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

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

3. 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

4. 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

5. 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

6. Organizational Charts

7. Organizational Charts

8. 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

9. 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%

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

11. 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

12. 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?

13. 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?

14. 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?

15. 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?

16. 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?

17. Job Opportunities

18. Significant Events in POM

19. 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)

20. 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)

21. 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

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

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

24. 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 −

25. 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% %
| | | | | | | | |

26. 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

27. 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 standard; increasing disposal costs
Environmentally sensitive production; green manufacturing; sustainability
Low-cost standardized products
Rise of consumerism; increased affluence; individualism
Mass customization

28. 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

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

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

31. 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

32. 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.

33. 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

34. 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

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

36. 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

37. 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

38. 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

39. 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

40. 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
= titles/labor-hr

41. 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 $
14 titles/day Overhead = $800/day
New System: =
Old multifactor productivity

42. 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 $ =
Old multifactor productivity
= titles/dollar

43. 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 $
8 titles/day $ =
Old multifactor productivity
= titles/dollar =
New multifactor productivity

44. 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 $ =
Old multifactor productivity
= titles/dollar
14 titles/day $ =
New multifactor productivity
= titles/dollar

45. 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

46. 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

47. 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

48. Investment and Productivity10 8 6 4 2
Percent increase in productivity
Percentage investment

49. 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

50. 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

51. 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 …

52. 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

53. THANK YOU