1. Operations As a Competitive Weapon

2. Processes and Operations
Internal and
external customers
Inputs
Workers
Managers
Equipment
Facilities
Materials
Services
Land
Energy
Processes and operations 5 1 2 3 4
Outputs
Services
Goods
This can apply to an organization, unit, or person. Processes are fundamental activities that organizations use to work and achieve their goals. Process takes one or more inputs, transforms them and adds value to them, and provides one or more outputs for its customers. The numbered circles represent operations through which services, products, or customers pass and where processes are performed. The arrows represent the flow. What is the difference between internal and external customers? Let’s take a fast food operation. What inputs, processes, and outputs are involved? Start at the beginning. How could you design the operation to give a competitive edge?
Information on performance

3. Describe Input-Process-Output
An airline
Inputs: passengers
Components: planes, crews, equipment, terminals
Primary functions: transportation
Output: satisfied, safe customers
A state penitentiary
Inputs: criminals
Components: legal system, physical plant (prison), guards and support staff
Primary functions: segregation of prisoners from society, punishment, rehabilitation
Output: reformed society members
A branch office of a bank
Inputs: customers
Components: tellers, bank officers, teller windows, systems
Primary functions: deposit and withdrawal handling, loan initiation, storing money and valuables
Output: satisfied customers, positive return on loan ratios
The home office of a major banking firm
Inputs: paperwork from customers and other institutions
Components: loan underwriters, clerks, computer systems
Primary function: record-keeping, loan processing, coordinating cash flows
Output: satisfied customers, sound investment portfolios

4. Nested Processes at Chase Manhattan Bank
Operations
Retail
Products
Wholesale
Maintain cards
Research problems
Site analysis
Others
Process deposits
Cash checks
Safe deposit boxes
Loan documentation
Review credit standing
Obtain manager approval
Prepare reports
Attend meetings
Input funds deals
ATM support
Customer transactions
Service quality
Teller line transactions
Track branch sales
ATM hotline
Credit applications
Manage retail products
Originate lease portfolio
Fund management
Market making spot
Dealer support
Cash Management
Loan operations
Trading operations
Distribution
Compliance
Finance
Human resources
Auto Finance
Cards
Mortgages
Trading
Loan administration
Leasing
Processes can be broken down into subprocesses, which can be broken down into more subprocesses. A process within a process is a nested process. One person or unit may be unable to complete the entire process.

5. Operations Management
Operations management (OM) is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services
Each part of the organization, not just operations, must design and operate processes and deal with quality, technology and staffing issues.

6. Types of OM Decisions
Strategic choices – how to best design processes for competitive priorities.
Process – improvement, one-time projects, technologies
Quality – SPC, improvement
Capacity, Location, Layout - global
Operating Decisions – SCM, forecasting, staffing levels, scheduling, resource planning
This slide presents the basic OM decision areas that form the basis for the text.

7. Operations Management as a Function
Functions
Types of Organizations
• Accounting
• Distribution
• Engineering
• Operations
• Finance
• Human
resources
• Marketing
Types of Organizations
Manufacturing
Construction
Transportation
Health care
Wholesale
Retailing
Bank
Government •

8. Goods vs. Services
“If you drop it on your foot, it won’t hurt you.” (Good or service?)
“Services never include goods and goods never include services.” (True or false?)
Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way.

9. Continuum of Characteristics
More like a manufacturing organization
More like
a service organization
Physical, durable product
Output that can be inventoried
Low customer contact
Long response time
Regional, national, or international markets
Large facilities
Capital intensive
Quality easily measured
Intangible, perishable product
Output that cannot be inventoried
High customer contact
Short response time
Local markets
Small facilities
Labor intensive
Quality not easily measured

10. Service Sector Jobs Manufacturing, mining, and construction
Percentage of workforce
40 –
30 –
20 –
10 –
| | | | |
Manufacturing, mining, and construction
Other services
Wholesale
and retail sales
Government

11. Productivity Output Input Productivity =
The first step is to define the basic productivity relationship.
Productivity is the value of outputs (goods and services) produced divided by the values of input resources.

12. Productivity Policies processed Employee hours Labor productivity =
An index of the output per person or hour worked.
Machine productivity =
Output
Number of Machines
From this point the slides present the insurance policy portion of Example 1.1.

13. (3 employees)(40 hours/employee)
Productivity
Labor productivity =
600 policies
(3 employees)(40 hours/employee)
The numbers are substituted in the equation.
Labor productivity = 5 policies/hour

14. Quantity at standard cost Labor cost + Materials cost + Overhead cost
Productivity
Multifactor productivity is an index of the output provided by more than one of the resources used in production. We have to convert the measure into a common unit of measure, usually dollars.
Multifactor productivity =
Quantity at standard cost
Labor cost + Materials cost + Overhead cost

15. Productivity Multifactor productivity = (400 units)($10/unit) $4000
A team of workers make 400 units of a product which is valued by its standard cost of $10 each. The reported costs for this product are $400 for labor, $1000 materials, and $300 overhead
Multifactor productivity =
(400 units)($10/unit) $4000
$400 + $ $300 $1700
= = 2.35

16. Productivity
The productivity measures are compared with measures from prior periods. If the ratios are not improved, the processes should be investigated.
Our challenge is to increase the value of the output relative to the cost of the input. If processes can generate more output or output of better quality using the same amount if input, productivity increases. If they can maintain the same level of output while reducing the use of resources, productivity also increases.

17. Productivity Measures
OM Explorer
Tutor 1.1—Productivity Measures
The state ferry service charges $18 per ticket plus a $3 surcharge to fund planned equipment upgrades. It expects to sell 4,700 tickets during the eight-week summer season. During that period, the ferry service will experience $110,000 in labor costs. Materials required for each passage sold (tickets, a tourist-information sheet, and the like) cost $1.30. Overhead during the period comes to $79,000.
What is the multifactor productivity ratio?
If ferry-support staff work an average of 310 person-hours per week for the 8 weeks of the summer season, what is the labor productivity ratio? Calculate labor productivity on an hourly basis.
The first slides shows the introductory screen from the Productivity example in OM Tutor.

18. Productivity Measures
Tutor 1.1—Productivity Measures
Enter data in yellow areas. Use Tab to advance from one input cell to the next.
a. Multifactor productivity is the ratio of the value of output to the value of input.
Step 1. Enter the number of tickets sold during a season, the price per ticket, and the surcharge per ticket. To compute value of output, multiply tickets sold by the sum of price and surcharge.
Tickets sold: 4,700 Value of output:
Price: $18
Surcharge: $3
Step 2. Enter labor costs, materials costs per passenger, and overhead cost. For value of input, add together labor costs, materials costs times number of passengers, and overhead costs.
Labor costs: $110,000 Materials costs: $1.30 Overhead: $79,000
Value of input:
Step 3. To calculate multifactor productivity, divide value of output by value of input.
Multifactor productivity:
The next two slides show the data input operations. This has been broken up into two slides to improve readability.

19. Productivity Measures
Tutor 1.1—Productivity Measures
Enter data in yellow areas. Use Tab to advance from one input cell to the next.
b. Labor productivity is the ratio of the value of output to labor hours The value of output is computed in part a, step 1.
Step 1. Enter person-hours per week and the number of weeks in the season; multiply the two together to calculate labor hours of input.
Hours per week: 310 Weeks: 8
Labor hours of input:
Step 2. To calculate labor productivity, divide value of output by labor hours of input.
Labor productivity:
Figure 1.6b

20. Productivity Measures
Tutor 1.1—Productivity Measures
Place cell pointer on green shaded areas to examine formulas.
a. Multifactor productivity is the ratio of the value of output to the value of input.
Step 1. Enter the number of tickets sold during a season, the price per ticket, and the surcharge per ticket. To compute value of output, multiply tickets sold by the sum of price and surcharge.
Tickets sold: 4,700 Value of output: $98,700
Price: $18
Surcharge: $3
Step 2. Enter labor costs, materials costs per passenger, and overhead cost. For value of input, add together labor costs, materials costs times number of passengers, and overhead costs.
Labor costs: $110,000 Materials costs: $1.30 Overhead: $79,000
Value of input: $195,110
Step 3. To calculate multifactor productivity, divide value of output by value of input.
Multifactor productivity:
These slides show the results of the exercise. Again, there are two slides to improve readability.

21. Productivity Measures
Tutor 1.1—Productivity Measures
Place cell pointer on green shaded areas to examine formulas.
b. Labor productivity is the ratio of the value of output to labor hours The value of output is computed in part a, step 1.
Step 1. Enter person-hours per week and the number of weeks in the season; multiply the two together to calculate labor hours of input.
Hours per week: 310 Weeks: 8
Labor hours of input: 2,480
Step 2. To calculate labor productivity, divide value of output by labor hours of input.
Labor productivity: $39.80

22. Productivity Measures
Management believes that sales will grow next season to 5500 tickets. If labor costs grow to $140,000 and everything else remains unchanged, what will be the new multifactor productivity ratio? Labor productivity ratio?

23. Productivity Measures
At the national level, productivity is measured as the dollar value of output per unit of labor. Productivity is a prime determinant of the nation’s standard of living. If the value of output per hour goes up, the nation benefits from higher overall income levels, because the productivity of human resources determines employee wages. Wage or price increases not accompanied by productivity increases lead to inflationary pressures rather than real increases in the standard of living.

24. Productivity Growth Average annual growth in productivity 2.8 2.8 2.0
3 –
2 –
1 –
2.0
1.9
1.4
Percent
The decade of the 90’s shows an increase in productivity growth rate.
1950s 1960s 1970s 1980s 1990s
Figure 1.7(a)

25. Productivity Growth Value added per hour worked Whole economy
Manufacturing
100 –
80 –
60 –
40 –
20 –
Percent
The second slide shows the productivity growth rate for just the manufacturing component of the economies.
United
States
France
Japan
Britain
Germany

26. Productivity Growth
The biggest problem associated with the measurement of service productivity is the definition of output. There is a lack of agreement among economists on the best definition of output. Another difficulty in measuring services outputs is the role of the consumer. One of the basic distinctions between manufacturing and services is that the consumer in services often supplies an essential input. For example how do you define the output of a music performance? Is it the same regardless of the number of people in the audience? Does it matter whether the audience enjoyed the performance or not? There is no widely accepted model for including the consumer in the measurement of service outputs.

27. Productivity Growth
Compare the productivity trends in manufacturing with the unit labor costs of manufacturing.
While the productivity of the manufacturing sector based on output per hour is showing a positive growth, the unit labor costs have generally trended downwards. This implies that manufacturing is able to get an increase in output while reducing the number of people employed to deliver that output. The manufacturing sector has become more capital intensive, which implies more use of automation and less people. Also the quality of the output has improved considerably in the 90's, so there is less cost of poor quality.

28. Competing Today Globalization Quality, time, and technology
Ethical, workforce diversity, environmental issues
What choices and decisions should be made to gain and sustain a competitive advantage?
How do we manage cross-functional responsibilities?

29. Current Trends in OM
Effectively consolidating the operations resulting from mergers.
Developing flexible supply chains to enable mass customization of products and services.
Managing global supplier, production and distribution networks.
Achieving the “Service Factory”.
Achieving good service from service firms.

30. Current Trends in OM JIT and TQC. Manufacturing Strategy Paradigm.
Service Quality and Productivity.
Total Quality Management and Quality Certification.
Business Process Reengineering.
Supply Chain Management.
Electronic Commerce