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

1 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall 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)

1 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall 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)

1 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 4.OM is such a costly part of an organization

1 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall Options for Increasing Contribution Table 1.1 Sales$100,000$150,000 $100,000 $100,000 Cost of Goods – 80,000– 120,000 – 80,000 – 64,000 Gross Margin20,00030,00020,000 36,000 Finance Costs– 6,000 – 6,000– 3,000 – 6,000 Subtotal14,00024,000 17,000 30,000 Taxes at 25%– 3,500– 6,000– 4,250 – 7,500 Contribution$ 10,500$ 18,000$ 12,750 $ 22,500 Finance/ MarketingAccountingOM OptionOptionOption IncreaseReduceReduce SalesFinanceProduction CurrentRevenue 50%Costs 50%Costs 20%

1 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall What Operations Managers Do  Planning  Organizing  Staffing  Leading  Controlling Basic Management Functions

1 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall 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, Maintenance17 Table 1.2

1 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall 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? Table 1.2 (cont.)

1 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 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? Table 1.2 (cont.)

1 - 13© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 5.Layout strategy  How should we arrange the facility?  How large must the facility be to meet our plan? 6.Human resources and job design  How do we provide a reasonable work environment?  How much can we expect our employees to produce? Table 1.2 (cont.)

1 - 14© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 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? Table 1.2 (cont.)

1 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall The Critical Decisions 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.)

1 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 17© 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, teamsToFrom  Local or national focus  Batch shipments  Low bid purchasing  Lengthy product development  Standard products  Job specialization

1 - 18© 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

1 - 19© 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

1 - 20© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 −

1 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall 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% % |||||||||

1 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall 120 – 100 – 80 – 60 – 40 – 20 – 0 – ||||||| (est) Employment (millions) Manufacturing and Service Employment Figure 1.4 (A) Manufacturing Service

1 - 23© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machinesSaved 12 seconds per shot

1 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machinesSaved 12 seconds per shot Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years. Productivity has improved by 27%, or about 4.5% per year.

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

1 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall Productivity Calculations Productivity = Units produced Labor-hours used = = 4 units/labor-hour 1, Labor Productivity One resource input  single-factor productivity

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

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

1 - 32© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 33© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

1 - 34© 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