Lecture 1- Operations and Productivity(s)

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Semester 2 (Jan – Apr 2011)OPMG210B

Operationsand

Productivity


Learning outcomes

Define operations managementExplain the difference between goods and servicesExplain the difference between production and productivity

Compute single-factor productivity

Compute multifactor productivity

Identify the critical variables in enhancing productivity

Semester 2 (Jan – Apr 2011)OPMG 210B

What is operations management?

Production is the creation of goods and services

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

Managers who successfully design and deliver goods and services through the world understand operationsOM applies to service industry such as restaurants as well as factories

Applies to office, hospital, restaurant, department store or factory –production of goods and services requires OM

Efficient production of goods and services requires effective applications of the concepts, tools and techniques of OM that we will study in this courseProduction activities may be more obvious in manufacturing firms and less obvious in organisation that does not create a tangible good or product (e.g. transplant of liver, transfer of funds from savings to chequing account)


Organising to produce goods and services

To create goods and services all organisations perform 3 essential functions:Marketing – generates demand

– Takes order for product or service– Nothing happens until there is a sale

Production/operations – creates the productFinance/accounting – tracks how well the organisation is doing, pays bills, collects the money

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OperationsTeller scheduling

Cheque clearing

Collection

Transaction processing

Facilities design/layout

Vault operations

Maintenance

Security

FinanceInvestments

Security

Real estate

Accounting

Auditing

MarketingLoans

Commercial

Industrial

Financial

Personal

Mortgage

Trust Department

Commercial Bank

Organisational charts

Shows how a bank organises itself to perform these functions


OperationsGround support

equipment

Maintenance

Ground Operations

Facilitymaintenance

Catering

Flight Operations

Crew schedulingFlyingCommunicationsDispatching

Management science

Finance/ accountingAccounting

PayablesReceivablesGeneral Ledger

Finance

Cash controlInternational

exchange

Airline

MarketingTraffic administration

ReservationsSchedulesTariffs (pricing)

Sales

Advertising

Organisational chartsShows how an airline organises itself to perform these functions


MarketingSales

promotion

Advertising

Sales

Market research

Organisational charts

OperationsFacilities

Construction; maintenance

Production and inventory controlScheduling; materials control

Quality assurance and control

Supply chain management

ManufacturingTooling; fabrication; assembly

DesignProduct development and designDetailed product specifications

Industrial engineeringEfficient use of machines, space,

and personnel

Process analysisDevelopment and installation of

production tools and equipment

Finance/ accountingDisbursements/

credits

ReceivablesPayablesGeneral ledger

Funds Management

Money marketInternational

exchange

Capital requirements

Stock issueBond issue

and recall

Manufacturing

Shows how a manufacturing firm organises itself to perform these functions


Why study OM?

Study OM for 4 reasonsOM is one of three major functions (marketing, finance, and operations) of any organisation

– All organisations market (sell), finance (account) and produce (operate) – OM is integrally related to all other business functions– Study how people organise themselves for productive enterprise

We want (and need) to know how goods and services are produced– Production function is the segment of society that creates the products

and services we use

We want to understand what operations managers do– By understanding, you can develop skills necessary to become such a

manager

OM is such a costly part of an organisation– Large % of revenue of most companies spent on OM function– OM provides opportunity to improve profitability and enhance service

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What operations managers do

All good managers perform the basic functions of the management process:PlanningOrganisingStaffingLeadingControlling

Operations managers apply these functions to 10 major OM decisionsJob opportunities include plant manager, operations analyst, quality manager, supply chain manager


Ten critical decisions of OM

Ten decision areas

Design of goods and servicesManaging qualityProcess and capacity design Location strategyLayout strategyHuman resources and job design Supply chain managementInventory managementSchedulingMaintenance


The critical decisions

Design of goods and services– What good or service should we offer?– How should we design these products and services?

Managing quality– How do we define quality?– Who is responsible for quality?

Process and capacity design– What process and what capacity will these products require?– What equipment and technology is necessary for these processes?

Location strategy– Where should we put the facility?– On what criteria should we base the location decision?

Layout strategy– How should we arrange the facility?– How large must the facility be to meet our plan?

Human resources and job design– How do we provide a reasonable work environment?– How much can we expect our employees to produce?


The critical decisions

Supply chain management– Should we make or buy this component?– Who are our suppliers and who can integrate into our e-commerce

program?

Inventory, material requirements planning, and JIT– How much inventory of each item should we have?– When do we re-order?

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Significant events in Operations Management


The heritage of OM

Division of labor (Adam Smith 1776; Charles Babbage 1852)

Standardised 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)


Computer (Atanasoff 1938)

CPM/PERT (DuPont 1957)

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)

The heritage of OM


Born 1765; died 1825French revolution saw new conflicts between Great Britain, France and the US so US government needed to prepare for war and started to rearmIssue contact for 10,000 musketsIn 1798, received government contract to make 10,000 musketsCredited for early popularisation of interchangeable parts

– Achieved through quality control and standardisation– Interchangeable parts – identical - made to specifications that ensure

they are so nearly identical that they will fit any device of the same type– Allows for ease of assembly and repair

Showed that machine tools could make standardised parts to exact specifications

– Musket parts could be used in any musket

Eli Whitney

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Frederick W. Taylor

Born 1856; died 1915Known as ‘father of scientific management’In 1881, as chief engineer for Midvale Steel, studied how tasks were doneContributed to personnel selection, planning and scheduling, motion study and ergonomicsBegan first motion and time studiesOne major contribution – belief that management should be more resourceful and aggressive in the improvement of work methods

– One of the first to systematically seek best way to produce

Created efficiency principlesAlso believed 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

Two famous experiments

– Shoveling – different sized shovel for different materials

– Pig iron – one best methodSemester 2 (Jan – Apr 2011)OPMG210B

Frank (1868-1924); Lillian (1878-1972)Husband-and-wife engineering team‘Father of motion study’ – Frank

– Principle that there is one best method to perform taskFurther developed work measurement methodsApplied efficiency methods to their home and 12 children! Book & Movie: “Cheaper by the Dozen,” book: “Bells on Their Toes”

Frank & Lillian Gilbreth


Born 1863; died 1947In 1903, created Ford Motor CompanyIn 1913, first used moving assembly line to make Model T

– Unfinished product moved by conveyor past work station– Men stood still and material moved

Paid workers very well for 1911 ($5/day!)

Henry Ford


Born 1900; died 1993Engineer and physicistCredited with teaching Japan quality control methods in post-WW2Used statistics to analyse processHis methods involve workers in decisionsTaught that by adopting appropriate principles of management, organizations can increase quality and simultaneously reduce costs (by reducing waste, rework, staff attrition and litigation while increasing customer loyalty)Key is to practice continual improvement and think of manufacturing as a system, not as bits and pieces

W. Edwards Deming

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Other disciplines contributing to progress of OM:– Human factors– Industrial engineering– Management science– Biological science– Physical sciences– Information technology

Combined with statistics, management and economics – contribute to improved models and decision making

Contributions from other disciplines


Goods and Services


Manufacturers produce a tangible product, service products are often intangibleSome products – combination of a good and a serviceSeveral differences between goods and services:

– Services include repair and maintenance, government, food, lodging, transportation, insurance, trade, financial, real estate, education, legal, medical, entertainment and other professional occupations

– Services – economic activities that typically produce an intangible product

Goods and services


Characteristics of goods

Tangible product

Consistent product definition

Production usually separate from consumption

Can be inventoried

Low customer interaction

Some aspects of quality are measurable

Product is transportable

Often easy to automate

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Characteristics of services

Intangible product

– E.g. purchase of ride in an empty airline seat

Produced and consumed simultaneously

– No stored inventory

– E.g. haircut – produced and ‘consumed’ at same time

Often unique

– E.g. haircut produced for you is not exactly like anyone else’s

High customer interaction

– Often difficult to standardise, automate and make as efficient as we would like because customer interaction demands uniqueness

Inconsistent product definition

Often knowledge-based

Frequently dispersed

– Brought to client via local office or retail outlet


Goods versus services

Can be resold

Can be inventoried

Some aspects of quality measurable

Selling is distinct from production

Product is transportable

Site of facility important for cost

Often easy to automate

Revenue generated primarily from tangible product

Attributes of goods(Tangible product)

Attributes of services(Intangible product)

Reselling unusual

Difficult to inventory

Quality difficult to measure

Selling is part of service

Provider, not product, isoften transportable

Site of facility important forcustomer contact

Often difficult to automate

Revenue generated primarily from the intangible service


Goods and services

Automobile

Computer

Installed carpeting

Fast-food meal

Restaurant meal/auto repair

Hospital care

Advertising agency/investment management

Consulting service/teaching

Counseling

% of product that is a good % of product that is a service

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

Distinction not clear cut - most goods contain a service, and most services contain a good

Pure service – does not include a tangible product


Industry and services as % of GDP

Services Manufacturing

Au

str

alia

Ca

na

da

Ch

ina

Cze

ch

Re

p

Fra

nc

e

Ge

rma

ny

Ho

ng

Ko

ng

Ja

pa

n

Me

xic

o

Ru

ss

ian

Fe

d

So

uth

Afr

ica

Sp

ain

UK

US

90 −

80 −

70 −

60 −

50 −

40 −

30 −

20 −

10 −

0 −

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120 –

100 –

80 –

60 –

40 –

20 –

0 – | | | | | | |1950 1970 1990 2010 (est)

1960 1980 2000

Em

plo

yment

(mill

ions)

Growth of services

Manufacturing

Service

Services constitute largest economic sector in postindustrial societiesManufacturing employment –decreased in last 25 years

US manufacturing and service employment


Manufacturing and service employment

40 40 –

30 30 –

20 20 –

10 10 –

0 0 – | | | | | | |19501950 19701970 19901990 2010 (2010 (estest))

19601960 19801980 20002000

– 150

– 125

– 100

– 75

– 50

– 25

– 0

Em

plo

ym

en

t (m

illio

ns)

Ind

ex:

1997 =

100

Manufacturingemployment

(left scale)

Industrial production

(right scale)

No of people employed in manufacturing decreased modestly in recent yearsBut production increases

– Each person is producing about 20 times more than in 1950

Services now dominant employer (since early 1920s)


Trends in Operations Management


New challenges in OM

Global focusJust-in-timeSupply chain partneringRapid product development, alliancesMass customisationEmpowered employees, teams

ToFromLocal or national focus

Batch (large) shipments

Low bid purchasing

Lengthy product development

Standard products

Job specialisation

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Local or national focus

Reliable worldwide communication and transportation networks

Global focus, moving production offshore

Batch (large) shipments

Short product life cycles and cost of capital put pressure on reducing inventory

Just-in-time performance

Low-bid purchasing

Supply chain competition requires that suppliers be engaged in a focus on the end customer

Supply chain partners, collaboration, alliances, outsourcing

Past Causes Future

New trends in OM


Lengthy product development

Shorter life cycles, Internet, rapid international communication, computer-aided design, and international collaboration

Rapid product development, alliances, collaborative designs

Standardized products

Affluence and worldwide markets; increasingly flexible production processes

Mass customization with added emphasis on quality

Job specialization

Changing socioculture milieu; increasingly a knowledge and information society

Empowered employees, teams, and lean production

Past Causes Future

New trends in OM


Low-cost focus

Environmental issues, ISO 14000, increasing disposal costs

Environmentally sensitive production, green manufacturing, recycled materials, remanufacturing

Ethics not at forefront

Businesses operate more openly; public and global review of ethics; opposition to child labor, bribery, pollution

High ethical standards and social responsibility expected

Figure 1.6Figure 1.6

Past Causes Future

New trends in OM


Global focus– Rapid decline in communication and transportation costs – made markets

global

– Resources (capital, markets, talent, labour) – also global

– Op managers responding with innovations that generate ideas, production and finished goods rapidly

Just-in-time performance– Vast financial resources committed to inventory – making it costly

– Inventory also impedes rapid response to changes in marketplace

– Op managers cutting inventories at all levels – raw materials to finished goods

Supply chain partnering– Shorter product life cycle driven by demanding customers – also rapid

changes in materials and processes – suppliers must be in tune with needs of customers

– Op managers are outsourcing and building long term partnerships with critical players in supply chain

New trends in OM

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Rapid product development– Rapid international communication of news, entertainment, lifestyles –

dramatically reducing life span pf products

– Op managers response – management structures and technology that are faster and partners that are more effective

Mass customisation– Cultural and individual differences place pressure on firms to respond

– Op managers response – flexible prod process – goal is to produce customised products whenever and wherever needed

Empowered employees– Explosion of knowledge and more technical workforce - more competence

required at work

– Op managers response – move decision making to individual worker level

Environmentally sensitive production– Op managers – designing products that are biodegradable, reuse, recycle,

more efficient packaging

Ethics– Op managers – enhance ethical behaviour

New challenges in OM


Productivity


Productivity challenge

Creation of goods and services requires changing resources into goods and services

– More efficiently we make change more productive we are

– More value added to the good or service provided

Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labour and capital)

Op manager’s job is to improve productivity – can be done in 2 ways:

– Reducing inputs while keeping output constant

– Increasing output while keeping input constant

Production – the making of goods and services

– High production does not imply high productivity

Measuring productivity – excellent way to evaluate country’s ability to provide improve standard of living for its people


Productivity challenge

Production is a measure of output only and not a measure of efficiency

Only through increase in productivity can standard of living improve

Only through increases in productivity can labour, capital etc receive additional payment

– If returns to labour, capital etc increase without increased productivity, prices rise

– Alternatively, increase in productivity = lower prices as more is produced with same resources

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A team of 10 analysts continually look for ways to shave time. Some improvements:

Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

Improving productivity at Starbucks


A team of 10 analysts continually look for ways to shave time. Some improvements:

Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

Improving productivity at Starbucks

Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years.

Productivity has improved by 27%, or about 4.5% per year.


Input measures – labour-hours, capital ($ invested), materials (tons), or energy (kW of electricity used)

Example: if units produced = 1000 and labour-hrs used = 250, then

Productivity =Units produced

Input used

Productivity measurement

= = 4 units/labor-hour

1,000

250

Productivity =Units produced

Labor-hours used


Single- and multi-factor productivity

Single factor productivity = one resource input

Multi-factor productivity – multiple resource inputs

Output

Labor + Material + Energy + Capital + Miscellaneous

Productivity =

Multifactor productivity – also known as total factor productivity

To aid computation individual inputs are often expressed in dollars and summed

Output

InputsProductivity =

∑

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Example: Multifactor productivity

Company A has a staff of 4, each working 8 hr per day (payroll cost = $640/day) with expenses of $400 per day. A total of 8 tiles are processed each day. The company recently purchased a computerised system that will allow 14 tiles to be processed each day. Although the staff, their work hours and pay will be the same, overhead expenses are now $800 per day.

How will labour productivity change?

What will be new multifactor productivity? By what percentage will it increase or decrease?


Solution: Multifactor productivity

Labour productivity (old) = 8 tiles per day/32 labour-hr = 0.25tiles per labour-hr

Labour productivity (new) = 14 tiles per day/32 labour-hr = 0.4375 tiles per labour-hr

Labour prod increased by 75% (0.4375-0.25)/0.25 = 75%

Multifactor productivity (old) = 8 tiles per day/640+400 = .0077tiles per $

Labour productivity (new) = 14 tiles per day/640+ 800 = .0097tiles per $

Multifactor prod increased by 26%

If overhead now goes to $960 rather than $800, what is the multifactor productivity? (0.00875)


Measurement problems

Productivity measures aid managers in determining how well they are doing

Multifactor usually better but more complicated

– Better info about trade-offs among factors, but many measurement problems including the following:

Quality may change while the quantity of inputs and outputs remains constant

– New colour TV and old black and white – quality improved but unit of measure – TV- still the same

External elements may cause an increase or decrease in productivity

– More reliable electricity system may greatly improve production – improving firm’s productivity rather than because of any internal decision

Precise units of measure may be lacking

– E.g. not all cars require same inputs

Measurement particularly difficult in service sector – end product hard to define

– E.g. statistics ignore quality of a haircut


Productivity variables

Productivity increases – dependent on 3 variables

These represent the broad areas in which managers can take action to improve productivity

Productivity variables – the 3 factors critical to productivity improvement – labour, capital and the art and science of management

– Labour - contributes about 10% of the annual increase

– Capital - contributes about 38% of the annual increase

– Management - contributes about 52% of the annual increase

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1. Labour

Improvement in contribution of labour to productivity is the result of healthier, better-educated and better-nourished labour force

About 10% of increase in prod attributed to improvement in labour

3 key variables for improved labour productivity

Basic education appropriate for the labour force

– Illiteracy – major impediment to productivity

Diet of the labour force

– Poor diet (obesity, malnutrition and chronic diseases) – also major impediment

Social overhead that makes labour available such as transportation

Challenge for developed countries - maintaining and enhancing skills in the midst of rapidly changing technology and knowledge

– Recent data – average 17yr-old American knows significantly less maths than average Japanese at same age

Training, motivation and team building, improved HR strategies as well as improved education – techniques that will contribute to increased labour productivity


2. Capital

Capital investments provide equipment and tools used in production

Inflation and taxes increase cost of capital

When capital invested per employee drops – productivity drops

Using labour rather than capital – reduces unemployment in the short run, but makes economies less productive and therefore lower wages in long run

Capital investment – necessary but seldom sufficient for increased productivity

– Constant trade-off between capital and labour


3. Management

Responsible for ensuring that labour and capital are effectively used to increase productivity

Accounts for > ½ of the annual increase in productivity

– Includes improvements made thru use of knowledge and application of technology

Post-industrial societies – knowledge societies

Knowledge society – a society in which much of the labour force has migrated from manual work to work based on knowledge

– i.e. technical and info-processing tasks requiring ongoing education

– Required education and training – important high-cost items –responsibility of Op managers

More effective use of capital – contributes to productivity

– Op manager must select best new capital investments as well as improving productivity of existing ones

Poorly educated labour, inadequate capital and dated technology -country cannot be a world-class competitor with these


Productivity and service sector

Productivity of service sector difficult to improve because work in the service sector is:

Typically labor intensive e.g. counseling, teaching

Frequently focused on unique individual attributes or desires e.g. investment advice

Often an intellectual task performed by professionals e.g. medical diagnosis

Often difficult to mechanize e.g. a haircut

Often difficult to evaluate for quality e.g. performance of a law firm

More intellectual and personal the task, more difficult to achieve increases in productivity

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Example: Productivity at Taco Bell

Case of how Taco Bell increased productivity to lower costs

Improvements made include;

Revised the menu

Designed meals for easy preparation

Shifted some preparation to suppliers

Efficient layout and automation

Training and employee empowerment


Improvements:Improvements:

�� Revised the menu Revised the menu

�� Designed meals for easy preparationDesigned meals for easy preparation

�� Shifted some preparation to suppliersShifted some preparation to suppliers

�� Efficient layout and automationEfficient layout and automation

�� Training and employee empowermentTraining and employee empowerment

Results:

Productivity at Taco Bell

Preparation time cut to 8 seconds

Management span of control increased from 5 to 30

In-store labor cut by 15 hours/day

Stores handle twice the volume with half the labor

Fast-food low-cost leader


Ethics and social responsibility

Op managers face many challenges and constant changes

– Physical, social environment, laws and values

Challenges from conflicting perspectives of stakeholders such as customers, distributors, suppliers, owners, lenders, employees

Ethical challenges facing Op managers include:

Developing and producing safe, quality products

Maintaining a clean environment

Providing a safe workplace

Honoring community commitments


Exercise 1: Productivity

Kleen Karpet cleaned 65 rugs in October, consuming the following resources:

Labour 520 hr at $13/hrSolvent 100 gallons at $5/galMachine rental 20 days at $50/day

a. What is the labour productivity per dollar?b. What is the multifactor productivity?

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Exercise 2

Student tuition at Boehring University is $150 per semester credit hour. The state supplements school revenue by $100 per semester credit hour. Average class size for a typical 3-credit course is 50 students. Labor costs are $4,000 per class, material costs are $20 per student per class, and overhead costs are $25,000 per class.

a. What is the multifactor productivity ratio for this course process?

b. If instructors work an average of 14 hours per week for 16 weeks for each 3-credit class of 50 students, what is the labor productivity ratio?


Exercise 3

Productivity can be measured in a variety of ways, such as by labour, 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 labour-hrs 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 labour-hrs will increase by 8 hrs- per day.

What will be the impact on productivity (measured in crates per labour-hr) if the buyer is hired?


Exercise 4

Art Binley has decide to look at his productivity from a multifactor productivity perspective. To do so, he has determined his labour, capital, energy, and material usage and has decided to use dollars as the common denominator.

His total labour-hrs 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 100logs per day are $1,000 and will remain the same.

If he pays an average of $10 per hr, determine Binley’s productivity increase

Lecture 1- Operations and Productivity(s)

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Transcript of Lecture 1- Operations and Productivity(s)