SECTION 1 INTRODUCTION TO OPERATIONS STRATEGY 3º GADI- 5º DG-ADI-DER Slide presentation Chapter 1 Departamento de Organización de Empresas y Marketing Área de Organización de Empresas Operations Management I Dirección de Operaciones I- English teaching

2 CHAPTER 1 INTRODUCTION TO OPERATIONS MANAGEMENT 1.1. What is OM? 1.2. Why study OM? 1.3. What Operations Managers Do 1.4. The Heritage of Operations Management (EPD) 1.5. Operations in the Service Sector 1.6. The Productivity Challenge

3 1.1 What is OM? Production: creation of goods and services. Operations Management: set of activities that creates value in the form of goods and services by transforming inputs into outputs. Also, the science and art of ensuring that goods and services are created and delivered successfully to customers. => Transformation process: Input->transformation->output Ex: hospital, restaurant, automobile factory, university, department store, distribution center, airline,… Essential functions:  Marketing: generates demand  Production/operations: creates the product  Finance/accounting: tracks how well the organization is doing, pays bills, collects the money

4 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

5 Marketing Sales promotion Advertising Sales Market research 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

6 Operations Finance/ accounting Airline Marketing

Why study OM? It is one of the three major functions of any organization, and it is integrally related to all the other business functions We want (and need) to know how goods and services are produced We want to understand what operations managers do It is such a costly part of an organization

8 Options for Increasing Contribution Sales100,000 €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 Ten Critical Decisions Ten Decision AreasChapter(s)  Service and product design3  Quality managementNot covered  Process and capacity 4,6  Location7  Layout design8  Human resources, 5 job design job design  Supply-chain Not covered management  Inventory managementNot covered  SchedulingNot covered  MaintenanceNot covered

10 The Critical Decisions  Service and product design  What good or service should we offer?  How should we design these products and services?  Quality management  How do we define quality?  Who is responsible for quality?  Process and capacity design  What process and what capacity will these products require?  What equipment and technology is necessary for these processes?  Location  Where should we put the facility?  On what criteria should we base the location decision?

11 The Critical Decisions  Layout design  How should we arrange the facility and material flow?  How large must the facility be to meet our plan?  Human resources and job design  How do we provide a reasonable work environment?  How much can we expect our employees to produce?  Supply-chain management  Should we make or buy this component?  Who are our suppliers and who can integrate into our e- commerce program?  Inventory, material requirements planning, and JIT  How much inventory of each item should we have?  When do we re-order?

12 The Critical Decisions  Intermediate and short–term scheduling  Are we better off keeping people on the payroll during slowdowns?  Which jobs do we perform next?  Maintenance  Who is responsible for maintenance?  When do we do maintenance?

What Operations Managers Do The management process consists on:  Planning  Organizing  Directing  Controlling

Operations in the Service Sector Characteristics of Goods  Tangible product  Consistent product definition  Production usually separate from consumption  Can be inventoried  Low customer interaction

Operations in the Service Sector Characteristics of Service  Intangible product  Produced and consumed at same time  Often unique  High customer interaction  Inconsistent product definition  Often knowledge-based  Frequently dispersed

16 Goods Versus Services Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product) Reselling unusual Difficult to inventory Quality difficult to measure Selling is part of service Provider, not product, is often transportable Site of facility important for customer contact Often difficult to automate Revenue generated primarily from the intangible service

17 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% % |||||||||

The 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 this measure of efficiency Important Note! Production is a measure of output only and not a measure of efficiency

19  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

20 Productivity Calculations Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1, Labor Productivity Output Labor + Material + Energy + Capital + Miscellaneous Productivity =  Also known as total factor productivity  Output and inputs are often expressed in dollars Multi-Factor Productivity

21 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

22 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

23 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 $ = Old multifactor productivity =.0077 titles/dollar

24 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 $ titles/day $ = Old multifactor productivity = New multifactor productivity =.0077 titles/dollar =.0097 titles/dollar

25 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

26 Productivity Variables  Labor - contributes about 10% of the annual increase  Capital - contributes about 32% of the annual increase  Management - contributes about 52% of the annual increase

27 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