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Chapter 1: Operations and Productivity
What is OM? How to organize to produce Goods and Services?
Why study OM? Where are the OM jobs? What OM managers do?
How is this Book Organized (10 decisions)?
History, Heritage of OM
OM in the Service Sector: Differences between Goods and Services,Growth of Services, Service Pay
New trends in OM
The Productivity Challenge: Productivity Measurement, ProductivityVariables, Productivity and the Service Sector
Ethics and Social Responsibility (clean environment, safe workplace,
ethical behavior)
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Utility is the value that comesfrom satisfying human needs
Form
Service(task)
Possession
Place
Time
Utility
Motorbike with air conditioningLeft handed pencil
Ejector seat for a helicopter
Wooden barbecue grill
Why do firms exist? Firms exist to provide utility.
What are firms offering? MMWhat is a Marketing Mix? 4P (Product, Price, Place, Promotion)What is Competitive Advantage? In Mk in OM.What is Customer Value?
Background Information
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Background Information (from Marketing)
Marketing Mix (MM):
Competitive Advantagefor MARKETING = a firmhas a MM that the target
market sees as betterthan a competitor's mix.
2.Price
4.Promotion
3.Place
1.Product
Customer
Customer Value is the difference
between the benefits a customersees from a market offering
(product or service) and the cost of
obtaining those benefits
CBCV
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What Is Production? What is OM?Production is the creation of goods and services
Operations management is the set of activities thatcreates value in the form of goods and services bytransforming inputs into outputs
Organizing to Produce Goods and Services
Essential functions:
Finance/accounting
tracks organizational
performance, pays bills,collects money
Operations creates the
product
Marketing understands
customer needs,
generates demand
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Why Study OM?
OM is one of three major functions of an organization.
We want (and need) to know how goods and services are
produced in order to be able to produce them better, we want tounderstand what Operations Managers do, OM is such a costlypart of any organization (see the contribution example).
Options for Increasing Contribution
Marketing
Option
Finance and
Accounting Option
OM Option
Current Increase Sales
by 50%
Decrease finance
costs by 50%
Decrease production
costs by 20%
Sales 100,000 150,000 100,000 100,000
COGS -80,000 -120,000 -80,000 -54,000
Gross Margin 20,000 30,000 20,000 46,000
Finance Costs -6,000 -6,000 -3,000 -6,000
Net Margin 14,000 24,000 17,000 40,000
Taxes at 25% -3,500 -6,000 -4,250 -10,000
Contribution 10,500 18,000 12,750 30,000
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What Operations Managers Do?
OM has contributions from:
Human factors
Industrial engineering
Computer technology (automation)
Management science (modeling)
Biological sciences
Physical sciences
Information sciences
One of the mostimportant
characteristics of
OM is the ability of
OperationsManager to work
with or within
multiple disciplines
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10 Critical Decisions
1 Service,
product design
Ch. 5 What product or service should we offer? How to design these
products and services?
2 Qualitymanagement
Ch. 6, 6S Who is responsible for quality? How do we define quality?
3 Process,
capacity design
Ch. 7, 7S What processes will these products require and in what
order? What equipment and technology is necessary?
4 Location Ch. 8 Where should we put the facility? On what criteria should we
base this decision?
5 Layout Ch. 9 How should we arrange the facility? How large a facility is
required?
6 HR, job design Ch. 10,10S
How do we provide a reasonable work environment?
How much can we expect our employees to produce?
7 Supply-chain
management
Ch.11,11s
Should we make or buy this item? Who are our good suppliers
and how many should we have? How to integrate suppliers?8 Inventory
management
Ch. 12,14, 16
How much inventory of each item should we have? When do
we re-order?
9 Scheduling Ch. 3, 13,15
Is subcontracting production a good idea? Are we better off
keeping people on the payroll during slowdowns? Which job
do we perform next?
10 Maintenance Ch. 17 Who is responsible for maintenance? When do we domaintenance?
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The Heritage of Operations Management
Division of labor (Adam Smith 1776) Standardized parts (1800): Eli Whitney received a government contract to make
10,000 muskets. He showed that machine tools could make standardized partsto exact specifications and parts could be used in any musket.
Scientific Management (Taylor 1881): Management should take moreresponsibility for: matching employees to right job, providing the proper training,
proper work methods and tools and establishing legitimate incentives for workto be accomplished. Coordinated assembly line: In 1903, Henry Ford created Ford Motor Company
(first assembly line used to make Model T, unfinished product moved byconveyor, fixed work station, workers paid very well for 1911 - $5/day!)
Gantt charts (1916), Motion study (Frank and Lillian Gilbreth 1922) Quality control (Shewhart 1924), CPM/PERT (DuPont 1957), Material
requirements planning (Orlicky 1960), Computer aided design (1970), Flexiblemanufacturing system (FMS 1975), Computer integrated manufacturing (1990),Globalization(1992), Internet (1995)
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Characteristics of Goods Characteristics of Services
Tangible product Intangible product
Consistent product definition Inconsistent product definitionProduction usually separate from consumption Produced & consumed at same time
Seldom unique Often unique, knowledge-based
Low customer interaction High customer interaction
Can be inventoried Can not be inventoried
Produced on one location Frequently dispersed
Can be resold and inventoried Reselling unusual, difficult to inventory
Some aspects of quality measurable Quality difficult to measure
Selling is distinct from production Selling is part of service
Product is transportable Provider, not product is transportable
Site of facility important for cost Site of facility important for customer contact
Often easy to automate Often difficult to automate
Revenue generated primarily from tangible product Revenue generated primarily from intangible
service
Goods and Services
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Goods Contain Services / Services Contain Goods
0 25 50 75 100255075100
AutomobileComputerInstalled Carpeting
Fast-food Meal
Restaurant MealAuto RepairHospital Care
Advertising AgencyInvestment Management
Consulting ServiceCounseling
Percent of Product that is a Good Percent of Product that is a Service
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Changing Challenges for the Operations Manager
Past Causes Future
Local or
national focus
Low-cost, reliable worldwide communication
and transportation networks
Global Focus
Batch (large)
shipments
Cost of capital puts pressure on reducing
investment in inventory
Just-in-time shipments
Low-bid
purchasing
Quality emphasis requires that suppliers be
engaged in product improvement
Supply-chain partners
Lengthy
product
development
Shorter life cycles, 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
Jobspecialization
Changing socio cultural environment.Increasingly a knowledge and information
society.
Empowered employees,teams, and lean production
Low cost focus Environmental issues, ISO 14000, increasing
disposal costs
Environmentally sensitive
production, recycled materials,
remanufacturing
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The Economic System Transforms Inputs toOutputs
The economic system
transforms inputs to
outputs at about an
annual 2.5% increase in
productivity
Land, Labor,
Capital,Management
Goods and
Services
Feedback loop
Inputs Process Outputs
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Measure of process improvement
Represents output relative to input Only through productivity increases can our standard of living
improve
Productivity
Input Used
ProducedUnitstyProductivi
ousMiscellaneEnergyMaterialLabour
ProducedUnitstyProductiviFactorMulti
dLabour Use
ProducedUnitstyProductiviLabour
Input UsedofTypeOne
ProducedUnitstyProductiviFactorSingle
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Measurement Problems
Qualitymay 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.
Service Productivity is difficult to improve
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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Productivity Variables
Labor- contributes about 10% of the annual increase
Capital- contributes about 38% of the annual increase
Management- contributes about 52% of the annual increase
Key Variables for Improved Labor Productivity
Basic education appropriate for the labor force (low tuition).
Social overhead that makes labor available.
Maintaining and enhancing skills in the midst of rapidly changingtechnology and knowledge.
Ethics and Social Responsibility
Increasing emphasis on business and social responsibility(increase productivitybut at what price?); Produce Safe, Quality
Products, Clean environment, Safe workplace, Ethical behaviour
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