Operations

Management
Operations and Productivity
Chapter 1

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 Outline
 PROFILE: HARD ROCK CAFE
 WHAT IS OPERATIONS MANAGEMENT?
 ORGANIZING TO PRODUCE GOODS AND
SERVICES
 WHY STUDY OM?
 WHAT OPERATIONS MANAGERS DO
 How This Book Is Organized

 WHERE ARE THE OM JOBS?

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 Outline - Continued
 THE HERITAGE OF OPERATIONS MANAGEMENT
 OPERATIONS IN THE SERVICE SECTOR
 Differences between Goods and Services
 Growth of Services
 Service Pay

 EXCITING NEW TRENDS IN OPERATIONS

MANAGEMENT

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 Outline - Continued
 THE PRODUCTIVITY CHALLENGE
 Productivity Measurement
 Productivity Variables
 Productivity and the Service Sector

 THE CHALLENGE OF SOCIAL

RESPONSIBILITY

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 Learning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:
 Production and productivity
 Operations Management (OM)
 What operations managers do
 Services

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 Learning Objectives - Continued
When you complete this chapter, you should be
able to :
Describe or Explain:
 A brief history of operations management
 Career opportunities in operations management
 The future of the discipline
 Measuring productivity

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 The Hard Rock Cafe
First opened in 1971
 Now – 110 restaurants in over 40 countries
Rock music memorabilia
Creates value in the form of good food and
entertainment
3,500+ custom meals per day
How does an item get on the menu?
Role of the Operations Manager

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 What Is Operations Management?

Production is the creation of goods and

services
Operations management is the set of
activities that creates value in the form
of goods and services by transforming
inputs into outputs

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 Organizing to Produce Goods and
Services

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Organizing to Produce Goods and
Services

Essential functions:
 Marketing – generates demand
 Operations –creates the product
 Finance/accounting – tracks organizational
performance, pays bills, collects money

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 Organizational Functions

Marketing
 Gets customers

Operations
 creates product or service

Finance/Accounting
 Obtains funds
 Tracks money
© 1995 Corel Corp.

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 Sample Organization Charts

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 Functions - Bank

Commercial Bank
© 1984-1994
T/Maker Co.

Marketing Operations Finance/

Accounting

Teller Check Transactions

Security
Scheduling Clearing Processing

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 Functions - Airline

Airline
© 1984-1994 T/Maker Co.

Marketing Operations Finance/

Accounting

Flight Ground Facility

Catering
Operations Support Maintenance

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 Functions - Manufacturer

Manufacturing

Marketing Operations Finance/

Accounting

Manufacturing Production Quality

Purchasing
Control Control

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 Organizational Charts
Commercial Bank

Operations Finance Marketing

Teller Scheduling Investments Loans
Check Clearing Security Commercial
Transactions Real Estate Industrial
processing
Financial
Facilities Accounting
design/layout Personal
Vault operations Mortgage
Maintenance Auditing
Security Trust Department

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 Organizational Charts
Airline

Operations Finance & Marketing

Ground support Traffic administration
equipment Accounting
Reservations
Maintenance Accounting
Schedules
Payables
Ground Operations Tariffs (pricing)
Facility maintenance Receivables
General Ledger Sales
Catering
Finance Advertising
Flight Operations
Crew scheduling Cash control
Flying International exchange
Communications rates
Dispatching
Management science
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 Organizational Charts
Manufacturing
Operations Finance & Accounting Marketing
Facilities: Disbursements/credits Sales
Construction:maintenance promotions
Receivables Advertising
Production & inventory control
Payables Sales
Scheduling: materials control
General ledger Market
Supply-chain management Funds Management research
Manufacturing Money market
Tooling, fabrication,assembly International exchange
Design Capital requirements
Product development and design
Stock issue
Detailed product specifications
Industrial engineering Bond issues and recall
Efficient use of machines, space, and personnel
Process analysis
Development and installation of production tools and
equipment
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 Why Study OM?

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 Why Study OM?
OM is one of three major functions
(marketing, finance, and operations) of any
organization.
We want (and need) to know how goods and
services are produced.
We want to understand what operations
managers do.
OM is such a costly part of an organization.

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 Options for Increasing
Contribution
Marketing Finance & OM Option
Option Accounting
Option
Current Sales Finance Production
Revenue : Costs: -50% Costs: -20%
+50%
Sales $100,000 $150,000 $100,000 $100,000
Cost of -80,000 -120,000 -80,000 -64,000
Goods Sold
Gross 20,000 30,000 20,000 36,000
Margin
Finance -6,000 -6,000 -3,000 -6,000
Costs
Net 14,000 24,000 17,000 30,000
Margin
Taxes @ -3,500 -6,000 -4,250 -7,500
25%
Contribution 10,500 18,000 12,750 22,500
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 What Operations Managers Do

Plan - Organize - Staff - Lead - Control

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 Ten Critical Decisions
 Service, product design…………….. Ch. 5
 Quality management………………… Ch. 6, 6S
 Process, capacity design………….. Ch. 7, 7S
 Location …………….………………… Ch. 8
 Layout design ……………………….. Ch. 9
 Human resources, job design…….. Ch. 10, 10S
 Supply-chain management………… Ch. 11,11s
 Inventory management ……………. Ch. 12, 14, 16
 Scheduling …………………………… Ch. 3, 13, 15
 Maintenance …………………………. Ch. 17
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 The Critical Decisions

Quality management
 Who is responsible for quality?
 How do we define quality?

Service and product design

 What product or service should we offer?
 How should we design these products and
services?

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 The Critical Decisions - Continued
Process and capacity design
 What processes will these products require and in
what order?
 What equipment and technology is necessary for
these processes?
Location
 Where should we put the facility
 On what criteria should we base this location
decision?

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The Critical Decisions - Continued
Layout design
 How should we arrange the facility?
 How large a facility is required?

Human resources and job design

 How do we provide a reasonable work
environment?
 How much can we expect our employees to
produce?

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The Critical Decisions - Continued
Supply chain management
 Should we make or buy this item?
 Who are our good suppliers and how many should
we have?
Inventory, material requirements planning,
 How much inventory of each item should we have?
 When do we re-order?

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 The Critical Decisions - Continued
Intermediate, short term, and project
scheduling
 Is subcontracting production a good idea?
 Are we better off keeping people on the payroll
during slowdowns?
Maintenance
 Who is responsible for maintenance?
 When do we do maintenance?

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 Where are the OM Jobs

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 Where are the OM Jobs

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 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
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 The Heritage of Operations Management

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 Significant Events in Operations
Management

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 The Heritage of
Operations Management
Division of labor (Adam Smith 1776 and Charles Babbage 1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Coordinated assembly line (Ford/Sorenson/Avery 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922
Quality control (Shewhart 1924; Deming 1950)
Computer (Atanasoff 1938)

CPM/PERT (DuPont 1957)

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 The Heritage of Operations
Management - Continued
Material requirements planning (Orlicky 1960)
Computer aided design (CAD 1970)
Flexible manufacturing system (FMS 1975)
Baldrige Quality Awards (1980)
Computer integrated manufacturing (1990)
Globalization(1992)
Internet (1995)

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 Eli Whitney

 Born 1765; died 1825

 In 1798, received government
contract to make 10,000
muskets
 Showed that machine tools
could make standardized parts
to exact specifications
 Musket parts could be used in any
musket
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 Frederick W. Taylor

 Born 1856; died 1915

 Known as ‘father of scientific
management’
 In 1881, as chief engineer for Midvale
Steel, studied how tasks were done
 Began first motion & time studies
 Created efficiency principles

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 Taylor: Management Should Take
More Responsibility for

Matching employees to right job

Providing the proper training
Providing proper work methods and tools
Establishing legitimate incentives for work
to be accomplished

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 Frank & Lillian Gilbreth
 Frank (1868-1924); Lillian
(1878-1972)
 Husband-and-wife
engineering team
 Further developed work
measurement methods
 Applied efficiency methods
to their home & 12 children!
 (Book & Movie: “Cheaper
by the Dozen,” book: “Bells
on Their Toes”) © 1995 Corel Corp.

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 Henry Ford
 Born 1863; died 1947
 In 1903, created Ford ‘Make them all
Motor Company alike!’

 In 1913, first used

moving assembly line
to make Model T
Unfinished product
© 1995 Corel
 Corp.

moved by conveyor
past work station
 Paid workers very well for 1911 ($5/day!)
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 W. Edwards Deming
 Born 1900; died 1993
 Engineer & physicist
 Credited with teaching Japan
quality control methods in
post-WW2
 Used statistics to analyze
process
 His methods involve workers
in decisions
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 Contributions From
Human factors
Industrial engineering
Management science
Biological science
Physical sciences
Information science

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 Significant Events in OM

 Division of labor (Smith, 1776)

 Standardized parts (Whitney, 1800)
 Scientific management (Taylor, 1881)
 Coordinated assembly line (Ford 1913)
 Gantt charts (Gantt, 1916)
 Motion study (the Gilbreths, 1922)
 Quality control (Shewhart, 1924)

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 Significant Events - Continued

 CPM/PERT (Dupont, 1957)

 MRP (Orlicky, 1960)
 CAD
 Flexible manufacturing systems (FMS)
 Manufacturing automation protocol (MAP)
 Computer integrated manufacturing (CIM)

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 New Challenges in OM
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
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 Operations in the Service Sector

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 Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction © 1995 Corel Corp.

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 Characteristics of Service
 Intangible product
 Produced & consumed at
same time
 Often unique
 High customer interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed
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 Service Economies
Proportion of Employment in the Service Sector

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 Goods Versus Services
Goods Service
Can be resold Reselling unusual
Can be inventoried Difficult to
inventory
Some aspects of Quality difficult to
quality measurable measure
Selling is distinct Selling is part of
from production service

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 Goods Versus Services -
Continued
Goods Service
 Product is  Provider, not product
transportable is transportable
 Site of facility  Site of facility
important for cost important for
customer contact
 Often easy to  Often difficult to
automate automate
 Revenue generated  Revenue generated
primarily from primarily from
tangible product intangible service.
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Goods Contain Services / Services
Contain Goods
Automobile
Computer
Installed Carpeting
Fast-food Meal
Restaurant Meal
Auto Repair
Hospital Care
Advertising Agency
Investment Management
Consulting Service
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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Organizations in Each Sector – Table 1.4

Service Sector Example % of

all
Jobs
Professional New York City PS108, Notre Dame 24.3
services, education, University, San Diego Zoo
legal, medical
Trade (retail, Walgreen’s, Wal-Mart, Nordstroms 20.6
wholesale)
Utilities, Pacific Gas & Electric, American 7.2
transportation Airlines, Santa Fe R.R, Roadway
Express

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Organizations in Each Sector – Table 1.4
Service Sector Example % of
all
Jobs
Business & Repair Snelling & Snelling, Waste 7.1
Services Management, Pitney-Bowes
Finance, Insurance, Citicorp, American Express, 6.5
Real Estate Prudential, Aetna, Trammel Crow
Food, Lodging, McDonald’s, Hard Rock Café, 5.2
Entertainment Motel 6, Hilton Hotels, Walt Disney
Paramount Pictures
Public Administration U.S., State of Alabama, Cook 4.5
County
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Organizations in Each Sector – Table 1.4

Manufacturing Example % of
Sector all
Jobs
General General Electric, Ford, U.S. Steel, 14.8
Intel
Construction Bechtel, McDermott 7.0
Agriculture King Ranch 2.4
Mining Homestake Mining 0.4

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Organizations in Each Sector – Table 1.4

Summary

Sector % of all Jobs

Service 75.4%
Manufacturing 24.6%

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Development of the Service Economy

U.S. Employment, % Share Services as a Percent of GDP U.S. Exports of Services

80 In Billions of Dollars
United States
%70
Canada 250
60 Services
France 200
50

40 Italy 150
Industry
30 Britain
100
20 Japan
Farming 50
10
W Germany
0 0
1970
1850 75 1900 25 50 75 2000 40 50 60 70 1970 75 80 85 90 95 2000
2000
Percent

Year 2000 data is estimated

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 Exciting New Challenges in Operations
Management

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 Changing Challenges for the
Operations Manager
Past Causes Future
Local or Low-cost, reliable worldwide Global Focus
national communication and
focus transportation networks
Batch (large) Cost of capital puts pressure on Just-in-time
shipments reducing investment in shipments
inventory
Low-bid Quality emphasis requires that Supply-chain
purchasing suppliers be engaged in product partners
improvement
Lengthy Shorter life cycles, rapid Rapid product
product international communication, development,
development computer-aided design, and alliances,
international collaboration collaborative
designs
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 Changing Challenges for the
Operations Manager
Past Causes Future
Standardized Affluence and worldwide markets; Mass
products increasingly flexible production customization
processes
Job Changing sociocultural milieu. Empowered
specialization Increasingly a knowledge and employees,
information society. teams, and lean
production
Low cost Environmental issues, ISO 14000, Environmentally
focus increasing disposal costs sensitive
production,
Green
manufacturing,
recycled
materials,
remanufacturing
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 The Productivity Challenge

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 The Economic System
Transforms Inputs to Outputs
Inputs Process Outputs

Land, Labor, The economic system Goods and

Capital, transforms inputs to outputs Services
Management at about an annual 2.5%
increase in productivity
(capital 38% of 2.5%), labor
(10% of 2.5%), management
(52% of 2.5%)

Feedback loop

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 Typical Impact of Quality
Improvement
As productivity improved Costs were pared Wages increased

Parts per man hour Cost per unit decreased Average worker's annual cash
compensation increased
$2.25
115

110 $2.00 27000

105 26000
$1.75
100 25000
95 $1.50 24000
Year A Year B Year C Year A Year B Year C Year A Year B Year C

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 Productivity
 Measure of process improvement
 Represents output relative to input
Productivity Units produced
= Input used

 Only through productivity increases can our

standard of living improve

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 Multi-Product Productivity

Productivity =

Output
Labor + material + energy + capital + miscellaneous

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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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 Key Variables for Improved Labor
Productivity

Basic education appropriate for the labor

force
Diet of the labor force
Social overhead that makes labor available
Maintaining and enhancing skills in the midst
of rapidly changing technology and
knowledge

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 Jobs in the U.S

Education, Health, etc.

6% 5% 5%
3% Manufacturing
6%
1%
Retail Trade

State & Local Gov't

14%
Finance, Insurance
26%
Wholesale Trade
Transport, Public Util.

16% Construction

Federal Government
18%
Mining

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 Comparison of Productivity

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 Investment and Productivity
in Selected Nations
10
U.S.
U.K.
8
Percent increase in productivity

Canada
6 Italy
Belgium
(Mfg)

4 France
Netherlands
2 Japan
Best fit
0
10 15 20 25 30 35
Nonresidential fixed investment to GNP (%)

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 Service Productivity

Typically labor intensive

Frequently individually processed
Often an intellectual task performed by
professionals
Often difficult to mechanize
Often difficult to evaluate for quality

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 The Challenge of Social Responsibility

Increasing emphasis on business and

social responsibility

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