Production Management

Conceptual Foundations
 Conceptual Foundations

Learning Objectives:
When you complete this topic, you should
be able to:
3. Identify or define production and
productivity;
4. Operations Management and;

5. What operations managers do?

 Conceptual Foundations

The global business system is changing not

only the way companies enhances
productivity and procures materials but
also the way firms throughout the world
provide goods and services. New global
information links connect suppliers,
customers, and manufacturers with the
stroke of a key, the click of a mouse
button, or even the touch of a screen.
Ideas, designs, money transfers, and
orders now move in seconds instead of
days or weeks.
 Conceptual Foundations
What is Operations Management?
 Production is the creation of goods and
services.
 OM is the set of activities that creates goods
and services by transforming inputs into
outputs.
 In manufacturing firms, the production
activities that creates goods are usually quite
obvious. We can see the creation of a tangible
products such as a Sony TV or Ford Taurus.
 Often when services are performed, no
tangible goods are produced. Instead, the
product may take such forms as the transfer of
funds from a savings account to a checking
account.
Conceptual Foundations
The Heritage of Operations Management
Eli Whitney (1800) is credited for the early
popularization of interchangeable parts,
which was achieved through standardization
and quality control.
Frederick W. Taylor (1881), known as the
father of scientific management, and the now
popular field of ergonomics. One of his major
contributions was his belief that management
should be much more resourceful and
aggressive in the improvement of work
methods.
 Conceptual Foundations
Taylor and his colleagues, Henry L. Gantt and
Frank and Lillian Gilbreth, were among the
first to seek systematically the best way to
produce.
Another of Taylor’s contributions was the belief
that management should assume more
responsibility for:
3. Matching employees to the right job.
4. Providing the proper training.
5. Providing proper work methods and tools.
6. Establishing legitimate incentives for work to
be accomplished.
 Conceptual Foundations
By 1913, Henry Ford and Charles
Sorensen combined what they knew
about standardized parts with the quasi-
assembly lines of the meatpacking and
mail-order industries and added the
revolutionary historically concept of the
assembly line where men stood still and
material moved.
 Conceptual Foundations
Quality Control is another historically
significant contribution to the field of OM.
Walter Shewhart (1924) combined his
knowledge of statistics with the need for
quality control and provided the
foundations for statistical sampling in
quality control.
W. Edwards Deming (1950) believed
that management must do more to
improve the work environment and
processes so that quality can be
improved.
 Why Study OM?
 OM is one of the three major functions of
any organization, it is integrally related
to all the other business functions. All
organizations market (sell), finance
(account), and produce (operate),
and it is important to know how the OM
activity functions. Therefore, we study
how people organize themselves for
productive enterprise.
 Why Study OM?
 We study OM because we want to know
how goods and services are produced.
 We study OM to understand what
operations managers do. By
understanding what these managers do,
you can develop the skills necessary to
become such a manager.
 We study OM because it is such a costly
part of an organization.
 Exciting New Trends in Operations
Management
 Global Focus: The rapid decline in
communication and transportation costs has
made markets global. But at the same time,
resources in the form of materials, talents, and
labor have also become global. Contributing to
this rapid globalization are countries throughout
the world that are vying fro economic growth
and industrialization. Operations managers are
responding with innovations that generate and
move ideas, parts, and finished goods rapidly,
whenever and wherever needed.
 Exciting New Trends in Operations
Management
 Just-in-Time Performance: Vast financial resources
are committed to inventory, and inventory impedes
response to the dynamic changes in the market place.
Operations managers are viciously cutting inventories at
every level, from raw materials to finished goods.
 Supply-chain Partnering: Shorter product life, as well
as rapid changes in material and process technology,
require more participation by suppliers.
 Rapid Product Development: Rapid international
communication of news, entertainment, and lifestyles is
dramatically chopping away at the life span f products.
 Mass Customization: Cultural differences,
compounded by individual differences, in a world where
customers are increasingly aware of options, places
substantial pressure on firms to respond.
 Operations in the Service Sector
Differences between Goods and Service
 Services are usually intangible as opposed to
tangible goods.
 Services are often unique.

 Services are often produced and consumed.

 Services have high customer interaction.

 Services have inconsistent product definition.

 Services are knowledge-based.

 Services are frequently dispersed.

 The Productivity Challenge
The creation of goods and services
requires changing resources into goods
and services. The more efficiently we
make this change, the more productive
we are.
Productivity is ratio of outputs (goods
and services) divide by the inputs
(resources, such as labor and capital)
 The Productivity Challenge
Productivity Measurement
The measurement of productivity can be
quite direct. Such is the when
productivity ca be measured as labor-
hours per ton of a specific type of steel
or as the energy necessary to generate a
kilowatt of electricity.

Productivity = Units produced/Input

used
 The Productivity Challenge
Example:
If units produced = 1,000 and labor-hours
is 250, then:

Productivity = 1,000/250 = 4 units per

labor-hour
The example above is a single-factor
productivity.
 The Productivity Challenge
Multiple Productivity
 Indicates the ratio of many or all
resources (inputs) to the goods and
services produced (outputs).

Productivity = Output/ Labor + Material

+ Energy + Capital +Miscellaneous
 The Productivity Challenge
Example: Collins Title Company has a staff
of 4, 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 company recently purchased a
computerized title-search system that
will allow the processing of 14 titles per
day. Although the staff, their work
hours, and pay will be the same, the
overhead expenses are now $800 per
day.
 The Productivity Challenge
Solution:
Labor productivity with the old system:
8 titles per day/ 32 labor-hours
= .25 titles per labor-hour
Labor productivity with the new system:
14 titles per day/ 32 labor-hours
= .4375 titles per labor-hour
Labor productivity has increased from .25
to .4375. The change is 75%.
 The Productivity Challenge
Multifactor productivity with the old system:
8 titles per day/ 640 + 400
= .0077 titles per dollar
Multifactor productivity with the new system
14 titles per day/ 640 + 800
= .0097 titles per dollar
Thus, Multifactor productivity has increased
from .0077 to .0097. This change is 25.0%
increase in multifactor productivity.
 The Productivity Challenge
Productivity increases are dependent upon
three productivity variables:
 Labor, which contributes about 10% of
the annual increase.
 Capital, which contributes about 38% of
the annual increase.
 Management, which contributes about
52% of the annual increase.
 Solved Problem:
1. Productivity can be measured in a variety of
ways, such as labor, capital, energy, material
usage, and so on. At Modern Lumber, Inc., Art
Binley, president and producer of apple crates
sold to growers, has been able, with his
current equipment, to produce 240 crates per
100 logs. He currently purchases 100 logs per
day, and each log requires 3 labor-hours to
process. He believes that he can hire a
professional buyer who can buy a better-
quality log at the same cost. If this is the case,
he can increase his production to 260 crates
per 100 logs. His labor-hours will increase by 8
hours par day. What will be the impact on
productivity (measured in crates per labor-
hour) if the buyer is hired?
Solution
Current Labor Productivity
240 crates/100 logs x 3 hours/log
=240/300
=.8 crates per labor-hour
Labor productivity with buyer
260 crates/(100 logsx3 hours/log) + 8
hours
=260/308
=.844 crates per labor-hour
Using current productivity = .844/.8
=5.5% increase
Solved Problem:
Art Binley has decided to look at his
productivity from a multifactor (total
factor productivity) perspective. To do so,
he has determined his labor, capital
energy, and material usage and decided
to use dollars as the common
denominator. His total labor-hours are
now 300 per day and will increase to 308
per day. His capital and energy costs will
remain constant at $350 and $150 per
day, respectively. Material costs for the
100 logs per day are $1,000 and will
remain the same.
Solved Problem:
Because he pays an average
of $10 per hour (with
fringes), Binley determines
his productivity increase as
follows;
Solved Problem:
Current System System with
Professional
Buyer
Labor:300 hrs @$10= $3,000 308 hrs @$10 = $3,080
Material: 100 logs/day 1,000 1,000
Capital: 350 350 350
Energy: 150 150
150
Total Cost: $4,500 $4,580
Productivity of current of proposed
system: system:
=240 crates/4,500 = 260 crates/ 4,580
=.0533 = .0567
Thus, the increase from .0567/.0533 is 6.38%