LSM 733- Production Operations Management LECTURE 2 LSM 733- Production Operations Management OSMAN BIN SAIF

Summary of Last Session Self Introduction Course outline, Procedures and Structure

Agenda of this Session Definition of Production Operations Management (OM) Organizational Functions Why Study POM? A brief history of operations management The future of the discipline Goods Versus Services Measuring productivity Career opportunities in operations management

What Is Production 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

Organizing to Produce Goods and Services Essential functions: Marketing – generates demand Production/operations – creates the product Finance/accounting – tracks how well the organization is doing, pays bills, collects the money Human Resources – provides labor, wage and salary administration and job evaluation

Organizational Charts

Organizational Charts

Why Study POM? POM is one of four major functions of any organization, we want to study how people organize themselves for productive enterprise We want (and need) to know how goods and services are produced We want to understand what operations managers do POM is IMPORTANT part of an organization

Options for Increasing Contribution 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 Finance/ Marketing Accounting OM Option Option Option Increase Reduce Reduce Sales Finance Production Current Revenue 50% Costs 50% Costs 20%

What Operations Managers Do ? Basic Management Functions Planning Organizing Staffing Leading Controlling

Ten Critical Decisions Ten Decision Areas Design of goods and services Managing quality Process and capacity design Location strategy Layout strategy Human resources and job design Supply-chain management Inventory, MRP, JIT Scheduling Maintenance

The Critical Decisions Design of goods and services What good or service should we offer? How should we design these products and services? Managing quality How do we define quality? Who is responsible for quality?

The Critical Decisions (Contd.) Process and capacity design What process and what capacity will these products require? What equipment and technology is necessary for these processes? Location strategy Where should we put the facility? On what criteria should we base the location decision?

The Critical Decisions (Contd.) Layout strategy How should we arrange the facility? How large must the facility be to meet our plan? Human resources and job design How do we provide a reasonable work environment? How much can we expect our employees to produce?

The Critical Decisions (Contd.) Supply-chain management Should we make or buy this component? Who should be our suppliers and how can we integrate them into our strategy? Inventory, material requirements planning, and JIT How much inventory of each item should we have? When do we re-order?

The Critical Decisions (Contd.) Intermediate and short–term scheduling Are we better off keeping people on the payroll during slowdowns? Which jobs do we perform next? Maintenance How do we build reliability into our processes? Who is responsible for maintenance?

Job Opportunities

Significant Events in POM

The Heritage of POM 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)

The Heritage of POM (Contd.) 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)

New Challenges in OM From To Local or national focus Global focus Batch shipments Low bid purchasing Lengthy product development Standard products Job specialization Global focus Just-in-time Supply-chain partnering Rapid product development, alliances Mass customization Empowered employees, teams To

Characteristics of Goods Tangible product Consistent product definition Production usually separate from consumption Can be inventoried Low customer interaction

Characteristics of Service Intangible product Produced and consumed at same time Often unique High customer interaction Inconsistent product definition Often knowledge-based Frequently dispersed

Industry and Services as Percentage of GDP Australia Canada China Czech Rep France Germany Hong Kong Japan Mexico Russian Fed South Africa Spain UK US Turkey 90 − 80 − 70 − 60 − 50 − 40 − 30 − 20 − 10 − 0 −

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

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

Changing Challenges (Contd.) Traditional Approach Reasons for Change Current Challenge Low cost production, with little concern for environment; free resources (air, water) ignored Public sensitivity to environment; ISO 14000 standard; increasing disposal costs Environmentally sensitive production; green manufacturing; sustainability Low-cost standardized products Rise of consumerism; increased affluence; individualism Mass customization

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

New Trends in OM Ethics Global focus Environmentally sensitive production Rapid product development Mass customization Empowered employees Supply-chain partnering Just-in-time performance

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

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

Efficiency Versus Effectiveness (Contd.) 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.

The Economic System Inputs Transformation Outputs Feedback loop Labor, capital, management Transformation Economic system transforms inputs to outputs /CONVERSITION PROCESS Outputs Goods and services Feedback loop

Productivity Units produced Input used Productivity = Measure of process improvement Represents output relative to input Only through productivity increases can our standard of living improve

Productivity Calculations Labor Productivity Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1,000 250 One resource input  single-factor productivity

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

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

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

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

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day 32 labor-hrs = Old labor productivity = .25 titles/labor-hr 14 titles/day 32 labor-hrs = New labor productivity = .4375 titles/labor-hr

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

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

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

Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 = Old multifactor productivity = .0077 titles/dollar 14 titles/day $640 + 800 = New multifactor productivity = .0097 titles/dollar

Measurement Problems Quality may change while the quantity of inputs and outputs remains constant (HDTV, iphones) External elements may cause an increase or decrease in productivity (using more reliable electric power system) Precise units of measure may be lacking

Productivity Variables Labor - contributes about 10% of the annual increase Capital - contributes about 38% of the annual increase Management - contributes about 52% of the annual increase

Key Variables for Improved Labor Productivity Basic education appropriate for the labor force Diet of the labor force 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

Investment and Productivity 10 8 6 4 2 Percent increase in productivity Percentage investment 10 15 20 25 30 35

Service Productivity Typically labor intensive (teaching, counseling) Frequently focused on unique individual desires (customer representatives in banks) Often an intellectual task performed by professionals Often difficult to mechanize Often difficult to evaluate for quality

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

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

Summary of this Session Definition of Production Operations Management (OM) Organizational Functions Why Study POM? A brief history of operations management The future of the discipline Goods Versus Services Measuring productivity Career opportunities in operations management

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