2/3/2012

Outline
Operations
; Global Company Profile: Hard Rock
Management Cafe
; What Is Operations Management?
Chapter
p 1–
; Organizing to Produce Goods and
Operations and Services
Productivity ; Why Study OM?
PowerPoint presentation to accompany ; What Operations Managers Do
Heizer/Render
Principles of Operations Management, 7e ; How This Book Is Organized
Operations Management, 9e
© 2008 Prentice Hall, Inc. 1–1 © 2008 Prentice Hall, Inc. 1–2

Outline - Continued Outline - Continued

; The Heritage of Operations ; The Productivity Challenge
Management
; Productivity Measurement
; Operations in the Service Sector ; Productivity Variables
; Differences between Goods and ; Productivity and the Service Sector
Services
; Growth of Services
; Ethics and Social Responsibility
; Service Pay
; Exciting New Trends in Operations
Management
© 2008 Prentice Hall, Inc. 1–3 © 2008 Prentice Hall, Inc. 1–4

Learning Objectives Learning Objectives

When you complete this chapter When you complete this chapter
you should be able to: you should be able to:

1. Define operations management 4. Compute single-

single-factor
productivity
d ti it
2. Explain the distinction between
goods and services 5. Compute multifactor productivity
3. Explain the difference between 6. Identify the critical variables in
production and productivity enhancing productivity

© 2008 Prentice Hall, Inc. 1–5 © 2008 Prentice Hall, Inc. 1–6

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The Hard Rock Cafe What Is Operations

Management?
; First opened in 1971
; Now – 121 restaurants in over 40 countries
Production is the creation of
; Rock music memorabilia goods and services
; Creates value in the form of good food
and entertainment
Operations management (OM) is
the set of activities that creates
; 3,500+ custom meals per day in Orlando value in the form of goods and
; How does an item get on the menu? services by transforming inputs
; Role of the Operations Manager into outputs

© 2008 Prentice Hall, Inc. 1–7 © 2008 Prentice Hall, Inc. 1–8

Organizing to Produce Organizational Charts

Goods and Services
Commercial Bank

; Essential functions: Operations Finance Marketing

; Marketing – generates demand Teller Investments Loans
Scheduling Security
Secu ty Commercial
Co e ca
; Production/operations
P d ti / ti – creates
t Check Clearing Real estate Industrial
the product Collection Financial
; Finance/accounting – tracks how Transaction Accounting Personal
processing
well the organization is doing, pays Facilities Mortgage
bills, collects the money design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security
Figure 1.1(A)
© 2008 Prentice Hall, Inc. 1–9 © 2008 Prentice Hall, Inc. 1 – 10

Organizational Charts Organizational Charts

Manufacturing
Airline
Operations Finance/ Marketing
Operations Finance/ Marketing Facilities accounting Sales
accounting Construction; maintenance Disbursements/ promotion
Ground support Traffic Production and inventory control credits Advertising
equipment Accounting administration Scheduling; materials control Receivables Sales
Maintenance Payables Reservations Quality assurance and control Payables
Receivables Schedules General ledger Market
Ground Operations Supply chain management research
General Ledger Tariffs (pricing) Funds Management
Facility Manufacturing
maintenance Finance Sales Tooling; fabrication; assembly Money market
Catering Advertising International
Cash control Design exchange
Flight Operations International Product development and design
exchange Detailed product specifications Capital requirements
Crew scheduling Industrial engineering Stock issue
Flying Efficient use of machines, space, Bond issue
Communications and personnel and recall
Dispatching Process analysis
Management science Development and installation of
Figure 1.1(B) production tools and equipment Figure 1.1(C)
© 2008 Prentice Hall, Inc. 1 – 11 © 2008 Prentice Hall, Inc. 1 – 12

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Why Study OM? Options for Increasing

Contribution
; OM is one of three major functions Finance/
Marketing Accounting OM
(marketing, finance, and operations) Option Option Option
of any organization Increase Reduce Reduce
Sales Finance Production
; We want (and
(and need)
need) to know how Current Revenue 50% Costs 50% Costs 20%

goods and services are produced Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000
; We want to understand what Gross Margin 20,000 30,000 20,000 36,000
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
operations managers do Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
; OM is such a costly part of an Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
organization
© 2008 Prentice Hall, Inc. 1 – 13 © 2008 Prentice Hall, Inc. 1 – 14

Ten Critical Decisions

What Operations
Ten Decision Areas Chapter(s)
Managers Do ; Design of goods and services 5
; Managing quality 6, Supplement 6
Basic Management Functions ; Process and capacity 7, Supplement 7
design
; Location strategy
gy 8
; Planning ; Layout strategy 9
; Organizing ; Human resources and 10, Supplement 10
job design
; Staffing ; Supply chain
management
11, Supplement 11

; Leading ; Inventory management 12, 14, 16

; Scheduling 13, 15
; Controlling ; Maintenance 17
Table 1.2
© 2008 Prentice Hall, Inc. 1 – 15 © 2008 Prentice Hall, Inc. 1 – 16

The Critical Decisions The Critical Decisions

; Design of goods and services ; Process and capacity design
; What good or service should we ; What process and what capacity will
offer? these products require?
; How should we design
g these products ; What equipment and technology is
and services?
necessary for these processes?
; Managing quality
; Location strategy
; How do we define quality?
; Where should we put the facility?
; Who is responsible for quality?
; On what criteria should we base the
location decision?
Table 1.2 (cont.) Table 1.2 (cont.)
© 2008 Prentice Hall, Inc. 1 – 17 © 2008 Prentice Hall, Inc. 1 – 18

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The Critical Decisions The Critical Decisions

; Layout strategy ; Supply chain management
; How should we arrange the facility?
; Should we make or buy this component?
; How large must the facility be to meet
; Who are our suppliers and who can
our plan?
integrate into our e-
e-commerce program?
; Human resources and job design ; Inventory, material requirements
; How do we provide a reasonable work planning, and JIT
environment?
; How much inventory of each item should
; How much can we expect our we have?
employees to produce?
; When do we re-
re-order?
Table 1.2 (cont.) Table 1.2 (cont.)
© 2008 Prentice Hall, Inc. 1 – 19 © 2008 Prentice Hall, Inc. 1 – 20

Where are the OM Jobs?

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

Table 1.2 (cont.)

© 2008 Prentice Hall, Inc. 1 – 21 © 2008 Prentice Hall, Inc.
Figure 1.2 1 – 22

Where are the OM Jobs? Significant Events in OM

; Technology/methods
; Facilities/space utilization
; Strategic issues
; Response time
; People/team development
; Customer service
; Quality
; Cost reduction
; Inventory reduction
; Productivity improvement Figure 1.3

© 2008 Prentice Hall, Inc. 1 – 23 © 2008 Prentice Hall, Inc. 1 – 24

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The Heritage of OM The Heritage of OM

; Division of labor (Adam Smith 1776; ; Computer (Atanasoff 1938)
Charles Babbage 1852)
; CPM/PERT (DuPont 1957)
; Standardized parts (Whitney 1800)
; Material requirements planning (Orlicky 1960)
; Scientific Management (Taylor 1881)
; Computer aided design (CAD 1970)
; Coordinated assembly line (Ford/
; Flexible manufacturing system (FMS 1975)
Sorenson 1913)
; Baldrige Quality Awards (1980)
; Gantt charts (Gantt 1916)
; Computer integrated manufacturing (1990)
; Motion study (Frank and Lillian Gilbreth
1922) ; Globalization (1992)
; Quality control (Shewhart 1924; Deming ; Internet (1995)
1950)
© 2008 Prentice Hall, Inc. 1 – 25 © 2008 Prentice Hall, Inc. 1 – 26

Eli Whitney Frederick W. Taylor

; Born 1765; died 1825
; In 1798, received government
contract to make 10,000 muskets
; Showed that machine tools could
make standardized parts to exact
specifications
; Musket parts could be used in any
musket
© 2008 Prentice Hall, Inc.
; Born 1856; died 1915
; Known as ‘father of scientific
management’
; In 1881, as chief engineer for
Midvale Steel, studied how tasks
were done
; Began first motion and time studies
; Created efficiency principles
1 – 27 © 2008 Prentice Hall, Inc. 1 – 28

Taylor’s Principles Frank & Lillian Gilbreth

Management Should Take More ; Frank (1868-
(1868-1924); Lillian (1878-
(1878-
Responsibility for: 1972)
; Husband
Husband--and
and--wife engineering team
; Matching employees to right job
; Providing the proper training ; Further
F th developed
d l d work
k
measurement methods
; Providing proper work methods and
tools ; Applied efficiency methods to their
; Establishing legitimate incentives for home and 12 children!
work to be accomplished ; Book & Movie: “Cheaper by the
Dozen,” book: “Bells on Their Toes”
© 2008 Prentice Hall, Inc. 1 – 29 © 2008 Prentice Hall, Inc. 1 – 30

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Henry Ford W. Edwards Deming

; Born 1863; died 1947
; Born 1900; died 1993
; In 1903, created Ford Motor
Company ; Engineer and physicist

; In 1913
1913, first used moving assembly ; Credited with teaching
g Japan
p
line to make Model T quality control methods in post
post--
WW2
; Unfinished product moved by
conveyor past work station ; Used statistics to analyze process
; Paid workers very well for 1911 ; His methods involve workers in
($5/day!) decisions
© 2008 Prentice Hall, Inc. 1 – 31 © 2008 Prentice Hall, Inc. 1 – 32

Contributions From New Challenges in OM

From To
; Human factors ; Local or national focus ; Global focus

; Industrial engineering ; Batch shipments ; Just

Just--in
in--time
; Low bid purchasing ; Supply chain
; Management science partnering
t i
; Biological science ; Lengthy product ; Rapid product
development development,
; Physical sciences alliances
; Standard products ; Mass
; Information technology customization
; Job specialization ; Empowered
employees, teams
© 2008 Prentice Hall, Inc. 1 – 33 © 2008 Prentice Hall, Inc. 1 – 34

Characteristics of Goods Characteristics of Service

; Tangible product ; Intangible product
; Consistent product ; Produced and
definition consumed at same time
; Production usually ; Often unique
q
separate from ; High customer
consumption interaction
; Can be inventoried ; Inconsistent product
; Low customer definition
interaction ; Often knowledge-
knowledge-based
; Frequently dispersed
© 2008 Prentice Hall, Inc. 1 – 35 © 2008 Prentice Hall, Inc. 1 – 36

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Industry and Services as Goods Versus Services

Percentage of GDP Attributes of Goods
(Tangible Product)
Attributes of Services
(Intangible Product)
90 − Can be resold Reselling unusual
Services Manufacturing
80 − Can be inventoried Difficult to inventory
70 − Some aspects of quality Quality difficult to measure
60 − measurable
50 − S lli is
Selling i distinct
di ti t from
f S lli is
Selling i partt off service
i
40 − production
30 − Product is transportable Provider, not product, is
20 − often transportable
10 − Site of facility important for cost Site of facility important for
0−
customer contact
Often easy to automate Often difficult to automate
Japan

Russian Fed

Spain
Australia

Canada

China

Germany

South Africa
Hong Kong
Czech Rep

Mexico

UK
France

US
Revenue generated primarily Revenue generated primarily
from tangible product from the intangible service

© 2008 Prentice Hall, Inc. 1 – 37 © 2008 Prentice Hall, Inc.

Table 1.3 1 – 38

Goods and Services Manufacturing and Service

Automobile
Employment
Computer
120 –
Installed carpeting
Fast-food meal 100 –
Employment (milllions)
Restaurant meal/auto repair
Hospital care 80 – Service

Advertising agency/
investment management 60 –

Consulting service/
teaching 40 –

Counseling Manufacturing
20 –
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |
0– | | | | | | |
Percent of Product that is a Good Percent of Product that is a Service 1950 1970 1990 2010 (est)
1960 1980 2000
Figure 1.4 Figure 1.5 (A)
© 2008 Prentice Hall, Inc. 1 – 39 © 2008 Prentice Hall, Inc. 1 – 40

Manufacturing Employment Development of the

and Production Service Economy
– 150
Industrial United Sta
production
Employment (millions)

(right scale) – 125 Can

100

– 100 Fra
Index: 1997 = 1

I
– 75
Bri
40 – Manufacturing – 50
employment Jap
30 – (left scale)
20 – – 25
| | | | |
W. Germ
10 –
| | | | | | 40 50 60 70 80
0 – –| 0
1950 1970 1990 2010 (est) 1970 2008 (est) Percent
1960 1980 2000
Figure 1.5 (B)
Figure 1.5 (C)
© 2008 Prentice Hall, Inc. 1 – 41 © 2008 Prentice Hall, Inc. 1 – 42

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Organizations in Each Sector Organizations in Each Sector

% of all
% of all Service Sector Example Jobs
Service Sector Example Jobs
Professional Snelling and Snelling, Waste 10.1
Education, Notre Dame University, 25.5 and Business Management, Pitney
Pitney--Bowes
Legal, Medical, San Diego Zoo, Arnold Services
and other Palmer Hospital
Finance
Finance, Citicorp American Express,
Citicorp, Express 9.6
96
Trade (retail, Walgreen’s, Wal-
Wal-Mart, 15.1 Information, Prudential, Aetna, Trammel
wholesale) Nordstrom’s Real Estate Crow, EDS, IBM
Utilities, Pacific Gas & Electric, 5.2 Food, Lodging, Olive Garden, Hard Rock Cafe, 8.5
Transportation American Airlines, Santa Entertainment Motel 6, Hilton Hotels, Walt
Fe R.R., Roadway Disney, Paramount Pictures
Express
Public U.S., State of Alabama, Cook 4.6
Administration County
Table 1.4 Table 1.4
© 2008 Prentice Hall, Inc. 1 – 43 © 2008 Prentice Hall, Inc. 1 – 44

Organizations in Each Sector New Trends in OM

Manufacturing % of all Past Causes Future
Sector Example Jobs Local or Reliable worldwide Global focus,
national communication and moving
Manufacturing General Electric, Ford, 11.5 focus transportation networks production
U.S. Steel, Intel offshore
Batch (large) Short product life cycles Just-in-
Just- in-time
Construction Bechtel, McDermott 7.9 shipments and cost of capital put performance
pressure on reducing
Agriculture King Ranch 1.6 inventory
Low-bid
Low- Supply chain competition Supply chain
Mining Homestake Mining 0.4 purchasing requires that suppliers be partners,
engaged in a focus on the collaboration,
Sector Percent of all jobs end customer alliances,
outsourcing
Service 78.6%
Manufacturing 21.4%
Table 1.4 Figure 1.6
© 2008 Prentice Hall, Inc. 1 – 45 © 2008 Prentice Hall, Inc. 1 – 46

New Trends in OM New Trends in OM

Past Causes Future Past Causes Future
Lengthy Shorter life cycles, Rapid product Low-cost
Low- Environmental issues, ISO Environmentally
product Internet, rapid international development, focus 14000, increasing disposal sensitive
development communication, computer
computer-- alliances, costs production, green
aided design, and collaborative manufacturing,
international collaboration designs recycled
Standardized Affluence and worldwide Mass materials,
products markets; increasingly customization remanufacturing
f t i
flexible production with added Ethics not Businesses operate more High ethical
processes emphasis on at forefront openly; public and global standards and
quality review of ethics; opposition social
Job Changing socioculture Empowered to child labor, bribery, responsibility
specialization milieu; increasingly a employees, pollution expected
knowledge and information teams, and lean
society production

Figure 1.6 Figure 1.6

© 2008 Prentice Hall, Inc. 1 – 47 © 2008 Prentice Hall, Inc. 1 – 48

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New Trends in OM Productivity Challenge

; Global focus
Productivity is the ratio of outputs (goods
; Just--in
Just in--time performance and services) divided by the inputs
; Supply chain partnering (resources such as labor and capital)
; R id product
Rapid d t development
d l t
; Mass customization The objective is to improve productivity!
; Empowered employees
; Environmentally sensitive production Important Note!
Production is a measure of output
; Ethics only and not a measure of efficiency

© 2008 Prentice Hall, Inc. 1 – 49 © 2008 Prentice Hall, Inc. 1 – 50

The Economic System Improving Productivity at

Starbucks
Inputs Processes Outputs
A team of 10 analysts
continually look for ways
Labor, The U.S. economic system Goods
capital, transforms inputs to outputs and
to save time. Some
management at about an annual 2.5% services improvements:
increase in productivity per
year. The productivity
increase is the result of a
Stop requiring signatures Saved 8 seconds
mix of capital (38% of 2.5%), on credit card purchases per transaction
labor (10% of 2.5%), and under $25
management (52% of 2.5%).
Change the size of the ice Saved 14 seconds
scoop per drink
Feedback loop
New espresso machines Saved 12 seconds
Figure 1.7
per shot
© 2008 Prentice Hall, Inc. 1 – 51 © 2008 Prentice Hall, Inc. 1 – 52

Improving Productivity at Productivity

Starbucks
A team of 10 analysts Units produced
continually look for ways Productivity =
to shave time. Some
Input used
improvements:
Operations improvements have
helped Starbucks
Stop requiring signatures increase
Saved yearly
8 seconds
; Measure of process improvement
revenue per outlet
on credit card purchases
under $25
perby $200,000 to
transaction
$940,000 in six years.
; Represents output relative to input
Change the sizeProductivity
of the ice hasSaved
improved by 27%,
14 seconds ; Only through productivity increases
scoop or about 4.5% per
peryear.
drink can our standard of living improve
New espresso machines Saved 12 seconds
per shot
© 2008 Prentice Hall, Inc. 1 – 53 © 2008 Prentice Hall, Inc. 1 – 54

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Productivity Calculations Multi--Factor Productivity

Multi
Output
Labor Productivity Productivity =
Labor + Material + Energy
Units produced + Capital + Miscellaneous
Productivity =
Labor-hours used
Labor- ; Also known as total factor productivity
; Output and inputs are often expressed
1,000 in dollars
= = 4 units/labor
units/labor--hour
250
Multiple resource inputs Ö multi
multi--factor productivity
One resource input Ö single
single--factor productivity

© 2008 Prentice Hall, Inc. 1 – 55 © 2008 Prentice Hall, Inc. 1 – 56

Collins Title Productivity Collins Title Productivity

Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day

Old labor 8 titles/day Old labor 8 titles/day

=
productivity 32 labor
=
productivity 32 labor = .25 titles/labor
titles/labor--hr
labor--hrs labor--hrs

© 2008 Prentice Hall, Inc. 1 – 57 © 2008 Prentice Hall, Inc. 1 – 58

Collins Title Productivity Collins Title Productivity

Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day
New System: New System:
14 titles/day Overhead = $800
$800/day
/day 14 titles/day Overhead = $800
$800/day
/day

Old labor 8 titles/day Old labor 8 titles/day

=
productivity 32 labor = .25 titles/labor
titles/labor--hr =
productivity 32 labor = .25 titles/labor
titles/labor--hr
labor--hrs labor--hrs

New labor 14 titles/day New labor 14 titles/day

productivity = 32 labor productivity = 32 labor = .4375 titles/labor
titles/labor--hr
labor--hrs labor--hrs

© 2008 Prentice Hall, Inc. 1 – 59 © 2008 Prentice Hall, Inc. 1 – 60

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Collins Title Productivity Collins Title Productivity

Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day
New System: New System:
14 titles/day Overhead = $800
$800/day
/day 14 titles/day Overhead = $800
$800/day
/day

Old multifactor 8 titles/day Old multifactor 8 titles/day

= = = .0077 titles/dollar
productivity $640 + 400 productivity $640 + 400

© 2008 Prentice Hall, Inc. 1 – 61 © 2008 Prentice Hall, Inc. 1 – 62

Collins Title Productivity Collins Title Productivity

Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day Payroll cost = $640
$640/day
/day Overhead = $400
$400/day
/day
New System: New System:
14 titles/day Overhead = $800
$800/day
/day 14 titles/day Overhead = $800
$800/day
/day

Old multifactor 8 titles/day Old multifactor 8 titles/day

= = .0077 titles/dollar = = .0077 titles/dollar
productivity $640 + 400 productivity $640 + 400

New multifactor 14 titles/day New multifactor 14 titles/day

= = = .0097 titles/dollar
productivity $640 + 800 productivity $640 + 800

© 2008 Prentice Hall, Inc. 1 – 63 © 2008 Prentice Hall, Inc. 1 – 64

Measurement Problems Productivity Variables

; Labor - contributes
; Quality may change while the about 10% of the
quantity of inputs and outputs annual increase
remains constant
; Capital
C it l - contributes
t ib t
; External elements may cause an
about 38% of the
increase or decrease in productivity
annual increase
; Precise units of measure may be
; Management -
lacking
contributes about 52%
of the annual increase
© 2008 Prentice Hall, Inc. 1 – 65 © 2008 Prentice Hall, Inc. 1 – 66

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Key Variables for Improved Labor Skills

Labor Productivity
About half of the 17
17--year
year--olds in the US cannot
correctly answer questions of this type
; Basic education appropriate for the
labor force
; Diet
Di t off the
th labor
l b force
f
; Social overhead that makes labor
available
; Maintaining and enhancing skills in the
midst of rapidly changing technology
and knowledge
Figure 1.8
© 2008 Prentice Hall, Inc. 1 – 67 © 2008 Prentice Hall, Inc. 1 – 68

Investment and Productivity Service Productivity

10
; Typically labor intensive
productivity

8
; Frequently focused on unique
6
individual attributes or desires
Percent increase in p

; Often an intellectual task performed by

4 professionals
2 ; Often difficult to mechanize
0
; Often difficult to evaluate for quality
10 15 20 25 30 35
Percentage investment

© 2008 Prentice Hall, Inc. 1 – 69 © 2008 Prentice Hall, Inc. 1 – 70

Productivity at Taco Bell Productivity at Taco Bell

Improvements: Improvements:
; Revised the menu ;Results:
Revised the menu
; Designed meals for easy preparation ; Designed meals for easy preparation
; Preparation time cut to 8 seconds
; Shifted some p preparation
p to suppliers
pp ; Shifted some p preparation
p to suppliers
pp
; Management span of control
; Efficient layout and automation ; Efficient layout and automation
increased from 5 to 30
; Training and employee empowerment ; Training and employee empowerment
; In-store labor cut by 15 hours/day
; Stores handle twice the volume with
half the labor
; Fast-food low-cost leader

© 2008 Prentice Hall, Inc. 1 – 71 © 2008 Prentice Hall, Inc. 1 – 72

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Ethics and Social Responsibility

Challenges facing
operations managers:

; Developing and producing safe,

quality products
; Maintaining a clean environment
; Providing a safe workplace
; Honoring community commitments

© 2008 Prentice Hall, Inc. 1 – 73

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