Operations Management I

Departamento de Organización de
Empresas y Marketing Dirección de Operaciones I- English teaching
Área de Organización de Empresas

SECTION 1
INTRODUCTION TO OPERATIONS STRATEGY

3º GADI- 5º DG-ADI-DER
2013-2014
Slide presentation Chapter 1
 CHAPTER 1
INTRODUCTION TO OPERATIONS MANAGEMENT

1.1. What is OM?

1.2. Why study OM?
1.3. What Operations Managers Do
1.4. The Heritage of Operations Management (EPD)
1.5. Operations in the Service Sector
1.6. The Productivity Challenge

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1.1 What is OM?
 Production: creation of goods and services.

 Operations Management: set of activities that creates value in the

form of goods and services by transforming inputs into outputs.
Also, the science and art of ensuring that goods and services are
created and delivered successfully to customers.

 => Transformation process: Input->transformation->output

 Ex: hospital, restaurant, automobile factory, university, department
store, distribution center, airline,…

 Essential functions:
 Marketing: generates demand
 Production/operations: creates the product
 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
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 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
Manufacturing Funds Management
Tooling; fabrication; assembly Money market
Design International
Product development and design exchange
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
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 Airline

Operations Finance/ Marketing

accounting

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1.2. Why study OM?
 It is one of the three major functions of any
organization, and it is integrally related to all the
other business functions
 We want (and need) to know how goods and
services are produced
 We want to understand what operations
managers do
 It 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 €

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Ten Critical Decisions
Ten Decision Areas Chapter(s)
 Service and product design 3
 Quality management Not covered
 Process and capacity 4,6
 Location 7
 Layout design 8
 Human resources, 5
job design
 Supply-chain Not covered
management
 Inventory management Not covered
 Scheduling Not covered
 Maintenance Not covered

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The Critical Decisions
 Service and product design
 What good or service should we offer?
 How should we design these products and services?
 Quality management
 How do we define quality?
 Who is responsible for quality?
 Process and capacity design
 What process and what capacity will these products
require?
 What equipment and technology is necessary for these
processes?
 Location
 Where should we put the facility?
 On what criteria should we base the location decision?

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The Critical Decisions
 Layout design
 How should we arrange the facility and material flow?
 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?
 Supply-chain management
 Should we make or buy this component?
 Who are our suppliers and who can integrate into our e-
commerce program?
 Inventory, material requirements planning, and JIT
 How much inventory of each item should we have?
 When do we re-order?

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 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?

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1.3. What Operations Managers Do

 The management process consists on:

 Planning
 Organizing
 Directing
 Controlling

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1.5. Operations in the Service
Sector
Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction 14
1.5. Operations in the Service
Sector
Characteristics of Service
 Intangible product
 Produced and consumed
at same time
 Often unique
 High customer interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed 15
 Goods Versus Services
Attributes of Goods
(Tangible 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
Attributes of Services
(Intangible Product)
Reselling unusual
Difficult to inventory
Quality difficult to measure
Selling is part of service
Provider, not product, is
often transportable
Site of facility important for
customer contact
Often difficult to automate
Revenue generated primarily
from the intangible service
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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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1.6.The 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 this

measure of efficiency

Important Note!
Production is a measure of output
only and not a measure of efficiency
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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
Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy + Capital
+ Miscellaneous
 Also known as total factor productivity
 Output and inputs are often expressed in
dollars
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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

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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

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

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

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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

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

New multifactor 14 titles/day

productivity = $640 + 800 = .0097 titles/dollar
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Measurement Problems

 Quality may change while the

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

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Productivity Variables

 Labor - contributes about 10% of

the annual increase
 Capital - contributes about 32%
of the annual increase
 Management - contributes about
52% of the annual increase

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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

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