1. 1 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 1 Operations and Productivity PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e PowerPoint slides by Jeff Heyl

2. 1 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall What Is Operations Management? Production Production is the creation of goods and services Operations management (OM) Operations management (OM) is the set of activities that create value in the form of goods and services by transforming inputs into outputs

3. 1 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall Organizing to Produce Goods and Services  Essential functions: 1.Marketing 1.Marketing – generates demand 2.Production/operations 2.Production/operations – creates the product 3.Finance/accounting 3.Finance/accounting – tracks how well the organization is doing, pays bills, collects the money

4. 1 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Organizational Charts Operations Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security Finance Investments Security Real estate Accounting Auditing Marketing Loans Commercial Industrial Financial Personal Mortgage Trust Department Commercial Bank Figure 1.1(A)

5. 1 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

6. 1 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall Marketing Sales promotion Advertising Sales Market research Organizational Charts Operations Facilities Construction; maintenance Production and inventory control Scheduling; materials control Quality assurance and control Supply-chain management Manufacturing Tooling; fabrication; assembly Design Product development and design Detailed product specifications Industrial engineering Efficient use of machines, space, and personnel Process analysis Development and installation of production tools and equipment Finance/ accounting Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall Manufacturing Figure 1.1(C)

7. 1 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall Why Study OM? 1.OM is one of three major functions of any organization, we want to study how people organize themselves for productive enterprise 2.We want (and need) to know how goods and services are produced 3.We want to understand what operations managers do 4.OM is such a costly part of an organization

8. 1 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall Options for Increasing Contribution Table 1.1 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%

9. 1 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall What Operations Managers Do  Planning  Organizing  Staffing  Leading  Controlling Basic Management Functions

10. 1 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall Ten Critical Decisions Ten Decision AreasChapter(s) 1.Design of goods and services5 2.Managing quality6, Supplement 6 3.Process and capacity 7, Supplement 7 design 4.Location strategy8 5.Layout strategy9 6.Human resources and 10 job design 7.Supply-chain 11, Supplement 11 management 8.Inventory, MRP, JIT12, 14, 16 9.Scheduling13, 15 10.Maintenance17 Table 1.2

11. 1 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 1.Design of goods and services  What good or service should we offer?  How should we design these products and services? 2.Managing quality  How do we define quality?  Who is responsible for quality? Table 1.2 (cont.)

12. 1 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 3.Process and capacity design  What process and what capacity will these products require?  What equipment and technology is necessary for these processes? 4.Location strategy  Where should we put the facility?  On what criteria should we base the location decision? Table 1.2 (cont.)

13. 1 - 13© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 5.Layout strategy  How should we arrange the facility?  How large must the facility be to meet our plan? 6.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.)

14. 1 - 14© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 7.Supply-chain management  Should we make or buy this component?  Who should be our suppliers and how can we integrate them into our strategy? 8.Inventory, material requirements planning, and JIT  How much inventory of each item should we have?  When do we re-order? Table 1.2 (cont.)

15. 1 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 9.Intermediate and short–term scheduling  Are we better off keeping people on the payroll during slowdowns?  Which jobs do we perform next? 10.Maintenance  How do we build reliability into our processes?  Who is responsible for maintenance? Table 1.2 (cont.)

16. 1 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall Where are the OM Jobs?  Technology/methods  Facilities/space utilization  Strategic issues  Response time  People/team development  Customer service  Quality  Cost reduction  Inventory reduction  Productivity improvement

17. 1 - 17© 2011 Pearson Education, Inc. publishing as Prentice Hall Certifications  APICS, the American Production and Inventory Control Society  American Society of Quality (ASQ)  Institute for Supply Management (ISM)  Project Management Institute (PMI)  Council of Supply Chain Management Professionals  Charter Institute of Purchasing and Supply (CIPS)

18. 1 - 18© 2011 Pearson Education, Inc. publishing as Prentice Hall New Challenges in OM  Global focus  Just-in-time  Supply-chain partnering  Rapid product development, alliances  Mass customization  Empowered employees, teamsToFrom  Local or national focus  Batch shipments  Low bid purchasing  Lengthy product development  Standard products  Job specialization

19. 1 - 19© 2011 Pearson Education, Inc. publishing as Prentice Hall Characteristics of Goods  Tangible product  Consistent product definition  Production usually separate from consumption  Can be inventoried  Low customer interaction

20. 1 - 20© 2011 Pearson Education, Inc. publishing as Prentice Hall Characteristics of Service  Intangible product  Produced and consumed at same time  Often unique  High customer interaction  Inconsistent product definition  Often knowledge-based  Frequently dispersed

21. 1 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall Industry and Services as Percentage of GDP Services Manufacturing Australia Canada China Czech Rep France Germany Hong Kong Japan Mexico Russian Fed South Africa Spain UK US 90 − 80 − 70 − 60 − 50 − 40 − 30 − 20 − 10 − 0 −

22. 1 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 GoodPercent of Product that is a Service 100%7550250255075100% |||||||||

23. 1 - 23© 2011 Pearson Education, Inc. publishing as Prentice Hall 120 – 100 – 80 – 60 – 40 – 20 – 0 – ||||||| 1950197019902010 (est) 196019802000 Employment (millions) Manufacturing and Service Employment Figure 1.4 (A) Manufacturing Service

24. 1 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall Manufacturing Employment and Production Figure 1.4 (B) 40 – 30 – 20 – 10 – 0 – ||||||| 1950197019902010 (est) 196019802000 150 – 150 125 – 125 100 – 100 75 – 75 50 – 50 25 – 25 0 – 0 Employment (millions) Index: 1997 = 100 Index: 1997 = 100 Manufacturing employment (left scale) Industrial production (right scale)

25. 1 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall Development of the Service Economy Figure 1.4 (C) United States Canada France Italy Britain Japan W. Germany 19702010 (est) ||||| 4050607080 Percent

26. 1 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Organizations in Each Sector Service Sector Example % of all Jobs Education, Legal, Medical, other San Diego Zoo, Arnold Palmer Hospital 25.8 Trade (retail, wholesale) Walgreen’s, Wal-Mart, Nordstrom’s 14.9 Utilities, Transportation Pacific Gas & Electric, American Airlines 5.2 Professional and Business Services Snelling and Snelling, Waste Management, Inc. 10.7 Table 1.3

27. 1 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall Organizations in Each Sector Service Sector Example % of all Jobs Finance, Information, Real Estate Citicorp, American Express, Prudential, Aetna 9.6 Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 8.5 Public Administration U.S., State of Alabama, Cook County 4.6 Total78.8 Table 1.3

28. 1 - 28© 2011 Pearson Education, Inc. publishing as Prentice Hall Organizations in Each Sector Other Sectors Example % of all Jobs Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 11.2 Construction Sector Bechtel, McDermott8.1 Agriculture Sector King Ranch1.4 Mining SectorHomestake Mining0.5 Total21.2 Table 1.3

29. 1 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

30. 1 - 30© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 14000 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

31. 1 - 31© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

32. 1 - 32© 2011 Pearson Education, Inc. publishing as Prentice Hall New Trends in OM  Ethics  Global focus  Environmentally sensitive production  Rapid product development  Environmentally sensitive production  Mass customization  Empowered employees  Supply-chain partnering  Just-in-time performance

33. 1 - 33© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

34. 1 - 34© 2011 Pearson Education, Inc. publishing as Prentice Hall Feedback loop Outputs Goods and services 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%). The Economic System Inputs Labor, capital, management Figure 1.6

35. 1 - 35© 2011 Pearson Education, Inc. publishing as Prentice Hall Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machinesSaved 12 seconds per shot

36. 1 - 36© 2011 Pearson Education, Inc. publishing as Prentice Hall Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machinesSaved 12 seconds per shot Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years. Productivity has improved by 27%, or about 4.5% per year.

37. 1 - 37© 2011 Pearson Education, Inc. publishing as Prentice Hall  Measure of process improvement  Represents output relative to input  Only through productivity increases can our standard of living improve Productivity Productivity = Units produced Input used

38. 1 - 38© 2011 Pearson Education, Inc. publishing as Prentice Hall Productivity Calculations Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1,000 250 Labor Productivity One resource input  single-factor productivity

39. 1 - 39© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

40. 1 - 40© 2011 Pearson Education, Inc. publishing as Prentice Hall Measurement Problems 1.Quality 1.Quality may change while the quantity of inputs and outputs remains constant 2.External elements 2.External elements may cause an increase or decrease in productivity  Precise units  Precise units of measure may be lacking

41. 1 - 41© 2011 Pearson Education, Inc. publishing as Prentice Hall Productivity Variables 1.Labor 1.Labor - contributes about 10% of the annual increase 2.Capital 2.Capital - contributes about 38% of the annual increase 3.Management 3.Management - contributes about 52% of the annual increase

42. 1 - 42© 2011 Pearson Education, Inc. publishing as Prentice Hall Key Variables for Improved Labor Productivity 1.Basic education appropriate for the labor force 2.Diet of the labor force 3.Social overhead that makes labor available  Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge

43. 1 - 43© 2011 Pearson Education, Inc. publishing as Prentice Hall Investment and Productivity 10 8 6 4 2 0 Percent increase in productivity Percentage investment 101520253035

44. 1 - 44© 2011 Pearson Education, Inc. publishing as Prentice Hall Service Productivity 1.Typically labor intensive 2.Frequently focused on unique individual attributes or desires 3.Often an intellectual task performed by professionals 4.Often difficult to mechanize 5.Often difficult to evaluate for quality

45. 1 - 45© 2011 Pearson Education, Inc. publishing as Prentice Hall Productivity at Taco Bell Improvements:  Revised the menu  Designed meals for easy preparation  Shifted some preparation to suppliers  Efficient layout and automation  Training and employee empowerment  New water and energy saving grills

46. 1 - 46© 2011 Pearson Education, Inc. publishing as Prentice Hall Productivity at Taco Bell Improvements:  Revised the menu  Designed meals for easy preparation  Shifted some preparation to suppliers  Efficient layout and automation  Training and employee empowerment  New water and energy saving grills 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  Conserve 300 million gallons of water and 200 million KwH of electricity each year saving $17 million annually

47. 1 - 47© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

48. 1 - 48© 2011 Pearson Education, Inc. publishing as Prentice Hall The Hard Rock Cafe  First opened in 1971  Now – 129 restaurants in over 40 countries  Rock music memorabilia  Creates value in the form of good food and entertainment  3,500 + custom meals per day in Orlando  How does an item get on the menu?  Role of the Operations Manager