Operations Management

Focus Area : Part I: Week 1

BASICS

LECTURE CONTENTS
Concept,
Introduction,
Role,
Classification,
Dynamics,
History &
Trends

Instructors Name
Muhammad Salman Bilal
Reference
Operations Management
Authors: Heizer, Render
Pearson Education
 Overview
Part I: BASICS

Week 1
Introduction to Operations Management (OM),
OM History
Week 2
OM versus Project Management, 5 Ps, New Trends

Week 3
OM based organizational structuring, POM Policy (Assignment 1)
 Concept of Operations Management
Operations management programs typically include
instruction in principles of general management,
manufacturing and production systems,
plant management,
equipment maintenance management,
production control,
industrial labor relations,
strategic manufacturing policy,
productivity analysis and cost control,
and materials planning.
 Operations Management
Operations Management is about transforming inputs
into finished goods and services and is virtually
back-bone of every organization.
Hence, acquiring skills in operations management
becomes essential for every business manager
whether he/she is pursuing a career directly involved
with operations or not.

NOTE: Management, including operations management, is

likeengineering in that it blends art withapplied sciences.
People skills, creativity, rational analysis, and knowledge of
technology are all required for success.
 What is Operation/Production?
Operations management
All of the activities that managers engage in to produce
goods and services

Operations manager
A person who manages systems that convert resources
into goods and services

NOTE:
Managers concern themselves with the control of
operations to ensure that the organizations goals
are achieved
 Competition in the Global Marketplace
The U.S. was the most productive country after World War II
Year 1940s-50s
Competitors in European (Design) and Asian countries (Quality)
eventually recovered and began to compete with the U.S. firms
Year 1960s-70s
U.S. firms have had to refocus on quality and customer needs
Year 1980s-90s

The most successful U.S. firms have focused on:

Motivating employees to improve productivity
Reducing production costs by carefully selecting suppliers
Revamping their facilities with state-of-the-art equipment
Using computer-aided and flexible manufacturing systems
Improving control procedures to lower manufacturing costs
Building foreign manufacturing facilities where labor costs are lower
 Intro to Operations Management (OM)
The business function A management function
responsible for planning,
Organizations core function
coordinating, and controlling
the resources needed to produce In every organization whether
products and services for a Service or Manufacturing,
company Profit or Not for profit
 Business Focus

Quality, Health,
Safety,
Environment

Marketing
Production Finance
Sales
Projects Accounts

Scheduling
Quality/ASQ
Risk
Agile/SCRUM
Business Analysis
Role of Operations Management (OM)
OM Transforms inputs to outputs
Inputs are resources such as
People, Material, and Money
Outputs are goods and services
 Basic Functioning of OM
To add value
Increase product value at each stage
Value added is the net increase between output product value and
input material value

To provide an efficient transformation

Efficiency means performing activities well for least possible cost
 Reasons for
Launching New Products and Services
Research and Development: A set of activities intended to
identify new ideas that have the potential to result in new
goods and services
Basic research
Uncovering new knowledge; scientific advancement without
regard for its potential use
e.g., Buoyancy
Applied research
Discovering new knowledge with some potential use
e.g., Explosives for Mining Industry
Development and implementation
Activities undertaken to put new or existing knowledge to use
in producing goods and services
e.g., Using Buoyancy for Designing huge Sea Ships for acting
as Air Bases floating in waters
Using Explosives for perforating Oil & Gas wells
 Reasons for
Launching New Products and Services
Product extension and refinement
Product life cycle
The rise and fall pattern of sales associated with the
introduction and acceptance of a product in the market place
Product refinement
Improving a products performance characteristics to increase
its utility to consumers
Product extension
Improving and adding additional performance features that
extend the want-satisfying capability of the product and its
life cycle in the market
 Basic Classification of OM
Manufacturing
Tangible product
Product can be inventoried
Low customer contact
Longer response time
Capital intensive
Services
Intangible product
Product cannot be inventoried
High customer contact
Short response time
Labor intensive
 Manufacturing versus Services
Both use technology & Both must forecast demand
Both have quality, productivity, capacity & layout issues
Both have customers, suppliers, scheduling and staffing issues
Manufacturing extends into providing services
Services at times procure/provides tangible goods

Reading Assignment:
Go through (Ch 1 & 2) of Text Book
 Increasing Importance of Services
Service Economy
An economy in which more effort is devoted to services
than to the production of goods
The production of services varies from
the production of goods
1. Services are consumed immediately and cannot be stored
2. Services are provided when and where the customer desires
3. Services are usually labor intensive
4. Services are intangible, making it difficult to evaluate
customer satisfaction
Service Industries

Source: U.S. Bureau of Labor Statistics website, www.bls.gov, accessed September 20, 2008.
Trend Shift of Developed Countries
Service sector growing to
50-80% of non-farm jobs
Global competitiveness
Demands for higher quality
Huge technology changes
Time based competition
Work force diversity
 OM Dynamics

Strategic
to
Tactical
History of Operations Management (OM)
Industrial revolution Late 1700s
Scientific management Early 1900s
Human relations movement 1930s
Management science 1940s
Computer age 1960s
Environmental Issues 1970s
JIT & TQM 1980s
Reengineering 1990
Global competition 1980
Flexibility/Adaptability 1990
Time-Based Competition 1990
Supply Chain Management 1990
Electronic Commerce 2000
Outsourcing & flattening of world 2000 +
Timeline ~ Operations Management
Timeline ~ Operations Management
 Established Trends of OM
Customers demand better quality, greater speed, and lower costs
Companies implementing lean system concepts a total systems
approach to efficient operations
Recognized need to better manage information using ERP and
CRM systems
Increased cross-functional decision making
OM has the most diverse organizational function
Manages the transformation process
OM has many established faces and names such as;
o V. P. operations, Director of SCM, Manufacturing manager
o Plant manger, Quality specialists, etc.
All business functions need information from OM in order to
perform their tasks
 Operations Management
Focus Area : Part I: Week 2
BASICS
LECTURE CONTENTS
Careers in OM,
Integration with Business,
Generalized OM,
OM versus Project Management,
OM versus Project Managers,
OM Decisions,
5 Ps,
POM Policy,
Guides to create POM Policy

Instructors Name
Muhammad Salman Bilal
Reference
Operations Management
Authors: Heizer, Render
Pearson Education
 Overview
Part I: BASICS

Week 1
Introduction to Operations Management (OM), OM History

Week 2
OM Careers, OM integrated with Business, OM versus
Project Management, Strategic OM decisions, 5 Ps,
Planning the Operations

Week 3
International Operations Strategies,
Exciting New Trends in OM
 Careers in Operations Management
Successful operations managers must:
Be able to motivate and lead people by letting them know OM is
integrally related to all the business functions.
Understand how technology can make a manufacturer more productive
and efficient to sustain & grow business
Understand the relationship between the customer, the marketing of a
product, and the production of a product to become productive enterprise
Appreciate the control processes that lower production costs and improve
product quality because large percentage of revenue of most firms is
spent in OM

NOTE: 40% of the available jobs are in OM

Ops managers MUST appreciate the manufacturing process
Mass production: a process that lowers the cost required to produce a large
number of identical or similar products over a long period of time
Analytic process: a process that breaks raw materials into different
component parts
Synthetic process: a process that combines raw materials or components to
create a finished product
 The Conversion Process
The purpose of the resources conversion
process is to provide utility to customers

Utility: the ability of a good or service to

satisfy a human need
Four types of utility: form, place, time,
and possession

Then What is Form Utility?

The utility created
by the converting raw materials, people,
finances, and information
into finished products
(i.e., production or manufacturing)
 The Nature of Conversion
Focus
The focus of the conversion process is the resource or
resources that comprise the major or most important input
Magnitude of change
The degree to which the resources are physically changed
Number of production processes
The number of production processes employed varies from
one or a few for small firms to many for larger firms
Functional
Business
Areas

Business Triggered
Operations
Managed
PRODUCT/
SERVICE
 Generalized OM in an Organization
Most businesses are supported by the functions of operations,
marketing, and finance & these major functional areas
must interact to achieve the organization goals

Marketing is not fully able to meet customer needs

if they do not understand what operations can produce
Finance cannot judge the need for capital investments
if they do not understand operations concepts and needs
Accounting needs to consider inventory management,
capacity information, and labor standards

Information Systems enables the information

flow throughout the organization
Human resources must understand job requirements
and worker skills
Integration with Business
 OM versus Project Management
Project Management deals with the management of a specific project,
which has a commence date, a number of tasks and a completion date.
A Project Manager would typically oversee the delivering of projects on time,
assigning tasks to developers and designers and ensuring client satisfaction.

Operations Management refers to the ongoing management of daily

works of a company, such as technical support, network management,
etc. With Operations Management, there is no set end point.
An Operations Manager would typically be involved in all operations of a
company, ensuring that everything is running smoothly and that staff are
delivering correctly.

Example A web agency may have many projects running at the same time
and once these projects are deployed, the project is finished, in terms of
operations management, the operations manager is still occupied with the day
to day support and management of the deployed project, ensuring that it is still
running correctly, fixing various problems and so forth.
 Categorization of Work: Operations or Projects
We generally categorize work performed in our organization as
either Project or Operational work.

Operational works are done to achieve business goals, whereas

projects are executed to start new business objectives.

One or more projects can be executed to provide inputs to

operations for better implementation. So, operations and projects
have few intersection points during theproduct life cycle.

Project management used to manage projects whereas business

process or operations management is used to execute operations.

NOTE:
Basically, Projects are means of executing those activities that cannot be
addressed within the organizations normal operations limit.
Project & Operations Management

(Reference: Page 12 PMBOK Guide 4th Edition)

 Comparison b/w Operations & Projects
Projects Operations
* Temporary * Ongoing
* Output: Unique * Output: Repetitive
* Purpose: Attain its objective * Purpose: Sustain the business
and then terminate
* Concludes when its specific * Adopt a new set of objectives
objectives have been attained and the work continues

Similarities between Projects and Operations

Performed by people
Constrained by limited resources
Planned, executed, and controlled
Domain of Project & Operations Managers

O
P
P
E
R
R
O
A
J
T
E
I
C
O
T
N
S
M
M
A
A
N
N
A
A
G
G
E
E
R
R
(Reference: Page 28, Table 2-1 PMBOK Guide 4th Edition)
 OM Decisions
All organizations follow an identical path for their
decision-making, i.e., Strategic giving lead to Tactical

Initial decisions are very broad Strategic decisions

Strategic Decisions set the direction for the entire
company; they are broad in scope and long-term in nature
Less Frequent normally
Following decisions focus on specifics - Tactical decision
Tactical decisions: focus on specific day-to-day issues like
resource needs, schedules, & quantities to produce
Tactical decisions are normally frequent

NOTE: Tactical and Strategic decisions must align

Examples of OM Decisions

Figure taken from Presentation by DAVID A. COLLIER & JAMES R. EVANS

 What is Strategy?

Strategy can be defined as

the determination of
the basic long-term goals & objective of the enterprise
and the adoption of
courses of action & the allocation of resources
Necessary for carrying out these goals
Alfred D Chandler, Jr.

Strategos in Greek language means

to designate a chief magistrate or
a military commander-in-chief
Comprehensive Plan aimed at achieving long-term organizational goals
 Strategic OM Decisions
Goods
What goods & Services
& services Design
& How should we design?
Managing
Defining Quality Quality
& assigning responsibilities
WhatProcess
What process &&what
equipment &Capacity
capacityDesign
technology is
is necessary?
required?
Where shouldLocation& Layout
we put facility? & how to arrange?
HR
Environment & & Job Design
productivity leading atmosphere

SCM
Make/Buy,
Inventory size&&Inventory(JIT)
Suppliers integration,
Timing e-commerce
for re-ordering
Who is Scheduling
Resourceresponsible & Maintenance
(Employees,&Jobs)Planning
When to do Maintenance?
& Scheduling

Figure drawn by M Salman Bilal based on the basic concept given by Jay Heizer & Berry Renders Table 1.2 of
the book Operations Management 9th Edition : Page 7
Strategic Decision-making to
Tactical Operational Moves & Controls

Strategic
to
Tactical

Figure drawn by M Salman Bilal

5 Ps:
Product, Plant, Process, Program & People

Strategic Planning for

PRODUCT/Service Design

PLANT/Facility Layout with

Equipment selection and
maintenance

Methodology/Work Measurement
along with Controlling Quality
with PROCESSES

Controls/Forecast/Inventory
management/Linear
Programming for Resource
allocation/Purchasing during
PROGRAM

PEOPLE covers Soft issues &

TACTICS Legal Protections
should align
STARTEGY
Figure drawn by M Salman Bilal based on Alan & John Oakland Approach
 POM: Production and Operation Management
Production & Operations Management is amalgam of all aspects of the work
Also there is ill-defined area of interest where the five sub-areas overlap (the grey area)
Continuous external and internal pressures keep on changing
Chain effect within sub-areas can arise
In 70s & 80s, Operations strategy was often neglected in favour of Finance & Marketing
Strategies in US, resulting in foreign mergers and acquisitions with a careful focus on
operations strategy. Late 80s and 90s were recovery years for US by opting Productivity.

PRODUCT

PEOPLE PLANT

POM
PROGRAM PROCESS

Figure from Presentation by DAVID A. COLLIER & JAMES R. EVANS

 Marketing Strategy
Finance Strategy

Figure taken from Presentation by DAVID A. COLLIER & JAMES R. EVANS

 POM Policy
Corporate policy cannot set down logical POM policy
that is within organizational capability
as Operations is virtually backbone of almost every business

Failure to attain POM policy in line & harmonized

with corporate policy simply means frustration
and malfunctioning of system ..ONLY solution is
to align them both i.e. POM & Corporate Policies
PRODUCT

PEOPLE PLANT

POM
PROGRAM PROCESS
 What is Operations Strategy?
OPERATIONS STRATEGY
The approach, consistent with the Organizational strategy, that is
used to guide the operations functions.

Guides to Operations Strategy/ POM Strategy

Identify the key objectives (Distinctive Competencies)

Control diversity (Variety Control)
Break problems into parts (Compartmentalization)
Keep organizations small (Flexibility)
Structure serves customer needs (Agility)
 Examples of Distinctive Competencies
Factor Competency Services or Goods
PRICE Low Cost Pakistan Post,
Motel-6, Gourmet Restaurant
QUALITY High Performance design Samsung LCD, Islamabad
and/or high quality Serena Hotel
Consistent Quality Coca Cola, Bata
TIME Rapid Delivery Mc Donalds,
On-time Delivery FedEx
Development Speed
FLEXIBILITY Customization Ad design, Shampoo bottles
Variety Subway Restaurant
Volume Toyota
SERVICE Superior customer service 5 Star Hotel, Nokia, HP

LOCATION Convenience ATMs, Service Stations,

CNG,
Operations Management
Part I: Week 3
BASICS

LECTURE CONTENTS
International Operations Strategies,
Organizational Structuring (OS),
Need & Selection Criteria for OS,
Exciting New Trends in OM.

Instructors Name
Muhammad Salman Bilal
Reference
Operations Management
Authors: Heizer, Render
Pearson Education
 Overview
Part I: BASICS

Week 1
Introduction to Operations Management (OM), OM History

Week 2
OM versus Project Management, 5 Ps, New Trends, POM Policy

Week 3
International Operations Strategies,
Exciting New Trends in OM
Changing Challenges for Ops Managers,
 Global Operations Strategy Options
An international business is any firm that engages in international
trade or investment.
Broad category and is the opposite of a domestic, or local, firm
A multinational corporation (MNC) is a firm with extensive
international business involvement.
MNCs buy resources, create goods or services, and sells goods or
services in a variety of countries.
The term multinational corporation applies to the most of the worlds
large, well known businesses.

Example:
Certainly IBM is a good example of MNC business.
It imports the electronic components to US from over 50 countries,
exports computers to over 130 countries, has facilities in 45 countries,
and earns more than half its sale and profits abroad.
 Four International Operations Strategies
for Ops Managers to target Global Opportunities

High
Global
Transnational
Hi degree of centralization
for economies of scale
Cost Reduction Consideration

Standardized product Across national boundaries

Cross-cultural Cross-cultural
Learning b/w facilities e.g.,
e.g., Nestle, Reuters, etc
Caterpillar, GM, etc

International Multi-domestic
Use existing domestic model
Import/export or Franchise, Joint Venture
license existing product e.g.,
e.g., McDonalds, etc
Harley-Davidson, etc

Low

Low Local Responsiveness Consideration High

Figure drawn by M Salman Bilal based on the basic concept given by Jay Heizer & Berry Renders in Operations Management 9th Edition
 EXAMPLES:
Four International Operations Strategies
International Harley Davidson is the brand famous for
international following but geographically restricted to US
vicinity as far as manufacturing is concerned. International
They are least concerned with the local (other countrys local
citizens) responsiveness to their product i.e., are not stretching Import/export or
license existing product
out to win their hearts by out reaching them in their countries e.g.,
for penetration purpose. Harley-Davidson, etc
Also HD are not eager to achieve cost reduction by moving out of
US for better productivity and cheaper labor purpose.

Primarily McDonalds is operating as a multi-domestic, which

gives it the local responsiveness needed to modify its menu
country by country with increased local following and acceptance Multi-domestic
for obvious reasons. (flavor, culture, religion, etc)
Use existing domestic model
McDonalds can then serve beer in Germany, wine in France. Franchise, Joint Venture
McHuevo (poached egg hamburger) in Uruguay, e.g.,
and hamburger without beef in India. McDonalds, etc

With over 2000 restaurants in Japan and presence of more than

a generation, the average Japanese family thinks Japan
invented McDonalds.
 EXAMPLES:
Four International Operations Strategies

Caterpillar, the world leader in earth moving equipment,

purse global strategies. Global
Earth moving equipment is the same in Nigeria as in
Hi degree of centralization
Pakistan, which allow Caterpillar to have individuals for economies of scale
factories focus on a limited line of products to be shipped Standardized product
Cross-cultural
worldwide. Learning b/w facilities
Hence achieving Cost Reduction Considerations. This result e.g.,
Caterpillar, GM, etc
in economies of scale and learning within each facility.

Nestle, is a good example of transnational company.

Although it is legally Swiss, 95% of its assets are held and
98% of its Sales are made outside Switzerland. Fewer than
10% of its workers are Swiss. Transnational
Similarly, Service firms such as Reuters (a news Agency) can
be viewed as transnational Service industries. Across national boundaries
Cross-cultural
We can expect the national identities of these transnationals e.g.,
to continue to fade. Nestle, Reuters, etc
Transnationals exploit the Cost Reductions Considerations as
well as the Local Responsive Considerations to the fullest.
 ASSIGNMENT

Referring to the four international operating strategies, submit written

assignment mentioning examples from Pakistans corporate world.
Explain how they come under each category.
(International, Multi-domestic, Global, Transnational)

Submission
COMING LECTURE
 Exciting New Trends in OM
q Prime reason of exciting new trends in OM is because of Service sectors & ITs
over-whelming penetration
q Special attributes of Service sector within OM:
Services cannot be usually re-sold; Services are neither inventoried nor
transportable. (Service-provider is however movable)
Many quality aspects of services are difficult to measure (a law firm)
Site of service is important for customer contact (doctors clinic) and services
are often difficult to automate (haircut steps)
Selling is often part of the service as compared to Goods where selling is
distinct from production

Figure drawn by M Salman Bilal based on Statistical abstract of US 2007

Changing Challenges for Ops Manager

Cause Global focus

Local or
National Reliable Going offshore/
Focus worldwide abroad
communication
Transportation
networks
PAST FUTURE

Cause Rapid product

Lengthy
Shorter life
development
product
designing cycles, internet, Collaborative
CAD design
International
collaboration
PAST FUTURE
Changing Challenges for Ops Manager

Cause Ethics on
Ethics not at priority
priority Business more open,
public, transparent, Social
ethical responsibility
Awareness & opposition
to child labor, bribery,
pollution

PAST FUTURE

Low bid
Cause Supply Chain
purchasing partners
SC healthy
competition Alliances
More focus on end Collaborative
customer designs
Long-lasting
relation
PAST FUTURE
 Most Exciting & Profitable Challenge for
Ops Manager

Cause

Knowledge
Management High Productivity
Low/No focus on Knowledge Economy High Profitability
Productivity
R & D
Consultancy
PAST FUTURE
 Production
Concerned with ACTIVITY of producing goods
Mere Output or Efficiency

Productivity
Concerned with Efficiency & Effectiveness with which the goods and services
are being produced
Output over Input and NOT the mere Output

Productivity is a scorecard on
effective resource use
A nations Productivity effects
its standard of living
US productivity growth
averaged 2.8% from 1948-1973
Productivity growth slowed for
the next 25 years to 1.1%
Productivity growth in service
industries has been less than
in manufacturing
 Misconceptions about Productivity
Lawn mower while working for long hours is concentrating on efficiency
part of his job. Of-course by adding couple more hours to his routine the
mower will reap more i.e., more efficient
Whereas productivity is more of thinking of applying a power-mower
(electrical or diesel) instead
Production improvement is not necessarily productivity improvement
Production Productivity
A bank processed 1,000 checks yesterday, using 20 hours of labor.
Same bank processed 1,200 checks today, using 24 hours of labor.
What is the change in Production ? (20% higher)
What is the change in Productivity ? (same)

80 to 85 % of organizations do not understand this

Efficiency improvement does not guarantee productivity improvement
Efficiency is a necessary, but not a sufficient condition for productivity
Both efficiency and effectiveness are required to be productive
 Misconceptions about Productivity
Improvements in sales revenue does not necessarily ensure
productivity improvement
Increase in Revenue Increase in Productivity
Companies set targets for sales revenues & monitor on a
monthly, weekly, or daily basis but productivity is not monitored
with the same passion or commitment
Increase in sales with a constant or lower productivity can be
disastrous for a business
Misconceptions about Productivity w.r.t. Quality
Quality improvement does not have to be at the expense of
productivity
Quality improvement usually results in increased productivity

SELF-QUESTIONING.. PROBABLE ANSWERS..

How can I be more efficient ? May be by adding hours
How can I be more productive? By use of IT
 The Productivity Challenge

Productivity is the ratio of outputs (goods & services) divided by the inputs
(resources, such as capital and labor)
OM job is to enhance (improve) this ratio of outputs to inputs
Improving productivity means improving efficiency

Input Process Output

Labor, US economic system transforms Goods and
Capital, inputs to outputs at about an
Services
Management annual 2.5% increase in productivity per year.

Productivity increase is the result of

Capital (38% of 2.5%= 0.95%)
Labor (10% of 2.5%= 0.25%)
Management (52% of 2.5%= 1.3%)
 Inputs to Productivity

Human
Labor, Supervisors, Managers, Staff, Professionals
Labor
Direct Labor: Directly associated with the product or service
(Operators, Welders, Bank Tellers, etc)
Indirect Labor: Supports a process or operation
(Inspectors, Supervisors, etc.)
Capital
Fixed
(Land, Plant - Building & Structure, Machines, Equipment, Tools,etcs)
Working (Inventories, Cash, Accounts Receivables, Other Receivables)
Materials
Direct Material: Used directly for manufacture of products (includes scrap an
losses)
Indirect Material: Consumed in the production process, but do not become
part of the finished product (Oils and lubricants for machines, sand in
casting, nails and screws in small quantities, etc)
Energy
Oil, Gas, Coal, Water, Electricity, etc.
Other Expenses (Burden)
Travel, Taxes, Professional Fees, Information, Office Supplies, R&D, General
Administration, etc.)
 Special Scenarios of Inputs to Productivity

Overhead
Costs that cannot be charged directly to any product
All expenses except the direct costs
Factory Overhead: Indirect labor, indirect material, other indirect
costs (around 30% of the plant costs)
Administration Overhead: Office building, rent, legal fees,
accounting, travel, entertainment, R&D, etc. (around 20% of total
operating costs)
Selling Overheads: Sales staff, shipping, storage, warehousing,
service calls (10% of total sales value)
 Case Study: STARBUCKS
This is a game of seconds says Silva Peterson, whom Starbucks has put in
charge of saving seconds. Her team of 10 analysts is constantly asking
themselves: How can we shave time off this?

Petersons analysis suggested that there were some obvious opportunities.

First, stop requiring signatures on credit-card purchases under US$ 25. This
sliced 8 seconds off the transaction time at the cash register.
Then, analysts noticed that Starbucks largest cold beverage, the Venti size,
required two bending and digging motions to scoop up enough ice. The scoop
was too small. Re-design of the scoop provided the proper amount in only one
motion, which cut 14 seconds off the average time of one minute.
Third were new espresso machines: with the push of a button, the machines
grind coffee beans and brew. This allowed the server, called a barista at
Starbucks, to do other things. This can save 12 seconds per espresso shot.

As a result, operations improvements at Starbucks outlets have increased the

average yearly volume by US$ 200,000, to US$ 940,000 in 6 years.
This is a 27% improvement in productivity, which is ~4.5% per year.

Reference: h*p://prodpran.che.engr.tu.ac.th/AE372/01%20Produc=vity%20Improvement%20-%20Case%20Studies.pdf
Reference: h*p://prodpran.che.engr.tu.ac.th/AE372/01%20Produc=vity%20Improvement%20-%20Case%20Studies.pdf
 QUESTION AND ANSWERS: CASE STUDY

Q1.
Why was taking off every second out of the service time so
important for starbucks?

As Silva Peterson says this is a game of seconds; starbucks is a

coffee house and for them serving the best coffee in the lowest
possible time is of utter importance. With millions of customers
rushing in the store every second; each second counts for this
international coffee chain.
 Q2.
What were the 3 improvements that Silva Peterson suggested?

1. Stop requiring signatures on credit cards purchases under $25

2. Redesign of the scoop for digging the ice.
3. Getting new espresso machines.

The 3 suggestions given by silva Peterson brought a huge difference

in cutting off seconds from the service times. revenues increased
and productivity improvement went from 4.5% to 27%.
 Q3.
The productivity improvement mentioned in the case study was
related to which type of productivity improvement and why?

1st improvement suggested was more of a an employee and process based

improvement. The employees used to take signatures on every credit card
purchase receipt. The process was improved by asking the employees not
to take signatures on credit card purchase under $25.

2nd improvement suggested was the technology based improvement.

Redesigning of the scoop was a technological improvement.

3rd improvement was also a technology based improvement. Buying a new

espresso machine was an improvement in technology as well.
 The Productivity Cycle

Productivity
MEASUREMENT

Productivity Productivity
IMPROVEMENT EVALUATION

Productivity
PLANNING
 The Productivity Cycle

Productivity Measurement
Business, operations, process level
Single-factor, multi-factor, total productivity measures

Productivity Evaluation
Evaluation or comparison against planned targets

Productivity Planning
Based on evaluations, target levels of productivity are planned
Short-term and long-term planning

Productivity Improvement
Based on targets, improvements are selected and implemented

Reference: Chapter 3: Productivity Engineering and Management,

by David J. Sumanth, 1984, McGraw-Hill
 The Productivity Spiral

Meas

Meas

Imp Eval Meas

PLAN
Imp Eval

PLAN
Total Productivity
perspective through the Productivity Cycle

MEASUREMENT
By Product
By Customer
By Department
By Plant/Division
By Firm/Company

IMPROVEMENT
Technology Based
Material Based EVALUATION
Employee Based Within Given Time Period
Product Based Between two Periods
Process Based

PLANNING
Long Term
Short Term
 Operation Management in parallel with
Productivity Management

PRODUCT Product Design

PLANT Plant Location & Layout

Work & Quality

PROCESS Measurements

PROGRAM Forecasting, Inventory Management,

Resource Allocation, Purchasing

Personnel Management,
PEOPLE Health & Safety Management

MEASUREMENT
By Product
By Customer
By Department
By Plant/Division
By Firm/Company
 Types of Productivity

NOTE:
Total-Factor Productivity includes ONLY Labor & Capital as its inputs
 Measuring Productivity

Productivity is a measure of how efficiently inputs are converted to outputs

Productivity = output/input

Total Productivity = $ Sales / $ Inputs

Partial Productivity = Cars/Employee

Multi-factor Productivity = $ Sales / Total costs (Labor & Capital)

NOTE:
Total-Factor Productivity includes ONLY Labor & Capital as its inputs
 Total Productivity Calculation

Bluegill Furniture makes kitchen chairs. The weekly dollar value of its
output, including finished goods and work-in-progress, is $14,280. The
value of inputs (labor, materials, capital) is approximately $16,528. What
is the total productivity measure for Bluegill?

Total productivity = output/input

= $14,280/$16,528 = .864 or 86.4%
 Partial Productivity Calculation

Bluegill Furniture has hired 2 new workers to paint chairs.

Together they have painted 10 chairs in 4 hours. What is
labor productivity for the pair?
Labor Productivity = Output / Labor

= (10 chairs)/(2 x 4 hr)

= (10 chairs)/(8 hr) or 1.25 chairs/hr
 Multifactor Productivity Calculation

Bluegill Furniture averages 35 chairs/day. Labor costs

average $480, material costs are typically $200, and overhead
cost is $250. Bluegill sells the chairs to a retailer for $70/unit.
Find multifactor productivity.

Multifactor productivity =
(value of output) / (Labor + Capital)

= ($70/chair x 35 chairs) / (480+200+250)

= ($2450) / ($930) or 2.63

NOTE: Material + Overhead costs come under Capital cost in this case.