Operations and

1 Productivity

Heizer and Render

Operations Management, 10e

1-1
 What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs

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 Organizing to Produce
Goods and Services
◆ Essential functions:
1. Marketing – generates demand
2. Production/operations – creates
the product
3. Finance/accounting – tracks how
well the organization is doing,
pays bills, collects the money

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 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
Figure 1.1(A)
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 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
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science Figure 1.1(B)
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 Organizational
Manufacturing
Charts
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 Figure 1.1(C)
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 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
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 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

Table 1.1
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 What Operations
Managers Do
Basic Management Functions
◆ Planning
◆ Organizing
◆ Staffing
◆ Leading
◆ Controlling
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 Ten Critical Decisions
Ten Decision Areas Chapter(s)
1. Design of goods and services 5
2. Managing quality 6, Supplement 6
3. Process and capacity 7, Supplement 7
design
4. Location strategy 8
5. Layout strategy 9
6. Human resources and 10
job design
7. Supply-chain 11, Supplement 11
management
8. Inventory, MRP, JIT 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17 Table 1.2
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 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.)

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 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.)

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 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.)

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 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.)
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 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.)

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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
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 New Challenges in OM
From To
◆ Local or national focus ◆ Global focus
◆ Batch shipments ◆ Just-in-time
◆ Low bid purchasing ◆ Supply-chain
partnering
◆ Lengthy product ◆ Rapid product
development development,
alliances
◆ Standard products ◆ Mass
customization
◆ Job specialization ◆ Empowered
employees, teams
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 17
 Characteristics of Goods
◆ Tangible product
◆ Consistent product
definition
◆ Production usually
separate from
consumption
◆ Can be inventoried
◆ Low customer
interaction

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Characteristics of Service
◆ Intangible product
◆ Produced and
consumed at same time
◆ Often unique
◆ High customer
interaction
◆ Inconsistent product
definition
◆ Often knowledge-based
◆ Frequently dispersed
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 Industry and Services as
Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
Germany

Russian Fed

South Africa

Spain
Mexico
Czech Rep

Japan
Hong Kong
France
Canada

UK
China
Australia

US
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 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

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Manufacturing and Service
Employment
120 –

Employment (millions) 100 –

80 – Service

60 –

40 –

Manufacturing
20 –

0– | | | | | | |
1950 1970 1990 2010 (est)
1960 1980 2000
Figure 1.4 (A)
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 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
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 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

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 The Economic System
Inputs Transformation 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

Figure 1.6

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 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
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 Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped Starbucks
Stop requiring signatures increase
Saved yearly
8 seconds
revenue per outlet
on credit card purchases perby $200,000 to
transaction
under $25 $940,000 in six years.
Change the sizeProductivity
of the ice hasSaved
improved by 27%,
14 seconds
scoop or about 4.5% per
peryear.
drink
New espresso machines Saved 12 seconds
per shot
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 Productivity
Units produced
Productivity =
Input used

◆ Measure of process improvement

◆ Represents output relative to input
◆ Only through productivity increases
can our standard of living improve

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 Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

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 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

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 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
◆ Precise units of measure may be
lacking

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 Productivity Variables
1. Labor - contributes
about 10% of the
annual increase
2. Capital - contributes
about 38% of the
annual increase
3. Management -
contributes about 52%
of the annual increase
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 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

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 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 34