07/02/2022

Operations Management
Lecture 2:
Understanding Operations Management
2

References:
Lee J Krajewwski, Manoj K Malhotra, Larry P Ritzman, Samir K Srivastava. Operations
Management: Process and Supply Chain (12/e). Pearson, 2019 – Chapter 1

Identifying Once managers determine the

competitive priorities for a process,
Gaps it is necessary to assess the
Between competitive capabilities of the
process.
Competitive
The gap between a competitive
Priorities priority and capability to achieve
and that competitive priority must be
closed by an effective operations
Capabilities strategy.

07/02/2022 Lecture 1: Understanding Operations Management 2

1
 07/02/2022

Why Some Organizations Fail

Neglecting operations strategy

Failing to take advantage of strengths and opportunities and/or failing to recognize competitive threats

Too much emphasis on short-term financial performance at the expense of R&D

Too much emphasis in product and service design and not enough on process design and improvement

Neglecting investments in capital and human resources

Failing to establish good internal communications and cooperation

Failing to consider customer wants and needs

07/02/2022 Lecture 1: Understanding Operations Management 3

Productivity /Efficiency
• Productivity or Efficiency =
Productivity is an average measure of the
efficiency of production.

Efficiency is a narrower concept that pertains to getting

Productivity is a ratio of production output to
what is required to produce it (inputs of capital,
labor, land, energy, materials, etc.).
The measure of productivity is defined as a total
output per one unit of a total input. We see that
as a measure of the average productivity is often
difficult to interpret correctly.
the most out of a fixed set of resources; productivity is a
broader concept that pertains to effective use of overall
resources. For example, an efficiency perspective on
mowing a lawn given a hand mower would focus on the
best way to use the hand mower; a productivity
perspective would include the possibility of using a
power mower.

07/02/2022 Lecture 1: Understanding Operations Management 4

2
 07/02/2022

Productivity Increase

Productivity measures are useful for tracking an operating

unit’s performance over time and judging the performance
of an entire industry or country
• Become efficient: output increases with little or no increase in input
• Expand: both output and input grow with output growing more rapidly
• Achieve breakthroughs: output increases while input decreases
• Downsize: output remains the same and input is reduced
• Retrench: both output and input decrease, with input decreasing at a
faster rate
07/02/2022 Lecture 1: Understanding Operations Management 5

5
Lecture 1: Understanding Operations Management

Why Productivity Matters

High productivity is linked to higher standards of living

• As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult
to maintain high standards of living

Higher productivity relative to the competition leads to competitive

advantage in the marketplace
• Pricing and profit effects

For an industry, high relative productivity makes it less likely it will be

supplanted by foreign industry

07/02/2022 6

3
 07/02/2022

Lecture 1: Understanding Operations Management

• National Productivity: Productivity at the national level is

typically defined and measured in terms of Gross Domestic
Types of Product (GDP) per capita, per employed person or per hour
worked. It is viewed by many as a key indicator of the
Productivity economic health of the country. Actions that improve
productivity typically enable wage gains to occur without
producing inflation.

07/02/2022 7

• Output can be expressed in units or money in a variety of scenarios, such as

sales made, products produced, customers served, meals delivered, or calls
answered.
• Single-factor productivity compares output to individual inputs, such as
labour hours, investment in equipment, material usage, or square

Measure of
footage.
• Multifactor productivity relates output to a combination of inputs, such
as (labor + capital) or (labour + capital + energy + materials).

Productivity • Capital can include the value of equipment, facilities, inventory,

and land.

and • Total factor productivity compares the total quantity of goods and
services produced with all the inputs used to produce them.

Productivity
Change

07/02/2022 Lecture 1: Understanding Operations Management 8

4
 07/02/2022

Lecture 1: Understanding Operations Management

• Single-factor measures =Output / (Single Input)

• Labor Productivity
– Quantity (or value) of output / labor hrs
– Quantity (or value) of output / shift
Measures of • Machine Productivity
– Quantity (or value) of output / machine hrs
Productivity • Energy Productivity
– Quantity (or value of output) / kwh
• Capital Productivity
– Quantity (or value) of output / value of input
• All-factors measure = Output / Total Inputs or All Inputs

07/02/2022 9

9
Lecture 1: Understanding Operations Management

• Single Factor
• If we produce only one product, the numerator can be
either the total units of the product or the total money
value of the product. If we produce several products,
Some the numerator is the total money value of all products.
• The denominator can be the units of input or the total
Important money value of input.
• All Factors
Issues • If we produce only one product, the numerator can be
either the total units of product or total money value of
the product.
• If we produce several products, the numerator is the
total money value of all products. Usually, the
numerator is the total money value of all outputs.
The denominator is total money value of all inputs.

07/02/2022 10

10

5
 07/02/2022

Lecture 1: Understanding Operations Management

• Service productivity is more problematic than manufacturing

productivity. In many situations, it is more difficult to measure, and
thus to manage, because it involves intellectual activities and a high
degree of variability.
• Service is becoming an increasingly large portion of our economy, the

Productivity in
issues related to service productivity will have to be dealt with.
• A useful measure closely related to productivity is process yield.

the Service • Where products are involved, process yield is defined as the
ratio of output of good product (i.e., defective product is not

Sector included) to the quantity of raw material input. ratio of output of

good product to the quantity of raw material input. Ratio of
output of good product to the quantity of raw material input
• Where services are involved, process yield measurement is often
dependent on the particular process. In a car rental agency, a
measure of yield is the ratio of cars rented to cars available for a
given day.
• However, not all services lend themselves to a simple yield
measurement. For example, services such as automotive, appliance,
and computer repair don’t readily lend themselves to such measures.

07/02/2022 11

11
Lecture 1: Understanding Operations Management

A commonly held misconception is that workers

are the main determinant of productivity.
• According to that theory, the route to productivity gains
involves getting employees to work harder.
Factors That • However, the fact is that many productivity gains in the
Affect past have come from technological improvements.

Numerous factors affect productivity. Generally,

Productivity they are:
• Methods
• Capital
• Quality
• Technology
• Management

07/02/2022 12

12

6
 07/02/2022

Lecture 1: Understanding Operations Management

Economies of Scale
Operations–
oriented Capital Investment
Barriers to
Entry Access to Supply and Distribution
Channels

Learning Curve

07/02/2022 13

13

Productivity Improvement
EXAMPLE 1.1
Calculate the productivity for the following operations:

a. Three employees process 600 insurance policies in a week.

They work 8 hours per day, 5 days per week.

SOLUTION
Policies processed
a. Labor productivity =
Employee hours

600 policies
= = 5 policies/hour
(3 employees)(40 hours/employee)

07/02/2022 Lecture 1: Understanding Operations Management 14

14

7
 07/02/2022

Productivity Improvement
EXAMPLE 1.1
Calculate the productivity for the following operations:

b. A team of workers makes 400 units of a product, which is

sold in the market for $10 each. The accounting department
reports that for this job the actual costs are $400 for labor,
$1,000 for materials, and $300 for overhead.

SOLUTION
Value of output
a. Multifactor productivity =
Labor cost + Materials cost
+ Overhead cost

(400 units)($10/unit) $4,000

= = = 2.35
$400 + $1,000 + $300 $1,700
07/02/2022 Lecture 1: Understanding Operations Management 15

15

Application
This Year Last Year Year Before Last
Factory unit sales ($) 2,762,103 2,475,738 2,175,447
Employment (hrs) 112,000 113,000 115,00
Sales of manufactured $49,363 $40,831 —
products ($)
Total manufacturing $39,000 $33,000 —
cost of sales ($)

 Calculate the year-to-date labor productivity:

This Year Last Year Year Before Last
factory unit sales 2,762,103 2,475,738 2,175,447
= 24.66/hr = 21.91/hr = $18.91/hr
employment 112,000 113,000 115,000

 Calculate the multifactor productivity:

This Year Last Year
sales of mfg products $49,363 $40,831
= 1.27 = 1.24
total mfg cost $39,000 $33,000

Lecture 1: Understanding Operations

07/02/2022 16
Management

16

8
 07/02/2022

Solved Problem 1
Student tuition at Boehring University is $150 per semester credit hour.
The state supplements school revenue by $100 per semester credit hour.
Average class size for a typical 3-credit course is 50 students. Labor costs
are $4,000 per class, material costs are $20 per student per class, and
overhead costs are $25,000 per class.

a. What is the multifactor productivity ratio for this course

process?
b. If instructors work an average of 14 hours per week for 16
weeks for each 3-credit class of 50 students, what is the
labor productivity ratio?

Lecture 1: Understanding Operations

07/02/2022 17
Management

17

Solved Problem 1
SOLUTION

a. Multifactor productivity is the ratio of the value of output to

the value of input resources.
$150 tuition +
50 student 3 credit hours $100 state support
Value of output =
class student credit hour

= $37,500/class

Value of inputs = Labor + Materials + Overhead

= $4,000 + ($20/student  50 students/class) + $25,000
= $30,000/class

Output $37,500/class
Multifactor productivity = = = 1.25
Input $30,000/class
07/02/2022 Lecture 1: Understanding Operations Management 18

18

9
 07/02/2022

Solved Problem 1
SOLUTION

b. Labor productivity is the ratio of the value of output to

labor hours. The value of output is the same as in part (a),
or $45,000, so

14 hours 16 weeks
Labor hours of input =
week class

= 224 hours/class

Output $45,000/class
Labor productivity = =
Input 224 hours/class

= $200.89/hour

07/02/2022 Lecture 1: Understanding Operations Management 19

19

Solved Problem 2
Natalie Attire makes fashionable garments. During a particular week
employees worked 360 hours to produce a batch of 132 garments, of
which 52 were “seconds” (meaning that they were flawed(defective)).
Seconds are sold for $90 each at Attire’s Factory Outlet Store. The
remaining 80 garments are sold to retail distribution at $200 each. What is
the labor productivity ratio of this manufacturing process?

07/02/2022 Lecture 1: Understanding Operations Management 20

20

10
 07/02/2022

Solved Problem 2
SOLUTION

Value of output = (52 defective  90/defective)

+ (80 garments  200/garment)

= $20,680

Labor hours of input = 360 hours

Output $20,680
Labor productivity = =
Input 360 hours

= $57.44 in sales per hour

07/02/2022 Lecture 1: Understanding Operations Management 21

21
Lecture 1: Understanding Operations Management

Organizational learning

Organizational learning involves

gaining experience with products
Productivity improvements may be
and processes, achieving greater
gained from better work methods,
efficiency through automation and
tools, product design, or
other capital investments, and
supervision, as well as from
making other improvements in
individual worker learning.
administrative methods or
personnel.

07/02/2022 22

22

11
 07/02/2022

Lecture 1: Understanding Operations Management

The Learning Effect

The terms manufacturing progress function

The learning effect can be represented by a
line called a learning curve, which displays
the relationship between the total direct
labor per unit and the cumulative quantity
of a product or service produced.
and experience curve also have been used
The learning curve relates to a repetitive
to describe this relationship, although the
job or task and represents the relationship
experience curve typically refers to total
between experience and productivity:
value-added costs per unit rather than
labor hours.
• The time required to produce a unit
decreases as the operator or firm
produces more units.
• At that point learning is negligible and a
standard time for the operation can be
developed.

07/02/2022 23

23

Learning Curves
• A learning curve, or improvement curve, is a
graph that reflects the fact that as workers
repeat their tasks, they will improve
performance.
• Illustrates improvement rate of workers as a
job is repeated
• Processing time per unit decreases by a
constant percentage each time output
doubles

07/02/2022 Lecture 1: Understanding Operations Management 24

24

12
 07/02/2022

Learning Curve for Mass Production Job

Processing time per unit

End of improvement

Standard
time

Units produced

07/02/2022 Lecture 1: Understanding Operations Management 25

25

LEARNING

07/02/2022 Lecture 1: Understanding Operations Management 26

26

13
 07/02/2022

Lecture 1: Understanding Operations Management

The Learning Effect

• The learning effect is attributed to a variety of factors:

• Worker learning
• Preproduction factors
• Tooling and equipment selection
• Product design
• Methods analysis
• Effort expended prior to the start of work
• Changes made after production has begun
• Changes in work methods
• Changes in tooling and equipment
• Managerial factors
• Improvements in planning, scheduling, motivation, and control

07/02/2022 27

27
Lecture 1: Understanding Operations Management

Interesting • The learning effect is predictable

• The learning percentage is constant
Characteristics • Every doubling of repetitions results in a constant
of Learning percentage decrease in the time per repetition
• Typical decreases range from 10 to 20 percent

07/02/2022 28

28

14
 07/02/2022

Unit Times: Formula Approach

Tn  T1  nb
where
Tn  Time for nth unit
T1  Time for first unit
ln r
b
ln 2
r  learning rate percentage
ln stands for the natural logarithm
07/02/2022 Lecture 1: Understanding Operations Management 29

29

Learning Curve Effect

Contract to produce 36 computers.

t1 = 18 hours, learning rate = 80%
What is time for 9th, 18th, 36th units?

t9 = (18)(9)ln(0.8)/ln 2 = (18)(9)-0.322
= (18)/(9)0.322 = (18)(0.493) = 8.874hrs
t18 = (18)(18)ln(0.8)/ln 2 = (18)(0.394) = 7.092hrs
t36 = (18)(36)ln(0.8)/ln 2 = (18)(0.315) = 5.674hrs

07/02/2022 Lecture 1: Understanding Operations Management 30

30

15
 07/02/2022

Lecture 1: Understanding Operations Management

Learning Percentage

• 90% learning percent means 10% decrease in unit time with each doubling of repetition
• 80% learning percent means 20% decrease in unit time with each doubling of repetition

07/02/2022 31

31

Example: Formula Approach

• If the learning rate
is 90, and the first ln .90
unit took 100 hours T25  100  25 ln 2

to complete, how
long would it take  100  25.15200
to complete the  61.3068 hours
25th unit?

07/02/2022 Lecture 1: Understanding Operations Management 32

32

16
 07/02/2022

Unit Times: Learning Factor Approach

• The learning factor approach uses a table that shows two things for
selected learning percentages:
• Unit value for the number of repetitions (unit number)
Tn  T1  Unit time factor
• Cumulative value, which enables us to compute the total time required to
complete a given number of units.

T n  T1  Total time factor

07/02/2022 Lecture 1: Understanding Operations Management 33

33

Learning Curve Coefficients

70% 75% 80% 85% 90% 95%

Unit Unit Total Unit Total Unit Total Unit Total Unit Total Unit Total
Number Time Time Time Time Time Time Time Time Time Time Time Time
1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
2 0.700 1.700 0.750 1.750 0.800 1.800 0.850 1.850 0.900 1.900 0.950 1.950
3 0.568 2.268 0.634 2.384 0.702 2.502 0.773 2.623 0.846 2.746 0.922 2.872
4 0.490 2.758 0.563 2.946 0.640 3.142 0.723 3.345 0.810 3.556 0.903 3.774
5 0.437 3.195 0.513 3.459 0.596 3.738 0.686 4.031 0.783 4.339 0.888 4.662
6 0.398 3.593 0.475 3.934 0.562 4.299 0.657 4.688 0.762 5.101 0.876 5.538
7 0.367 3.960 0.446 4.380 0.534 4.834 0.634 5.322 0.744 5.845 0.866 6.404
8 0.343 4.303 0.422 4.802 0.512 5.346 0.614 5.936 0.729 6.574 0.857 7.261
9 0.323 4.626 0.402 5.204 0.493 5.839 0.597 6.533 0.716 7.290 0.850 8.111
10 0.306 4.932 0.385 5.589 0.477 6.315 0.583 7.116 0.705 7.994 0.843 8.954
11 0.291 5.223 0.370 5.958 0.462 6.777 0.570 7.686 0.695 8.689 0.837 9.792
12 0.278 5.501 0.357 6.315 0.449 7.227 0.558 8.244 0.685 9.374 0.832 10.624
13 0.267 5.769 0.345 6.660 0.438 7.665 0.548 8.792 0.677 10.052 0.827 11.451
14 0.257 6.026 0.334 6.994 0.428 8.092 0.539 9.331 0.670 10.721 0.823 12.274
15 0.248 6.274 0.325 7.319 0.418 8.511 0.530 9.861 0.663 11.384 0.818 13.092
16 0.240 6.514 0.316 7.635 0.410 8.920 0.522 10.383 0.656 12.040 0.815 13.907
17 0.233 6.747 0.309 7.944 0.402 9.322 0.515 10.898 0.650 12.690 0.811 14.717
18 0.226 6.973 0.301 8.245 0.394 9.716 0.508 11.405 0.644 13.334 0.807 15.525
19 0.220 7.192 0.295 8.540 0.388 10.104 0.501 11.907 0.639 13.974 0.804 16.329
20 0.214 7.407 0.288 8.828 0.381 10.485 0.495 12.402 0.634 14.608 0.801 17.130
21 0.209 7.615 0.283 9.111 0.375 10.860 0.490 12.892 0.630 15.237 0.798 17.929
22 0.204 7.819 0.277 9.388 0.370 11.230 0.484 13.376 0.625 15.862 0.796 18.724
23 0.199 8.018 0.272 9.660 0.364 11.594 0.479 13.856 0.621 16.483 0.793 19.517
24 0.195 8.213 0.267 9.928 0.359 11.954 0.475 14.331 0.617 17.100 0.790 20.307
25 0.191 8.404 0.263 10.191 0.355 12.309 0.470 14.801 0.613 17.713 0.788 21.095
26 0.187 8.591 0.259 10.449 0.350 12.659 0.466 15.267 0.609 18.323 0.786 21.881
27 0.183 8.774 0.255 10.704 0.346 13.005 0.462 15.728 0.606 18.929 0.784 22.665
28 0.180 8.954 0.251 10.955 0.342 13.347 0.458 16.186 0.603 19.531 0.781 23.446
29 0.177 9.131 0.247 11.202 0.338 13.685 0.454 16.640 0.599 20.131 0.779 24.226
30 0.174 9.305 0.244 11.446 0.335 14.020 0.450 17.091 0.596 20.727 0.777 25.003

07/02/2022 Lecture 1: Understanding Operations Management 7S-34

34

17
 07/02/2022

Example: Learning Factor Approach

• If the learning rate is 90, and the first unit took 100 hours to
complete, how long would it take to complete the 25th unit?
T25  100  .613
 61.3 hours
• How long would it take to complete the first 25 units?

T 25  100  17.713
 1,771.3 hours

07/02/2022 Lecture 1: Understanding Operations Management 35

35

Estimating labor costs is an important part

of preparing bids for large jobs. Knowing
Bid the learning rate, the number of units to
Preparation be produced, and wage rates, the
estimator can arrive at the cost of labor by
using a learning curve.

Using Learning curves can be used in financial

planning to help the financial planner

Learning Financial
Planning
determine the amount of cash needed to
finance operations. Learning curves
provide a basis for comparing prices and
Curves costs.

For a given production schedule, the

analyst can use learning curves to project
Labor
direct labor requirements. This
Requiremen
information can be used to estimate
t Estimation
training requirements and develop
production and staffing plans.

07/02/2022 Lecture 1: Understanding Operations Management 36

36

18
 07/02/2022

Lecture 1: Understanding Operations Management

Cautions and Criticisms

1. Learning rates may differ from organization to organization and by type of work
• Base learning rates on empirical studies rather than assumptions where possible
2. Projections based on learning curves should be regarded as approximations of actual times
3. Because time estimates are based on the first unit, care should be taken to ensure that the time is valid
4. It is possible that at some point the curve might level off or even tip upward
5. Some of the improvements may be more apparent than real: improvements in times may be caused by increases in indirect
labor costs
6. In mass production situations, learning curves may be of initial use in predicting how long it will take before the process
stabilizes
• The concept does not usually apply because improvement in time per unit is almost imperceptible
7. Users of learning curves fail to include carryover effects from previous experiences
8. Shorter product life cycles, flexible manufacturing, and cross-functional workers can affect the ways in which learning curves
may be applied

07/02/2022 37

37
Lecture 1: Understanding Operations Management

Operations Strategy

• Learning curves have strategic implications for:

• Market entry when trying to rapidly gain market share
• As volume increases, operations is able to move quickly down the learning curve
• Reduced cost  improved competitive advantage
• Useful for capacity planning
• Can lead to more realistic time estimates, thus leading to more accurate capacity
needs assessment

07/02/2022 38

38

19
 07/02/2022

Learning Curves and Competitive Strategy

Learning curves enable managers to project the manufacturing cost per unit for any cumulative
production quantity.

Firms that choose to emphasize low price as a competitive strategy rely on high volumes to
maintain profit margins.

These firms strive to move down the learning curve (lower labor hours per unit or lower costs
per unit) by increasing volume. This tactic makes entry into a market by competitors difficult.

However, market or product changes can disrupt the expected benefits of increased
production.

07/02/2022 Lecture 1: Understanding Operations Management 39

39
Lecture 1: Understanding Operations Management

Developing Learning Curves

• When we develop a learning curve, we make the following assumptions:

• The direct labor required to produce the 1st unit will always be less than the direct
labor required for the nth unit.
• Direct labor requirements will decrease at a declining rate as cumulative production
increases.
• The reduction in time will follow an exponential curve.
• In other words, the production time per unit is reduced by a fixed percentage each time
production is doubled. We can use a logarithmic model to draw a learning curve. The
direct labor required for the nth unit, kn, is kn = k1nb

07/02/2022 40

40

20
 07/02/2022

Lecture 1: Understanding Operations Management

Managerial Considerations in the use of Learning

Curves

• Although learning curves can be useful tools for operations planning, managers should
keep several things in mind when using them.
• An estimate of the learning rate is necessary in order to use learning curves, and it
may be difficult to get. Using industry averages can be risky because the type of work
and competitive niches can differ from firm to firm. The learning rate depends on
factors such as process complexity and the rate of capital additions.
• Another important estimate, if the first unit has yet to be produced, is that of the
time required to produce it. The entire learning curve is based on it. The estimate
may have to be developed by management using past experiences with similar
products.

07/02/2022 41

41

Managerial Considerations in the use of Learning Curves

• Learning curves provide their greatest advantage in the early stages of new
service or product production. As the cumulative number of units produced
becomes large, the learning effect is less noticeable.
• Learning curves are dynamic because they are affected by various factors. For
example, a short service or product life cycle means that firms may not enjoy
the flat portion of the learning curve for very long before the service or
product is changed or a new one is introduced.
• Finally, managers should always keep in mind that learning curves are only
approximations of actual experience.

07/02/2022 Lecture 1: Understanding Operations Management 42

42

21