Chapter 1

Operations
&
Productivity
1

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 forms of goods/services by
transforming inputs into outputs.
2

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, pays
bills, collects the money
3

Organizational
Charts

Organizational
Charts

Organizational
Charts

Why study OM?

We want to study how people organize
themselves for productive enterprise
We want to know how goods and services
are produced
We want to learn what operations managers
(executives) do
OM is a costly part of an organization

What Operations
Managers Do

Planning
Organizing
Staffing
Leading
Controlling
8

The Heritage of OM

Characteristics of
Goods
Tangible product
Consistent
product definition
Production usually
separate from
consumption
Can be
inventoried
Low customer
interaction
10

Characteristics of
Service
Intangible product
Produced and
consumed at same
time
Often unique
High customer
interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed
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

12

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

The Economic
System
Inputs
Labor,
capital,
manageme
nt

Processes
The U.S. economic
system transforms
inputs to outputs at
about an annual 2.5%
increase in productivity
per year. The
productivity increase is
the result of a mix of
capital (38% of 2.5%),
labor (10% of 2.5%),
and management (52%
of 2.5%).

Feedback loop

Outputs
Goods
and
service
s

Productivity
Units produced
Productivity =
Input used
Measure of process
improvement
Represents output relative to
input
Only through productivity
increases can our standard of

Productivity
Calculations
If units produced= 1000 and labor used is 250
hrs then

Labor Productivity

Units produced
Productivity = Labor-hours used
=

1,000
=
4
units/labor-hour
250

One resource input single-factor productivity

Multi-Factor
Productivity
Productivity =

Output
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

Example 1
Riverside Metal Works produces cast bronze valves
on a 10-person assembly line. On a recent day, 160
valves were produced during an 8-hour shift.
a) Calculate the labor productivity of the line.
b) The manager at Riverside changed the layout
and was able to increase production to 180 units
per 8-hour shift. What is the new labor
productivity?
c) What is the percentage of productivity increase?

19

Example 2
Collins Title wants to evaluate its labor and
multifactor productivity with a new computerized
search system. The company has a staff of four,
each working 8 hours per day (for a payroll cost of
$160/day for each staff) 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.
a) Calculate labor productivity of both old and new
system.
b) Calculate multifactor productivity of both old and
new system.
20

Example 3
In December, General Motors produced 6,600
customized vans at its plant in Detroit. The labor
productivity at this plant is known to have been
0.10 vans per labor hour during that month. 300
laborers were employed at the pant that month.
a) How many hours did the average laborer
worked that month?
b) If productivity can be increased to 0.11 vans
per hour, how many hours would the average
laborer work that month?

21

Questions/Discussion
s

22