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What Is Operations Management? Chapter 1 Introduction to Operations Management and Productivity

Product/Output
Goods or services Consumer goods, industrial goods or producer goods

Production is the creation of goods and services Operations management is the set of activities that creates value in the form of goods and services by transforming inputs into outputs
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Why Study OM?

OM is one of three major functions (marketing, finance, and operations) of any organization. We want (and need) to know how goods and services are produced. We want to understand what operations managers do. OM is such a costly part of an organization.
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Objectives of OM
To produce a specific product, on a schedule, at minimum cost To achieve customer satisfaction by providing them G+S at competitive cost, affordable price, within a reasonable time schedule To be an effective producer - max the value of output To enhance productivity through efficiency of the production process To adapt for future survival - production system has to be flexible, ability to respond rapidly to changes in product design or process design
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Cont
To utilize labor, equipment, material & other resources efficiently. Management is concerned with labor efficiency due to high cost associated with utilization of labor To produce goods to meet expected demand & meet the required delivery date

Organizing to Produce Goods and Services

Functions: Marketing
- Gets customers

Operations
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creates product or service Obtains funds Tracks money

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Finance/Accounting
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Functions - Bank
Commercial Bank
1984-1994 T/Maker Co.

Functions - Manufacturer
Manufacturing
Finance/ Accounting

Marketing

Operations

Finance/ Accounting

Marketing

Operations

Teller Scheduling

Check Clearing

Transactions Processing

Security Manufacturing Production Control Quality Control Purchasing

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Roles of Operations Manager

Performs the basic functions of the management process: planning, organizing, staffing, directing and controlling Ability to make goods decisions, allocate resources effectively and make efficient operations functions
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10 Strategic OM Decision a) b) c) d) e) f) g) h) I) k) Goods & Service Design Quality Process & Capacity Design Location Selection Layout Design Human Resource & Job Design Supply Chain Management Inventory Scheduling Maintenance
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The Critical Decisions

Goods and Service design
- What product or service should we offer? - How should we design these products and services?

The Critical Decisions - Continued

Process and capacity design
- What processes will these products require and in what order? - What equipment and technology is necessary for these processes?

Quality management
- Who is responsible for quality? - How do we define quality?

Location
- Where should we put the facility - On what criteria should we base this location decision?
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The Critical Decisions - Continued

Layout design
- How should we arrange the facility? - How large a facility is required?

The Critical Decisions - Continued

Supply chain management
- Should we make or buy this item? - Who are our good suppliers and how many should we have?

Human resources and job design

- How do we provide a reasonable work environment? - How much can we expect our employees to produce?

Inventory, material requirements planning,

- How much inventory of each item should we have? - When do we re-order?
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The Critical Decisions - Continued

Intermediate, short term, and project scheduling
- Is subcontracting production a good idea? - Are we better off keeping people on the payroll during slowdowns?

Characteristics of Goods
Tangible product - Can be seen and touched and must be delivered to customers. Production usually separate from consumption - Goods are produced in advance, sale and consumption comes later Can be inventoried - Product can be produced in advance and held as inventories until customer needs them
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Maintenance
- Who is responsible for maintenance? - When do we do maintenance?

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Cont
Low customer interaction - Customers are not involved in the production process. Long lead times
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Characteristics of Service
Intangible product - Cannot be seen, touched or displayed (airlines services, hotel services) Produced & consumed at same time - there is no stored inventory. (beauty salon produces hair cut, the doctor produces an operation) Often unique - Mix of financial coverage such as investments and insurance policies, may be not the same as anyone else
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It may takes several days or weeks to manufacture goods.

Consistent product definition

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Cont High customer interaction

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Cont Often knowledge-based

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Services are often difficult to standardize, automate and make as efficient as we would like because customer interaction demands uniqueness Product definition may be rigorous, as in the case of an auto insurance policy, but inconsistent because policyholders change cars and mature
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As in the case of educational, medical and legal services and therefore hard to automate.

Frequently dispersed
- Dispersion occurs because services are frequently brought to the client/customer via a local office or a retail outlet Short lead times - services may need to be delivered immediately when customer wants the service
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Inconsistent product definition

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Differences between Goods & Services

Attributes of GOODS Product can be resold Product can be inventoried Some aspects of quality are measurable Selling is distinct from production Product is transportable Site of facility is important for cost Often easy to automate Attributes of SERVICES Reselling a service is unusual Many services cannot be inventoried Many aspects of quality are difficult to measure Selling is often a part of the service Provider, not product, is often transportable Site of facility is important for customer contact Service is often difficult to automate

Operations/Production System Model

Inputs Transformation Process/conversion process Outputs

Feedback

Revenue is generated primarily from Revenue is generated primarily from the tangible product the intangible service.
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Features of Production System

Inputs - consist of all resources that are necessary for production to take place, consist of manpower, machine, material, money, equipment. Transformation Process - during this process, the less valuable input resources are transformed into valuable form of output through a series of value added processes. Ex: surgical procedures in a hospital, assembly parts in a automobile factory - Factors affecting are capacity, efficiency, effectiveness, flexibility
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Cont
Outputs - End result of a production either good or services Feedback (actual vs expected)
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A control mechanism for operations systems. It includes measuring the operations system actual performance against the expected performance Feedback loop enables management to decide whether or not adjustments in the organizational activities are needed

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Relationship of Operations System and other functions in the organization

Environment influences the operations systems either directly/indirectly Internal environment includes all subsystems within the organization or firms - Consists of 3 primary functions - Marketing, Production/operations, Finance External environment exists outside the organization which may affects the decisions and behaviors of a business organization either directly/indirectly - Ex : government, law and regulation, competitors, suppliers, labor union, consumers
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Trends in Operations management

Ethics Global focus Rapid product development Environmentally sensitive production Mass customization Empowered employees Supply-chain partnering Just in time performance
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Productivity the ratio of outputs (G&S) divided by the inputs (recourses such as land, labor, capital and management)
Measure of process improvement Represents output relative to input

Cont
The measurement of productivity can be quite direct. Labor hours is a common measure of input Other measures such as capital, material or energy can be used

Single factor Units produced/output Productivity = Input used

Only through productivity increases can our standard of living improve
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Multi-factor Productivity - Indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs)
Multi-factor Productivity

Measurement Problems
Quality may change while the quantity of inputs and outputs remains constant External elements may cause an increase or decrease in productivity Precise units of measure may be lacking

Unit produced/Output Labor + material + energy + capital + miscellaneous

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Productivity Variables
Labor improvement in the contribution of labor to productivity is the result of healthier, better educated and better nourished labor forced Capital inflation and taxes increases the cost of capital, making capital investment increasingly expensive. Management responsible for ensuring that labor and capital are effectively used to increase productivity

Problem 1:
Mike Fray, the Production Manager at Ralts Mills, can currently expect his operation to produce 1000 square yards of fabric for each ton of raw cotton. Each ton of raw cotton requires 5 labor hours to process. He believes that he can buy better quality raw cotton, which will enable him to produce 1200 square yards per ton of raw cotton with the same labor hours. What will be the impact on productivity (measured in square yards per labor-hour) if he purchases the higher quality raw cotton?

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Answer 1:
Current labor productivity = 1000 sq yds 1 ton x 5 hours = 200 sq yds per hour New labor productivity = 1200 sq yds 1 ton x 5 hours = 240 sq yds per hour
Productivity improves 20% = ( 240 - 200 ) / 200 = 0.2
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Problem 2:
Joanna French is currently working a total of 12 hours per day to produce 240 dolls. She thinks that by changing the paint used for the facial features and fingernails that she can increase her rate to 360 dolls per day. Total material cost for each doll is approximately $3.50; she has to invest $20 in the necessary supplies (expendables) per day; energy costs are assumed to be only $4.00 per day; and she thinks she should be making $10 per hour for her time. Viewing this from a total (multifactor) productivity perspective, what is her productivity at present and with the new paint?

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Answer 2:
Currently Labor Material Supplies Energy Total Inputs Productivity 12 hrs * $10 = $120 240 * $3.50 = $840 = $ 20 =$ 4 Using the new paint 12 hrs * $10 = $ 120 360 * $3.50 = $1260 =$ =$ 20 4

= $984 240/984 = 0.24

= $1404 360/1404 = .26

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