01 Heiz Om4ce PP 01

Operations Management: Sustainability
and Supply Chain Management

Fourth Canadian Edition
Chapter 1
Operations and
Productivity
Copyright © 2023 Pearson Canada Inc. 1-1

Outline (1 of 2)
• Global Company Profile: Operations Management at

Hard Rock Café
• What Is Operations Management?
• Organizing to Produce Goods and Services
• Why Study Operations Management?
• What Operations Managers Do
• The Heritage of Operations Management
• Operations in the Service Sector

Outline (2 of 2)
• New Challenges in Operations Management

• The Productivity Challenge
• Ethics, Social Responsibility, and Sustainability

Learning Objectives (1 of 2)
When you complete this chapter, you should be

able to:
1. Define operations management
2. Identify the 10 strategic decisions of operations
management
3. Identify career opportunities in operations
management
4. Explain the distinction between goods and services

Learning Objectives (2 of 2)
When you complete this chapter, you should be

able to:
5. Explain the difference between production and
productivity
6. Compute single-factor productivity
7. Compute multifactor productivity
8. Identify the critical variables in enhancing
productivity

The Hard Rock Café
• First opened in 1971

– Now: 129 restaurants in over 40 countries
• Rock music memorabilia
• Creates value in the form of good food and
entertainment
• Over 3500 custom meals per day in Orlando
• How does an item get on the menu?
• Role of the Operations Manager

What Is Operations Management?
LO1: Define 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

8

9

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
Copyright © 2023 Pearson Canada Inc. 1 - 10

Organization Charts for Two Service
Organizations and One Manufacturing
Organization (1 of 3)
Figure 1.1(a) A bank. The blue areas are OM activities.

Figure 1.1(b) An airline. The blue areas are OM activities.

Figure 1.1(c) A manufacturing organization. The blue areas are OM activities.

The Supply Chain
• The Supply Chain is a global network of

organizations and activities that supply a firm with
goods and services.
Figure 1.2 Soft Drink Supply Chain

A supply chain for a bottle of Coke requires a beet or sugar cane farmer, a syrup producer, a bottler, a distributor, and a
retailer, each adding value to satisfy a customer. Only with collaborations among all members of the supply chain can
efficiency and customer satisfaction be maximized. The supply chain, in general, starts with the provider of basic raw
materials and continues all the way to the final customer at the retail store.

Why Study Operations Management?
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

Options for Increasing Contribution
Table 1.1 Options for Increasing Contribution

Marketing Finance/Accounting
Optiona Optionb OM Optionc
Increase Sales Reduce Finance Reduce Production
Current Revenue 50% Costs 50% Costs 20%
Sales $100,000 $ 150,000 $100,000 $100,000
Costs 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
Contributiond $ 10,500 $ 18,000 $ 12,750 $ 22,500
a
Increasing sales 50% increases contribution by $7,500, or 71% (= 7,500/10,500).
b
Reducing finance costs 50% increases contribution by $2,250, or 21% (= 2,250/10,500).
c
Reducing production costs 20% increases contribution by $12,000, or 114% (= 12,000/10,500).
d
Contribution to fixed costs (excluding finance costs) and profit.

What Operations Managers Do
LO2: Identify the 10 strategic decisions in operations management
Basic Management Functions

• Planning
• Organizing
• Staffing
• Leading
• Controlling

Ten Critical Decisions (1 of 2)
Table 1.2 10 Critical Decisions of Operations Management
10 Decision Areas Issues Chapter(s)

1. Design of goods and services What good or service should we offer? 5
How should we design these products?
2. Managing quality How do we define the quality? 6, Supplement 6
Who is responsible for quality?
3. Process and capacity design What process and what capacity will these 7, Supplement 7
products require?
What equipment and technology are necessary
for these processes?
4. Location strategy Where should we put the facility? 8
On what criteria should we base the location
decision?
5. Layout strategy How should we arrange the facility? 9
How large must the facility be to meet our plan?

Ten Critical Decisions (2 of 2)
Table 1.2 10 Critical Decisions of Operations Management

(continued)
10 Decision Areas Issues Chapter(s)

6. Human resources and job design How do we provide a reasonable work 10
environment?
How much can we expect our employees to
produce?
7. Supply chain management Should we make or buy this component? 11, Supplement 11
Who should be our suppliers and how can we
integrate them into our strategy?
8. Inventory, material requirements How much inventory of each item should we 12, 14, 16
planning, and JIT (just-in-time) have?
When do we reorder?
9. Intermediate and short-term Are we better off keeping people on the payroll 13, 15
scheduling during slowdowns?
Which job do we perform next?
10. Maintenance Who is responsible for maintenance? 17

The Critical Decisions (1 of 5)
1. Design of goods and services

– What goods or services should we offer?
– How should we design these products and services?
2. Managing quality
– How do we define quality?
– Who is responsible for quality?

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?

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?

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 (MRP),
and JIT
– How much inventory of each item should we have?
– When do we reorder?

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?

Where are the OM Jobs?
LO3: Identify career opportunities in operations management
• Technology/methods • Customer service

• Facilities/space • Quality
utilization • Cost reduction
• Strategic issues • Inventory reduction
• Response time • Productivity
• People/team improvement
development

Certifications
• APICS, the Association for Operations Management

(www.apics.org)
• Excellence Canada
• Standards Council of Canada (www.scc.ca)
• Institute for Supply Management (ISM)
(www.instituteforsupplymanagement.org)
• Project Management Institute (PMI) (www.pmi.org)
• Council of Supply Chain Management Professionals
(www.cscmp.org)

Opportunities for Operations Managers
(1 of 2)
Figure 1.3 Many Opportunities Exist for Operations Managers

Opportunities for Operations Managers
(2 of 2)
Figure 1.3 (continued) Many Opportunities Exist for Operations Managers

The Heritage of Operations
Management
• Division of labour (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)

Other Historical Disciplines
Impacting OM
• Industrial Engineering
• Management Science (operations research)
• Statistics and Economics
• Physical Sciences (new materials/technology)
• Information Technology (computer-aided design,
enterprise resource planning, computer integrated
manufacturing)
• Flexible manufacturing system
• Globalization
• Internet
New Challenges in Operations
Management (1 of 2)
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

Operations in the Service Sector
Characteristics of Services:
• Intangible product
• Produced and consumed at same time
• Often unique
• High customer interaction
• Inconsistent product definition
• Often knowledge-based
• Frequently dispersed
Difference between Goods and
Services
LO4: Explain the distinction between goods and services
Characteristics of Goods
• Tangible product
• Consistent product definition
• Production usually separate from consumption
• Can be inventoried
• Low customer interaction

Manufacturing and Service Employment
Figure 1.4 U.S. Agriculture, Manufacturing, and Service Employment

SOURCE: U.S. Bureau of Labor Statistics.

Organizations in Each Sector (1 of 2)
Table 1.4 Examples of Organizations in Each Sector
Percent of
Sector Example All Jobs
Service-Producing Sector
Trade Hudson Bay Company; Real Canadian Superstore 15%
Transportation and warehousing WestJet; Maritime–Ontario Freight Lines Limited 5%
Finance, insurance, real estate, Royal Bank; Manulife 6%
and leasing
Professional, scientific, and Borden Ladner Gervais Law Firm 8%
technical services
Business, building, and other Edmonton Waste Management Centre; Carlson 4%
support services1 Wagonlit Travel
Educational services McGill University 7%
Health care and social assistance SickKids Hospital 12%
Information, culture, and Calgary Flames; Princess of Wales Theatre 5%
recreation
Accommodation and food services Tim Hortons; Royal York Hotel 6%

Organizations in Each Sector (2 of 2)
Table 1.4 (continued)
Percent of
Sector Example All Jobs
Other Services Joe’s Barber Shop; ABC Landscaping 4%
Public administration Province of Manitoba; City of Hamilton 6%
Goods-Producing Sector 22%
Agriculture Farming Operations 2%
Forestry, fishing, mining, Canadian Mining Company Inc.; Dome Pacific 2%
quarrying, Logging Ltd.
oil, and gas2
Utilities Ontario Power Generation 1%
Construction PCL Construction Management Inc. 7%
Manufacturing Magna International Inc. 10%
1
Formerly “Management of companies, administrative, and other support services.”
2
Also referred to as “natural resources.”
SOURCE: Statistics Canada, CANSIM, TABLE 282-0008 and Catalogue no. 71F0004XCB.

New Challenges in Operations
Management (2 of 2)
• Ethics
• Global focus
• Environmentally sensitive production
• Mass customization
• Empowered employees
• Supply-chain partnering
• Just-in-time performance

The Productivity Challenge
LO5: Explain the difference between production and productivity
• Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources such as
labour and capital).
– The objective is to improve productivity!
Important Note!
Production is a measure of output only
and not a measure of efficiency

The Economic System
Figure 1.5 The Economic System Adds Value by Transforming Inputs to Outputs
An effective feedback loop evaluates performance against a strategy or standard. It also evaluates customer satisfaction
and sends signals to managers controlling the inputs and transformation process.

Improving Productivity at Starbucks
(1 of 2)
A team of 10 analysts continually look for ways to

save time. Some improvements:
Stop requiring signatures on → Saved 8 seconds per

credit card purchases under $25 transaction
Change the size of the ice scoop → Saved 14 seconds per drink
New espresso machines → Saved 12 seconds per shot

Improving Productivity at Starbucks
(2 of 2)
A team of 10 analysts continually look for ways to

save time. Some improvements:
Operations improvements have helped Starbucks increase

yearly revenue per outlet by $200,000 to $940,000 in six
years.
Productivity has improved by 27%, or about 4.5% per year.

Productivity
• Measure of process improvement

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

Productivity Calculations
LO6: Compute single-factor productivity
Labour Productivity
One resource input → single-factor productivity

Multi-Factor Productivity
LO7: Compute multifactor productivity
• Also known as total factor productivity

• Output and inputs are often expressed in dollars
Multiple resource inputs → multi-factor productivity

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

Productivity Variables
LO8: Identify the critical variables in enhancing productivity
1. Labour – 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

Key Variables for Improved Labour
Productivity
1. Basic education appropriate for the labour force
2. Diet of the labour force
3. Social overhead that makes labour available
– Challenge is in maintaining and enhancing skills in the
midst of rapidly changing technology and knowledge

Service Productivity
1. Typically, labour intensive

2. Frequently focused on unique individual attributes or
desires
3. Often an intellectual task performed by professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality

Productivity at Taco Bell (1 of 3)
• Improvements:
– Revised the menu
– Designed meals for easy preparation
– Shifted some preparation to suppliers
– Efficient layout and automation
– Training and employee empowerment
– New water and energy saving grills

• Improvements:
 Revised the menu
 Designed meals for easy preparation
 Shifted some preparation to suppliers
 Efficient layout and automation
 Training and employee empowerment
 New water and energy saving grills

Results:
• Preparation time cut to 8 seconds
• Management span of control increased from 5
restaurants to 30
• In-store labour cut by 15 hours/day
• Stores handle twice the volume with half the labour
• Conserve over a billion litres of water and 200
million KwH of electricity each year saving $17
million annually

Ethics, Social Responsibility, and
Sustainability
• Challenges facing operations managers:
– Developing and producing safe, quality products
– Maintaining a clean environment
– Providing a safe workplace
– Honouring stakeholder commitments

Summary
• The operations function creates goods and services

• Operations, marketing, finance are three functions
basic to all organizations
• Operations management has a long history and keeps
evolving
• Operations managers are key players for improved
productivity
• Affluent societies devote more of their resources to
services
• In Canada more than ¾ of the workforce are in the
service sector

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Operations Management: Sustainability

and Supply Chain Management

Copyright © 2023 Pearson Canada Inc. 1-1

• Global Company Profile: Operations Management at

Copyright © 2023 Pearson Canada Inc. 1-2

• New Challenges in Operations Management

Copyright © 2023 Pearson Canada Inc. 1-3

When you complete this chapter, you should be

Copyright © 2023 Pearson Canada Inc. 1-4

When you complete this chapter, you should be

Copyright © 2023 Pearson Canada Inc. 1-5

• First opened in 1971

Copyright © 2023 Pearson Canada Inc. 1-6

• Production is the creation of goods and services

Copyright © 2023 Pearson Canada Inc. 1-7

Copyright © 2023 Pearson Canada Inc. 1-8

Copyright © 2023 Pearson Canada Inc. 1-9

Copyright © 2023 Pearson Canada Inc. 1 - 10

Figure 1.1(a) A bank. The blue areas are OM activities.

Copyright © 2023 Pearson Canada Inc. 1 - 11

Figure 1.1(b) An airline. The blue areas are OM activities.

Copyright © 2023 Pearson Canada Inc. 1 - 12

Figure 1.1(c) A manufacturing organization. The blue areas are OM activities.

Copyright © 2023 Pearson Canada Inc. 1 - 13

• The Supply Chain is a global network of

Figure 1.2 Soft Drink Supply Chain

Copyright © 2023 Pearson Canada Inc. 1 - 14

1. OM is one of three major functions of any

Copyright © 2023 Pearson Canada Inc. 1 - 15

Table 1.1 Options for Increasing Contribution

Copyright © 2023 Pearson Canada Inc. 1 - 16

LO2: Identify the 10 strategic decisions in operations management

Basic Management Functions

Copyright © 2023 Pearson Canada Inc. 1 - 17

Table 1.2 10 Critical Decisions of Operations Management

10 Decision Areas Issues Chapter(s)

Copyright © 2023 Pearson Canada Inc. 1 - 18

Table 1.2 10 Critical Decisions of Operations Management

10 Decision Areas Issues Chapter(s)

Copyright © 2023 Pearson Canada Inc. 1 - 19

1. Design of goods and services

Copyright © 2023 Pearson Canada Inc. 1 - 20

3. Process and capacity design

Copyright © 2023 Pearson Canada Inc. 1 - 21

Copyright © 2023 Pearson Canada Inc. 1 - 22

Copyright © 2023 Pearson Canada Inc. 1 - 23

9. Intermediate and short–term scheduling

Copyright © 2023 Pearson Canada Inc. 1 - 24

• Technology/methods • Customer service

Copyright © 2023 Pearson Canada Inc. 1 - 25

• APICS, the Association for Operations Management

Copyright © 2023 Pearson Canada Inc. 1 - 26

Figure 1.3 Many Opportunities Exist for Operations Managers

Copyright © 2023 Pearson Canada Inc. 1 - 27

Figure 1.3 (continued) Many Opportunities Exist for Operations Managers

Copyright © 2023 Pearson Canada Inc. 1 - 28

Copyright © 2023 Pearson Canada Inc. 1 - 29

Copyright © 2023 Pearson Canada Inc. 1 - 31

Copyright © 2023 Pearson Canada Inc. 1 - 33

Figure 1.4 U.S. Agriculture, Manufacturing, and Service Employment

Copyright © 2023 Pearson Canada Inc. 1 - 34

Table 1.4 Examples of Organizations in Each Sector

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