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Operations ManagementChapter 1 – Chapter 1 – Operations and Operations and ProductivityProductivity
What Is Operations Management?
Production is the creation of goods and services
Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs
into outputs
The operations function is fashionable!
The consultancy services market – % of world revenues of 40 largest consultancy firms
Marketing / sales2
Operations and process management
31
Corporate strategy17
IT strategy17
Benefits / actuarial16
Organizational design
11
Financial6
UK Employment Demographics Circa 1850-2008
0
10
20
30
40
50
60
70
80
90
1850
1860
1870
1880
1890
1900
1910 19
201930
1940
1950
1960
1970 19
801990 20
00
Year
Prop
ortio
n of
tota
l em
ploy
men
t
Agriculture
Service
Manufacturing
Organizing to Produce Goods and Services
Essential functions: Marketing – generates demand Production/operations – creates the
product Finance/accounting – tracks how well the
organization is doing, pays bills, collects the money
The Operations Function• Inputs to Outputs
• transformation system/value adding process• example:
Aircraft manufacture – function valueSource to destination – place valueDoing an MBA – skill/knowledge value
Value adding process - airlines
© Wiley 2007 7
Inputs Transformation process
Outputs
Pilots, planes, ground crew, passengers, freight, data
Selling tickets, flying people and materials from one place to another, processing schedule data
Tickets sent out, people/materials transport to destination, travel information
Value adding process - supermarkets
© Wiley 2007 8
Inputs Transformation process
Outputs
Employees, wholesale goods, supermarkets, website
Selling retail goods and services, giving customer service
Products taken away by customers, customer enquiries answered
Question
A well-designed conversion process operates as closed loop system. Explain what a closed loop system is and why it is used. Give some examples from you own experience to illustrate your answer.
Example of Closed Loop system
Environment
Corporate Strategy
Operations Strategy
Results
Product Design
Process Design
Planning,Organising, Control,Operations
Example:Market, EconomyCustomersCompetitors
But need to explain use of feedback for improvements and provide examples when you illustrate your experience.
Feedback Loop
Question
Draw a diagram illustrating the conversion process that is present in a good quality restaurant. The diagram should include inputs, conversion activities, methods of feedback and outputs (products).
- Methods of feedback could be in various forms ( eg customer complaints, high wastage, employee suggestions etc etc)
Question
List 4 examples of resources that could be considered inputs to the conversion process in a brewery and discuss which of these maybe subject to the greatest variability. Assume the conversion process is fully operational.
( Inputs to brewery could include raw materials, fuel, labour and power. Fuel prices presently showing great variability).
The systems approach.. Question
Discuss how the concept of ‘systems’ can help in developing an understanding of operations
• Systems complexity – Boulding’s taxonomy• Inputs transformation & outputs• Interdependent sub-systems ( eg a human body)• Negative feedback to maintain equilibrium (e.g. riding
a bicycle )• Time lag• Sub-optimisation
Pattern in batch operations..VolUMe
Time
1000
500
Average stock = ½ of Q1000/2=500 x RM10=RM5000 per component. &10,000 components = RM5.0million
Need to have wider system boundary..
Factory 1
Factory 2
Factory 3
Inputs Assembly Division Production
Other parts of the system suffers!As smaller orders may require more ordering costs or set-up costs
If manage decides to reduce stocks and order 100 at a time..
10 Strategic OM Decisions
1. Goods and service design
2. Quality 3. Process and
capacity design4. Location selection5. Layout design
6. Human resources and job design
7. Supply chain management
8. Inventory9. Scheduling10. Maintenance
Class discussion
Form 10 groups, think of an organization you know and advise the class why each of the 10 areas are considered critical.
The Critical Decisions Design of goods and services
What good or service should we offer? How should we design these products
and services? Managing quality
How do we define quality? Who is responsible for quality?
Table 1.2 (cont.)Table 1.2 (cont.)
The Critical Decisions Process and capacity design
What process and what capacity will these products require?
What equipment and technology is necessary for these processes?
Location strategy Where should we put the facility? On what criteria should we base the
location decision?Table 1.2 (cont.)Table 1.2 (cont.)
The Critical Decisions Layout strategy
How should we arrange the facility? How large must the facility be to meet
our plan? 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.)Table 1.2 (cont.)
The Critical Decisions Supply chain management
Should we make or buy this component? Who are our suppliers and who can
integrate into our e-commerce program? Inventory, material requirements planning,
and JIT How much inventory of each item should we
have? When do we re-order?
Table 1.2 (cont.)Table 1.2 (cont.)
The Critical Decisions Intermediate and short–term
scheduling Are we better off keeping people on the
payroll during slowdowns? Which jobs do we perform next?
Maintenance Who is responsible for maintenance? When do we do maintenance?
Table 1.2 (cont.)Table 1.2 (cont.)
Goods and Services and the 10 OM Decisions
OperationsDecisions Goods ServicesGoods and service design
Product is usually tangible
Product is not tangible
Quality Many objective standards
Many subjective standards
Process and capacity design
Customers not involved
Customer may be directly involvedCapacity must match demand
Table 2.1Table 2.1
Goods and Services and the 10 OM Decisions
OperationsDecisions Goods ServicesLocation selection
Near raw materials and labor
Near customers
Layout design
Production efficiency
Enhances product and production
Human resources and job design
Technical skills, consistent labor standards, output based wages
Interact with customers, labor standards vary
Table 2.1Table 2.1
Goods and Services and the 10 OM Decisions
OperationsDecisions Goods ServicesSupply chain Relationship critical
to final productImportant, but may not be critical
Inventory Raw materials, work-in-process, and finished goods may be held
Cannot be stored
Scheduling Level schedules possible
Meet immediate customer demand
Table 2.1Table 2.1
Goods and Services and the 10 OM Decisions
OperationsDecisions Goods ServicesMaintenance Often preventive
and takes place at production site
Often “repair” and takes place at customer’s site
Table 2.1Table 2.1
Where are the OM Jobs?
Figure 1.2Figure 1.2
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
Significant Events in OM
Figure 1.3Figure 1.3
The Heritage of OM
Division of labor (Adam Smith 1776; Division of labor (Adam Smith 1776; Charles Babbage 1852)Charles Babbage 1852)
Standardized parts (Whitney 1800)Standardized parts (Whitney 1800) Scientific Management (Taylor 1881)Scientific Management (Taylor 1881) Coordinated assembly line (Ford/ Coordinated assembly line (Ford/
Sorenson 1913)Sorenson 1913) Gantt charts (Gantt 1916)Gantt charts (Gantt 1916) Motion study (Frank and Lillian Gilbreth Motion study (Frank and Lillian Gilbreth
1922)1922) Quality control (Shewhart 1924; Deming Quality control (Shewhart 1924; Deming
1950)1950)
The Heritage of OM
Computer (Atanasoff 1938)Computer (Atanasoff 1938) CPM/PERT (DuPont 1957)CPM/PERT (DuPont 1957) Material requirements planning (Orlicky Material requirements planning (Orlicky
1960)1960) Computer aided design (CAD 1970)Computer aided design (CAD 1970) Flexible manufacturing system (FMS 1975)Flexible manufacturing system (FMS 1975) Baldrige Quality Awards (1980)Baldrige Quality Awards (1980) Computer integrated manufacturing (1990)Computer integrated manufacturing (1990) Globalization (1992)Globalization (1992) Internet (1995)Internet (1995)
Contributions From
Human factors Industrial engineering Management science Biological science Physical sciences Information technology
New Challenges in OM
Global focus Just-in-time Supply chain
partnering Rapid product
development, alliances
Mass customization Empowered
employees, teams
ToToFromFrom Local or national focusLocal or national focus Batch shipmentsBatch shipments Low bid purchasingLow bid purchasing
Lengthy product Lengthy product developmentdevelopment
Standard productsStandard products
Job specializationJob specialization
Industry and Services as Percentage of GDP
ServicesServices ManufacturingManufacturing
Aus
tral
iaA
ustr
alia
Can
ada
Can
ada
Chi
naC
hina
Cze
ch R
epC
zech
Rep
Fran
ceFr
ance
Ger
man
yG
erm
any
Hon
g K
ong
Hon
g K
ong
Japa
nJa
pan
Mex
ico
Mex
ico
Rus
sian
Fed
Rus
sian
Fed
Sout
h A
fric
aSo
uth
Afr
ica
Spai
nSp
ain
UKUK
USUS
90 90 −80 80 −70 70 −60 60 −50 50 −40 40 −30 30 −20 20 −10 10 −
00 −
Goods and ServicesAutomobile
ComputerInstalled carpeting
Fast-food mealRestaurant meal/auto repair
Hospital careAdvertising agency/
investment managementConsulting service/
teachingCounseling
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
New Trends in OM
Global focus Just-in-time performance Supply chain partnering Rapid product development Mass customization Empowered employees Environmentally sensitive production Ethics
Productivity 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
Effects of productivity on profitBefore($)
After10% rise in sales($)
After 10% rise in productivity ($)
Sales 1000 1100 1000
Variable costs
700 770 630
Fixed Costs
200 200 200
Profit 100 130 (+30%)
170(+70%)
Factors affecting productivity improvement
• Internal factors - those which management may modify• Hard factors ( product, plant & equipment, technology, materials and
energy)• Soft factors ( people, organisations, work methods, management
styles)
• External factors ( those beyond control of organisation)• Structural adjustments ( economic, demographic and social)• Natural resources ( manpower,land, energy and raw materials)• Government & infrastructure ( institutional mechanisms, policies and
strategies, infrastructure and public enterprise)
• Class exercise – OM notes
Performance & productivity Measurement
• Productivity = Output / Input• Financial performance measures
• Profitability ( profit margin, ROCE, ROI)• Liquidity ( current ratio, cash position, working capital, quick
ratio)• Turnover ( stock turnover, assets turnover)• Growth ( sales, assets, market share, sales per employee)• Size ( assets, profits, sales, number of employees, market
capitalisation)• Capital ( price-earning(P/E) ratio,market to book value)
• But are financial measures of performance not adequate?
Some measures of productivity• Sales/labour costs• Sales/pay• Sales/sales people• Value of sales/direct labour + indirect labour
+ material + overhead costs• Total pay/personnel department pay• Yards of carpet laid/number of carpet layers• Square feet of floor cleaned/cost of cleaner
Productivity measurements ( cont’d)
• Labour productivity• Units of output per labour hour• Value added per labour hour• Dollar output per labour hour• Production value per labour
dollar
• Energy productivity• Units of output per kilowatt
hour• Unit of output per energy
dollar input• Production value per barrel of
fuel
• Capital productivity• Units of output per dollar input• Dollar output per dollar input• Inventory turnover ( dollar
sales/dollar inventory
• Service productivity• Units of output per overhead
hour• Increased sales(annual)
/training budget• Number of customers
served/staff member
Question What do you consider to be the major challenges facing Operations Managers in the 21st century? Illustrate your answer with examples from your experience.
- primary reason for slow growth in service sector due to management (Drucker, OM Notes). -focus on objective of competitiveness not cost cutting.- globalization of services and rise of consumer demands.- Important areas : service process design, employee satisfaction, service culture, leadership and performance management.
Service 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
Some frameworks for developing performance measures
• Kaplan & Norton balanced scorecard framework• Oregon productivity matrix• Sink & Turtle strategic matrix• The Fitzgerald model• Carl Thor ‘ family of measures’ • Curtis & Kastner stakeholder model• Theory of constraints• Neely & Adams performance Q:. Give an account
of Neely’s criticisms of traditional accounting methods? (OM Notes )
• Benchmarking
Question• Several performance frameworks exist within the
study of Operations Management:– Kaplan & Norton balanced scorecards, – Oregon productivity matrix, – Sink & Turtle strategic matrix,– Fitzgerald model,– Carl Thor ‘ family of measures’ ,– Curtis & Kastner stakeholder model– Theory of constraints ( video) ,– Neely & Adams performance.
• discuss how you would go about developing performance measures for an organization using one of these frameworks.
Question
• Pressure for productivity increases in the service sector is rising. Outline briefly with a few key points, what you think might be the implications for the– cost of service products?– variety of services available? – and the quality of service products
Possible solution
1. cost of service products – labour based and productivity linked to employee, otherwise cycle of failure
2. variety of services available? ( specialised usually)
3. and the quality of service products ( intangible and requires customer
participation in the process.