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Operations Management

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Operations and Productivity 1

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Learning ObjectivesWhen you complete this chapter you should be able to:

1. Define operations management2. Explain the distinction between

goods and services3. Explain the difference between

production and productivity

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What Is Operations Management?

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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

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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

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Organizational Charts

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Organizational Charts

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Organizational Charts

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The Supply Chain▶A global network of organizations and

activities that supply a firm with goods and services

▶Members of the supply chain collaborate to achieve high levels of customer satisfaction, efficiency and competitive advantage.

Farmer Syrup Bottler Distributor Retailerproducer

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Why Study OM?

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

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Options for Increasing Contribution

TABLE 1.1

MARKETING OPTION

FINANCE /ACCOUNTING

OPTION OM OPTION

CURRENT

INCREASE SALES

REVENUE 50%

REDUCE FINANCE

COSTS 50%

REDUCE PRODUCTION COSTS 20%

Sales $100,000 $150,000 $100,000 $100,000Cost 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 –6,000Subtotal 14,000 24,000 17,000 30,000Taxes at 25% –3,500 –6,000 –4,200 –7,500Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

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What Operations Managers Do

Basic Management Functions

▶Planning▶Organizing▶Staffing▶Leading▶Controlling

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Ten Critical DecisionsTen Decision Areas

1. Design of goods and services2. Managing quality3. Process and capacity 4. Location strategy5. Layout strategy6. Human resources and job design 7. Supply chain management8. Inventory management9. Scheduling10. Maintenance

Table 1.2

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The Strategic Decisions

1. Design of goods and services▶ Defines what is required of operations

▶ Product design determines quality, sustainability and human resources

2. Managing quality▶ Determine the customer’s quality expectations

▶ Establish policies and procedures to identify and achieve that quality

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The Strategic Decisions3. Process and capacity design

▶ How is a good or service produced?▶ Commits management to specific

technology, quality, resources, and investment.

4. Location strategy▶ Nearness to customers, suppliers, and

talent.▶ Considering costs, infrastructure, logistics,

and government.

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The Strategic Decisions5. Layout strategy

▶ Integrate capacity needs, personnel levels, technology, and inventory

▶ Determine the efficient flow of materials, people, and information.

6. Human resources and job design▶ Recruit, motivate, and retain personnel with

the required talent and skills.▶ Integral and expensive part of the total

system design.

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The Strategic Decisions7. Supply-chain management

▶ Integrate supply chain into the firm’s strategy.▶ Determine what is to be purchased, from

whom, and under what conditions.

8. Inventory management▶ Inventory ordering and holding decisions.▶ Optimize considering customer satisfaction,

supplier capability, and production schedules.

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The Strategic Decisions9. Scheduling

▶ Determine and implement intermediate- and short-term schedules.

▶ Utilize personnel and facilities while meeting customer demands.

10. Maintenance▶ Consider facility capacity, production

demands, and personnel.▶ Maintain a reliable and stable process.

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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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Opportunities

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Certifications APICS, the Association for Operations Management

American Society for Quality (ASQ)

Institute for Supply Management (ISM)

Project Management Institute (PMI)

Council of Supply Chain Management Professionals

Charter Institute of Purchasing and Supply (CIPS)

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Significant Events in OM

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The Heritage of OM

▶ Division of labor (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)

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The Heritage of OM▶ Computer (Atanasoff 1938)▶ CPM/PERT (DuPont 1957, Navy 1958)▶ 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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Goods and ServicesAutomobile

ComputerInstalled carpeting

Fast-food mealRestaurant meal/auto repair

Hospital careAdvertising agency/

investment managementConsulting service/

teachingCounseling

Percent of Product that is a Good Percent of Product that is a Service

100% 75 50 25 0 25 50 75 100%| | | | | | | | |

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Characteristics of Goods Tangible product Consistent product

definition Production usually

separate from consumption

Can be inventoried Low customer

interaction

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Characteristics of Service Intangible product Produced and

consumed at same time Often unique High customer

interaction Inconsistent product

definition Often knowledge-based Frequently dispersed

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Allocation of GDP by Sector, Turkey, 2010

▶Agriculture 8.8%▶Industry 25.7%▶Services 65.5%

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New Challenges in OM

Global focus Just-in-time Supply-chain partnering Rapid product

development, alliances Mass customization Empowered employees,

teams

ToFrom Local or national focus Batch shipments Low bid purchasing

Lengthy product development

Standard products

Job specialization

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Changing ChallengesTraditional Approach

Reasons for Change

Current Challenge

Ethics and regulations not at the forefront

Public concern over pollution, corruption, child labor, etc.

High ethical and social responsibility; increased legal and professional standards

Local or national focus

Growth of reliable, low cost communication and transportation

Global focus, international collaboration

Lengthy product development

Shorter life cycles; growth of global communication; CAD, Internet

Rapid product development; design collaboration

Figure 1.5

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Changing ChallengesTraditional Approach

Reasons for Change

Current Challenge

Emphasis on specialized, often manual tasks

Recognition of the employee's total contribution; knowledge society

Empowered employees; enriched jobs

“In-house” production; low-bid purchasing

Rapid technological change; increasing competitive forces

Supply-chain partnering; joint ventures, alliances

Large lot production

Shorter product life cycles; increasing need to reduce inventory

Just-In-Time performance; lean; continuous improvement

Figure 1.5

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Efficiency Versus Effectiveness

▶ The difference between efficient and effective is that efficiency refers to how well you do something, whereas effectiveness refers to how useful it is.

▶ “Efficiency is doing things right; effectiveness is doing the right things.”

▶Doing the Right Things is More Important than Doing Things Right

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The Transformation Process

Inputs• Land• Labor• Capital• Information

Outputs• Goods• Services

Transformation/Conversion

Process

Control

Measurementand Feedback

Measurementand Feedback

Measurementand Feedback

Value-Added

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established standards to determine if corrective action is needed.

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▶ Measure of process improvement▶ Represents output relative to input▶ Only through productivity increases

can our standard of living improve

Productivity

Productivity =Units produced

Input used

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Productivity Variables1. Labor - 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

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Capital

10

8

6

4

2

0

Perc

ent i

ncre

ase

in p

rodu

ctiv

ity

Percentage investment10 15 20 25 30 35

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Management

▶Ensures labor and capital are effectively used to increase productivity▶Use of knowledge▶Application of technologies

▶Knowledge societies▶Difficult challenge

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Productivity and the Service Sector

1. Typically labor intensive2. Frequently focused on unique individual

attributes or desires3. Often an intellectual task performed by

professionals4. Often difficult to mechanize and automate5. Often difficult to evaluate for quality

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New Challenges in OM

▶ Global focus▶ Supply-chain partnering▶ Sustainability▶ Rapid product development▶ Mass customization▶ Just-in-time performance▶ Empowered employees

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Ethics, Social Responsibility, and Sustainability

Challenges facing operations managers:

▶ Develop and produce safe, high-quality green products

▶ Train, retrain, and motivate employees in a safe workplace

▶ Honor stakeholder commitments

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Thank You