Chapter 1: Operations & Productivity
Chapter 1 Learning Objectives:
• Define operations management
• Explain the distinction between goods and services
• Explain the difference between production and productivity
• Compute single-factor productivity
• Compute multifactor productivity
• Identify the critical variables in enhancing productivity
Proprietary Materials. May not be Copied or Distributed. 2024 Operations University. [Link] 1-1
What is Operations Management?
• Production: the creation of goods and services
• Production activities that go on in an organization are referred
to as “Operations”
• Operations Management (OM): the set of activities that create
value in the form of goods and services by transforming inputs into
outputs
• Types of operations: goods producing, storage/transportation,
exchange, entertainment, communication…
• The principles of OM help one to view a business enterprise as a
total system, in which all activities are coordinated, not only
vertically throughout the organization, but also horizontally across
multiple functions
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Why Study Operations
Management?
• The three major functions of an organization must work together
for the organization to function successfully
• Must understand their role and the roles of the other functions
• Significant interface between the functions
• Exchange of information
• Cooperative decision-making
• Impact of decisions of one function on others
Operations
Marketing Finance
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The Supply Chain
• Supply Chain: a global network of organizations and activities that
supplies a firm with goods and services
• Members of the supply chain collaborate to achieve high levels
of customer satisfaction, efficiency and competitive advantage
• In general, starts with the provider of basic raw materials and
continues all the way to the final customer at the retail store
• Example: Supply chain for a bottle of Coke
• Requires beet or sugar cane farmer, a syrup producer, a
distributor and a retailer, each adding values to satisfy a
customer
Farmer Syrup Bottler Distributor Retailer Customer
producer
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Four Basic Operations
Management Functions
• Planning: Provides the basis for future activities by developing
strategies, goals and objectives and establishing guidelines,
actions and schedules to meet them
• Organizing: The process of bringing together the resources
(people, material, equipment, technology, information and capital)
necessary to perform planned activities
• Directing (Staffing/Leading): The process of turning plans into
realities by assigning specific tasks and responsibilities to
employees, motivating them and coordinating their efforts
• Controlling: Evaluating performance and applying corrective
measures to ensure that plans are achieved
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Operations Management Decisions
• Strategic decisions are long-term decisions and concern the
determination of broad policies and plans for using the resources
of a company to best support its long-term competitive strategy
• Tactical decisions primarily address how to efficiently manage
capacity, inventory and schedules within the constraints of
previously made strategic decisions
• Operations decisions are narrow and short-term by comparison
and act under the operation constraints set out by the strategic
and tactical management decisions
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Understanding Goods
and Services
• A good is a physical product that you can see, touch, or possibly
consume
• A durable good is a product that typically lasts at least three
years
• A non-durable good is perishable and generally lasts for less
than three years
• A service is any activity that does not directly produce a physical
product
• A service encounter is an interaction between the customer
and the service provider
• Service encounters consist of one or more “moments of truth”
in which a customer comes into contact with any aspect of the
delivery system, and thereby has an opportunity to form an
impression
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Similarities Between Goods
and Services
• Goods and services provide value and satisfaction to customers
who purchase and use them
• They both can be standardized or customized to individual wants
and needs
• A process creates and delivers each good or service
• Therefore, Operations Management is a critical skill!
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Differences Between Goods
and Services
1. Goods are tangible while services are intangible
2. Customers participate in many service processes, activities, and
transactions
3. The demand for services is more difficult to predict than the
demand for goods
4. Services cannot be stored as physical inventory
5. Service management skills are paramount to a successful service
encounter
6. Service facilities typically need to be in close proximity to the
customer
7. Patents protect goods, they do not protect services
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Examples of Goods and
Service Content
High Goods Low Goods
Content Content
(Tangible) (Intangible)
(Pure Goods) (Pure Service)
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Goods Quality
• Quality: the degree to which the output of a process meets customer
requirements
• Goods quality: the physical performance and characteristics of a good
• Performance: a good’s primary operating characteristics
• Features: the “bells and whistles” of a good
• Reliability: the probability of a good’s surviving over a specified
period of time under stated conditions of its use
• Conformance: the degree to which physical and performance
characteristics of a good match pre-established standards
• Durability: the amount of use one gets from a good before it
physically deteriorates or until replacement is preferred
• Serviceability: the speed, courtesy and competence of repair work
• Aesthetics: how a good looks, feels, sounds, tastes or smells
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Service Quality
• Service quality: consistently meeting or exceeding customer
expectations (external focus) and service delivery system performance
(internal focus) for all service encounters
• Tangibles: physical facilities, uniforms, equipment, vehicles, and
appearance of employees
• Reliability: ability to perform the promised service dependably and
accurately
• Responsiveness: willingness to help customers and provide
prompt recovery to service upsets
• Assurance: knowledge and courtesy of the service-providers, and
their ability to inspire trust and confidence in customers
• Empathy: caring attitude and individualized attention provided to its
customers
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Quality of Goods and Services
• Three types of attributes to evaluate the quality of goods and
services
• Search attributes: are those attributes that a customer can
determine prior to purchasing the goods and/or services
• Experience attributes: are those attributes that can be
discerned only after purchase or during consumption or use
• Credence attributes: are any aspects of a good or service that
the customer must believe in, but cannot personally evaluate
even after purchase and consumption
• Goods are easier to evaluate than services
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Evaluating the Quality
of Services
• Customers evaluate services in ways that are often different from
goods, such as:
• Customers seek and rely more on information from personal
sources than from non-personal sources when evaluating
services prior to purchase
• Customers use a variety of perceptual features in evaluating
services
• Customers normally adopt innovations in services more slowly
than they adopt innovation in goods
• Customers perceive greater risks when buying services than
when buying goods
• These insights help to explain why it is more difficult to design
services and service processes than goods and manufacturing
operations
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Goods-Services Continuum
High Goods Content High Services Content
Easy to Difficult to
evaluate evaluate
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Characteristics of Goods
and Services
Characteristic Goods Service
Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Output Tangible Intangible
Measurement of productivity Easy Difficult
Opportunity to correct problems High Low
Inventory Much Little
Evaluation Easier Difficult
Patentable Usually Not usual
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Production
• Production: the creation of goods and services
• The production of goods and services requires transforming inputs
into outputs
• Operations manager’s job is to improve the transformation
processes
Inputs Transformation Outputs
Labor, The U.S. economic system Goods
capital, transforms inputs to outputs and
management at about an annual 2.5% services
increase in productivity
per year.
Feedback loop
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Productivity Variables
1. 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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Productivity Variables
1. 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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Productivity
• Productivity: A measure of the effective use of resources,
expressed as the ratio of output of a process to the input
• The objective is to improve productivity by improving the ratio
Productivity = Units produced / Input used
• Efficiency: doing the job well, with a minimum of resources and
waste
• Improving productivity improves efficiency
• Productivity ratios are used for
• Planning workforce requirements
• Scheduling equipment
• Financial analysis
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Productivity
• Productivity is a relative measure
• Can be compared with similar operations within its industry
• Can be compared over time
• Productivity may be expressed as:
• Partial measures: output to one input
Output Output Output Output
Partial Measures:
Labor Machine Capital Energy
• Multifactor measures: output to a group of inputs
Output Output
Multifactor Measures:
Labor + Machine Labor + Capital + Energy
• Total measures: output to all inputs
Goods or Services Produced
Total Measures:
All inputs used to produce them
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Productivity Growth
• Productivity growth (decline) is the increase (decrease) in
productivity from one period to the next relative to the productivity
of the previous period
Current Productivi ty - Previous Productivi ty
Productivi ty Growth = x 100%
Previous Productivi ty
Example: What is the growth rate if productivity increased from 80 to 84?
Space provided 84 – 80
X 100 = 5%
for calculations! 80
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Productivity Example
• Consider a division of Miller Chemicals that produces water
purification crystals for swimming pools. The major inputs used in
the production process are labor, raw materials and energy.
• For 2019 labor costs are $180,000; raw materials cost $30,000
and energy costs amount to $5,000
• For 2020 labor costs are $350,000; raw materials cost $40,000
and energy costs amount to $6,000
• Miller Chemicals produced 100,000 pounds of crystals in 2019
and 150,000 in 2020
• Question: Has productivity increased or declined between 2019
and 2020?
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Productivity Solution
Miller Chemicals
Inputs 2019 2020
Labor, $ 180,000 350,000
Raw Materials, $ 30,000 40,000
Energy, $ 5,000 6,000
Output 2019 2020
Crystals, pounds 100,000 150,000
Productivity = Quantity of output/quantity of input
2019: Productivity = 100,000 / (180,000 + 30,000 + 5,000)
= 0.465 lb/dollar
2020: Productivity = 150,000 / (350,000 + 40,000 + 6,000)
= 0.379 lb/dollar
So, productivity dropped from 2019 to 2020:
(P-cur) – (P-prev)/(P-prev) x 100=
[(0.379-0.465)/0.465]x100= -18.49%
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Real life Productivity Example
at Starbucks
A team of 10 analysts continually look for ways to shave
time. Some improvements:
Operations improvements have helped Starbucks
increase yearly revenue per facility by $250,000 to
$1,000,000 in seven years. Productivity has improved
by 27%, or about 4.5% per year.
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Service Productivity
• Productivity in the service sector is difficult to improve because:
• Typically labor intensive
• Frequently focused on unique individual attributes or desires
• Often an intellectual task performed by professionals
• Often difficult to mechanize
• Often difficult to evaluate for quality
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Historical Evolution of
Operations Management
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U.S. Agriculture, Manufacturing,
and Service Employment
100 –
80 –
60 –
Percent of
Workforce
40 –
20 –
0– | | | | | | | | |
1825 1875 1925 1975 2025 (est.)
1800 1850 1900 1950 2000
Agriculture Services Manufacturing
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U.S. Agriculture, Manufacturing,
and Service Employment
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New Challenges in Operations
Management
Challenges OM Response
Global focus: decline in Operations managers are seeking
communication and transportation creative designs, efficient production
costs has made markets global and high-quality goods via
international collaboration
Supply-chain partnering: shorter Operations managers are
product life cycles, demanding outsourcing and building long-term
customers and rapid changes in partnerships with critical players in
material, processes and technology the supply chain
Sustainability: concern for products Designing green products and
and processes that are ecologically packaging that minimize resource
sustainable use and can be recycled or reused
Rapid product development: product New management structures,
life space is dramatically reduced enhanced collaboration and alliances
that are more responsive and
effective
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New Challenges in Operations
Management
Challenges OM Response
Mass customization: consumers are Must respond with product designs
increasingly aware of innovation and and flexible processes that cater to
options and want customized the individual whims of consumers
products
Just-in-time performance: inventory Operations managers must work with
requires financial resources and supply chains to cut inventory at
constrains response to shorter every level
product life cycles
Empowered employees: knowledge OM is responding by enriching jobs
explosion and more technical and moving more decision-making to
workplace require more employee the individual contributor
competence
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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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