Operations and Productivity

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What Is Operations Management?

Production is the creation of goods and services

Operations management (OM) is the set of activities that creates value in the form of goods and services by transforming inputs into outputs
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Organizing to Produce Goods and Services

Essential functions:
Marketing generates demand Production/operations creates the product Finance/accounting tracks how well the organization is doing, pays bills, collects the money

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Organizational Charts
Airline Operations
Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science
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Finance/ accounting
Accounting Payables Receivables General Ledger Finance Cash control International exchange

Marketing
Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

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Organizational Charts
Manufacturing Operations
Facilities
Construction; maintenance

Finance/ accounting
Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall

Marketing
Sales promotion Advertising Sales Market research

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
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What Operations Managers Do

Basic Management Functions

Planning Organizing Staffing Leading Controlling

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Ten Critical Decisions

Ten Decision Areas Design of goods and services Managing quality Process and capacity design Location strategy Layout strategy Human resources and job design Supply chain management Inventory management Scheduling Maintenance
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The Critical Decisions

Design of goods and services

What good or service should we offer? How should we design these products and services?

Managing quality
How do we define quality? Who is responsible for quality?

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The Critical Decisions

Process and capacity design

What process and what capacity will these products require? What equipment and technology is necessary for these processes?

Location strategy
Where should we put the facility? On what criteria should we base the location decision?

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The Critical Decisions

Layout strategy
How should we arrange the facility? 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?

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The Critical Decisions

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?

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The Critical Decisions

Intermediate and shortterm 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?

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New Challenges in OM
From
Local or national focus Batch shipments Low bid purchasing Standard products Job specialization

To
Global focus
Just-in-time Supply chain partnering Mass customization Empowered employees, teams

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Characteristics of Goods
Tangible product

Production usually separate from consumption

Can be inventoried

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Characteristics of Service
Intangible product

Produced and consumed at same time

Often unique

Often knowledge-based

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Industry and Services as Percentage of GDP

90 80 70 60 50 40 Services

Manufacturing

30
20 10 0

Hong Kong

Japan

Russian Fed

Czech Rep

France

Germany

Canada

Mexico

South Africa

China

Spain

UK

Australia

US
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Goods Versus Services

Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product)

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
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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
Table 1.3
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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

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The Economic System

Inputs
Labor, capital, management

Processes
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%).

Outputs
Goods and services

Feedback loop

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Improving Productivity at Starbucks

A team of 10 analysts continually look for ways to save time. Some improvements:
Stop requiring signatures on credit card purchases under $25 Change the size of the ice scoop Saved 8 seconds per transaction Saved 14 seconds per drink

New espresso machines

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Saved 12 seconds per shot

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Improving Productivity at Starbucks

A team of 10 analysts continually look for ways to shave time. Some improvements:

Operations improvements have helped Starbucks increase yearly Stop requiring signatures Saved 8 seconds revenue per outlet $200,000 to on credit card purchases perby transaction $940,000 in six years. under $25

Productivity improved by 27%, Change the size of the ice has Saved 14 seconds or about 4.5% per year. scoop per drink New espresso machines
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Saved 12 seconds per shot

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Productivity
Units produced Productivity = Input used

Measure of process improvement

Represents output relative to input Only through productivity increases can our standard of living improve
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Productivity Calculations
Labor Productivity
Productivity = Units produced Labor-hours used 1,000 250 = 4 units/labor-hour

One resource input single-factor productivity

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

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Problem 1

Collins Title Company has a staff of 4, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400/day. Collins processes and closes on 8 titles each day. The company recently purchased a computerized title search system that will allow the processing of 14 titles per day. Although the staff, their work hours, and pay will be the same, the overhead expenses are now $800 per day.
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Labor productivity with the old system= 8 titles per day/32 labor hours = .25 titles per labor hour Labor productivity with the new system= 14 titles per day/32 labor hours = .4375 titles per labor hour multifactor productivity with the old system= 8 titles per day/(640+400) = .0077 titles per dollar multifactor productivity with the new system= 14 titles per day/(640+800) = .0097 titles per dollar
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Labor productivity has increased from .25 to .4375. The change is .4375/.25= 1.75, or a 75% increase in labor productivity. Multifactor productivity has increased from .0077 to .0097. This change is .0097/.007= 1.259, or 25.9% increase in multifactor productivity.

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Problem 2
Kaleen Karpet cleaned 65 rugs in October, consuming the following resources: Labor: 520 hours at $13 per hour Solvent: 100 gallons at $5 per gallon Machine Rental: 20days at $50 per day a) What is labor productivity per dollar? b) What is multifactor productivity?

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Problem 3
David Upton is president of Upton Manufacturing, a producer of Go-Kart Tires. Upton makes 1000 tires per day with following resources: Labor: 400 hours per day @ $12.50 per hour Raw material: 20000 pounds per day @ $1 per pound Energy: $5000 per day Capital: $10000 per day

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Continued..
a)

b) c)

What is the labor productivity per hour for these tires at Upton Manufacturing? What is multifactor productivity for these tires at Upton Manufacturing? What is the present change in multifactor productivity if Upton can reduce the energy bill by $1000 per day without cutting production or changing any other inputs?
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Problem 4
Eric produces final exams care packages for resale by her sorority. She is currently working a total of 5 hours per day to produce 100 care packages. a) What is Erics productivity? b) Eric thinks that redesigning the package, she can increase her total productivity to 133 care packages per day. What will be her new productivity? c) What will be the percentage increase in productivity if Eric makes the change?

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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

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Productivity Variables
Labor - contributes about 10% of the annual increase Capital - contributes about 38% of the annual increase
Management contributes about 52% of the annual increase
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Key Variables for Improved Labor Productivity

Basic education appropriate for the labor force Diet of the labor force

Social overhead that makes labor available

Maintaining and enhancing skills of labor

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Service Productivity
Typically labor intensive Often an intellectual task performed by professionals Often difficult to mechanize Often difficult to evaluate for quality

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Productivity at Taco Bell (A Case Study)

Improvements:
Revised the menu Designed meals for easy preparation Shifted some preparation to suppliers Efficient layout and automation Training and employee empowerment

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Productivity at Taco Bell

Improvements:
Results: Revised the menu Designed meals for easy preparation Preparation time cut to 8 seconds Shifted some preparation to suppliers Management span of control Efficient layout and automation increased from 5 to 30 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

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