Operations Management

Chapter 1 – Operations and Productivity

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

The consultancy services market – % of world revenues of 40 largest consultancy firms
Financial 6 Organizational design 11 Benefits / actuarial 16 IT strategy 17 Corporate strategy 17 Marketing / sales 2

Operations and process management 31

The operations function is fashionable!

UK Employment Demographics Circa 1850-2008
                                               
9 0 8 0 7 0 6 0 5 0 4 0 3 0 2 0 1 0 0
2 0 00

Proportion of total employment

Service

Manufacturi ng Agriculture
1 0 87 1 0 88 1 0 92 1 0 93

1 0 85

1 0 86

1 0 89

1 0 90

1 0 91

1 0 94

1 0 95

1 0 96

1 0 97

1 0 98

Ye ar

1 0 99

pays bills.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. collects the money .

The Operations Function • Inputs to Outputs • transformation system/value adding process • example: Aircraft manufacture – function value Source to destination – place value Doing an MBA – skill/knowledge value .

people/materials transport to destination. travel information 7 . processing schedule data © Wiley 2007 Tickets sent out.airlines Inputs Transformation process Outputs Pilots. passengers. freight.Value adding process . ground crew. data Selling tickets. flying people and materials from one place to another. planes.

Selling retail wholesale goods.Value adding process supermarkets Inputs Transformation process Outputs Employees. services. giving website customer service Products taken away by customers. goods and supermarkets. customer enquiries answered © Wiley 2007 8 .

Explain what a closed loop system is and why it is used.Question A well-designed conversion process operates as closed loop system. Give some examples from you own experience to illustrate your answer. .

Design Control. . Operations Corporate Strategy Product Design Feedback Loop Results need to explain use of feedback for improvements and ide examples when you illustrate your experience. Environm Economy ent Customers Competitors Operation s Strategy Planning. Process Organising.Example of Closed Loop system Example: Market.

Methods of feedback could be in various forms ( eg customer complaints. The diagram should include inputs. employee suggestions etc etc) .Question Draw a diagram illustrating the conversion process that is present in a good quality restaurant. methods of feedback and outputs (products). conversion activities. high wastage. .

Fuel prices presently showing great variability). labour and power. fuel. ( Inputs to brewery could include raw materials. Assume the conversion process is fully operational.Question List 4 examples of resources that could be considered inputs to the conversion process in a brewery and discuss which of these maybe subject to the greatest variability. .

. Question Discuss how the concept of ‘systems’ can help in developing an understanding of operations • Systems complexity – Boulding’s taxonomy • Inputs transformation & outputs • Interdependent sub-systems ( eg a human body) • Negative feedback to maintain equilibrium (e.The systems approach.g. riding a bicycle ) • Time lag • Sub-optimisation .

Pattern in batch operations. V o l U M e 1000 500 Time Average stock = ½ of Q 1000/2=500 x RM10=RM5000 per component. & 10.000 components = RM5.0million ..

. Factory 1 Factory 2 Factory 3 Other parts of the system suffers! As smaller orders may require more ordering costs or set-up costs Inputs Assembly Division Production manage decides to reduce stocks and order 100 at a ti .Need to have wider system boundary.

Human resources and job design 7. Maintenance . Location selection 5.10 Strategic OM Decisions 1. Inventory 9. Process and capacity design 4. Layout design 6. Goods and service design 2. Quality 3. Supply chain management 8. Scheduling 10.

Class discussion Form 10 groups. think of an organization you know and advise the class why each of the 10 areas are considered critical. .

The Critical Decisions  Design of goods and services  What good or service should we offer?  How should we design these products and services?  Managing quality  How do we define quality?  Who is responsible for quality? Table 1.2 (cont.) .

The Critical Decisions  Process and capacity design  What process and what capacity will these products require?  What equipment and technology is necessary for these processes?  Location strategy  Where should we put the facility?  On what criteria should we base the location decision? Table 1.2 (cont.) .

The Critical Decisions  Layout strategy  How should we arrange the facility?  How large must the facility be to meet our plan?  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.) .

2 (cont.) . material requirements planning.The Critical Decisions  Supply chain management  Should we make or buy this component?  Who are our suppliers and who can integrate into our e-commerce program?  Inventory. and JIT  How much inventory of each item should we have?  When do we re-order? Table 1.

) .2 (cont.The Critical Decisions  Intermediate and short–term scheduling  Are we better off keeping people on the payroll during slowdowns?  Which jobs do we perform next?  Maintenance  Who is responsible for maintenance?  When do we do maintenance? Table 1.

Goods and Services and the 10 OM Decisions Operations Decisions Goods Services Product is not tangible Many subjective standards Customer may be directly involved Capacity must match demand Table 2.1 Goods and Product is usually service design tangible Quality Many objective standards Process and Customers not capacity involved design .

Goods and Services and the 10 OM Decisions Operations Decisions Location selection Goods Services Near raw materials Near customers and labor Layout design Production efficiency Enhances product and production Human Technical skills.1 . resources and consistent labor job design standards. labor standards vary Table 2. output based wages Interact with customers.

Cannot be stored work-in-process.1 Scheduling . and finished goods may be held Level schedules possible Meet immediate customer demand Table 2.Goods and Services and the 10 OM Decisions Operations Decisions Goods Services Supply chain Relationship critical Important. but may to final product not be critical Inventory Raw materials.

1 .Goods and Services and the 10 OM Decisions Operations Decisions Maintenance Goods Services Often preventive Often “repair” and and takes place at takes place at production site customer’s site Table 2.

2 .Where are the OM Jobs? Figure 1.

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 .

Significant Events in OM Figure 1.3 .

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) .

The Heritage of OM  Computer (Atanasoff 1938)  CPM/PERT (DuPont 1957)  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) .

Contributions From  Human factors  Industrial engineering  Management science  Biological science  Physical sciences  Information technology .

teams .New Challenges in OM From  Local or national focus  Batch shipments  Low bid purchasing  Lengthy product development  Standard products  Job specialization To  Global focus  Just-in-time  Supply chain partnering  Rapid product development. alliances  Mass customization  Empowered employees.

Industry and Services as Percentage of GDP 90 − 80 − 70 − 60 − 50 − 40 − 30 − 20 − 10 − 0− Services Manufacturing Australia China France South Africa Czech Rep Hong Kong Japan Mexico Russian Fed Spain Canada Germany UK US .

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 Figure 1.4 .

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

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 .

Effects of productivity on profit Before ($) After After 10% 10% rise in rise in productivity sales ($) ($) 1100 770 200 130 (+30%) 1000 630 200 170(+70%) Sales Variable costs Fixed Costs Profit 1000 700 200 100 .

demographic and social) • Natural resources ( manpower. infrastructure and public enterprise) • Class exercise – OM notes . policies and strategies. plant & equipment.those which management may modify • Hard factors ( product. management styles) • External factors ( those beyond control of organisation) • Structural adjustments ( economic. technology. materials and energy) • Soft factors ( people.land.Factors affecting productivity improvement • Internal factors . energy and raw materials) • Government & infrastructure ( institutional mechanisms. organisations. work methods.

Performance & productivity Measurement • Productivity = Output / Input • Financial performance measures • Profitability ( profit margin. sales per employee) • Size ( assets. market capitalisation) • Capital ( price-earning(P/E) ratio. ROCE.market to book value) • But are financial measures of performance not adequate? . profits. market share. quick ratio) • Turnover ( stock turnover. working capital. sales. number of employees. assets turnover) • Growth ( sales. cash position. assets. ROI) • Liquidity ( current ratio.

Some measures of productivity • • • • Sales/labour costs Sales/pay Sales/sales people Value of sales/direct labour + indirect labour + material + overhead costs • Total pay/personnel department pay • Yards of carpet laid/number of carpet layers • Square feet of floor cleaned/cost of cleaner .

Productivity measurements ( cont’d) • Labour productivity • • • • Units of output per labour hour Value added per labour hour Dollar output per labour hour Production value per labour dollar • Capital productivity • Units of output per dollar input • Dollar output per dollar input • Inventory turnover ( dollar sales/dollar inventory • Energy productivity • Units of output per kilowatt hour • Unit of output per energy dollar input • Production value per barrel of fuel • Service productivity • Units of output per overhead hour • Increased sales(annual) /training budget • Number of customers served/staff member .

service culture. -focus on objective of competitiveness not cost cutting.Important areas : service process design.Question What do you consider to be the major challenges facing Operations Managers in the 21st century? Illustrate your answer with examples from your experience. employee satisfaction.primary reason for slow growth in service sector due to management (Drucker. . leadership and performance management. .globalization of services and rise of consumer demands. . . OM Notes).

Service Productivity  Typically labor intensive  Frequently focused on unique individual attributes or desires  Often an intellectual task performed by professionals  Often difficult to mechanize  Often difficult to evaluate for quality .

Give an account of Neely’s criticisms of traditional accounting methods? (OM Notes ) • Benchmarking • • • • • • • • .Some frameworks for developing performance measures Kaplan & Norton balanced scorecard framework Oregon productivity matrix Sink & Turtle strategic matrix The Fitzgerald model Carl Thor ‘ family of measures’ Curtis & Kastner stakeholder model Theory of constraints Neely & Adams performance Q:.

Question • Several performance frameworks exist within the study of Operations Management: – – – – – – – – Kaplan & Norton balanced scorecards. Carl Thor ‘ family of measures’ . Fitzgerald model. • discuss how you would go about developing performance measures for an organization using one of these frameworks. Neely & Adams performance. . Oregon productivity matrix. Curtis & Kastner stakeholder model Theory of constraints ( video) . Sink & Turtle strategic matrix.

Question • Pressure for productivity increases in the service sector is rising. Outline briefly with a few key points. what you think might be the implications for the – cost of service products? – variety of services available? – and the quality of service products .

otherwise cycle of failure 2. variety of services available? ( specialised usually) 3.Possible solution 1. and the quality of service products ( intangible and requires customer participation in the process. . cost of service products – labour based and productivity linked to employee.

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