Operations and

Productivity 1
PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Twelfth Edition

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education, Inc. 1-1

 What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM) is
the set of activities that create
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:
1. Marketing – generates demand
2. Production/operations – creates the
product
3. Finance/accounting – tracks how
well the organization is doing, pays
bills, collects the money

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 The Supply Chain
▶ A global network of organizations and
activities that supply a firm with goods and
services
▶ Members of the supply chain collaborate to
achieve high levels of customer satisfaction,
efficiency and competitive advantage
Figure 1.2

Farmer Syrup Bottler Distributor Retailer

producer

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 Options for Increasing
Contribution
TABLE 1.1
FINANCE/
MARKETING ACCOUNTING
OPTION OPTION OM OPTION
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –80,000 –120,000 –80,000 –64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs –6,000 –6,000 –3,000 –6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

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 Ten Strategic Decisions
TABLE 1.2
DECISION CHAPTER(S)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity strategy 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17

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 The Strategic Decisions
1. Design of goods and services
▶ Defines what is required of operations
▶ Product design determines quality,
sustainability and human resources
2. Managing quality
▶ Determine the customer’s quality
expectations
▶ Establish policies and procedures to
identify and achieve that quality
Table 1.2 (cont.)

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 The Strategic Decisions
3. Process and capacity design
▶ How is a good or service produced?
▶ Commits management to specific
technology, quality, resources, and
investment
4. Location strategy
▶ Nearness to customers, suppliers, and
talent
▶ Considering costs, infrastructure, logistics,
and government Table 1.2 (cont.)

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 The Strategic Decisions
5. Layout strategy
▶ Integrate capacity needs, personnel levels,
technology, and inventory
▶ Determine the efficient flow of materials,
people, and information
6. Human resources and job design
▶ Recruit, motivate, and retain personnel with
the required talent and skills
▶ Integral and expensive part of the total
system design
Table 1.2 (cont.)

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 The Strategic Decisions
7. Supply chain management
▶ Integrate supply chain into the firm’s strategy
▶ Determine what is to be purchased, from
whom, and under what conditions
8. Inventory management
▶ Inventory ordering and holding decisions
▶ Optimize considering customer satisfaction,
supplier capability, and production schedules

Table 1.2 (cont.)

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 The Strategic Decisions
9. Scheduling
▶ Determine and implement intermediate-
and short-term schedules
▶ Utilize personnel and facilities while
meeting customer demands
10. Maintenance
▶ Consider facility capacity, production
demands, and personnel
▶ Maintain a reliable and stable process
Table 1.2 (cont.)

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 Where are the OM Jobs?
▶ Technology/methods
▶ Facilities/space utilization
▶ Strategic issues
▶ Response time
▶ People/team development
▶ Customer service
▶ Quality
▶ Cost reduction
▶ Inventory reduction
▶ Productivity improvement
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 Opportunities
Figure 1.3

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 Certifications
▶ APICS, the Association for Operations
Management
▶ American Society for Quality (ASQ)
▶ Institute for Supply Management (ISM)
▶ Project Management Institute (PMI)
▶ Council of Supply Chain Management
Professionals
▶ Charter Institute of Procurement and Supply
(CIPS)

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 Contributions From

▶ Industrial engineering
▶ Statistics
▶ Management
▶ Economics
▶ Physical sciences
▶ Information technology

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 Operations for
Goods and Services
Services – Economic activities that
typically produce an intangible product
(such as education, entertainment,
lodging, government, financial, and
health services)

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 Operations for
Goods and Services
▶ Manufacturers produce tangible product,
services often intangible
▶ Operations activities often very similar
▶ Distinction not always clear
▶ Few pure services

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 Differences Between Goods and
Services
TABLE 1.3
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory (beauty care
produces a haircut that is consumed as it is produced products)
Unique: Your investments and medical care are unique Similar products produced (iPods)

High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and medical Standard tangible product tends to make automation
services are hard to automate feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products are easy
education, and medical services to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value

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 U.S. Agriculture, Manufacturing,
and Service Employment
Figure 1.5
100 -

80 –
Percent of Workforce

60 –

40 –

20 –

0 . | | | | | | | | |

1825 1875 1925 1975 2025 (est.)

1800 1850 1900 1950 2000

Agriculture Services Manufacturing

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 Organizations in Each Sector
TABLE 1.4

PERCENT OF
SECTOR EXAMPLE ALL JOBS
Service Sector
Education, Medical, Other San Diego State University, Arnold Palmer 15.3
Hospital
Trade (retail, wholesale), Walgreen's, Walmart, Nordstrom, Alaska 15.8
Transportation Airlines
Information, Publishers, Broadcast IBM, Bloomberg, Pearson, ESPN 1.9
85.2
Professional, Legal, Business Snelling and Snelling, Waste Management, Inc., 13.6
Services, Associations American Medical Association, Ernst & Young
Finance, Insurance, Real Estate Citicorp, American Express, Prudential, Aetna 9.6
Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 10.4
Public Administration U.S., State of Alabama, Cook County 15.6
Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 8.6
Construction Sector Bechtel, McDermott 4.3
Agriculture King Ranch 1.4
Mining Sector Homestake Mining .5
Grand Total 100.0

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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 Transformation Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs at and
management about an annual 2.5% increase services
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%).

Feedback loop

Figure 1.6

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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 Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
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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 StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
revenue per outlet
on credit card purchases perbytransaction
$250,000 to
under $25 $1,000,000.
Change the size Productivity
of the ice has improved
Saved 14by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
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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
Units produced
Productivity =
Labor-hours used

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

One resource input  single-factor productivity

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 Multi-Factor Productivity
Output
Multifactor =
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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 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

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

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

Old labor 8 titles/day

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

New labor 14 titles/day

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

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

Old multifactor 8 titles/day

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

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

Old multifactor 8 titles/day

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

New multifactor 14 titles/day

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

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 Measurement Problems
1. Quality may change while the
quantity of inputs and outputs remains
constant
2. External elements may cause an
increase or decrease in productivity
3. Precise units of measure may be
lacking

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 Key Variables for Improved
Labor Productivity
1. Basic education appropriate for the
labor force
2. Diet of the labor force
3. Social overhead that makes labor
available
▶ Challenge is in maintaining and enhancing
skills in the midst of rapidly changing
technology and knowledge

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 Labor Skills
About half of the 17-year-olds in the U.S. cannot
correctly answer questions of this type

Figure 1.7
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 Management
▶ Ensures labor and capital are effectively
used to increase productivity
▶ Use of knowledge
▶ Application of technologies
▶ Knowledge societies
▶ Labor has migrated from manual work to
technical and information-processing tasks
▶ More effective use of technology,
knowledge, and capital
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 Productivity in the Service
Sector
▶ Productivity improvement in services is
difficult because:
1. Typically labor intensive
2. Frequently focused on unique individual
attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality
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