases under $25under $25

Saved 8 seconds Saved 8 seconds per transactionper transaction

Change the size of the ice Change the size of the ice scoopscoop

Saved 14 seconds Saved 14 seconds per drinkper drink

New espresso machinesNew espresso machines Saved 12 seconds Saved 12 seconds per shotper shot

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Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:

Stop requiring signatures Stop requiring signatures on credit card purchases on credit card purchases under $25under $25

Saved 8 seconds Saved 8 seconds per transactionper transaction

Change the size of the ice Change the size of the ice scoopscoop

Saved 14 seconds Saved 14 seconds per drinkper drink

New espresso machinesNew espresso machines Saved 12 seconds Saved 12 seconds per shotper shot

Operations improvements have Operations improvements have helped Starbucks increase yearly helped Starbucks increase yearly revenue per outlet by $200,000 to revenue per outlet by $200,000 to $940,000 in six years.$940,000 in six years.

Productivity has improved by 27%, Productivity has improved by 27%, or about 4.5% per year.or about 4.5% per year.

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Measure of process improvementMeasure of process improvement

Represents output relative to inputRepresents output relative to input

Only through productivity increases Only through productivity increases can our standard of living improvecan our standard of living improve

ProductivityProductivity

Productivity =Productivity =Units producedUnits produced

Input usedInput used

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Productivity CalculationsProductivity Calculations

Productivity =Productivity =Units producedUnits produced

Labor-hours usedLabor-hours used

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

250250

Labor ProductivityLabor Productivity

One resource input One resource input single-factor productivity single-factor productivity

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Multi-Factor 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

Multiple resource inputs Multiple resource inputs multi-factor productivity multi-factor productivity

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Collins Title ProductivityCollins 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

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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

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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

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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

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==Old multifactor Old multifactor

productivityproductivity88 titles/day titles/day

$640 + 400$640 + 400

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$640 + 400$640 + 400==

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

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$640 + 400$640 + 400==

Old multifactor Old multifactor productivityproductivity

==New multifactor New multifactor


= = .0077.0077 titles/dollar titles/dollar


$640 + 800$640 + 800

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$640 + 400$640 + 400


$640 + 800$640 + 800

==Old multifactor Old multifactor


==New multifactor New multifactor




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Measurement ProblemsMeasurement 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

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Productivity VariablesProductivity Variables

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

CapitalCapital - contributes - contributes about about 38%38% of the of the annual increaseannual increase

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

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Key Variables for Improved Key Variables for Improved Labor ProductivityLabor 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

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Service ProductivityService Productivity

Typically labor intensiveTypically labor intensive

Frequently focused on unique Frequently focused on unique individual attributes or desiresindividual attributes or desires

Often an intellectual task performed by Often an intellectual task performed by professionalsprofessionals

Often difficult to mechanizeOften difficult to mechanize

Often difficult to evaluate for qualityOften difficult to evaluate for quality

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Productivity at Taco BellProductivity 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

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Productivity at Taco BellProductivity 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

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