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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

OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science

Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange

Airline

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising

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MarketingSales promotionAdvertisingSalesMarket research

Organizational Charts

OperationsFacilities Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and controlSupply chain managementManufacturing 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/ accountingDisbursements/ credits Receivables Payables General ledgerFunds Management Money market International exchangeCapital requirements Stock issue Bond issue and recall

Manufacturing

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What Operations Managers Do

Planning Organizing Staffing Leading Controlling

Basic Management Functions

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Ten Critical DecisionsTen 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 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?

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New Challenges in OM

Global focus Just-in-time Supply chain

partnering Mass

customization Empowered

employees, teams

ToFrom Local or national focus Batch shipments Low bid purchasing

Standard products

Job specialization

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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

Services Manufacturing

Au

stra

lia

Can

ada

Ch

ina

Cze

ch R

ep

Fra

nce

Ger

man

y

Ho

ng

Ko

ng

Jap

an

Mex

ico

Ru

ssia

n F

ed

So

uth

Afr

ica

Sp

ain

UK

US

90 −

80 −

70 −

60 −

50 −

40 −

30 −

20 −

10 −

0 −

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Goods Versus Services

Table 1.3

Can be resoldCan be inventoriedSome aspects of quality measurableSelling is distinct from productionProduct is transportable

Site of facility important for cost

Often easy to automateRevenue generated primarily from tangible product

Attributes of Goods(Tangible Product)

Attributes of Services (Intangible Product)

Reselling unusualDifficult to inventoryQuality difficult to measure

Selling is part of service

Provider, not product, isoften transportableSite of facility important forcustomer contactOften difficult to automateRevenue generated primarily from the intangible service

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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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Feedback loop

Outputs

Goods and

services

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%).

The Economic System

Inputs

Labor,capital,

management

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Improving Productivity at StarbucksA team of 10 analysts continually look for ways to save 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 machines Saved 12 seconds per shot

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Improving Productivity at StarbucksA 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 machines Saved 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.

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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

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Productivity Calculations

Productivity =Units produced

Labor-hours used

= = 4 units/labor-hour1,000

250

Labor Productivity

One resource input single-factor productivity

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Multi-Factor Productivity

OutputLabor + 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

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Problem 1Collins 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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= .25 titles per labor hour

= .0077 titles per dollar

multifactor productivity with the new system= 14 titles per day/(640+800) = .0097 titles per dollar

Labor productivity with the old system= 8 titles per day/32 labor hours

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)

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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 2Kaleen Karpet cleaned 65 rugs in

October, consuming the following resources:

Labor: 520 hours at $13 per hourSolvent: 100 gallons at $5 per

gallonMachine Rental: 20days at $50 per

daya) What is labor productivity per

dollar?b) What is multifactor productivity?

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Problem 3David 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 dayCapital: $10000 per day

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Continued…..

a) What is the labor productivity per hour for these tires at Upton Manufacturing?

b) What is multifactor productivity for these tires at Upton Manufacturing?

c) 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 4Eric 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 Eric’s 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 BellImprovements:

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

Results:

Preparation time cut to 8 seconds Management span of control

increased from 5 to 30 In-store labor cut by 15 hours/day Stores handle twice the volume with

half the labor Fast-food low-cost leader