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Operations and

1 Productivity

PowerPoint presentation to accompany


Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e

PowerPoint slides by Jeff Heyl

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-1


The 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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Learning Objectives
 Definition of Operations Management (OM)
 Organizational Functions
 Why Study OM?
 A brief history of operations management
 The future of the discipline
 Goods Versus Services
 Measuring productivity
 Career opportunities in operations management

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-3


What Is Operations
Management?
Production is the creation of
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

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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
4. Human Resources – provides
labor, wage and salary
administration and job evaluation

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Organizational Charts
Commercial Bank

Operations Marketing
Finance
Teller Scheduling Loans Human Resources
Investments
Check Clearing Commercial Recruitment
Security
Collection Industrial Job evaluation
Real estate
Transaction processing Financial Performance evaluation
Accounting
Facilities design/layout Personal Wage and Salary Adm.
Auditing
Vault operations Mortgage Personnel records

Maintenance Trust Department


Security

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Organizational Charts
Manufacturing

Operations
Finance/ accounting Human Resources
Facilities Disbursements/
Construction; maintenance credits Recruitment
Production and inventory control Receivables
Scheduling; materials control Marketing
Payables Job evaluation
Quality assurance and control
Supply-chain management General ledger Sales
Manufacturing Funds Management promotion Performance evaluation
Tooling; fabrication; assembly Money market
Design
International
Advertising
Product development and design Sales Wage and Salary Adm.
Detailed product specifications exchange
Industrial engineering Capital requirements Market research Personnel records
Efficient use of machines, space, Stock issue
and personnel
Bond issue
Process analysis
Development and installation of and recall
production tools and equipment

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Why Study OM?
1. OM is one of four 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
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-8
Options for Increasing
Contribution
Finance/
Marketing Accounting OM
Option Option 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 – 4,250 – 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Table 1.1
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What Operations
Managers Do
Basic Management Functions
 Planning
 Organizing
 Staffing
 Leading
 Controlling
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Ten Critical Decisions
Ten Decision Areas Chapter(s)
1. Design of goods and services 5
2. Managing quality 6, Supplement 6
3. Process and capacity 7, Supplement 7
design
4. Location strategy 8
5. Layout strategy 9
6. Human resources and 10
job design
7. Supply-chain 11, Supplement 11
management
8. Inventory, MRP, JIT 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17 Table 1.2
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The Critical Decisions
1. 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?

Table 1.2 (cont.)


© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 12
The Critical Decisions
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?

Table 1.2 (cont.)


© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 13
The Critical Decisions
5. Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet
our plan?
6. 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.)


© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 14
The Critical Decisions
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?
Table 1.2 (cont.)
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The Critical Decisions
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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Opportunities

Figure 1.2

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Significant Events in OM

Figure 1.3
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The Heritage of OM
 Division of labor (Adam Smith 1776;
Charles Babbage 1852)
 Standardized parts (Whitney 1800)
 Scientific Management (Taylor 1881)
 Assembly line (Ford/ Sorenson 1913)
 Gantt charts (Gantt 1916)
 Motion study (Frank and Lillian Gilbreth
1922)
 Quality control (Shewhart 1924; Deming
1950)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 19


The Heritage of OM
 First Digital 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)
 Mass Customization (2000s)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 20
New Challenges in OM
From To
 Local or national focus  Global focus
 Batch shipments  Just-in-time
 Low bid purchasing  Supply-chain
partnering
 Lengthy product  Rapid product
development development,
alliances
 Standard products  Mass
customization
 Job specialization  Empowered
employees, teams
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 21
Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

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Characteristics of Service
 Intangible product
 Produced and
consumed at same time
 Often unique
 High customer
interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 23
Industry and Services as
Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−

Turkey
Germany

Japan

Spain
Canada

China

Czech Rep

Russian Fed
Hong Kong
France

Mexico

UK
South Africa

US
Australia

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 24


Allocation of GDP by Sector,
Turkey, 2010

Agriculture 8.8%
Industry 25.7%
Services 65.5%

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Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

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Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Ethics and Public concern over High ethical and
regulations pollution, corruption, social
not at the child labor, etc. responsibility;
forefront increased legal
and professional
standards
Local or Growth of reliable, low Global focus,
national cost communication international
focus and transportation collaboration

Lengthy Shorter life cycles; Rapid product


product growth of global development;
development communication; CAD, design
Internet collaboration

Figure 1.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 27
Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Low cost Public sensitivity to Environmentally
production, environment; ISO 14000 sensitive
with little standard; increasing production; green
concern for disposal costs manufacturing;
environment; sustainability
free
resources
(air, water)
ignored
Low-cost Rise of consumerism; Mass
standardized increased affluence; customization
products individualism

Figure 1.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 28
Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Emphasis on Recognition of the Empowered
specialized, employee's total employees;
often manual contribution; knowledge enriched jobs
tasks society
“In-house” Rapid technological Supply-chain
production; change; increasing partnering; joint
low-bid competitive forces ventures,
purchasing alliances
Large lot Shorter product life Just-In-Time
production cycles; increasing need performance;
to reduce inventory lean; continuous
improvement

Figure 1.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 29
New Trends in OM
 Ethics
 Global focus
 Environmentally sensitive production
 Rapid product development
 Mass customization
 Empowered employees
 Supply-chain partnering
 Just-in-time performance

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 30


Productivity 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!

Important Note!
Production is a measure of output
only and not a measure of efficiency

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Efficiency Versus
Effectiveness
 The difference between efficient and effective is that
efficiency refers to how well you do something, whereas
effectiveness refers to how useful it is.
 “Efficiency is doing things right; effectiveness is
doing the right things.”
Doing the Right Things is More
Important than Doing Things Right

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Efficiency Versus
Effectivenes
For example, if a company is not doing
well and they decide to train their
workforce on a new technology. The
training goes really well - they train all
their employees in avery short time and
tests show they have absorbed the
training well. But overall productivity
doesn't improve. In this case the
company's strategy was efficient but not
effective.
1 - 33
The Economic System
Inputs Transformation Outputs

Labor, Economic system Goods


capital, transforms inputs to outputs and
management /CONVERSITION PROCESS services

Feedback loop

Figure 1.6

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Productivity
Units produced
Productivity =
Input used

 Measure of process improvement


 Represents output relative to input
 Only through productivity increases
can our standard of living improve

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Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used

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

One resource input  single-factor productivity

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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

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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


=
productivity 32 labor-hrs

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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


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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 39


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


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

New labor 14 titles/day


=
productivity 32 labor-hrs

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 40


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


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

New labor 14 titles/day


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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 41


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


=
productivity $640 + 400

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 42


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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 43


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


=
productivity $640 + 800

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 44


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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 45


Measurement Problems
1. Quality may change while the quantity
of inputs and outputs remains constant
(HDTV, iphones)

2. External elements may cause an


increase or decrease in productivity
(using more reliable electric power
system)
3. Precise units of measure may be
lacking

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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
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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 such as transportation and
sanitation
 Challenge is in maintaining and
enhancing skills in the midst of rapidly
changing technology and knowledge

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Investment and Productivity
10
Percent increase in productivity

0
10 15 20 25 30 35
Percentage investment

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Service Productivity
1. Typically labor intensive (teaching,
counseling)

2. Frequently focused on unique individual


desires (customer representatives in banks)
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality

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Ethics and
Social Responsibility
Challenges facing
operations managers:
 Developing and producing safe,
quality products
 Maintaining a clean environment
 Providing a safe workplace
 Honoring stakeholder commitments

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Entry-Level Jobs in OM
Purchasing planner/buyer
Production (or operations) supervisor
Production (or operations)
scheduler/controller
Production (or operations) analyst
Inventory analyst
Quality specialist
Others …

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