Operations and Productivity 1 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

Outline What Is Operations Management? Organizing to Produce Goods and Services Why Study OM? What Operations Managers Do © 2011 Pearson Education, Inc. publishing as Prentice Hall

Outline - Continued The Heritage of Operations Management Operations in the Service Sector Differences between Goods and Services Growth of Services Service Pay Exciting New Trends in Operations Management © 2011 Pearson Education, Inc. publishing as Prentice Hall

Outline - Continued The Productivity Challenge Productivity Measurement Productivity Variables Productivity and the Service Sector Ethics and Social Responsibility © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Organizational Charts 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) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Organizational Charts Manufacturing Operations Facilities Construction; maintenance 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 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 Figure 1.1(C) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Why Study OM? OM is one of three 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 OM is such a costly part of an organization © 2011 Pearson Education, Inc. publishing as Prentice Hall

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% Table 1.1 © 2011 Pearson Education, Inc. publishing as Prentice Hall

What Operations Managers Do Basic Management Functions Planning Organizing Staffing Leading Controlling © 2011 Pearson Education, Inc. publishing as Prentice Hall

Ten Critical Decisions Ten Decision Areas Chapter(s) Design of goods and services 5 Managing quality 6, Supplement 6 Process and capacity 7, Supplement 7 design Location strategy 8 Layout strategy 9 Human resources and 10 job design Supply-chain 11, Supplement 11 management Inventory, MRP, JIT 12, 14, 16 Scheduling 13, 15 Maintenance 17 Table 1.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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? Table 1.2 (cont.) © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

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

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Opportunities Figure 1.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Significant Events in OM Figure 1.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Characteristics of Goods Tangible product Consistent product definition Production usually separate from consumption Can be inventoried Low customer interaction © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

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 90 − 80 − 70 − 60 − 50 − 40 − 30 − 20 − 10 − 0 − Services Manufacturing © 2011 Pearson Education, Inc. publishing as Prentice Hall

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% | | | | | | | | | © 2011 Pearson Education, Inc. publishing as Prentice Hall

Manufacturing and Service Employment 120 – 100 – 80 – 60 – 40 – 20 – 0 – | | | | | | | 1950 1970 1990 2010 (est) 1960 1980 2000 Employment (millions) Service Manufacturing Figure 1.4 (A) © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Labor, capital, management 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 (38% of 2.5%), labor (10% of 2.5%), and management (52% of 2.5%). Outputs Goods and services Feedback loop Figure 1.6 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machines Saved 12 seconds per shot © 2011 Pearson Education, Inc. publishing as Prentice Hall

Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years. Productivity has improved by 27%, or about 4.5% per year. Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machines Saved 12 seconds per shot © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Productivity Calculations Labor Productivity Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1,000 250 One resource input  single-factor productivity © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Measurement Problems Quality may change while the quantity of inputs and outputs remains constant External elements may cause an increase or decrease in productivity Precise units of measure may be lacking © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Service Productivity Typically labor intensive Frequently focused on unique individual attributes or desires Often an intellectual task performed by professionals Often difficult to mechanize Often difficult to evaluate for quality © 2011 Pearson Education, Inc. publishing as Prentice Hall

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall