Introduction

Chapter 1
Operations and Productivity
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
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
 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
2014 Pearson Education
 Operations Management
Operations Management is:
The management of systems or processes
that create goods and/or provide services
Goods = physical items inclusive of raw materials, parts,
subassemblies and final products
Services = activities that provide a combination of time, location,
form and psychological value

OM plans & coordinates the use of resources to convert

inputs into outputs affects:
Companies ability to compete
Nations ability to compete internationally
Organizing to Produce Goods and
Services
Essential functions:
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
 The Organisation

The Three Basic Functions

Organization

Finance Operations Marketing

Figure 1.1 Stevenson & Chuong (2014)

Example 1: Organizational Charts

Heizer&Render (2014)
Example 2: Organizational Charts

Heizer&Render (2014)
Example 3: Organizational Charts

Heizer&Render (2014)
Overlap of Business Functions
Figure 1.5

Operations

Finance Marketing

Stevenson & Chuong (2014)

Why Study OM?
1. OM is one of 3 major functions of any
organization want to study how people
organize themselves for productive enterprise
2. Want (and need) to know how goods and
services are produced
3. Want to understand what operations managers
do
4. OM is such a costly part of an organization
Options for Increasing Contribution
Example1 on page 44-45 Heizer, Render &
Munson (2017):
Table 1.1 shows a simple profit-and-loss statement
and 3 strategic options for the firm
i. Marketing
ii. Finance or accounting and
iii. Operations
Options for Increasing Contribution
TABLE 1.1
FINANCE
MARKETING /ACCOUNTING
OPTION OPTION OM OPTION
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods 80,000 120,000 80,000 64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs 6,000 6,000 3,000 6,000
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

Development of increasingly effective operations is

the approach taken by many companies due to global
competition
Heizer&Render (2014)
Options for Increasing Contribution
1. Marketing Option: Increasing sales by 50% will
increase contribution by 71%
Increasing sales by 50% is very difficult in practice,
virtually impossible
2. Finance/accounting Option: Reducing finance
costs by 50% will increase contribution by 21%
Reducing finance costs by 50% is very difficult in
practice, virtually impossible
3. Operations Option: Reducing production costs
by 20% will increase contribution by 114%
Reducing production costs by 20% maybe difficult but
feasible strategy in practice
What Operations Managers Do
Basic Management Functions

Planning
Organizing
Staffing
Leading
Controlling
Ten Strategic Decisions
TABLE 1.2
DECISION CHAPTER(S)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17
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
Opportunities
Scope of Operations Management
Operations Management includes:
all activities that are directly related to producing
goods (goods-oriented) or providing services (act-
oriented)
Forecasting
Capacity planning
Scheduling
Managing inventories
Assuring quality
Motivating and training employees
Locating facilities
Supply chain management
And more . . .
 Value-Added Process
The operations function involves the conversion of inputs into
outputs

Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback

Figure 1.2 Stevenson & Chuong (2014)

Value-Added and Product Packages
Value-added elements
The essence of operations function is to add value
during transformation process
Make the difference between the cost of inputs and
the value/price of outputs

Product packages
Combination of goods production and services
delivery
In reality, relatively very few pure Goods or pure Services
Can make a company more competitive
OM more interesting and challenging
Types of Operations
Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, financial
advising, renting or leasing
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and TV
newscasts, telephone, satellites
Table 1.4 Stevenson & Chuong (2014)
The GoodsService Continuum
Goods Service

Surgery, teaching

Song writing, software development

Computer repair, restaurant meal

Automobile repair, fast food

Home remodeling, retail sales

Automobile assembly, steel making

Figure 1.3 Stevenson & Chuong (2014)

Food Processor
Inputs Processing Outputs
Raw vegetables Cleaning Canned
Metal sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment

Table 1.2 Stevenson & Chuong (2014)

Hospital
Inputs Processing Outputs
Doctors, nurses Examination Treated
Hospital Surgery patients
Medical supplies Monitoring
Equipment Medication
Laboratories Therapy

Table 1.2
Stevenson & Chuong (2014)
Manufacturing or Service?

Tangible Act

Stevenson & Chuong (2014)

Production of Goods vs.
Delivery of Services
Production of goods tangible output
Anything can be seen or touched
Delivery of services an act
Majority of service job categories
Government
Wholesale/retail
Financial services
Healthcare
Personal services
Business services
Education
Table 1.3

Key Differences Goods vs. Service

Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usually
Key Differences Goods vs. Service
TABLE 1.3
CHARACTERISTICS OF SERVICES
Intangible: Ride in an airline seat
Produced and consumed simultaneously:
Beauty salon produces a haircut that is
consumed as it is produced
Unique: Your investments and medical care
are unique
High customer interaction: Often what the
customer is paying for (consulting, education)
Inconsistent product definition: Auto Insurance
changes with age and type of car
Often knowledge based: Legal, education,
and medical services are hard to automate
Services dispersed: Service may occur at
retail store, local office, house call, or via
internet.
Quality may be hard to evaluate: Consulting,
education, and medical services
Reselling is unusual: Musical concert or
medical care
CHARACTERISTICS OF GOODS
Tangible: The seat itself
Product can usually be kept in inventory
(beauty care products)
Similar products produced (iPods)
Limited customer involvement in production
Product standardized (iPhone)
Standard tangible product tends to make
automation feasible
Product typically produced at a fixed facility
Many aspects of quality for tangible products
are easy to evaluate (strength of a bolt)
Product often has some residual value
Heizer&Render (2014)
Decline in Manufacturing Jobs
Both manufacturing and service sectors are
important to the economy
Reasons:
a) Productivity
Increasing productivity allows companies to
maintain or increase their output using fewer
workers
b) Outsourcing
Some manufacturing work has been outsourced
to more productive companies
Challenges of Managing Services
Service jobs are often less structured than
manufacturing jobs
Customer contact is higher
Worker skill levels are lower
Services hire many low-skill, entry-level workers
Employee turnover is higher
Input variability is higher
Service performance can be affected by
workers personal factors
 Class Activity

Choose a product or service. Identify and explain 3

critical characteristics that will influence customer
satisfaction or high demand for it.
Key Decisions of Operations
Managers
What
What resources/what amounts
When
Needed/scheduled/ordered
Where
Work to be done
How
Designed/Resources allocated
Who
To do the work
Operations Management Decision
Making Tools
Models
Quantitative approaches
Performance metrics
Analysis of trade-offs
Systems approach
Establishing priorities
Ethics
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
revenue per outlet
on credit card purchases bytransaction
per $250,000 to
under $25 $1,000,000 in seven years.
Change the size Productivity
of the ice has improved
Saved 14 by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
per shot
 Productivity
Units produced
Productivity =
Input used
Measure of process improvement
Measures the effective use of resources
An index that measures output relative to the input used to
produce them

Productivity ratios are used for

i. Planning workforce requirements
ii. Scheduling equipment
iii. Financial analysis

Only through productivity increases can our

standard of living improve
Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input single-factor productivity

 Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
Also known as total factor productivity
Output and inputs are often expressed in
dollars

Multiple resource inputs multi-factor productivity

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

Old labor 8 titles/day

= = .25 titles/labor-hr
productivity 32 labor-hrs
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

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

New labor 14 titles/day

= = .4375 titles/labor-hr
productivity 32 labor-hrs
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

= = .0077 titles/dollar
productivity $640 + 400
 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

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

New multifactor 14 titles/day

= = .0097 titles/dollar
productivity $640 + 800
Measurement Problems
1. Quality may change while the
quantity of inputs and outputs remains
constant
2. External elements may cause an
increase or decrease in productivity
3. Precise units of measure may be
lacking
Productivity Variables
1. Labor - contributes
about 10% of the
annual increase
2. Capital - contributes
about 38% of the
annual increase
3. Management -
contributes about 52%
of the annual increase
Productivity Variables: Labour
Key Variables for Improved Labor
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
Productivity Variables: Capital
10
Percent increase in productivity

0
10 15 20 25 30 35
Percentage investment
Productivity Variables: Management

Ensures labor and capital are effectively used to

increase productivity
Use of knowledge
Application of technologies
Knowledge societies
Difficult challenge
Productivity and the Service Sector
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 and automate
5. Often difficult to evaluate for quality
New Challenges in OM
Global focus
Supply-chain partnering
Sustainability
Rapid product development
Mass customization
Just-in-time performance
Empowered employees
Ethical Issues
Financial statements
Worker safety
Product safety
Quality
Environment
Community
Hiring/firing workers
Closing facilities
Workers rights
Trends in Business
Major trends
The Internet, e-commerce, e-business
Management technology
Globalization
Management of supply chains
Outsourcing
Agility
Ethical behavior
Other Important Trends
Operations strategy
Working with fewer resources
Revenue management
Process analysis and improvement
Increased regulation and product liability
Lean production
Experiential Learning
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