9/21/2021

Chapter 1:

Operations and
productivity

Instructor: Truong Quang Duoc, Ph.D

Learning Objectives
When you complete this lecture, you
should be able to:

1. Define operations management

2. Explain the distinction between
goods and services
3. Explain the difference between
production and productivity

1
 9/21/2021

Learning Objectives
When you complete this lecture, you
should be able to:

4. Compute single-factor productivity

5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity

Operations Management
at Hard Rock Cafe

 First opened in 1971

• Now – 185 restaurants in over 75 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

2
 9/21/2021

What is Operations Management?

 Production is the creation of goods and

services
 Operations management (OM) is the set
of activities that creates value in the form
of goods and services by transforming
inputs into outputs

Operations as a Transformation Process

Value added

INPUT Transformation OUTPUT

process

Control
feedback feedback
Material/Land Goods
Machines or
Labor Services
Management
Capital/Information
6

3
 9/21/2021

Types of Operations
Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
7

Organizing to Produce Goods & Services

 Essential functions:
1. Marketing – generates demand for goods
2. Operations – creates the product
3. Finance/accounting – tracks how well
organizational performance, pays bills,
collects money
Operations

Business Operations Marketing Finance

Overlap
8

4
 9/21/2021

Organizational Charts
Commercial Bank

Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security
9

Organizational Charts
Airline

Operations Finance/ Marketing

Ground support accounting
Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility Finance
maintenance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science
10

10

5
 9/21/2021

Organizational Charts
Manufacturing

Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply-chain management research
Funds Management
Manufacturing
Tooling; fabrication; assembly Money market
International
Design exchange
Product development and design
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel and recall
Process analysis
Development and installation of
production tools and equipment
11

11

The Supply Chain

 A global network of organizations and activities
that supply a firm with goods and services
 Members of the supply chain collaborate to
achieve high levels of customer satisfaction,
efficiency and competitive advantage.

Farmer Syrup Bottler Distributor Retailer

producer

Soft Drink Supply Chain

12

12

6
 9/21/2021

Why Study OM?

1. OM is one of three major functions, 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

13

13

Options for Increasing Contribution

Finance/
Marketing Accounting OM
Option Option Option

Increase Reduce Reduce

Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%
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

14

14

7
 9/21/2021

Responsibilities of Operations Manager

Planning Staffing
– Capacity – Hiring/laying off
– Location – Use of Overtime
– Products & services
Leading
– Make or buy
– Incentive plans
– Layout
– Issuance of work orders
– Projects
– Job assignments
– Scheduling
Controlling
Organizing Inventory
–
– Degree of centralization Quality
–
– Process selection
– Costs
– Productivity
15

15

Critical Decisions
Decision Areas Lecture(s)
1. Design of goods and services 3
2. Managing quality 4
3. Process & capacity design 5,6
4. Location strategy 8
5. Layout strategy 9
6. Supply-chain management 10
7. Inventory MRP and JIT 11,12
8. Scheduling 13
9. Job design & Work Measurement 14
10. Maintenance No

16

16

8
 9/21/2021

Ten 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?

17

17

Ten Critical Decisions (cont.)

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?
18

18

9
 9/21/2021

Ten Critical Decisions (cont.)

5. Layout strategy
 How should we arrange the facility
and material flow?
 How large must the facility be to meet
our plan?
6. Scheduling
 Are we better off keeping people on
the payroll during slowdowns?
 Which jobs do we perform next?

19

19

Ten Critical Decisions (cont.)

7. Supply-chain management
 Should we make or buy this
component?
 Who are our suppliers and who can
integrate into our e-commerce program?
8. Inventory, material requirements
planning, and JIT
 How much inventory of each item
should we have?
 When do we re-order? 20

20

10
 9/21/2021

Ten Critical Decisions (cont.)

9. Human resources and job design
 How do we provide a reasonable
work environment?
 How much can we expect our
employees to produce?
10. Maintenance
 Who is responsible for maintenance?
 When do we do maintenance?

WHAT – WHEN – WHERE – HOW - WHO

21

21

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
22

22

11
 9/21/2021

Opportunities

23

23

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)

24

24

12
 9/21/2021

Significant Events in OM

25

25

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)

26

26

13
 9/21/2021

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)

27

27

Eli Whitney
 Born 1765; died 1825
 In 1798, received
government contract to
make 10,000 muskets
 Showed that machine
tools could make
standardized parts to
exact specifications
© 1995 Corel Corp.
 Musket parts could be
used in any musket

28

28

14
 9/21/2021

Frederick W. Taylor

 Born 1856; died 1915

 Known as ‘father of scientific
management’
 In 1881, as chief engineer for
Midvale Steel, studied how
tasks were done
 Began first motion and time
studies
 Created efficiency principles

29

29

Taylor’s Principles
Management Should Take More
Responsibility for:
 Matching employees to right job
 Providing the proper training
 Providing proper work methods and tools
 Establishing legitimate incentives for work
to be accomplished

30

30

15
 9/21/2021

Frank & Lillian Gilbreth

 Frank (1868-1924);
Lillian (1878-1972)
 Husband-and-wife engineering
team
 Further developed work
measurement methods
 Applied efficiency methods to
their home and 12 children!
 Book & Movie: “Cheaper by the
Dozen,” book: “Bells on Their
Toes”
31

31

Henry Ford
 Born 1863; died 1947
 In 1903, created Ford Motor
Company
 In 1913, first used moving
assembly line to make Model T
 Unfinished product moved
by conveyor past work
station
 Paid workers very well for 1911
($5/day!)

Ford Historic Model T, CarData

http://www.youtube.com/watch?v=S4KrIMZpwCY
32

32

16
 9/21/2021

W. Edwards Deming
 Born 1900; died 1993
 Engineer and physicist
 Credited with teaching Japan
quality control methods in
post-WW2
 Used statistics to analyze
process
 His methods involve workers
in decisions

33

33

Contributions from

 Human factors
 Industrial engineering: statistics, economics
 Management science
 Biological science
 Physical sciences: anatomy, chemistry, physics
 Information science: internet, e-commerce

34

34

17
 9/21/2021

Operations for
Goods and Services
 Manufacturers produce tangible product,
services often intangible
 Operations activities often very similar
 Distinction not always clear
 Few pure services

35

Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction
36

36

18
 9/21/2021

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

37

37

Differences Between Goods and

TABLE 1.3 Services
CHARACTERISTICS OF SERVICES
Intangible: Ride in an airline seat
Produced and consumed simultaneously:
Beauty salon produces a haircut that is
consumed as it is produced
Unique: Your investments and medical care are
unique
High customer interaction: Often what the
customer is paying for (consulting, education)
Inconsistent product definition: Auto Insurance
changes with age and type of car
Often knowledge based: Legal, education, and
medical services are hard to automate
Services dispersed: Service may occur at retail
store, local office, house call, or via internet.
Quality may be hard to evaluate: Consulting,
education, and medical services
Reselling is unusual: Musical concert or
medical care
CHARACTERISTICS OF GOODS
Tangible: The seat itself
Product can usually be kept in inventory
(beauty care products)
Similar products produced (iPods)
Limited customer involvement in production
Product standardized (iPhone)
Standard tangible product tends to make
automation feasible
Product typically produced at a fixed facility
Many aspects of quality for tangible products
are easy to evaluate (strength of a bolt)
Product often has some residual value

38

19
 9/21/2021

Industry and Services as

Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
France

UK
Canada

Germany

South Africa
China

Japan

Russian Fed

US
Australia

Czech Rep

Hong Kong

Mexico

Spain
39

39

Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

40

40

20
 9/21/2021

U.S. Agriculture, Manufacturing,

and Service Employment
100 –

80 –
Percent of Workforce

60 –

40 –

20 –

0–
| | | | | | | | |

1825 1875 1925 1975 2025 (est.)

1800 1850 1900 1950 2000

Agriculture Services Manufacturing

41

Organizations in Each Sector

TABLE 1.4
PERCENT OF
SECTOR EXAMPLE ALL JOBS
Service Sector

Education, Legal, Medical, San Diego Zoo, Arnold Palmer Hospital 13.2
Other Walgreen's, Walmart, Nordstrom 13.8
Trade (retail, wholesale) Pacific Gas & Electric, American Airlines 3.3
Utilities, Transportation Snelling and Snelling, Waste Management, 10.1
85.9
Professional and Business Inc. 21.0
Services Citicorp, American Express, Prudential, 9.0
Finance, Information, Real Aetna
Estate 15.5
Olive Garden, Motel 6, Walt Disney
Food, Lodging, Entertainment U.S., State of Alabama, Cook County
Public Administration
Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 8.2
Construction Sector Bechtel, McDermott 4.1
Agriculture King Ranch 1.4
Mining Sector Homestake Mining .4
Grand Total 100.0

42

21
 9/21/2021

Service Pay
 Perception that services are low-paying
 42% of service workers receive above
average wages
 14 of 33 service industries pay below
average
 Retail trade pays only 61% of national
average
 Overall average wage is 96% of the
average

43

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
44

44

22
 9/21/2021

The Economic System

Inputs Processes Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs and
management at about an annual 2.5% services
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%).

Feedback loop

45

45

Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
46

46

23
 9/21/2021

Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped Starbucks increase yearly
Stop requiring signatures Saved
revenue per outlet by8$250,000
secondsto
on credit card purchases
$1,000,000per
in transaction
six years.
under $25
Productivity has improved by 27%,
Change the size of theorice Saved
about 4.5% 14year.
per seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot 47

47

Productivity measurement
Units produced
Productivity =
Input used
 Measure of process improvement
 Represents output relative to input
 Only through productivity increases can
our standard of living improve

48

48

24
 9/21/2021

Productivity Calculations

Labor Productivity

Units produced
Productivity =
Labor-hours used
1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

49

49

Multi-Factor Productivity

Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous

 Also known as total factor productivity

 Output and inputs are often expressed
in dollars
Multiple resource inputs  multi-factor productivity
50

50

25
 9/21/2021

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

=
productivity 32 labor-hrs = .25 titles/labor-hr

51

51

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old labor 8 titles/day

=
productivity 32 labor-hrs = .25 titles/labor-hr

New labor 14 titles/day

= = .4375 titles/labor-hr
productivity 32 labor-hrs
52

52

26
 9/21/2021

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

= = .0077 titles/dollar
productivity $640 + 400

53

53

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day

Old multifactor 8 titles/day

= = .0077 titles/dollar
productivity $640 + 400

New multifactor 14 titles/day

= = .0097 titles/dollar
productivity $640 + 800
54

54

27
 9/21/2021

Measurement Problems

1. Quality may change while the

quantity of inputs and outputs
remains constant
2. External elements may cause an
increase or decrease in
productivity
3. Precise units of measure may be
lacking

55

55

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
56

56

28
 9/21/2021

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 maintaining and
enhancing skills in the midst of
rapidly changing technology and
knowledge
57

57

Labor Skills
About half of the 17-year-olds in the US cannot
correctly answer questions of this type

58

58

29
 9/21/2021

Capital
Percent increase in mfg productivity 10

8 Japan
Belgium
Netherlands
6
Italy
France
4
Canada
2 US UK

0
10 15 20 25 30 35
Percentage investment
59

59

Management
 Ensures labor and capital are effectively
used to increase productivity
 Use of knowledge
 Application of technologies
 Knowledge societies
 Difficult challenge

60

30
 9/21/2021

Productivity and the

Service Sector
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

61

61

New Challenges in OM
 Global focus
 Supply-chain partnering
 Sustainability
 Rapid product development
 Mass customization
 Just-in-time performance
 Empowered employees

62

62

31
 9/21/2021

Ethics and Social Responsibility,

and Sustainability
Challenges facing
operations managers:
 Develop and produce safe, high-quality
green products
 Train, retrain, and motivate employees in
a safe workplace
 Honor stakeholder commitments

63

63

32