Operations Management

Operations and Productivity
Dr. Vaidy Jayaraman Univ of Miami, FL, USA

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

A Competitive Framework for Operations

Inputs

S U P

MY COMPANY

Demand Share

Outputs Preferences

P
L I E R

Service Cost Quality

Performance

Market Response
Market Size

Flexibility
Outputs

S

Inputs

C U S T O M E R S

Competitors
Demand Share

Why Study Operations Management?
Systematic Approach to Org. Processes

Business Education

Operations Management

Career Opportunities

Cross-Functional Applications

Organizing to Produce Goods and Services
 Essential functions:
 Marketing – generates demand

 Production/operations – creates the product
 Finance/accounting – tracks how well the organization is doing, pays bills, collects the money

6 Westside’s competitive strategy? .

youtube.com/stapleschannel Staples’ competitive strategy? . Video from the Staples Channel at www.7 Staples: The world’s largest office products company ($23 billion in sales).

Toyota timeline 2008: #1 carmaker in the world.com Toyota’s competitive strategy? . 2009-2010: 8.5 million vehicles recalled Graphs from nytimes.

Quality vs growth – Internal re-work costs vs External recall costs – Managerial choices: Process control.Aligning operations with strategic objectives 9 • Quick response @Westside – Capacity (Service level) vs Cost – Managerial choices: Capacity planning? Demand planning? • Low price @Staples – Inventory costs vs customer satisfaction – Managerial choices: Inventory planning? Product variety? • High quality @Toyota – Quality vs cost. quality . speed.

Strategic fit Operations structure CORPORATE Make it easy for customers to buy a wide range of office suppliers at low cost Operations strategy Corporate strategy OPERATIONS STRUCTURE Smart sourcing Efficient transportation Local warehouses Inter-store communication OPERATIONS STRATEGY Low inventory levels Large variety Convenient delivery .

and express it in numbers. you know something about it.“ When you can measure what you are speaking about. Lord Kelvin (18241907) 11 “ .

Best-in-class emergency room High Responsiv eness Operations frontier Best-in-class nonemergency hospital Low Low High Cost efficiency Operations frontier in healthcare Trade-offs in competitive strategy .

Balancing trade-offs • How to model and optimally resolve trade-offs? – – – – Build mathematical models Analyze and solve model Recover solution Supplement with managerial judgement .

Organizational Charts Airline 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 Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising .

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

finance. and operations) of any organization  We want (and need) to know how goods and services are produced  We want to understand what operations managers do  OM is such a costly part of an organization .Why Study OM?  OM is one of three major functions (marketing.

Winning versus Qualifying Criteria COST { { { { Initial Cost: Lifecycle Cost: the cost of acquiring the product which is directly related to the price the customer pays (usually relevant in everyday use consumer products) the cost of acquiring. maintaining and disposing the product (relevant in industrial equipment markets) Design Quality: Conformance Quality: QUALITY features. styling and other product attributes that enhance fitness for use (typically important in luxury products) the product conforms to set standards during the production process (important for almost all product markets) Delivery Speed: Delivery Reliability: SERVICE ability to produce and deliver the product in a short notice(characteristic environments of time based competition) ability to produce and deliver consistently products according to contractually prespecified time intervals New Product Flexibility: ability to introduce in an effective and timely manner new products (again characteristic of time based competition) FLEXIBILITY Customization: Product Mix Flexibility: ability to produce a large variety of products that match the needs of a highly segmented market (mass customization) ability to efficiently and effectively adjust the production mix in response to demand fluctuations of various products (cyclical demand markets) .

. Tax Incentives) Functional .g.RESOURCES ORIENTED OPERATIONS Geographic • Rationalization of Resources • Economies of Scale • Supply Chain Coordination • Financial Flexibility (e.

INFORMATION ORIENTED OPERATIONS Geographic • Rationalization of Resources • Economies of Scope • Network Optimization Sectorial • Operational Flexibility .

USER ORIENTED OPERATIONS • Rationalization of Resources • Technology Development and R&D • Customer Service (Winning. Maintain) • Responsiveness Flexibility Sectorial Functional .

GLOBAL OPERATIONS FRAMEWORK Geographic Information Oriented Operations Resource Oriented Operations Sectorial User Oriented Operations Functional .

OPERATIONAL ORIENTATION FOR COMPANIES Resources Oriented • Cost • Utilization • Efficiency Information Oriented • Speed of Exchange • Extent of Communication User Oriented • Customer Service • Bargaining Power .

Core Services Defined Core services are basic things that customers want from products they purchase .

Core Services Performance Objectives Quality Flexibility Operations Management Speed Price (or cost Reduction) .

Value-Added Services Defined Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way .

Value-Added Service Categories Problem Solving Information Operations Management Sales Support Field Support .

What Operations Managers Do Basic Management Functions  Planning  Organizing  Staffing  Leading  Controlling .

Ten Critical Decisions           Ten Decision Areas Design of goods and services Managing quality Process and capacity design Location strategy Layout strategy Human resources and job design Supply chain management Inventory management Scheduling Maintenance .

Where are the OM Jobs? .

Significant Events in OM .

Goods vs Service Characteristic Customer contact Uniformity of input Labor content Uniformity of output Output Measurement of productivity Opportunity to correct problems Inventory Evaluation Patentable Goods Low High Low High Tangible Easy High Much Easier Usually Service High Low High Low Intangible Difficult Low Little Difficult Not usual .

Goods Versus Services Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product) Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product Reselling unusual Difficult to inventory Quality difficult to measure Selling is part of service Provider. is often transportable Site of facility important for customer contact Often difficult to automate Revenue generated primarily from the intangible service . not product.

New Trends in OM Past Local or national focus Batch (large) shipments Causes Reliable worldwide communication and transportation networks Short product life cycles and cost of capital put pressure on reducing inventory Supply chain competition requires that suppliers be engaged in a focus on the end customer Future Global focus. alliances. moving production offshore Just-in-time performance Low-bid purchasing Supply chain partners. outsourcing . collaboration.

rapid international communication. and lean production Job specialization .New Trends in OM Past Lengthy product development Standardized products Causes Shorter life cycles. collaborative designs Mass customization with added emphasis on quality Empowered employees. Internet. alliances. teams. increasingly a knowledge and information society Future Rapid product development. and international collaboration Affluence and worldwide markets. computeraided design. increasingly flexible production processes Changing socioculture milieu.

opposition to child labor. pollution . recycled materials. public and global review of ethics.New Trends in OM Past Low-cost focus Causes Environmental issues. increasing disposal costs Future Environmentally sensitive production. green manufacturing. ISO 14000. bribery. remanufacturing High ethical standards and social responsibility expected Ethics not at forefront Businesses operate more openly.

New Trends in OM         Global focus Just-in-time performance Supply chain partnering Rapid product development Mass customization Empowered employees Environmentally sensitive production Ethics .

Strategy • Mission – The reason for existence for an organization • Mission Statement – States the purpose of an organization • Goals – Provide detail and scope of mission • Strategies – Plans for achieving organizational goals • Tactics – The methods and actions taken to accomplish strategies .

Red Roof Inns High-performance design Sony TV or high quality Consistent Lexus. first-class postage Motel-6. One-hour photo. Fedex. Kodak.Examples of Operations Strategies Price Quality Time Flexibility Service Location Low Cost U. Cadillac quality Pepsi. Motorola Rapid delivery On-time delivery Variety Volume Superior customer service Convenience Express Mail. ATMs . UPS Burger King Supermarkets Disneyland Nordstroms Banks.S.

and economic differences . cultural.Global Strategy • Strategic decisions must be made with respect to globalization • What works in one country may not work in another • Strategies must be changed to account for these differences • Other issues – Political. social.

Strategy Formulation • Distinctive competencies • Environmental scanning • SWOT • Order qualifiers • Order winners .

Strategy Formulation • Order qualifiers – Characteristics that customers perceive as minimum standards of acceptability to be considered as a potential purchase • Order winners – Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition .

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 .

Some improvements: Stop requiring signatures on credit card purchases under $25 Change the size of the ice scoop Saved 8 seconds per transaction Saved 14 seconds per drink New espresso machines Saved 12 seconds per shot .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 8 seconds revenue per outlet $200.5% per year. under $25 Productivity improved by 27%.000 to on credit card purchases perby transaction $940. scoop per drink New espresso machines Saved 12 seconds per shot . Change the size of the ice has Saved 14 seconds or about 4.Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time.000 in six years.

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 .

000 250 = 4 units/labor-hour = One resource input  single-factor productivity .Productivity Calculations Labor Productivity Productivity = Units produced Labor-hours used 1.

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 .

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day 8 titles/day Overhead = $400/day 8 titles/day Old labor = productivity 32 labor-hrs .

25 titles/labor-hr .Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day 8 titles/day Overhead = $400/day 8 titles/day Old labor = productivity 32 labor-hrs = .

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old labor = productivity 32 labor-hrs = .25 titles/labor-hr 14 titles/day New labor = productivity 32 labor-hrs .

25 titles/labor-hr 14 titles/day New labor = = .4375 titles/labor-hr productivity 32 labor-hrs .Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old labor = productivity 32 labor-hrs = .

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = productivity $640 + 400 .

0077 titles/dollar productivity $640 + 400 .Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = = .

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = = .0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = productivity $640 + 800 .

0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = = .Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = = .0097 titles/dollar productivity $640 + 800 .

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