© 2006 Prentice Hall, Inc.1 – 1 Operations Management Chapter 1 – Operations and Productivity Chapter 1 – Operations and Productivity © 2006 Prentice Hall, Inc. Heizer/Render Operations Management, 8e

© 2006 Prentice Hall, Inc.1 – 2 Learning Objectives When you complete this chapter, you should be able to: Identify or Define:  Production and productivity  Operations management (OM)  The future of the discipline  Measuring productivity

© 2006 Prentice Hall, Inc.1 – 3 What Is Operations Management? Production is the creation of goods and services Operations management (OM) is the set of activities and knowledge that help managers to find the most efficient and effective way of transforming inputs into outputs

© 2006 Prentice Hall, Inc.1 – 4 Organizing to Produce Goods and Services  Essential functions:  Generate Demand, e.g. Marketing and Sales [Manage the Market]  Produce Products & Services, e.g. Production/Operations [Manage the Operations]  Generate Support, e.g. Finance, Accounting, Customer Support [Manage the Money]

© 2006 Prentice Hall, Inc.1 – 5 Organizational Charts 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 Airline Figure 1.1(B) Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

© 2006 Prentice Hall, Inc.1 – 6 Options for Increasing Contribution Sales$100,000$150,000$100,000$100,000 Cost of Goods – 80,000– 120,000– 80,000– 64,000 Gross Margin20,00030,00020,00036,000 Finance Costs– 6,000 – 6,000– 3,000– 6,000 Subtotal14,00024,00017,00030,000 Taxes at 25%– 3,500– 6,000– 4,250– 7,500 Contribution$ 10,500$ 18,000$ 12,750$ 22,500 Finance/ MarketingAccountingOM OptionOptionOption IncreaseReduceReduce SalesFinanceProduction CurrentRevenue 50%Costs 50%Costs 20%

© 2006 Prentice Hall, Inc.1 – 7 What Operations Managers Do  Planning  Organizing  Staffing  Leading  Controlling Basic Management Functions

© 2006 Prentice Hall, Inc.1 – 8 The Critical Decisions  Process and capacity design  What process and what capacity will these products require?  Location  Where should we put the facility?  Service and product design  What good or service should we offer?  Quality management  How do we define quality? Table 1.2 (cont.)

© 2006 Prentice Hall, Inc.1 – 9 The Critical Decisions  Layout design  How should we arrange the facility and material flow?  Human resources and job design  How do we provide a reasonable work environment?  Supply-chain management  Should we make or buy this component?  Inventory, material requirements planning, and JIT  How much inventory of each item should we have? Table 1.2 (cont.)

© 2006 Prentice Hall, Inc.1 – 10 Significant Events in OM Figure 1.3

© 2006 Prentice Hall, Inc.1 – 11 Contributions to OM from other Disciplines  Human factors  Industrial engineering  Management science  Biological science  Physical sciences  Information science

© 2006 Prentice Hall, Inc.1 – 12 Industry and Services as Percentage of GDP ManufacturingServices AustraliaCanadaChina Czech Rep FranceGermany Hong Kong JapanMexico Russian Fed South Africa SpainUKUS − − − − − − − − − 0 0 −

© 2006 Prentice Hall, Inc.1 – 13 Goods Versus Services Table 1.3 Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product) Reselling unusual Difficult to inventory Quality difficult to measure Selling is part of service Provider, not product, is often transportable Site of facility important for customer contact Often difficult to automate Revenue generated primarily from the intangible service

© 2006 Prentice Hall, Inc.1 – 14 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 this measure of efficiency Production is a measure of output only and not a measure of efficiency Effectiveness is doing the right thing. Efficiency is doing things right.

© 2006 Prentice Hall, Inc.1 – 15Processes Processes Sub-processes Activities Feedbackloop Feedback loop Outputs Goods and services The Economic System Inputs Raw Materials, Labor, Capital, Machines Figure 1.7

© 2006 Prentice Hall, Inc.1 – 16Processes Processes Sub-processes Activities Feedbackloop Feedback loop Outputs Goods and services (units, $) The System (with Quantitative Measures) Inputs Raw Materials (units), Labor (number, hours, $), Capital ($), Machines (units, hours) Figure 1.7

© 2006 Prentice Hall, Inc.1 – 17  Measure of process improvement  Represents output relative to input  Only through productivity increases can our standard of living improve Productivity Productivity = Units produced Input resources used

© 2006 Prentice Hall, Inc.1 – 18 Output Labor + Material + Energy + Capital + Miscellaneous Factor Productivity Types Total Factor Productivity = OutputLabor Labor Productivity = OutputMaterial Material Productivity = OutputCapital Capital Productivity =

© 2006 Prentice Hall, Inc.1 – 19 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 Staff of 4 works 8 hrs/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

© 2006 Prentice Hall, Inc.1 – 20 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 $ titles/day $ = Old multifactor productivity = New multifactor productivity =.0077 titles/dollar =.0097 titles/dollar

© 2006 Prentice Hall, Inc.1 – 21 In-Class Example: Productivity Calculations

© 2006 Prentice Hall, Inc.1 – 22 Actions Must Change Before The Productivity Measure Changes (Taco Bell) Improvements:  Revised the menu  Designed meals for easy preparation  Shifted some preparation to suppliers  Efficient layout and automation  Training and employee empowerment

© 2006 Prentice Hall, Inc.1 – 23 Productivity at Taco Bell Improvements: Results:   Preparation time cut to 8 seconds   Management span of control increased from 5 to 30   In-store labor cut by 15 hours/day   Stores handle twice the volume with half the labor   Fast-food low-cost leader

© 2006 Prentice Hall, Inc.1 – 24 Summary Conclusion:   Demand matters   Products/Services matter   Operations matter   Operations management matters