1. 1 Lecture 1 BSB 370 Managing Quality and Operations

2. 2 Operations Management The management of systems or processes that create goods and/or provide services Organization Finance Operations Marketing Figure 1.1

3. 3 Value-Added The difference between the cost of inputs and the value or price of outputs. Inputs Land Labor Capital Transformation/ Conversion process Outputs Goods Services Control Feedback Value added Figure 1.2

4. 4 Food Processor InputsProcessing Outputs Raw VegetablesCleaning Canned vegetables Metal SheetsMaking cans WaterCutting EnergyCooking LaborPacking BuildingLabeling Equipment Table 1.2

5. 5 Hospital Process InputsProcessingOutputs Doctors, nursesExaminationHealthy patients HospitalSurgery Medical SuppliesMonitoring EquipmentMedication LaboratoriesTherapy Table 1.2

6. 6 Production of Goods vs. Delivery of Services  Production of goods – tangible output  Delivery of services – an act  Service job categories  Government  Wholesale/retail  Financial services  Healthcare  Personal services  Business services  Education

7. 7 Manufacturing vs Service CharacteristicManufacturingService Output Customer contact Uniformity of input Labor content Uniformity of output Measurement of productivity Opportunity to correct quality problems Tangible Low High Low High Easy High Intangible High Low High Low Difficult Low High

8. 8  Operations Management includes:  Forecasting  Capacity planning  Scheduling  Managing inventories  Assuring quality  Deciding where to locate facilities  And more...  The operations function  Consists of all activities directly related to producing goods or providing services Scope of Operations Management

9. 9 Types of Operations Table 1.4 OperationsExamples Goods ProducingFarming, mining, construction, manufacturing, power generation Storage/TransportationWarehousing, trucking, mail service, moving, taxis, buses, hotels, airlines ExchangeRetailing, wholesaling, banking, renting, leasing, library, loans EntertainmentFilms, radio and television, concerts, recording CommunicationNewspapers, radio and television newscasts, telephone, satellites

10. 10 Responsibilities of Operations Management Products & services Planning – Capacity – Location – – Make or buy – Layout – Projects – Scheduling Controlling/Improving – Inventory – Quality Organizing – Process selection Staffing – Hiring/laying off – Use of Overtime Directing – Incentive plans – Issuance of work orders – Job assignments – Costs – Productivity Table 1.6

11. 11 Key Decisions of Operations Managers  What What resources/what amounts  When Needed/scheduled/ordered  Where Work to be done  How Designed  Who To do the work

12. 12 Decision Making  System Design  Capacity  Location  Arrangement of departments  Product and service planning  Acquisition and placement of equipment

13. 13 Decision Making  System Operation  Management of personnel  Inventory planning and control  Scheduling  Project Management  Quality assurance

14. 14 Decision Making  Models  Quantitative approaches  Analysis of trade-offs

15. 15 Models A model is an abstraction of reality. – Physical – Schematic – Mathematical What are the pros and cons of models? Tradeoffs

16. 16 A Simulation Model

17. 17 Models Are Beneficial  Easy to use, less expensive  Require users to organize  Systematic approach to problem solving  Increase understanding of the problem  Enable “what if” questions: simulation models  Specific objectives  Power of mathematics  Standardized format

18. 18 Quantitative Approaches Linear programming: optimal allocation of resources Queuing Techniques: analyze waiting lines Inventory models: management of inventory Project models: planning, coordinating and controlling large scale projects Statistical models: forecasting

19. 19 Product Mix Example Type 1Type 2 Profit per unit $60$50 Assembly time per unit 4 hrs10 hrs Inspection time per unit 2 hrs1 hr Storage space per unit 3 cubic ft ResourceAmount available Assembly time100 hours Inspection time22 hours Storage space39 cubic feet

20. 20  Objective – profit maximization Maximize 60X 1 + 50X 2  Subject to Assembly 4X 1 + 10X 2 <= 100 hours Inspection 2X 1 + 1X 2 <= 22 hours Storage3X 1 + 3X 2 <= 39 cubic feet X 1, X 2 >= 0 A Linear Programming Model

21. 21 Business Operations Overlap Operations Finance Figure 1.5 Marketing

22. 22 Businesses Compete Using Operations  Product and service design  Cost  Location  Quality  Quick response  Flexibility  Inventory management  Supply chain management Competitiveness How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

23. 23 Analysis of Trade-offs  How many more jeans would Levi need to sell to justify the cost of additional robotic tailors?  Cost of additional robotic tailors vs Inventory Holding Cost

24. 24 Competitiveness, Strategy, and Productivity Chapter 2

25. 25 Productivity  Productivity  A measure of the effective use of resources  Usually expressed as the ratio of output to input  Productivity ratios are used for  Planning workforce requirements  Scheduling equipment  Financial analysis

26. 26 Productivity  Partial measures  output/(single input)  Multi-factor measures  output/(multiple inputs)  Total measure  output/(total inputs) Productivity= Outputs Inputs

27. 27 Measures of Productivity Table 2.4 Partial Output Output Output Output measures Labor Machine Capital Energy Multifactor Output Output measures Labor + Machine Labor + Capital + Energy Total Goods or Services Produced measure All inputs used to produce them

28. 28 Units of output per kilowatt-hour Dollar value of output per kilowatt-hour Energy Productivity Units of output per dollar input Dollar value of output per dollar input Capital Productivity Units of output per machine hour Dollar value of output per machine hour Machine Productivity Units of output per labor hour Units of output per shift Value-added per labor hour Labor Productivity Examples of Partial Productivity Measures Table 2.5

29. 29 Productivity Growth Current Period Productivity – Previous Period Productivity Previous Period Productivity Productivity Growth =

30. 30 In-class Example 1 7040 Units Produced Sold for $1.10/unit Cost of labor of $1,000 Cost of materials: $520 Cost of overhead: $2000 What is the total productivity? Ans. 2.20

31. 31 Example 1 Solution TP = Output Labor + Materials + Overhead TP = (7040 units)*($1.10) $1000 + $520 + $2000 TP =2.20

32. 32 In-class Example 2  A company has introduced a process improvement that reduces processing time for each unit, so that output is increased by 25% with less material, but one additional worker required.  Under the old process, five workers could produce 60 units per hour.  Labor costs are $12/hour.  Material input was previously $16/unit.  For the new process, material is now $10/unit.  Overhead is charged at 1.6 times direct labor cost.  Finished units sell for $31 each.  What increase in productivity is associated with the process improvement?

33. 33 Example 2 Solution      

34. 34 In-class Example 3  Student tuition at a local southern CA state university is $100 per semester credit hour.  The state supplements school revenue by matching student tuition dollar for dollar.  Average class size for the typical 3-credit course is 50 students.  Instructors compensation is $4000 per class.  Materials cost $20 per student per class.  Overhead costs are $25,000 per class.  What is the multi-factor productivity for this course process?  If instructors work an average of 14 hours per week for 16 weeks for each 3-credit class of 50 students, determine the labor productivity.

35. 35 Example 3 Solution  Multi-factor productivity  Value of outputs =  Value of inputs = $30,000  Labor = $4000  Material = $20x50 = $1000  Overhead = $25,000  Multi-factor productivity = = 1  Labor productivity  Instructor hours per class = 14x16 = 224  Labor productivity = output/input = $30,000/224 = $133.93/hour

36. 36 Factors Affecting Productivity CapitalQuality TechnologyManagement

37. 37  Standardization  Quality  Use of Internet  Computer viruses  Searching for lost or misplaced items  Scrap rates  New workers  Bottleneck operations Other Factors Affecting Productivity

38. 38 Bottleneck Operation Figure 2.3 Machine #2 Bottleneck Operation Bottleneck Operation Machine #1 Machine #3 Machine #4 10/hr 30/hr

39. 39 Cost, Revenue, Profit Models & Break-even Analysis Chapter 5

40. 40 Cost Classification of Owning and Operating a Passenger Car

41. 41 Cost-Volume Relationship

42. 42 Cost-Volume Relationship

43. 43 Cost-Volume Relationships Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Figure 5.5a Amount ($) Q (volume in units) 0 Total revenue Figure 5.5b

44. 44 Cost-Volume Relationships Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost Formula (5-8) of Course Text

45. 45 Example: Ponderosa Development Corp.  Ponderosa Development Corporation (PDC) is a small real estate developer that builds only one style house.  The selling price of the house is $115,000.  Land for each house costs $55,000 and lumber, supplies, and other materials run another $28,000 per house. Total labor costs are approximately $20,000 per house.  Ponderosa leases office space for $2,000 per month. The cost of supplies, utilities, and leased equipment runs another $3,000 per month.  The one salesperson of PDC is paid a commission of $2,000 on the sale of each house. PDC has seven permanent office employees whose monthly salaries are given on the next slide.

46. 46 Employee Monthly Salary President $10,000 VP, Development 6,000 VP, Marketing 4,500 Project Manager 5,500 Controller 4,000 Office Manager 3,000 Receptionist 2,000 Example: Ponderosa Development Corp.

47. 47  Identify all costs and denote the marginal cost and marginal revenue for each house.  Write the monthly cost function c (x), revenue function r (x), and profit function p (x).  What is the breakeven point for monthly sales of the houses?  What is the monthly profit if 12 houses per month are built and sold?  Determine the BEP for monthly sale of houses graphically. Example: Ponderosa Development Corp.

48. 48 Example: Ponderosa Development Corp. 0 200 400 600 800 1000 1200 012345678910 Number of Houses Sold (x) Thousands of Dollars Break-Even Point = 4 Houses Total Cost = Total Cost = 40,000 + 105,000x 40,000 + 105,000x Total Revenue = Total Revenue = 115,000x 115,000x

49. 49 Profit Total Revenue Total Cost Variable Cost Fixed Cost Quantity Sold Unit Cost Price Influence Chart

50. 50 Example: Step Fixed Costs  A manager has the option of purchasing 1, 2 or 3 machines  Fixed costs and potential volumes are as follows:  Variable cost = $10/unit and revenue = $40/unit  If the projected annual demand is between 580 and 630 units, how many machines should the manager purchase? # of machinesTotal annual FC ($)Range of output 196000 – 300 215000301 – 600 320000601 – 900

51. 51 Break-Even Problem with Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines Figure 5.6 a & b combined Total Revenue BEVs Total Cost

52. 52 1. One product is involved 2. Everything produced can be sold 3. Variable cost per unit is the same regardless of volume 4. Fixed costs do not change with volume 5. Revenue per unit constant with volume 6. Revenue per unit exceeds variable cost per unit Assumptions of Cost-Volume Analysis