1. Operations and Productivity1
PowerPoint presentation to accompany
Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl
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2. 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
Activities creating goods and services take place in all organizations. In manufacturing firms,
the production activities that create goods are usually quite obvious. In them, we can see the
creation of a tangible product such as a Sony TV or a Harley-Davidson motorcycle.
In an organization that does not create a tangible good or product, the production function
may be less obvious. We often call these activities services . The services may be “hidden”
from the public and even from the customer. The product may take such forms as the transfer
of funds from a savings account to a checking account, the transplant of a liver, the filling of
an empty seat on an airplane, or the education of a student. Regardless of whether the end
product is a good or service, the production activities that go on in the organization are often
referred to as operations, or operations management .
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3. 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
To create goods and services, all organizations perform three functions (see Figure 1.1 ). These
functions are the necessary ingredients not only for production but also for an organization’s
survival. They are:
1. Marketing , which generates the demand, or at least takes the order for a product or service
(nothing happens until there is a sale).
2. Production/operations , which creates, produces, and delivers the product.
3. Finance/accounting , which tracks how well the organization is doing, pays the bills, and
collects the money.
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4. Organizational Charts
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5. Organizational Charts
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6. 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
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7. 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%
Fisher Technologies is a small firm that must double its dollar contribution to fixed cost and profit in
order to be profitable enough to purchase the next generation of production equipment. Management
has determined that if the firm fails to increase contribution, its bank will not make the loan and the
equipment cannot be purchased. If the firm cannot purchase the equipment, the limitations of the old
equipment will force Fisher to go out of business and, in doing so, put its employees out of work and
discontinue producing goods and services for its customers. Given the conditions of our brief example, Fisher Technologies has increased contribution
from $10,500 to $22,500. It may now have a bank willing to lend it additional funds.
INSIGHT c The OM option not only yields the greatest improvement in contribution but also may be
the only feasible option. Increasing sales by 50% and decreasing finance cost by 50% may both be virtually
impossible. Reducing operations cost by 20% may be difficult but feasible.
Table 1.1
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8. What Operations Managers Do
Basic Management Functions
Planning
Organizing
Staffing
Leading
Controlling
Given the conditions of our brief example, Fisher Technologies has increased contribution
from $10,500 to $22,500. It may now have a bank willing to lend it additional funds.
INSIGHT c The OM option not only yields the greatest improvement in contribution but also may be
the only feasible option. Increasing sales by 50% and decreasing finance cost by 50% may both be virtually
impossible. Reducing operations cost by 20% may be difficult but feasible.
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9. 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 job design
Supply-chain 11, Supplement management
Inventory, MRP, JIT 12, 14, 16
Scheduling 13, 15
Maintenance 17
in each of the other OM decisions. For instance, product design usually
determines the lower limits of cost and the upper limits of quality, as well as
major implications for sustainability and the human resources required.
5, Supplement 5
2. Managing quality: Determines the customer’s quality expectations and
establishes policies and procedures to identify and achieve that quality.
6, Supplement 6
3. Process and capacity strategy: Determines how a good or service is produced
(i.e., the process for production) and commits management to specifi c
technology, quality, human resources, and capital investments that determine
much of the fi rm’s basic cost structure.
7, Supplement 7
4. Location strategy: Requires judgments regarding nearness to customers,
suppliers, and talent, while considering costs, infrastructure, logistics, and
government. 8
5. Layout strategy: Requires integrating capacity needs, personnel levels,
technology, and inventory requirements to determine the effi cient fl ow of
materials, people, and information.
Table 1.2
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10. 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?
6. Human resources and job design: Determines how to recruit, motivate, and
retain personnel with the required talent and skills. People are an integral and
expensive part of the total system design. 10
7. Supply chain management: Decides how to integrate the supply chain into the
fi rm’s strategy, including decisions that determine what is to be purchased,
from whom, and under what conditions.
11, Supplement 11
8. Inventory management: Considers inventory ordering and holding decisions
and how to optimize them as customer satisfaction, supplier capability, and
production schedules are considered.
12, 14, 16
9. Scheduling: Determines and implements intermediate- and short-term
schedules that effectively and effi ciently utilize both personnel and facilities
while meeting customer demands.
13, 15
10. Maintenance: Requires decisions that consider facility capacity, production
demands, and personnel necessary to maintain a reliable and stable process.
Table 1.2 (cont.)
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11. 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.)
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12. 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.)
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13. 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.)
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14. 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.)
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15. Significant Events in OM
The field of OM is relatively young, but its history is rich and interesting. Our lives and the
OM discipline have been enhanced by the innovations and contributions of numerous individuals.
We now introduce a few of these people, and we provide a summary of significant
events in operations management in Figure 1.4 .
Figure 1.3
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16. The Heritage of OM
Division of labor (Adam Smith 1776; Charles Babbage 1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Coordinated assembly line (Ford/ Sorenson 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922)
Quality control (Shewhart 1924; Deming 1950)
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17. The Heritage of OM 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)
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18. 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
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19. Characteristics of Goods
Tangible product
Consistent product definition
Production usually separate from consumption
Can be inventoried
Low customer interaction
Manufacturers produce a tangible product, while service products are often intangible. But
many products are a combination of a good and a service, which complicates the definition of
a service. Even the U.S. government has trouble generating a consistent definition. Because
definitions vary, much of the data and statistics generated about the service sector are inconsistent.
However, we define services as including repair and maintenance, government, food
and lodging, transportation, insurance, trade, financial, real estate, education, legal, medical,
entertainment, and other professional occupations.
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20. 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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21. 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% %
| | | | | | | | |
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22. 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
Figure 1.5
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23. Changing Challenges 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
Figure 1.5
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24. Changing Challenges 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
Figure 1.5
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25. New Trends in OM Ethics Global focus
Environmentally sensitive production
Rapid product development
Mass customization
Empowered employees
Supply-chain partnering
Just-in-time performance
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26. 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!
The creation of goods and services requires changing resources into goods and services. The
more efficiently we make this change, the more productive we are and the more value is added
to the good or service provided. Productivity is the ratio of outputs (goods and services) divided
by the inputs (resources, such as labor and capital) (see Figure 1.6 ). The operations manager’s
job is to enhance (improve) this ratio of outputs to inputs. Improving productivity means
improving efficiency. 1
Important Note!
Production is a measure of output only and not a measure of efficiency
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27. 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
This improvement can be achieved in two ways: reducing inputs while keeping output
constant or increasing output while keeping inputs constant. Both represent an improvement
in productivity. In an economic sense, inputs are labor, capital, and management, which are
integrated into a production system. Management creates this production system, which
provides the conversion of inputs to outputs. Outputs are goods and services, including such
diverse items as guns, butter, education, improved judicial systems, and ski resorts. Production
is the making of goods and services. High production may imply only that more people are
working and that employment levels are high (low unemployment), but it does not imply high
productivity .
Figure 1.6
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28. 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
The measurement of productivity can be quite direct. Such is the case when productivity is
measured by labor-hours per ton of a specific type of steel. Although labor-hours is a common
measure of input, other measures such as capital (dollars invested), materials (tons of ore), or
energy (kilowatts of electricity) can be used.
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29. Productivity Calculations
Labor Productivity
Productivity =
Units produced
Labor-hours used
= = 4 units/labor-hour
1,000
250
The use of just one resource input to measure productivity, as shown in Equation (1-1) , is
known as single-factor productivity . However, a broader view of productivity is multifactor productivity ,
which includes all inputs (e.g., capital, labor, material, energy). Multifactor productivity is also
known as total factor productivity .
One resource input  single-factor productivity
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30. Multi-Factor Productivity
Output
Labor + Material + Energy + Capital + Miscellaneous
Productivity =
Also known as total factor productivity
Output and inputs are often expressed in dollars
Multifactor productivity is calculated by combining the
input units as shown here:
Multiple resource inputs  multi-factor productivity
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31. 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 Insurance Ltd. 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 per day. Collins processes and closes on 8 titles each
day. The new computerized title-search system will allow the processing of 14 titles per day. Although
the staff, their work hours, and pay are the same, the overhead expenses are now $800 per day.
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32. 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
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33. 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
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34. 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
Labor productivity has increased from .25 to The change is ( ) >.25 = 0.75, or a
75% increase in labor productivity.
14 titles/day
32 labor-hrs =
New labor productivity
= titles/labor-hr
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35. 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
© 2011 Pearson Education, Inc. publishing as Prentice Hall

36. 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
© 2011 Pearson Education, Inc. publishing as Prentice Hall

37. 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
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38. 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
Multifactor productivity has increased from to This
change is ( ) >.0077 = 0.26, or a 26% increase in multifactor productivity.
INSIGHT c Both the labor (single-factor) and multifactor productivity measures show an increase
in productivity. However, the multifactor measure provides a better picture of the increase because it
includes all the costs connected with the increase in output.
= titles/dollar
14 titles/day $ =
New multifactor productivity
= titles/dollar
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39. 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
1. Compare
an HDTV of this decade with a black-and-white TV of the 1950s. Both are TVs, but few
people would deny that the quality has improved. The unit of measure—a TV—is the
same, but the quality has changed.
2. External elements may cause an increase or a decrease in productivity for which the system
under study may not be directly responsible. A more reliable electric power service
may greatly improve production, thereby improving the firm’s productivity because of
this support system rather than because of managerial decisions made within the firm.
3. Not all automobiles require the same inputs:
Some cars are subcompacts, others are 911 Turbo Porsches.
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40. Productivity Variables
Labor - contributes about 10% of the annual increase
Capital - contributes about 38% of the annual increase
Productivity measurement is particularly difficult in the service sector, where the end product
can be hard to define. For example, economic statistics ignore the quality of your haircut, the
outcome of a court case, or the service at a retail store. In some cases, adjustments are made
for the quality of the product sold but not the quality of the sales presentation or the advantage
of a broader product selection. Productivity measurements require specific inputs and outputs,
but a free economy is producing worth—what people want—which includes convenience,
speed, and safety. Traditional measures of outputs may be a very poor measure of these other
measures of worth. Note the quality-measurement problems in a law office, where each case is
different, altering the accuracy of the measure “cases per labor-hour” or “cases per employee.”
Management - contributes about 52% of the annual increase
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41. Key Variables for Improved Labor Productivity
Basic education appropriate for the labor force
Diet of the labor force
Social overhead that makes labor available
Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge
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42. Investment and Productivity10 8 6 4 2
Percent increase in productivity
Percentage investment
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43. 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
Productivity of the service sector has proven difficult to improve because service-sector
work is:
1. Typically labor intensive (e.g., counseling, teaching).
2. Frequently focused on unique individual attributes or desires (e.g., investment advice).
3. Often an intellectual task performed by professionals (e.g., medical diagnosis).
4. Often difficult to mechanize and automate (e.g., a haircut).
5. Often difficult to evaluate for quality (e.g., performance of a law firm).
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44. 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
The systems that operations managers build to convert resources into goods and services are
complex. And they function in a world where the physical and social environment is evolving,
as are laws and values. These dynamics present a variety of challenges that come from the conflicting
perspectives of stakeholders , such as customers, distributors, suppliers, owners, lenders,
employees, and community. Stakeholders, as well as government agencies at various levels,
require constant monitoring and thoughtful responses.
Identifying ethical and socially responsible responses while developing sustainable processes
that are also effective and efficient productive systems is not easy. Managers are also challenged to:
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