Operations
Management
Chapter 1 –
Operations and
Productivity
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
© 2008 Prentice Hall, Inc. 1–1
Learning Objectives
When you complete this chapter
you should be able to:
1. Define operations management
2. Explain the distinction between
goods and services
3. Explain the difference between
production and productivity
© 2008 Prentice Hall, Inc. 1–5
Learning Objectives
When you complete this chapter
you should be able to:
4. Compute single-factor
productivity
5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity
© 2008 Prentice Hall, Inc. 1–6
Organizing to Produce
Goods and Services
Essential functions:
Marketing – generates demand
Production/operations – creates
the product
Finance/accounting – tracks how
well the organization is doing, pays
bills, collects the money
© 2008 Prentice Hall, Inc. 1–9
Organizational Charts
Commercial Bank
Operations Finance Marketing
Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security
Figure 1.1(A)
© 2008 Prentice Hall, Inc. 1 – 10
Organizational Charts
Airline
Operations Finance/ Marketing
Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science Figure 1.1(B)
© 2008 Prentice Hall, Inc. 1 – 11
Organizational
Manufacturing
Charts
Operations Finance/ Marketing
Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply chain management research
Manufacturing Funds Management
Tooling; fabrication; assembly Money market
Design International
Product development and design exchange
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel
and recall
Process analysis
Development and installation of
production tools and equipment Figure 1.1(C)
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What Operations
Managers Do
Basic Management Functions
Planning
Organizing
Staffing
Leading
Controlling
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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
© 2008 Prentice Hall, Inc. 1 – 23
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)
© 2008 Prentice Hall, Inc. 1 – 25
The Heritage of OM
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)
© 2008 Prentice Hall, Inc. 1 – 26
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 and time studies
Created efficiency principles
© 2008 Prentice Hall, Inc. 1 – 28
Taylor’s Principles
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
© 2008 Prentice Hall, Inc. 1 – 29
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 and 12 children!
Book & Movie: “Cheaper by the
Dozen,” book: “Bells on Their Toes”
© 2008 Prentice Hall, Inc. 1 – 30
Henry Ford
Born 1863; died 1947
In 1903, created Ford Motor
Company
In 1913, first used moving assembly
line to make Model T
Unfinished product moved by
conveyor past work station
Paid workers very well for 1911
($5/day!)
© 2008 Prentice Hall, Inc. 1 – 31
W. Edwards Deming
Born 1900; died 1993
Engineer and physicist
Credited with teaching Japan
quality control methods in post-
WW2
Used statistics to analyze process
His methods involve workers in
decisions
© 2008 Prentice Hall, Inc. 1 – 32
Contributions From
Human factors
Industrial engineering
Management science
Biological science
Physical sciences
Information technology
© 2008 Prentice Hall, Inc. 1 – 33
Characteristics of Goods
Tangible product
Consistent product
definition
Production usually
separate from
consumption
Can be inventoried
Low customer
interaction
© 2008 Prentice Hall, Inc. 1 – 34
Characteristics of Service
Intangible product
Produced and
consumed at same time
Often unique
High customer
interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed
© 2008 Prentice Hall, Inc. 1 – 35
Industry and Services as
Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
Mexico
Canada
UK
Spain
Czech Rep
Hong Kong
Japan
Russian Fed
Australia
China
Germany
South Africa
France
US
© 2008 Prentice Hall, Inc. 1 – 36
Goods Versus Services
Attributes of Goods Attributes of Services
(Tangible Product) (Intangible Product)
Can be resold Reselling unusual
Can be inventoried Difficult to inventory
Some aspects of quality Quality difficult to measure
measurable
Selling is distinct from Selling is part of service
production
Product is transportable Provider, not product, is
often 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 Revenue generated primarily
from tangible product from the intangible service
© 2008 Prentice Hall, Inc.
Table 1.3 1 – 37
Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |
Percent of Product that is a Good Percent of Product that is a Service
Figure 1.4
© 2008 Prentice Hall, Inc. 1 – 38
Manufacturing and Service
Employment
120 –
100 –
Employment (millions)
Service
80 –
60 –
40 –
Manufacturing
20 –
| | | | | | |
0 – 1950 1970 1990 2010 (est)
1960 1980 2000
Figure 1.5 (A)
© 2008 Prentice Hall, Inc. 1 – 39
Development of the
Service Economy
United States
Canada
France
Italy
Britain
Japan
W. Germany | | | | |
40 50 60 70 80
1970 2008 (est) Percent
Figure 1.5 (C)
© 2008 Prentice Hall, Inc. 1 – 41
Organizations in Each Sector
Manufacturing % of all
Sector Example Jobs
Manufacturing General Electric, Ford, 11.5
U.S. Steel, Intel
Construction Bechtel, McDermott 7.9
Agriculture King Ranch 1.6
Mining Homestake Mining 0.4
Sector Percent of all jobs
Service 78.6%
Manufacturing 21.4%
Table 1.4
© 2008 Prentice Hall, Inc. 1 – 44
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
© 2008 Prentice Hall, Inc. 1 – 45
New Trends in OM
Past Causes Future
Local or Reliable worldwide Global focus,
national communication and moving
focus transportation networks production
offshore
Batch (large) Short product life cycles Just-in-time
shipments and cost of capital put performance
pressure on reducing
inventory
Low-bid Supply chain competition Supply chain
purchasing requires that suppliers be partners,
engaged in a focus on the collaboration,
end customer alliances,
outsourcing
Figure 1.6
© 2008 Prentice Hall, Inc. 1 – 46
New Trends in OM
Past Causes Future
Lengthy Shorter life cycles, Rapid product
product Internet, rapid international development,
development communication, computer- alliances,
aided design, and collaborative
international collaboration designs
Standardized Affluence and worldwide Mass
products markets; increasingly customization
flexible production with added
processes emphasis on
quality
Job Changing socioculture Empowered
specialization milieu; increasingly a employees,
knowledge and information teams, and lean
society production
Figure 1.6
© 2008 Prentice Hall, Inc. 1 – 47
New Trends in OM
Past Causes Future
Low-cost Environmental issues, ISO Environmentally
focus 14000, increasing disposal sensitive
costs production, green
manufacturing,
recycled
materials,
remanufacturing
Ethics not Businesses operate more High ethical
at forefront openly; public and global standards and
review of ethics; opposition social
to child labor, bribery, responsibility
pollution expected
Figure 1.6
© 2008 Prentice Hall, Inc. 1 – 48
New Trends in OM
Global focus
Just-in-time performance
Supply chain partnering
Rapid product development
Mass customization
Empowered employees
Environmentally sensitive production
Ethics
© 2008 Prentice Hall, Inc. 1 – 49
Productivity Challenge
Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output
only and not a measure of efficiency
© 2008 Prentice Hall, Inc. 1 – 50
The Economic System
Inputs Processes Outputs
Labor, The economic system Goods
capital, transforms inputs to outputs and
management at about an annual 2.5% services
increase in productivity per
year. The productivity
increase is the result of a
mix of capital (38% of 2.5%),
labor (10% of 2.5%), and
management (52% of 2.5%).
Feedback loop
Figure 1.7
© 2008 Prentice Hall, Inc. 1 – 51
Productivity
Units produced
Productivity =
Input used
Measure of process improvement
Represents output relative to input
Only through productivity increases
can our standard of living improve
© 2008 Prentice Hall, Inc. 1 – 54
Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used
1,000
= = 4 units/labor-hour
250
One resource input single-factor productivity
© 2008 Prentice Hall, Inc. 1 – 55
Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous
Also known as total factor productivity
Output and inputs are often expressed
in dollars
Multiple resource inputs multi-factor productivity
© 2008 Prentice Hall, Inc. 1 – 56
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old labor 8 titles/day
productivity = 32 labor-hrs
© 2008 Prentice Hall, Inc. 1 – 57
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old labor 8 titles/day
productivity = 32 labor-hrs = .25 titles/labor-hr
© 2008 Prentice Hall, Inc. 1 – 58
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old labor 8 titles/day
productivity = 32 labor-hrs = .25 titles/labor-hr
New labor 14 titles/day
productivity = 32 labor-hrs
© 2008 Prentice Hall, Inc. 1 – 59
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old labor 8 titles/day
productivity = 32 labor-hrs = .25 titles/labor-hr
New labor 14 titles/day
productivity = 32 labor-hrs = .4375 titles/labor-hr
© 2008 Prentice Hall, Inc. 1 – 60
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = $640 + 400
© 2008 Prentice Hall, Inc. 1 – 61
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = $640 + 400 = .0077 titles/dollar
© 2008 Prentice Hall, Inc. 1 – 62
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = $640 + 400 = .0077 titles/dollar
New multifactor 14 titles/day
productivity = $640 + 800
© 2008 Prentice Hall, Inc. 1 – 63
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
New System:
14 titles/day Overhead = $800/day
Old multifactor 8 titles/day
productivity = $640 + 400 = .0077 titles/dollar
New multifactor 14 titles/day
productivity = $640 + 800 = .0097 titles/dollar
© 2008 Prentice Hall, Inc. 1 – 64
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
© 2008 Prentice Hall, Inc. 1 – 65
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
© 2008 Prentice Hall, Inc. 1 – 66
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
© 2008 Prentice Hall, Inc. 1 – 67
Labor Skills
About half of the 17-year-olds in the US cannot
correctly answer questions of this type
Figure 1.8
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Investment and Productivity
10
Percent increase in productivity
0
10 15 20 25 30 35
Percentage investment
© 2008 Prentice Hall, Inc. 1 – 69
Service Productivity
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
© 2008 Prentice Hall, Inc. 1 – 70
Productivity at Taco Bell
Improvements:
Revised the menu
Designed meals for easy preparation
Shifted some preparation to suppliers
Efficient layout and automation
Training and employee empowerment
© 2008 Prentice Hall, Inc. 1 – 71
Productivity at Taco Bell
Improvements:
Results:
Revised the menu
Designed meals for easy preparation
Preparation time cut to 8 seconds
Shifted some preparation to suppliers
Management span of control
Efficient layout and automation
increased from 5 to 30
Training and employee empowerment
In-store labor cut by 15 hours/day
Stores handle twice the volume with
half the labor
Fast-food low-cost leader
© 2008 Prentice Hall, Inc. 1 – 72
Ethics and Social Responsibility
Challenges facing
operations managers:
Developing and producing safe,
quality products
Maintaining a clean environment
Providing a safe workplace
Honoring community commitments
© 2008 Prentice Hall, Inc. 1 – 73
