Operations and Productivity

OPMG 310 ± Spring 2012


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

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

Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

Figure 1.1(B)

assembly Design Product development and design Detailed product specifications Industrial engineering Efficient use of machines. materials control Quality assurance and control Supply-chain management Manufacturing Tooling. fabrication.Organizational Charts Manufacturing Operations Facilities Construction. and personnel Process analysis Development and installation of production tools and equipment Figure 1.1(C) 1-4 . 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. space.

What Operations Managers Do Basic Management Functions  Planning  Organizing  Staffing  Leading  Controlling 1-5 .

Managing quality 3. JIT 9. Supplement 11 12.2 1-6 . 14. Process and capacity design 4. 16 13. MRP. Human resources and job design 7. 15 17 Table 1. Supplement 7 8 9 10 11. Scheduling 10.Ten Critical Decisions Ten Decision Areas 1. Layout strategy 6. Location strategy 5. Inventory. Maintenance Chapter(s) 5 6. Design of goods and services 2. Supply-chain management 8. Supplement 6 7.

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 1-7 .

2 1-8 .Opportunities Figure 1.

Significant Events in OM Figure 1.3 1-9 .

alliances  Mass customization  Empowered employees. teams 1 .10 .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.

11 .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 1 .

12 . German 40 50 1970 2010 (est) 60 70 Percent 80 Figure 1.Development of the Service Economy United State Canad Franc Ita Brita | | | | | Japa W.4 (C) 1 .

13 .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 1 .

14 . Some improvements: Stop requiring signatures on credit card purchases under $25 Change the size of the ice scoop New espresso machines Saved 8 seconds per transaction Saved 14 seconds per drink Saved 12 seconds per shot 1 .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 on credit card purchases outlet by $200.000 to per transaction $940. Saved 14 seconds or about 4. scoop per drink New espresso machines Saved 12 seconds per shot 1 . under $25 Productivity Change the size of the ice has improved by 27%.000 in six years.Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time.15 .5% per year.

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 1 .16 .

Productivity Calculations
Labor Productivity
Units produced Productivity = Labor-hours used 1,000 = = 4 units/labor-hour 250 One resource input single-factor productivity
1 - 17

MultiMulti-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
1 - 18

Collins Title Productivity 
Collins Title wants to evaluate its labor and multi-factor productivity with a new computerized title-search system. The company has a staff of four, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400 per day. Collins processes and closes on 8 titles each day. The new computerized title-search system will allow the processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the overhead expenses are now $800 per day.
1 - 19

20 .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 1 .

25 titles/labor-hr 1 .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 = .21 .

25 titles/labor-hr 14 titles/day New labor = productivity 32 labor-hrs labor1 .22 .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 = .

4375  0.25 titles/labor-hr 14 titles/day New labor = = .4375 titles/labor-hr productivity 32 labor-hrs % change : ¨ 0.25 ¸ ¨ new  old ¸ ¹ v100% ! 75% increase © ¹ v100% ! © 0.23 .25 ª º ª old º 1 .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 = .

24 .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 1 .

25 .0077 titles/dollar productivity $640 + 400 1 .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 = = .

26 .0077 titles/dollar = productivity $640 + 400 14 titles/day New multifactor = productivity $640 + 800 1 .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 % change : ¨ 0.0077 old ª º ª º 1 .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 = = .0097  0.27 .0077 ¸ ¨ new  old ¸ ¹ v100% ! 26% increase © ¹ v100% ! © 0.

contributes about 10% of the annual increase 2. Capital .contributes about 38% of the annual increase 3.28 . Labor . Management contributes about 52% of the annual increase 1 .Productivity Variables 1.

Productivity at Taco Bell 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 1 .29 .

Productivity at Taco Bell Results: Improvements:  Preparation time cut to 8 seconds Revised the menu  Management span of control increased Designed meals for easy preparation from 5 to 30 Shifted some preparation to suppliers  In-store labor cut by 15 hours/day Efficient layout and automation  Stores handle twice the volume with half Training the labor and employee empowerment New water and energy saving grills  Conserve 300 million gallons of water and 200 million KwH of electricity each year saving $17 million annually 1 .30 .

Workers receive $10 per hour. the company used five workers. who produced an average of 80 carts per hour. it was possible to transfer one of the workers to another department.Problem 1 A company that makes shopping carts for supermarkets and other stores recently purchased some new equipment that reduces the labor content of the jobs needed to produce the shopping carts. c) Comment on the changes in productivity according to the two measures. Prior to buying the new equipment. . and machine cost was $40 per hour. Use carts per dollar cost (labor plus equipment) as the measure. and equipment cost increased by $10 per hour while output increased by four carts per hour. b) Compute the multifactor productivity under each system. With the new equipment. Use carts per worker per hour as the measure of labor productivity. a) Compute labor productivity of the system. and on which one you believe is the more pertinent for this situation.

at a pay rate of $25 per hour per employee. Material costs are $1.000. . Calculate the multifactor productivity for this operation in fees generated per dollar input. paying a one-time fee of $70. Each employee identifies an average of 3.000 per week.000 potential leads a week from a list of 5.000 per week. An average of 4 percent actually sign up for the service. and overhead costs are $9. Three employees work 40 hours a week on the leads.Problem 2 A company offers ID theft protection using leads obtained from client banks.

Problem 3 An operation has a 10 percent scrap rate (i. 72 pieces per hour are produced.e. 0% scrap rate)? . What is the potential increase in labor productivity that could be achieved by eliminating the scrap (i.e. As a result. 10% of the pieces produced are discarded because of defects).

Question: What are effective ways to motivate hourly employees vs. salaried managers? If productivity of these workers is below expectation. what are good and poor ways to try to motivate them? What methods might work well with blue collar employees but not white collar employees. and vice-versa? . and vice-versa? What methods might work well in the short run but not in the long run.

2 OPMG 310 Fall 2011 Operations Strategy in a Global Environment 2 .35 .

Outline  Developing Missions And Strategies  Mission  Strategy  Achieving Competitive Advantage Through Operations  Competing On Differentiation  Competing On Cost  Competing On Response  Ten Strategic OM Decisions 2 .36 .

Global Strategies  Boeing ± sales and production are worldwide  Benetton ± moves inventory to stores around the world faster than its competition by building flexibility into design. and around the world 2 . and distribution  Sony ± purchases components from suppliers in Thailand. production.37 . Malaysia.

) Reasons 2. Reduce costs (labor. taxes. tariffs. etc. Provide better goods and services 4. Understand markets Intangible 5.Reasons to Globalize Reasons to Globalize Tangible 1. Learn to improve operations Reasons 6. Improve supply chain 3.38 . Attract and retain global talent 2 .

Cultural and Ethical Issues  Cultures can be quite different  Attitudes can be quite different towards  Punctuality  Lunch breaks  Environment  Intellectual property 2 .39  Thievery  Bribery  Child labor .

40 .Companies Want To Consider  National literacy rate  Rate of innovation  Rate of technology change  Number of skilled workers  Political stability  Product liability laws  Export restrictions  Variations in language  Work ethic  Tax rates  Inflation  Availability of raw materials  Interest rates  Population  Number of miles of highway  Phone system 2 .

41 .Developing Missions and Strategies Mission statements tell an organization where it is going The Strategy tells the organization how to get there 2 .

42 .Mission  Mission .where are you going?  Organization¶s purpose for being  Answers µWhat do we provide society?¶  Provides boundaries and focus 2 .

Mission: AUC School of Business The School of Business strives to create an environment that fosters the development of principled and innovative business leaders and entrepreneurs who can make a difference.43 . 2 .

Mission of the Management Department Our mission is to develop business leaders who are dedicated to the betterment of society by providing a high quality business education to top caliber students from all segments of Egyptian society as well as from other countries while focusing on continuous improvement and a commitment to excellence in learning. intellectual contributions and service.44 . 2 .

Factors Affecting Mission Philosophy and Values Environment Mission Customers Benefit to Society 2 .45 Profitability and Growth Public Image .

3 2 . Sample Operations Management Mission To produce products consistent with the company¶s mission as the worldwide low-cost manufacturer. growing.46 . and profitable worldwide microwave communications business that exceeds our customers¶ expectations. Figure 2.Sample Missions Sample Company Mission To manufacture and service an innovative.

production. and field service operations To determine. and good quality of work life at economical cost. procurement. and produce the production process and equipment that will be compatible with low-cost product. Figure 2. high quality. design. To attain the exceptional value that is consistent with our company mission and marketing objectives by close attention to design.Sample Missions Sample OM Department Missions Product design To design and produce products and services with outstanding quality and inherent customer value.47 Quality management Process design .3 2 .

48 .Strategic Process Organization¶s Mission Functional Area Missions Marketing Operations Finance/ Accounting 2 .

neutralize threats.49 . and avoid weaknesses 2 .Strategy  Action plan to achieve mission  Functional areas have strategies  Strategies exploit opportunities and strengths.

or at least different  Hard Rock Cafe ± dining experience  Cost leadership ± cheaper  Southwest Airlines ± secondary airports. no frills service.Strategies for Competitive Advantage  Differentiation ± better. efficient utilization of equipment  Response ± rapid response  McDonald¶s 2 .50 .

positively.51 .OM¶ OM¶s Contribution to Strategy 10 Operations Decisions Product Quality Process Location Layout Human resource Supply chain Inventory Scheduling Maintenance RESPONSE Flexibility « Reliability « Quickness « Approach DIFFERENTIATION Innovative design « Broad product line « After-sales service « Experience « COST LEADERSHIP Low overhead « Effective capacity use « Inventory management « Example Safeskin¶s innovative gloves Fidelity Security¶s mutual funds Caterpillar¶s heavy equipment service Hard Rock Café¶s dining experience Franz-Colruyt¶s warehouse-type stores Southwest Airline¶s aircraft utilization Wal Mart¶s sophisticated distribution system Hewlett-Packard¶s response to volatile world market FedEx¶s ³absolutely. on time´ Pizza Hut¶s 5-minute guarantee at lunchtime Response (faster) Cost leadership (cheaper) Competitive Advantage Differentiation (better) Figure 2.4 2 .

-Encourages the establishment of close partnerships with the business community through consultancies and service that enhance the intellectual and economic quality of Egypt while enriching the learning process.(AUC Management Department)In support of this mission the department: -Provides a high quality contemporary-style business education that blends a global perspective with national cultures and is relevant to the business needs of Egypt and the region.52 . -Seeks to develop a portfolio of intellectual contributions to learning and pedagogy. individual initiative and teamwork -Provides a learning environment that fosters faculty/student communication and promotes lifelong learning and career development -Encourages faculty development activities that improve teaching. to practice. innovation. -Provides programs that encourage the development of an entrepreneurial spirit that emphasizes creativity. 2 . maintain competence and that keep faculty current with ideas and concepts in their field. and to the theory and knowledge base of the disciplines.

Managing Global Service Operations Requires a different perspective on:  Capacity planning  Location planning  Facilities design and layout  Scheduling 2 .53 .

institutional kitchen) Variety of Products Moderate Low Low Moderate Volume High 2 .Process Design High Process-focused Mass Customization JOB SHOPS Customization at high Volume (Print shop.54 . fast-food Product focused restaurants) CONTINUOUS (Steel. appliances. TVs. paper. fine-dining Repetitive (modular) cafeteria) restaurant) focus ASSEMBLY LINE (Cars. bread. (Dell Computer¶s PC. emergency room. beer. machine shop.

Issues In Operations Strategy  Resources view  Value Chain analysis  Porter¶s Five Forces model  Operating in a system with many external factors  Constant change 2 .55 .

56 .Product Life Cycle Introduction Company Strategy/Issues Best period to increase market share R&D engineering is critical Growth Practical to change price or quality image Strengthen niche Maturity Poor time to change image.5 2 . price. or quality Decline Cost control critical Competitive costs become critical Defend market position Drive-through Internet search engines iPods Xbox 360 Sales Avatars Boeing 787 Twitter LCD & plasma TVs restaurants CD-ROMs Analog TVs Figure 2.

5 2 .Product Life Cycle Introduction Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Growth Forecasting critical Product and process reliability Maturity Decline Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity Standardization Fewer product changes.57 . more minor changes Optimum capacity Competitive product Increasing improvements stability of and options process Increase capacity Long production runs Shift toward product focus Product improvement Enhance and cost cutting distribution OM Strategy/Issues Figure 2.

58 .SWOT Analysis Mission Internal Strengths Analysis Internal Weaknesses Strategy External Threats External Opportunities 2 .

design. quality. Figure 2. customers. and threats.59 . weaknesses.6 2 .Strategy Development Process Analyze the Environment Identify the strengths. industry. such as low price. Understand the environment. or volume flexibility. aftersale service. and competitors. dependability. broad product lines. Determine the Corporate Mission State the reason for the firm¶s existence and identify the value it wishes to create. quick delivery. Form a Strategy Build a competitive advantage. opportunities.

14.Key Success Factors Support a Core Competence and Implement Strategy by Identifying and Executing the Key Success Factors in the Functional Areas Marketing Service Distribution Promotion Channels of distribution Product positioning (image. how much to keep on hand Stable or fluctuating production rate Repair as required or preventive maintenance Chapter 5 6. 16 13. technology. functions) Finance/Accounting Leverage Cost of capital Working capital Receivables Payables Financial control Lines of credit Production/Operations Decisions Product Quality Process Location Layout Human resource Supply chain Inventory Schedule Maintenance Sample Options Customized. capacity Near supplier or near customer Work cells or assembly line Specialized or enriched jobs Single or multiple suppliers When to reorder. S11 12.60 . S7 8 9 10 11. 15 17 Figure 2. S6 7. or standardized Define customer expectations and how to achieve them Facility size.7 2 .

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