Production Management

Conceptual Foundations

Conceptual Foundations

Learning Objectives:When you complete this topic, you should

be able to:1. Identify or define production and

productivity;2. Operations Management and;3. What operations managers do?

Conceptual Foundations

The global business system is changing not only the way companies enhances productivity and procures materials but also the way firms throughout the world provide goods and services. New global information links connect suppliers, customers, and manufacturers with the stroke of a key, the click of a mouse button, or even the touch of a screen. Ideas, designs, money transfers, and orders now move in seconds instead of days or weeks.

Conceptual Foundations What is Operations Management? Production is the creation of goods and

services. OM is the set of activities that creates goods

and services by transforming inputs into outputs.

In manufacturing firms, the production activities that creates goods are usually quite obvious. We can see the creation of a tangible products such as a Sony TV or Ford Taurus.

Often when services are performed, no tangible goods are produced. Instead, the product may take such forms as the transfer of funds from a savings account to a checking account.

Conceptual Foundations

The Heritage of Operations ManagementEli Whitney (1800) is credited for the early popularization of interchangeable parts, which was achieved through standardization and quality control.Frederick W. Taylor (1881), known as the father of scientific management, and the now popular field of ergonomics. One of his major contributions was his belief that management should be much more resourceful and aggressive in the improvement of work methods.

Conceptual FoundationsTaylor and his colleagues, Henry L. Gantt and

Frank and Lillian Gilbreth, were among the first to seek systematically the best way to produce.

Another of Taylor’s contributions was the belief that management should assume more responsibility for:

1. Matching employees to the right job.2. Providing the proper training.3. Providing proper work methods and tools.4. Establishing legitimate incentives for work to

be accomplished.

Conceptual Foundations

By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized parts with the quasi-assembly lines of the meatpacking and mail-order industries and added the revolutionary historically concept of the assembly line where men stood still and material moved.

Conceptual FoundationsQuality Control is another historically

significant contribution to the field of OM. Walter Shewhart (1924) combined his knowledge of statistics with the need for quality control and provided the foundations for statistical sampling in quality control.

W. Edwards Deming (1950) believed that management must do more to improve the work environment and processes so that quality can be improved.

Why Study OM? OM is one of the three major functions of

any organization, it is integrally related to all the other business functions. All organizations market (sell), finance (account), and produce (operate), and it is important to know how the OM activity functions. Therefore, we study how people organize themselves for productive enterprise.

Why Study OM? We study OM because we want to know

how goods and services are produced. We study OM to understand what

operations managers do. By understanding what these managers do, you can develop the skills necessary to become such a manager.

We study OM because it is such a costly part of an organization.

Exciting New Trends in Operations Management

Global Focus: The rapid decline in communication and transportation costs has made markets global. But at the same time, resources in the form of materials, talents, and labor have also become global. Contributing to this rapid globalization are countries throughout the world that are vying fro economic growth and industrialization. Operations managers are responding with innovations that generate and move ideas, parts, and finished goods rapidly, whenever and wherever needed.

Exciting New Trends in Operations Management

Just-in-Time Performance: Vast financial resources are committed to inventory, and inventory impedes response to the dynamic changes in the market place. Operations managers are viciously cutting inventories at every level, from raw materials to finished goods.

Supply-chain Partnering: Shorter product life, as well as rapid changes in material and process technology, require more participation by suppliers.

Rapid Product Development: Rapid international communication of news, entertainment, and lifestyles is dramatically chopping away at the life span f products.

Mass Customization: Cultural differences, compounded by individual differences, in a world where customers are increasingly aware of options, places substantial pressure on firms to respond.

Operations in the Service Sector

Differences between Goods and Service Services are usually intangible as opposed to

tangible goods. Services are often unique. Services are often produced and consumed. Services have high customer interaction. Services have inconsistent product definition. Services are knowledge-based. Services are frequently dispersed.

The Productivity Challenge

The creation of goods and services requires changing resources into goods and services. The more efficiently we make this change, the more productive we are.

Productivity is ratio of outputs (goods and services) divide by the inputs (resources, such as labor and capital)

The Productivity Challenge

Productivity MeasurementThe measurement of productivity can be

quite direct. Such is the when productivity ca be measured as labor-hours per ton of a specific type of steel or as the energy necessary to generate a kilowatt of electricity.

Productivity = Units produced/Input used

The Productivity Challenge

Example:If units produced = 1,000 and labor-hours

is 250, then:

Productivity = 1,000/250 = 4 units per labor-hour

The example above is a single-factor productivity.

The Productivity Challenge

Multiple Productivity Indicates the ratio of many or all

resources (inputs) to the goods and services produced (outputs).

Productivity = Output/ Labor + Material + Energy + Capital +Miscellaneous

The Productivity Challenge

Example: 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 per 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.

The Productivity Challenge

Solution: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

Labor productivity has increased from .25 to .4375. The change is 75%.

The Productivity ChallengeMultifactor productivity with the old system:

8 titles per day/ 640 + 400 = .0077 titles per dollar

Multifactor productivity with the new system14 titles per day/ 640 + 800= .0097 titles per dollar

Thus, Multifactor productivity has increased from .0077 to .0097. This change is 25.0%

increase in multifactor productivity.

The Productivity Challenge

Productivity increases are dependent upon three productivity variables:

Labor, which contributes about 10% of the annual increase.

Capital, which contributes about 38% of the annual increase.

Management, which contributes about 52% of the annual increase.

Solved Problem:1. Productivity can be measured in a variety of

ways, such as labor, capital, energy, material usage, and so on. At Modern Lumber, Inc., Art Binley, president and producer of apple crates sold to growers, has been able, with his current equipment, to produce 240 crates per 100 logs. He currently purchases 100 logs per day, and each log requires 3 labor-hours to process. He believes that he can hire a professional buyer who can buy a better-quality log at the same cost. If this is the case, he can increase his production to 260 crates per 100 logs. His labor-hours will increase by 8 hours par day. What will be the impact on productivity (measured in crates per labor-hour) if the buyer is hired?

Solution

Current Labor Productivity240 crates/100 logs x 3 hours/log

=240/300=.8 crates per labor-hour

Labor productivity with buyer260 crates/(100 logsx3 hours/log) + 8 hours

=260/308=.844 crates per labor-hour

Using current productivity = .844/.8 =5.5% increase

Solved Problem:

Art Binley has decided to look at his productivity from a multifactor (total factor productivity) perspective. To do so, he has determined his labor, capital energy, and material usage and decided to use dollars as the common denominator. His total labor-hours are now 300 per day and will increase to 308 per day. His capital and energy costs will remain constant at $350 and $150 per day, respectively. Material costs for the 100 logs per day are $1,000 and will remain the same.

Solved Problem:

Because he pays an average of $10 per hour (with fringes), Binley determines his productivity increase as follows;

Solved Problem:Current System System with

Professional Buyer

Labor:300 hrs @$10= $3,000 308 hrs @$10 = $3,080Material: 100 logs/day 1,000 1,000Capital: 350 350 350Energy: 150 150 150Total Cost: $4,500

$4,580Productivity of current of proposed

system: system:=240 crates/4,500 = 260 crates/ 4,580=.0533 = .0567Thus, the increase from .0567/.0533 is 6.38%