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11 Operations and Productivity
Operations and Productivity
PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e
PowerPoint slides adapted from Jeff Heyl
© 2011 Pearson Education, Inc. publishing as Prentice Hall
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Learning ObjectivesLearning Objectives
When you complete this chapter you should When you complete this chapter you should be able to:be able to:
1. Define operations management
2. Explain the distinction between goods and services
3. Explain the difference between production and productivity
4. Compute single-factor productivity
5. Compute multifactor productivity
6. Identify the critical variables in enhancing productivity
1 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall
The Hard Rock CafeThe Hard Rock Cafe
First opened in 1971 Now – 129 restaurants in over 40 countries
Rock music memorabilia
Creates value in the form of good food and entertainment
3,500+ custom meals per day in Orlando
How does an item get on the menu?
Role of the Operations Manager
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Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services
Essential functions:
1.1. MarketingMarketing – generates demand
2.2. Production/operationsProduction/operations – creates the product
3.3. Finance/accountingFinance/accounting – tracks how well the organization is doing, pays bills, 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
Figure 1.1(A)
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Organizational ChartsOrganizational Charts
OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science
Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange
Airline
Figure 1.1(B)
MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising
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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)
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Options for Increasing Options for Increasing ContributionContribution
Table 1.1
Sales $100,000 $150,000 $100,000 $100,000Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000Gross Margin 20,000 30,000 20,000 36,000Finance Costs – 6,000 – 6,000 – 3,000 – 6,000Subtotal 14,000 24,000 17,000 30,000Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
Finance/Marketing Accounting OM
Option Option Option
Increase Reduce ReduceSales Finance Production
Current Revenue 50% Costs 50% Costs 20%
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What Operations What Operations Managers DoManagers Do
Planning
Organizing
Staffing
Leading
Controlling
Basic Management FunctionsBasic Management Functions
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What Is Operations Management?What Is Operations Management?
ProductionProduction is the creation of goods and services
Operations management (OM)Operations management (OM) is the set of activities that create value in the form of goods and services by transforming inputs into outputs
The production activities that go on in the organization are operations
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Why Study OM?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. To know how goods and services are produced
3. To understand what operations managers do
4. To reduce costs and improve profitability
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Ten Critical DecisionsTen Critical DecisionsTen Decision Areas Chapter(s)
1. Design of goods and services 52. Managing quality 6, Supplement 63. Process and capacity 7, Supplement 7
design 4. Location strategy 85. Layout strategy 96. Human resources and 10
job design 7. Supply-chain 11, Supplement 11
management8. Inventory, MRP, JIT 12, 14, 169. Scheduling 13, 1510. Maintenance 17 Table 1.2
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The Critical DecisionsThe Critical Decisions1. 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?
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?
5. Layout strategy How should we arrange the facility? How large must the facility be to meet our plan?
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The Critical DecisionsThe Critical Decisions6. Human resources and job design
How do we provide a reasonable work environment? How much can we expect our employees to produce?
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?
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?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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CertificationsCertifications APICS, the American Production and Inventory
Control Society
American Society of Quality (ASQ)
Institute for Supply Management (ISM)
Project Management Institute (PMI)
Council of Supply Chain Management Professionals
Charter Institute of Purchasing and Supply (CIPS)
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The Heritage of OMThe 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)
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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New Challenges in OMNew Challenges in OM
Global focus
Just-in-time
Supply-chain partnering
Rapid product development, alliances
Mass customization
Empowered employees, teams
ToToFromFrom Local or national focus
Batch shipments
Low bid purchasing
Lengthy product development
Standard products
Job specialization
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Characteristics of Goods & ServicesCharacteristics of Goods & Services
Tangible product
Consistent product definition
Production usually separate from consumption
Can be inventoried
Low customer interaction
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 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 Good Percent of Product that is a Service
100% 75 50 25 0 25 50 75 100%| | | | | | | | |
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Industry and Services as Industry and Services as Percentage of GDPPercentage of GDP
Services Manufacturing
Au
stra
lia
Can
ada
Ch
ina
Cze
ch R
ep
Fra
nce
Ger
man
y
Ho
ng
Ko
ng
Jap
an
Mex
ico
Ru
ssia
n F
ed
So
uth
Afr
ica
Sp
ain
UK
US
90 −
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0 −
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120 –
100 –
80 –
60 –
40 –
20 –
0 –| | | | | | |
1950 1970 1990 2010 (est)1960 1980 2000
Em
plo
ymen
t (m
illi
on
s)
Manufacturing and Service Manufacturing and Service EmploymentEmployment
Figure 1.4 (A)
Manufacturing
ServiceService
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Manufacturing Employment Manufacturing Employment and Productionand Production
Figure 1.4 (B)
40 –
30 –
20 –
10 –
0 – | | | | | | |1950 1970 1990 2010 (est)
1960 1980 2000
– 150150
– 125125
– 100100
– 7575
– 5050
– 2525
– 00
Em
plo
ymen
t (m
illi
on
s)
In
dex
: 19
97 =
100
Ind
ex:
1997
= 1
00
Manufacturingemployment
(left scale)
Industrial Industrial productionproduction
(right scale)(right scale)
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Development of the Development of the Service EconomyService Economy
Figure 1.4 (C)
United States
Canada
France
Italy
Britain
Japan
W. Germany
1970 2010 (est)
| | | | |
40 50 60 70 80Percent
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Organizations in Each SectorOrganizations in Each Sector
Service SectorService Sector ExampleExample% of all % of all
JobsJobs
Education, Legal, Medical, other
San Diego Zoo, Arnold Palmer Hospital
25.8
Trade (retail, wholesale)
Walgreen’s, Wal-Mart, Nordstrom’s
14.9
Utilities, Transportation
Pacific Gas & Electric, American Airlines
5.2
Professional and Business Services
Snelling and Snelling, Waste Management, Inc.
10.7
Table 1.3
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Organizations in Each SectorOrganizations in Each Sector
Service SectorService Sector ExampleExample% of all % of all
JobsJobs
Finance, Information, Real Estate
Citicorp, American Express, Prudential, Aetna
9.6
Food, Lodging, Entertainment
Olive Garden, Motel 6, Walt Disney
8.5
Public Administration
U.S., State of Alabama, Cook County
4.6
Total 78.8
Table 1.3
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Organizations in Each SectorOrganizations in Each Sector
Other SectorsOther Sectors ExampleExample% of all % of all
JobsJobs
Manufacturing Sector
General Electric, Ford, U.S. Steel, Intel
11.2
Construction Sector
Bechtel, McDermott 8.1
Agriculture Sector
King Ranch 1.4
Mining Sector Homestake Mining 0.5
Total 21.2
Table 1.3
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Changing ChallengesChanging ChallengesTraditional Approach
Reasons for Change
Current Challenge
Ethics and regulations not at the forefront
Public concern over pollution, corruption, child labor, etc.
High ethical and social responsibility; increased legal and professional standards
Local or national focus
Growth of reliable, low cost communication and transportation
Global focus, international collaboration
Lengthy product development
Shorter life cycles; growth of global communication; CAD, Internet
Rapid product development; design collaboration
Figure 1.5
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Changing ChallengesChanging ChallengesTraditional Approach
Reasons for Change
Current Challenge
Low cost production, with little concern for environment; free resources (air, water) ignored
Public sensitivity to environment; ISO 14000 standard; increasing disposal costs
Environmentally sensitive production; green manufacturing; sustainability
Low-cost standardized products
Rise of consumerism; increased affluence; individualism
Mass customization
Figure 1.5
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Changing ChallengesChanging ChallengesTraditional Approach
Reasons for Change
Current Challenge
Emphasis on specialized, often manual tasks
Recognition of the employee's total contribution; knowledge society
Empowered employees; enriched jobs
“In-house” production; low-bid purchasing
Rapid technological change; increasing competitive forces
Supply-chain partnering; joint ventures, alliances
Large lot production
Shorter product life cycles; increasing need to reduce inventory
Just-In-Time performance; lean; continuous improvement
Figure 1.5
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New Trends in OMNew 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 ChallengeProductivity 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!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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Feedback loop
Outputs
Goods and
services
Transformation
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 SystemThe Economic System
Inputs
Labor,capital,
management
Figure 1.6
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Measure of process improvement
Represents output relative to input
Only through productivity increases can our standard of living improve
ProductivityProductivity
Productivity =Units produced
Input used
Productivity CalculationsProductivity Calculations
Labor ProductivityLabor Productivity
Productivity = Units produced
Labor-hours used
= = 4 units/labor-hour1,000
250
One resource input single-factor productivity
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Multi-Factor Productivity Multi-Factor Productivity
Output
Labor + Material + Energy + Capital + Miscellaneous
Productivity =
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 ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
=Old labor
productivity8 titles/day
32 labor-hrs
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
8 titles/day
32 labor-hrs=
Old labor productivity = .25 titles/labor-hr
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs=
Old labor productivity
=New labor
productivity
= .25 titles/labor-hr
14 titles/day14 titles/day
32 labor-hrs32 labor-hrs
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs=
Old labor productivity = .25 titles/labor-hr
14 titles/day
32 labor-hrs=
New labor productivity = .4375 titles/labor-hr
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
=Old multifactor
productivity8 titles/day
$640 + 400
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400=
Old multifactor productivity = .0077 titles/dollar
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400=
Old multifactor productivity
=New multifactor
productivity
= .0077 titles/dollar
14 titles/day14 titles/day
$640 + 800$640 + 800
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400
14 titles/day
$640 + 800
=Old multifactor
productivity
=New multifactor
productivity
= .0077 titles/dollar
= .0097 titles/dollar
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Measurement ProblemsMeasurement Problems
1.1. QualityQuality may change while the quantity of inputs and outputs remains constant
2.2. External elementsExternal elements may cause an increase or decrease in productivity Precise unitsPrecise units of measure may be
lacking
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Productivity VariablesProductivity Variables
1.1. LaborLabor - contributes about 10% of the annual increase
2.2. CapitalCapital - contributes about 38% of the annual increase
3.3. ManagementManagement - contributes about 52% of the annual increase
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Key Variables for Improved Key Variables for Improved Labor ProductivityLabor 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 Investment and Productivity
10
8
6
4
2
0
Per
cen
t in
crea
se in
pro
du
ctiv
ity
Percentage investment
10 15 20 25 30 35
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Service ProductivityService 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 BellProductivity 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
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
Conserve 300 million gallons of water and 200 million KwH of electricity each year saving $17 million annually
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Ethics andEthics andSocial ResponsibilitySocial Responsibility
Challenges facing Challenges facing operations managers:operations managers:
Developing and producing safe, quality products
Maintaining a clean environment
Providing a safe workplace
Honoring stakeholder commitments