1. 1 - 1 1 1 Operations and Productivity PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e PowerPoint slides adapted from Jeff Heyl © 2011 Pearson Education, Inc. publishing as Prentice Hall

2. 1 - 2 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 4.Compute single-factor productivity 5.Compute multifactor productivity 6.Identify the critical variables in enhancing productivity

3. 1 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall The Hard Rock Cafe  First opened in 1971  Now – 129 restaurants in over 40 countries  Rock music memorabilia  Creates value in the form of good food and entertainment  3,500+ custom meals per day in Orlando  How does an item get on the menu?  Role of the Operations Manager

4. 1 - 4 Organizing to Produce Goods and Services  Essential functions: 1.Marketing 1.Marketing – generates demand 2.Production/operations 2.Production/operations – creates the product 3.Finance/accounting 3.Finance/accounting – tracks how well the organization is doing, pays bills, collects the money

5. 1 - 5 Organizational Charts Operations Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security Finance Investments Security Real estate Accounting Auditing Marketing Loans Commercial Industrial Financial Personal Mortgage Trust Department Commercial Bank Figure 1.1(A)

6. 1 - 6 Organizational Charts Operations Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science Finance/ accounting Accounting Payables Receivables General Ledger Finance Cash control International exchange Airline Figure 1.1(B) Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

7. 1 - 7 Marketing Sales promotion Advertising Sales Market research Organizational Charts Operations Facilities Construction; maintenance Production and inventory control Scheduling; materials control Quality assurance and control Supply-chain management Manufacturing Tooling; fabrication; assembly Design Product development and design Detailed product specifications Industrial engineering Efficient use of machines, space, and personnel Process analysis Development and installation of production tools and equipment Finance/ accounting Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall Manufacturing Figure 1.1(C)

8. 1 - 8 Options for Increasing Contribution Table 1.1 Sales$100,000$150,000$100,000$100,000 Cost of Goods – 80,000– 120,000– 80,000– 64,000 Gross Margin20,00030,00020,00036,000 Finance Costs– 6,000 – 6,000– 3,000– 6,000 Subtotal14,00024,00017,00030,000 Taxes at 25%– 3,500– 6,000– 4,250– 7,500 Contribution$ 10,500$ 18,000$ 12,750$ 22,500 Finance/ MarketingAccountingOM OptionOptionOption IncreaseReduceReduce SalesFinanceProduction CurrentRevenue 50%Costs 50%Costs 20%

9. 1 - 9 What Operations Managers Do  Planning  Organizing  Staffing  Leading  Controlling Basic Management Functions

10. 1 - 10 What Is Operations Management? Production Production is the creation of goods and services Operations management (OM) Operations management (OM) is the set of activities that create value in the form of goods and services by transforming inputs into outputs The production activities that go on in the organization are operations

11. 1 - 11 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.To know how goods and services are produced 3.To understand what operations managers do 4.To reduce costs and improve profitability

12. 1 - 12 Ten Critical Decisions Ten Decision AreasChapter(s) 1.Design of goods and services5 2.Managing quality6, Supplement 6 3.Process and capacity 7, Supplement 7 design 4.Location strategy8 5.Layout strategy9 6.Human resources and 10 job design 7.Supply-chain 11, Supplement 11 management 8.Inventory, MRP, JIT12, 14, 16 9.Scheduling13, 15 10.Maintenance17 Table 1.2

13. 1 - 13 The Critical Decisions 1.Design of goods and services  What good or service should we offer?  How should we design these products and services? 2.Managing quality  How do we define quality?  Who is responsible for quality? 3.Process and capacity design  What process and what capacity will these products require?  What equipment and technology is necessary for these processes? 4.Location strategy  Where should we put the facility?  On what criteria should we base the location decision? 5.Layout strategy  How should we arrange the facility?  How large must the facility be to meet our plan?

14. 1 - 14 The Critical Decisions 6.Human resources and job design  How do we provide a reasonable work environment?  How much can we expect our employees to produce? 7.Supply-chain management  Should we make or buy this component?  Who should be our suppliers and how can we integrate them into our strategy? 8.Inventory, material requirements planning, and JIT  How much inventory of each item should we have?  When do we re-order? 9.Intermediate and short–term scheduling  Are we better off keeping people on the payroll during slowdowns?  Which jobs do we perform next? 10.Maintenance  How do we build reliability into our processes?  Who is responsible for maintenance? Table 1.2 (cont.)

15. 1 - 15 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

16. 1 - 16 Certifications  APICS, the American Production and Inventory Control Society  American Society of Quality (ASQ)  Institute for Supply Management (ISM)  Project Management Institute (PMI)  Council of Supply Chain Management Professionals  Charter Institute of Purchasing and Supply (CIPS)

17. 1 - 17 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)  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)

18. 1 - 18 New Challenges in OM  Global focus  Just-in-time  Supply-chain partnering  Rapid product development, alliances  Mass customization  Empowered employees, teamsToFrom  Local or national focus  Batch shipments  Low bid purchasing  Lengthy product development  Standard products  Job specialization

19. 1 - 19 Characteristics of Goods & Services  Tangible product  Consistent product definition  Production usually separate from consumption  Can be inventoried  Low customer interaction  Intangible product  Produced and consumed at same time  Often unique  High customer interaction  Inconsistent product definition  Often knowledge-based  Frequently dispersed

20. 1 - 20 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 GoodPercent of Product that is a Service 100%7550250255075100% |||||||||

21. 1 - 21 Industry and Services as Percentage of GDP Services Manufacturing Australia Canada China Czech Rep France Germany Hong Kong Japan Mexico Russian Fed South Africa Spain UK US 90 − 80 − 70 − 60 − 50 − 40 − 30 − 20 − 10 − 0 −

22. 1 - 22 120 – 100 – 80 – 60 – 40 – 20 – 0 – ||||||| 1950197019902010 (est) 196019802000 Employment (millions) Manufacturing and Service Employment Figure 1.4 (A) Manufacturing Service

23. 1 - 23 Manufacturing Employment and Production Figure 1.4 (B) 40 – 30 – 20 – 10 – 0 – ||||||| 1950197019902010 (est) 196019802000 150 – 150 125 – 125 100 – 100 75 – 75 50 – 50 25 – 25 0 – 0 Employment (millions) Index: 1997 = 100 Index: 1997 = 100 Manufacturing employment (left scale) Industrial production (right scale)

24. 1 - 24 Development of the Service Economy Figure 1.4 (C) United States Canada France Italy Britain Japan W. Germany 19702010 (est) ||||| 4050607080 Percent

25. 1 - 25 Organizations in Each Sector Service Sector Example % of all Jobs Education, Legal, Medical, other San Diego Zoo, Arnold Palmer Hospital 25.8 Trade (retail, wholesale) Walgreen’s, Wal-Mart, Nordstrom’s 14.9 Utilities, Transportation Pacific Gas & Electric, American Airlines 5.2 Professional and Business Services Snelling and Snelling, Waste Management, Inc. 10.7 Table 1.3

26. 1 - 26 Organizations in Each Sector Service Sector Example % of all Jobs Finance, Information, Real Estate Citicorp, American Express, Prudential, Aetna 9.6 Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 8.5 Public Administration U.S., State of Alabama, Cook County 4.6 Total78.8 Table 1.3

27. 1 - 27 Organizations in Each Sector Other Sectors Example % of all Jobs Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 11.2 Construction Sector Bechtel, McDermott8.1 Agriculture Sector King Ranch1.4 Mining SectorHomestake Mining0.5 Total21.2 Table 1.3

28. 1 - 28 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

29. 1 - 29 Changing Challenges Traditional Approach Reasons for Change Current Challenge Low cost production, with little concern for environment; free resources (air, water) ignored Public sensitivity to environment; ISO 14000 standard; increasing disposal costs Environmentally sensitive production; green manufacturing; sustainability Low-cost standardized products Rise of consumerism; increased affluence; individualism Mass customization Figure 1.5

30. 1 - 30 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

31. 1 - 31 New Trends in OM  Ethics  Global focus  Environmentally sensitive production  Rapid product development  Environmentally sensitive production  Mass customization  Empowered employees  Supply-chain partnering  Just-in-time performance

32. 1 - 32 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

33. 1 - 33 Feedback loop Outputs Goods and services Transformation The U.S. economic system transforms inputs to outputs at about an annual 2.5% 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%). The Economic System Inputs Labor, capital, management Figure 1.6

34. 1 - 34  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 Productivity Calculations Labor Productivity Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1,000 250 One resource input  single-factor productivity

35. 1 - 35 Multi-Factor Productivity Output Labor + Material + Energy + Capital + Miscellaneous Productivity =  Also known as total factor productivity  Output and inputs are often expressed in dollars Multiple resource inputs  multi-factor productivity

36. 1 - 36 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: = Old labor productivity 8 titles/day 32 labor-hrs

37. 1 - 37 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 8 titles/day 32 labor-hrs = Old labor productivity =.25 titles/labor-hr

38. 1 - 38 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day 32 labor-hrs = Old labor productivity = New labor productivity =.25 titles/labor-hr 14 titles/day 32 labor-hrs

39. 1 - 39 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day 32 labor-hrs = Old labor productivity =.25 titles/labor-hr 14 titles/day 32 labor-hrs = New labor productivity =.4375 titles/labor-hr

40. 1 - 40 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: = Old multifactor productivity 8 titles/day $640 + 400

41. 1 - 41 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 = Old multifactor productivity =.0077 titles/dollar

42. 1 - 42 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 = Old multifactor productivity = New multifactor productivity =.0077 titles/dollar 14 titles/day $640 + 800

43. 1 - 43 Collins Title Productivity Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day Old System: 14 titles/day Overhead = $800/day New System: 8 titles/day $640 + 400 14 titles/day $640 + 800 = Old multifactor productivity = New multifactor productivity =.0077 titles/dollar =.0097 titles/dollar

44. 1 - 44 Measurement Problems 1.Quality 1.Quality may change while the quantity of inputs and outputs remains constant 2.External elements 2.External elements may cause an increase or decrease in productivity  Precise units  Precise units of measure may be lacking

45. 1 - 45 Productivity Variables 1.Labor 1.Labor - contributes about 10% of the annual increase 2.Capital 2.Capital - contributes about 38% of the annual increase 3.Management 3.Management - contributes about 52% of the annual increase

46. 1 - 46 Key Variables for Improved Labor Productivity 1.Basic education appropriate for the labor force 2.Diet of the labor force 3.Social overhead that makes labor available  Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge

47. 1 - 47 Investment and Productivity 10 8 6 4 2 0 Percent increase in productivity Percentage investment 101520253035

48. 1 - 48 Service Productivity 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 5.Often difficult to evaluate for quality

49. 1 - 49 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  New water and energy saving grills Results:  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  Conserve 300 million gallons of water and 200 million KwH of electricity each year saving $17 million annually

50. 1 - 50 Ethics and Social Responsibility Challenges facing operations managers:  Developing and producing safe, quality products  Maintaining a clean environment  Providing a safe workplace  Honoring stakeholder commitments