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Operations Management

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Operations and
Productivity 1

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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

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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 Retailer
producer

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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 $100,000
Cost 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 –6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 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 Decisions
Ten Decision Areas
1. Design of goods and services
2. Managing quality
3. Process and capacity
4. Location strategy
5. Layout strategy
6. Human resources and job design
7. Supply chain management
8. Inventory management
9. Scheduling
10. 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 Decisions
3. 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 Decisions
5. 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 Decisions
7. 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 Decisions
9. 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 Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
Percent of Product that is a Good Percent of Product that is a Service
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

27. 1 - 27© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as
Prentice Hall
Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

28. 1 - 28© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as
Prentice Hall
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%

30. 1 - 30© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as
Prentice Hall
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

31. 1 - 31© 2011 Pearson Education, Inc. publishing as
Prentice Hall
Changing Challenges
Traditional
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

32. 1 - 32© 2011 Pearson Education, Inc. publishing as
Prentice Hall
Changing Challenges
Traditional
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
Measurement
and Feedback
Measurement
and Feedback
Measurement
and 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 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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Capital
10
8
6
4
2
0
Percentincreaseinproductivity
Percentage investment
10 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 intensive
2. Frequently focused on unique individual
attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize and automate
5. 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 