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Introduction to Operations Management

PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl

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Outline
1. What Is Operations Management ? 2. Organizing to Produce Goods & Services

3. Why Study OM ?
4. What Operations Managers Do 5. The Heritage of Operations Management

6. Operations in the Service Sector

7. Exciting New Trends in Operations Management 8. Productivity Challenge

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1. 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

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2. Organizing to Produce Goods & Services

Basic Functions of the Business Organization

Organization Marketing Operations

Finance

Essential functions:
Marketing generates demand Production/operations creates the product Finance/accounting tracks how well the organization is doing, pays bills, collects the money
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Supply & Demand

Operations & Supply Chains Sales & Marketing

Supply

>
<

Demand

Wasteful Costly

Supply

Demand

Opportunity Loss Customer Dissatisfaction

Supply

Demand

Ideal

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Organizational Charts Example (Manufacturing)

e.g. Toyota, Frito-Lay, PTT, SCG

Manufacturing Operations
Facilities
Construction; maintenance

Finance/ accounting
Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall

Marketing
Sales promotion Advertising Sales Market research

Production and inventory control

Scheduling; materials control

Quality assurance and control Supply chain management Manufacturing

Tooling; fabrication; assembly

Design
Product development and design Detailed product specifications

Industrial engineering
Efficient use of machines, space, and personnel

Process analysis
Development and installation of production tools and equipment

Figure 1.1(C)
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Organizational Charts Example (Service)

e.g. THAI, Air Asia, etc.

Airline
Operations
Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science

Finance/ accounting
Accounting Payables Receivables General Ledger Finance Cash control International exchange

Marketing
Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

Figure 1.1(B)
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3. Why Study OM ?
CEO

Organization

Marketing
CMO

Operations
COO

Finance
CFO

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
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Opportunities

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OM is such a costly part of an organization !!!

Example: Options for Increasing Contribution
Marketing Option Finance/ Accounting Option OM Option Reduce Production Costs 20% $100,000 64,000 36,000 6,000 30,000 7,500 $ 22,500
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Current Sales Cost of Goods (80% of sales) Gross Margin Finance Costs Subtotal Taxes at 25% Contribution
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Increase Reduce Sales Finance Revenue 50% Costs 50% $150,000 120,000 30,000 6,000 24,000 6,000 $ 18,000 $100,000 80,000 20,000 3,000 17,000 4,250 $ 12,750

$100,000 80,000 20,000 6,000 14,000 3,500 $ 10,500

4. What Operations Managers Do

Basic Management Functions

Planning Organizing Staffing

Leading
Controlling
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The 10 OM Critical Decisions

Design of goods and services (Ch.5)
What good or service should we offer? How should we design these products and services? How do we define quality? Who is responsible for quality? What process and what capacity will these products require? What equipment and technology is necessary for these processes?

Managing quality (Ch. 6, Supplement 6)

Process and capacity design (Ch. 7, Supplement 7)

Location strategy (Ch. 8)

Where should we put the facility? On what criteria should we base the location decision?

Layout strategy (Ch. 9)

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How should we arrange the facility? How large must the facility be to meet our plan?
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The 10 OM Critical Decisions

Human resources and job design (Ch. 10)

How do we provide a reasonable work environment?

How much can we expect our employees to produce? Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program? How much inventory of each item should we have? When do we re-order? Are we better off keeping people on the payroll during slowdowns? Which jobs do we perform next? Who is responsible for maintenance? When do we do maintenance?
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Supply chain management (Ch. 11, Supplement 11)

Inventory, material requirements planning, and JIT (Ch. 12, 14, 16)

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Intermediate and shortterm scheduling (Ch. 13, 15)

Maintenance (Ch. 17)

5. The Heritage of Operations Management

Significant Events in OM

Providing choices to customers

Meeting customers expectation

Figure 1.3
Maximizing outputs
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 Frederick Winslow Taylor Father of Scientific Management

Believed in a science of management based on observation, measurement, analysis and improvement of work methods, and economic incentives

Management is responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperation between management and workers, and separating management activities from work activities Emphasis was on maximizing output

Henry Ford - employed scientific management techniques to his factories

Moving assembly line
Ford assembly plant (Model T) then
Ford assembly plant (Mustang) now

Mass production

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OM Progress With Contributions From

Industrial engineering Management science Quantitative Analysis (e.g. statistics, linear programming, PERT, decision analysis, transportation model, etc.)

Economics
Physical sciences (e.g. biology, anatomy, chemistry, physics, etc.)

Human factors
Information and Communication technology (ICT)
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6. Operations in the Service Sector

Manufacturing vs. Service?
Manufacturing and Service Organizations differ chiefly because manufacturing is goods-oriented and service is act-oriented.

Goods

Services

Tangible

Act-Oriented

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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

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Manufacturing and Service Employment (U.S.)

120
100 80 60 40 20 0

Employment (millions)

Service

Manufacturing
| | | | | | | 1950 1970 1990 2010 (est) 1960 1980 2000
Figure 1.5 (A)

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Manufacturing Employment and Production (U.S.)

150 Industrial production
(right scale)

125

Employment (millions)

Output
40 30 20 10 0

75 50

Manufacturing employment 25
(left scale)

| 1950

| | | | | 1970 1990 2010 (est) 1960 1980 2000

Figure 1.5 (B)

Input

Index: 1997 = 100

100

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Industry and Services as Percentage of GDP

90 80

Services

Manufacturing

70
60 50 40 30 20 10 Germany Japan 0

Mexico

Russian Fed

Czech Rep

Spain

Hong Kong

China

Canada

France

South Africa

UK

Australia

US
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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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7. Exciting New Trends in Operations Management

Changing Challenges Traditional Approach
Ethics and regulations not at the forefront Local or national focus

Reasons for Change

Public concern over pollution, corruption, child labor, etc.

Current Challenge
High ethical and social responsibility; increased legal and professional standards Global focus, international collaboration

Growth of reliable, low cost communication and transportation

Lengthy product development

Shorter life cycles; growth of global communication; CAD, Internet

Rapid product development; design collaboration

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Changing Challenges Traditional Approach

Low cost production, with little concern for environment; free resources (air, water) ignored Low-cost standardized products

Reasons for Change

Public sensitivity to environment; ISO 14000 standard; increasing disposal costs

Current Challenge
Environmentally sensitive production; green manufacturing; sustainability

Rise of consumerism; increased affluence; individualism

Mass customization

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Changing Challenges Traditional Approach

Emphasis on specialized, often manual tasks In-house production; low-bid purchasing Large lot production

Reasons for Change

Recognition of the employee's total contribution; knowledge society Rapid technological change; increasing competitive forces Shorter product life cycles; increasing need to reduce inventory

Current Challenge
Empowered employees; enriched jobs Supply-chain partnering; joint ventures, alliances Just-In-Time performance; lean; continuous improvement

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8. Productivity Challenge
The Economic System
Inputs
Labor, capital, management

Transformation
The U.S. economic system transforms inputs to outputs at about an annual 2.5% increase in productivity per year. The productivity increase is the result of a mix of capital (0.95%), labor (0.25%), and management (1.3%).

Outputs
Goods and services

Feedback loop
Figure 1.6
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Productivity
Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital)

Productivity =

Units produced Input used

Improve productivity means improving efficiency

Efficient means doing the job well i.e. with a minimum of resources and waste Effective means doing the right thing Productivity measures are useful for
Tracking an operating units performance over time Judging the performance of an entire industry or country

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Productivity Calculations
Labor Productivity
Example : Units produced = 1,000 and labor-hours used is 250

Productivity =

Units produced Labor-hours used 1,000 250 = 4 units/labor-hour

One resource input single-factor productivity

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Practice Problem 1.1 : Productivity (pp 1.2)

C. A. Ratchet, the local auto mechanic, finds that it usually takes him 2 hours to diagnose and fix a typical problem. What is his daily productivity (assume an 8 hour day)? Ans : 4 problems/day

Mr. Ratchet believes he can purchase a small computer trouble-shooting device, which will allow him to find and fix a problem in the incredible (at least to his customers!) time of 1 hour. He will, however, have to spend an extra hour each morning adjusting the computerized diagnostic device.
What will be the impact on his productivity if he purchases the device? Ans : new productivity = 7 problems/day productivity increase of 75 %

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Multi-Factor Productivity Productivity = Output 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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Example - Collins Title Productivity

Collins Title wants to evaluate its labor and multifactor productivity with a new computerized title-search system. The company has a staff of four, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400/day. Collins processes and closes on 8 titles each day. The new computerized system will allow the processing of 14 titles per day. The staff, their work hours, and pay are the same, but the overhead expenses are now $800/day.

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Example - Collins Title Productivity Labor productivity Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

8 titles/day Old labor = productivity 32 labor-hrs = .25 titles/labor-hr 14 titles/day New labor = = .4375 titles/labor-hr productivity 32 labor-hrs
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Example - Collins Title Productivity Multifactor productivity Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

8 titles/day Old multifactor = = .0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = = .0097 titles/dollar productivity $640 + 800
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Practice Problem 1.2 : Multifactor Productivity (pp 1.3, 1.5)

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. (a) Viewing this from a total (multifactor) productivity perspective, what is her productivity at present and with the new paint? (Ans: 0.24, 0.26) (b) How would total (multifactor) productivity change if using the new paint raised Ms. Frenchs material costs by $0.50 per doll? (Ans:

0.23)
(c) If she uses the new paint, by what amount could Ms. Frenchs material costs increase without reducing total (multifactor) productivity? (Ans: by $0.27)
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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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Video Case 1.1

Frito-Lay: Operations Management in Manufacturing
More than three dozen brands, 15 brands sell more than $100 million annually, 7 sell over $1 billion Planning processes covers 3 to 18 months

Unique processes and specially designed equipment

High fixed costs require high volumes and high utilization Demand profile based on historical sales, forecasts, innovations, promotion, local demand data

Match total demand to capacity, expansion plans, and costs

Quarterly aggregate plan goes to 38 plants in 18 regions Each plant develops 4-week plan for product lines and production runs

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Video Case 1.2

Hard Rock Cafe: Operations Management in Services

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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Discussion Point
Identify how each of the 10 decisions of OM is applied at Frito Lay VS Hard Rock Cafe
Operations Decisions Goods and service design Quality Process and capacity design Location selection Layout design Human resources and job design Supply chain Inventory Goods Product is usually tangible Many objective standards Customers not involved Services Product is not tangible Many subjective standards Customer may be directly involved Capacity must match demand Near raw materials and labor Production efficiency Technical skills, consistent labor standards, output based wages Relationship critical to final product Raw materials, work-in-process, and finished goods may be held Level schedules possible Often preventive and takes place at production site Near customers Enhances product and production Interact with customers, labor standards vary Important, but may not be critical Cannot be stored

Scheduling Maintenance
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Meet immediate customer demand Often repair and takes place at customers site
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