Outline
Operations and
Productivity
Outline - Continued
▶ The Productivity Challenge
▶ Productivity Measurement
▶ Productivity Variables
▶ Productivity and the Service Sector
▶ New Challenges in Operations
Management
▶ Ethics, Social Responsibility, and
Sustainability
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
▶ Global Company Profile: Hard Rock Cafe
1 ▶ What Is Operations Management?
▶ Organizing to Produce Goods and
Services
▶ Why Study OM?
▶ What Operations Managers Do
▶ The Heritage of Operations Management
▶ Operations for Goods and Services
▶ Growth of Services
1-1 ▶ Service Pay 1-2
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
1-3 1-4
Operations Management
at Hard Rock Cafe
▶ First opened in 1971
▶ Now – 150 restaurants in over 53 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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1
►LO1: What Is Operations ► Organizing to Produce
Management? Goods and Services

Production is the creation of ▶ Essential functions:

goods and services.
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs.
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 Organizational Charts

Figure 1.1 Figure 1.1

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Organizational Charts ► Why Study OM?

Figure 1.1 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 ► What Operations
Contribution – Example 1
Managers Do
TABLE 1.1

MARKETING
FINANCE
/ACCOUNTING Basic Management Functions
OPTION OPTION OM OPTION

▶ Planning
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000 ▶ Organizing
Cost of goods
Gross margin
–80,000
20,000
–120,000
30,000
–80,000
20,000
–64,000
36,000
▶ Staffing
Finance costs –6,000 –6,000 –3,000 –6,000 ▶ Leading
▶ Controlling
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

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Ten Strategic Decisions The Strategic Decisions

TABLE 1.2
DECISION CHAPTER(S) 1. Design of goods and services
1. Design of goods and services 5, Supplement 5
▶ Defines what is required of operations
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7 ▶ Product design determines quality,
4. Location strategy 8
sustainability and human resources
5. Layout strategy 9 2. Managing quality
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
▶ Determine the customer’s quality
expectations
8. Inventory management 12, 14, 16
9. Scheduling 13, 15 ▶ Establish policies and procedures to
10. Maintenance 17 identify and achieve that quality
Table 1.2 (cont.)

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The Strategic Decisions The Strategic Decisions

5. Layout strategy
3. Process and capacity design
▶ Integrate capacity needs, personnel levels,
▶ How is a good or service produced? technology, and inventory
▶ Commits management to specific ▶ Determine the efficient flow of materials,
technology, quality, resources, and
people, and information.
investment.
6. Human resources and job design
4. Location strategy
▶ Recruit, motivate, and retain personnel with
▶ Nearness to customers, suppliers, and
the required talent and skills.
talent.
▶ Integral and expensive part of the total
▶ Considering costs, infrastructure, logistics,
system design.
and government. Table 1.2 (cont.) Table 1.2 (cont.)

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3
 The Strategic Decisions The Strategic Decisions
7. Supply-chain management 9. Scheduling
▶ Integrate supply chain into the firm’s strategy. ▶ Determine and implement intermediate-
▶ Determine what is to be purchased, from and short-term schedules.
whom, and under what conditions. ▶ Utilize personnel and facilities while
8. Inventory management meeting customer demands.
▶ Inventory ordering and holding decisions. 10. Maintenance
▶ Optimize considering customer satisfaction, ▶ Consider facility capacity, production
supplier capability, and production schedules. demands, and personnel.
▶ Maintain a reliable and stable process.
Table 1.2 (cont.) Table 1.2 (cont.)

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Opportunities
Where are the OM Jobs? Figure 1.3

▶ 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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Certifications Significant Events in OM

▶ APICS, the Association for Operations
Management
▶ American Society for Quality (ASQ)
▶ Institute for Supply Management (ISM)
▶ Project Management Institute (PMI)
▶ Council of Supply Chain Management
Professionals
▶ Charter Institute of Purchasing and Supply
(CIPS)
Figure 1.4
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4
 ► The 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)
The Heritage of OM
▶ 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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Eli Whitney Frederick W. Taylor

▶ Born 1765; died 1825
▶ In 1798, received government
contract to make 10,000 muskets
▶ Showed that machine tools could
make standardized parts to exact
specifications
▶ Musket parts could be used in any
musket
1 - 27
▶ Born 1856; died 1915
▶ Known as ‘father of scientific
management’
▶ In 1881, as chief engineer for
Midvale Steel, studied how tasks
were done
▶ Began first motion and time studies
▶ Created efficiency principles
1 - 28

Taylor’s Principles Frank & Lillian Gilbreth

▶ Frank (1868-1924); Lillian (1878-1972)
Management Should Take More
Responsibility for: ▶ Husband-and-wife engineering team
▶ Further developed work measurement
► Matching employees to right job methods
Providing the proper training
►
▶ Applied efficiency methods to their
► Providing proper work methods and home and 12 children!
tools
▶ Book & Movie: “Cheaper by the Dozen,”
► Establishing legitimate incentives for
work to be accomplished “Bells on Their Toes”

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5
 Henry Ford W. Edwards Deming
▶ Born 1863; died 1947
▶ Born 1900; died 1993
▶ In 1903, created Ford Motor Company
▶ Engineer and physicist
▶ In 1913, first used moving assembly
line to make Model T ▶ Credited with teaching Japan quality
control methods in post-WW2
▶ Unfinished product moved by conveyor
past work station ▶ Used statistics to analyze process
▶ Paid workers very well for 1911 ▶ His methods involve workers in
($5/day!) decisions

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Contributions From ► Operations for

Goods and Services
▶ Human factors ▶ Manufacturers produce tangible product,
▶ Industrial engineering services often intangible
▶ Management science ▶ Operations activities often very similar
▶ Biological science ▶ Distinction not always clear
▶ Physical sciences
▶ Few pure services
▶ Information technology

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LO2: Differences Between Goods

U.S. Agriculture, Manufacturing,
and Services
TABLE 1.3 and Service Employment
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Figure 1.5
Intangible: Ride in an airline seat Tangible: The seat itself 100 –
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory (beauty care
produces a haircut that is consumed as it is produced products)
80 –
Unique: Your investments and medical care are unique Similar products produced (iPods)
Percent of Workforce

High customer interaction: Often what the customer is Limited customer involvement in production 60 –
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car 40 –

Often knowledge based: Legal, education, and medical Standard tangible product tends to make automation
services are hard to automate feasible 20 –
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
0– | | | | | | | | |
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products are easy
education, and medical services to evaluate (strength of a bolt) 1825 1875 1925 1975 2025 (est.)
1800 1850 1900 1950 2000
Reselling is unusual: Musical concert or medical care Product often has some residual value
Agriculture Services Manufacturing

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6
 Organizations in Each Sector Service Pay
▶ Perception that services are low-paying
TABLE 1.4
PERCENT OF

▶ 42% of service workers receive above

SECTOR EXAMPLE ALL JOBS
Service Sector
Education, Legal, Medical, Other
Trade (retail, wholesale)
San Diego Zoo, Arnold Palmer Hospital
Walgreen's, Walmart, Nordstrom
13.2
13.8
average wages
Utilities, Transportation
Professional and Business Services
Pacific Gas & Electric, American Airlines
Snelling and Snelling, Waste Management, Inc.
3.3
10.1
▶ 14 of 33 service industries pay below
Finance, Information, Real Estate Citicorp, American Express, Prudential, Aetna 21.0
85.9
average
▶ Retail trade pays only 61% of national
Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 9.0
Public Administration U.S., State of Alabama, Cook County 15.5
Manufacturing Sector
Construction Sector
General Electric, Ford, U.S. Steel, Intel
Bechtel, McDermott
8.2
4.1
average
Agriculture King Ranch 1.4
▶ Overall average wage is 96% of the
Mining Sector Homestake Mining .4
Grand Total 100.0 average
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► LO3: Productivity The Economic System

Challenge
Inputs Transformation Outputs
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources Labor, The U.S. economic system Goods
such as labor and capital) capital, transforms inputs to outputs at and
management about an annual 2.5% increase services
in productivity per year. The
productivity increase is the
The objective is to improve productivity! result of a mix of capital (38%
of 2.5%), labor (10% of 2.5%),
and management (52% of
2.5%).
Important Note!
LO3: Production is a measure of output
only and not a measure of efficiency Feedback loop

Figure 1.6

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Improving Productivity at Improving Productivity at

Starbucks Starbucks
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:
Operations improvements have
Stop requiring signatures Saved 8 seconds helped StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
on credit card purchases per transaction revenue per outlet
on credit card purchases perbytransaction
$250,000 to
under $25 under $25 $1,000,000 in seven years.
Change the size of the ice Saved 14 seconds Change the size Productivity
of the ice has improved
Saved 14by 27%, or
seconds
scoop per drink scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds New espresso machines Saved 12 seconds
per shot 1 - 41
per shot 1 - 42

7
 ► LO4: Productivity Productivity Calculations (1-1)

Units produced Labor Productivity

Productivity =
Input used Units produced
Productivity =
Labor-hours used
▶ Measure of process improvement
1,000
▶ Represents output relative to input = = 4 units/labor-hour
250
▶ Only through productivity increases
can our standard of living improve
One resource input  LO4: single-factor productivity

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► LO5: Multi-Factor Collins Title Productivity –

Productivity (1-2) Example 2
Old System:
Output Staff of 4 works 8 hrs/day 8 titles/day
Productivity =
Labor + Material + Energy + Payroll cost = $640/day Overhead = $400/day
Capital + Miscellaneous
► Also known as total factor productivity
► Output and inputs are often expressed in Old labor 8 titles/day
dollars productivity = 32 labor-hrs

Multiple resource inputs  LO5: multi-factor productivity

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Collins Title Productivity Collins Title Productivity

Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day Old labor 8 titles/day

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

New labor 14 titles/day

productivity = 32 labor-hrs

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8
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
Collins Title Productivity
Old System:
8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Overhead = $400/day Payroll cost = $640/day Overhead = $400/day
New System:
Overhead = $800/day 14 titles/day Overhead = $800/day

Old labor 8 titles/day Old multifactor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr productivity =
$640 + 400

New labor 14 titles/day

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

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Collins Title Productivity Collins Title Productivity

Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day Payroll cost = $640/day Overhead = $400/day
New System: New System:
14 titles/day Overhead = $800/day 14 titles/day Overhead = $800/day

Old multifactor 8 titles/day Old multifactor 8 titles/day

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

New multifactor 14 titles/day

productivity =
$640 + 800

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Collins Title Productivity Measurement Problems

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
1. Quality may change while the
Payroll cost = $640/day Overhead = $400/day quantity of inputs and outputs remains
New System: constant
14 titles/day Overhead = $800/day 2. External elements may cause an
increase or decrease in productivity
Old multifactor 8 titles/day
productivity = = .0077 titles/dollar 3. Precise units of measure may be
$640 + 400
lacking
New multifactor 14 titles/day
productivity = = .0097 titles/dollar
$640 + 800

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9
 LO6: Key Variables for
Productivity Variables Improved Labor
1. Labor - contributes Productivity
about 10% of the 1. Basic education appropriate for the
annual increase labor force

2. Capital - contributes 2. Diet of the labor force

about 38% of the 3. Social overhead that makes labor
annual increase available

3. Management - ▶ Challenge is in maintaining and enhancing

skills in the midst of rapidly changing
contributes about 52% technology and knowledge
of the annual increase
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Labor Skills Capital

About half of the 17-year-olds in the U.S. cannot 10
correctly answer questions of this type
Percent increase in productivity

0
10 15 20 25 30 35
Percentage investment
Figure 1.7
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Management Productivity and the

Service Sector
▶ Ensures labor and capital are effectively
used to increase productivity 1. Typically labor intensive
▶ Use of knowledge 2. Frequently focused on unique individual
attributes or desires
▶ Application of technologies
3. Often an intellectual task performed by
▶ Knowledge societies professionals
▶ Difficult challenge 4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality

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 ► New Challenges in OM ► Ethics, Social Responsibility,
▶ Global focus
and Sustainability
▶ Supply-chain partnering Challenges facing
▶ Sustainability operations managers:
▶ Rapid product development ▶ Develop and produce safe, high-quality
green products
▶ Mass customization
▶ Train, retrain, and motivate employees
▶ Just-in-time performance in a safe workplace
▶ Empowered employees ▶ Honor stakeholder commitments

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otherwise, without the prior written permission of the publisher.
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