Operations

Management
Operations and Productivity
Chapter 1
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Outline
PROFILE: HARD ROCK CAFE
WHAT IS OPERATIONS MANAGEMENT?
ORGANIZING TO PRODUCE GOODS AND SERVICES
WHY STUDY OM?
WHAT OPERATIONS MANAGERS DO

How This Book Is Organized

WHERE ARE THE OM JOBS?

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Outline - Continued
THE HERITAGE OF OPERATIONS MANAGEMENT
OPERATIONS IN THE SERVICE SECTOR

Differences between Goods and Services

Growth of Services

Service Pay

EXCITING NEW TRENDS IN OPERATIONS MANAGEMENT

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Outline - Continued
THE PRODUCTIVITY CHALLENGE

Productivity Measurement

Productivity Variables

Productivity and the Service Sector

THE CHALLENGE OF SOCIAL RESPONSIBILITY

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Learning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:

Production and productivity

Operations Management (OM)
What operations managers do
Services

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Learning Objectives - Continued

When you complete this chapter, you should be
able to :
Describe or Explain:

A brief history of operations management

Career opportunities in operations management
The future of the discipline
Measuring productivity

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The Hard Rock Cafe

First opened in 1971

Now 110 restaurants in over 40 countries

Rock music memorabilia

Creates value in the form of good food and
entertainment
3,500+ custom meals per day
How does an item get on the menu?
Role of the Operations Manager
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What Is Operations Management?

Production is the creation of goods and

services
Operations management 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

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Organizing to Produce Goods and

Services
Essential functions:
Marketing generates demand
Operations creates the product
Finance/accounting tracks organizational
performance, pays bills, collects money

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Organizational Functions
Marketing

Gets customers

Operations

creates product or service

Finance/Accounting
Obtains funds
Tracks money

1995 Corel Corp.

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Sample Organization Charts

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Functions - Bank
Commercial Bank
1984-1994
T/Maker Co.

Marketing

Teller
Scheduling

Operations

Transactions

Check
Clearing

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Processing

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Finance/
Accounting

Security

Functions - Airline

Airline

Marketing

Flight
Operations

Operations

Ground
Support

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Facility
Maintenance

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1984-1994 T/Maker Co.

Finance/
Accounting

Catering

Functions - Manufacturer

Manufacturing

Marketing

Manufacturing

Finance/
Accounting

Operations

Production
Control

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Quality
Control

Purchasing

Organizational Charts
Commercial Bank
Operations

Finance

Teller Scheduling
Check Clearing
Transactions
processing
Facilities
design/layout
Vault operations
Maintenance
Security

Investments
Security
Real Estate

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Accounting
Auditing

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Marketing
Loans
Commercial
Industrial
Financial
Personal
Mortgage

Trust Department

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
rates

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Marketing
Traffic administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising

Organizational Charts
Manufacturing
Finance & Accounting

Operations
Facilities:

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

Construction:maintenance

Production & inventory control

Scheduling: materials 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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Marketing
Sales
promotions
Advertising
Sales
Market
research

Why Study OM?

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Why Study OM?

OM is one of three major functions
(marketing, finance, and operations) of any
organization.
We want (and need) to know how goods and
services are produced.
We want to understand what operations
managers do.
OM is such a costly part of an organization.
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Options for Increasing

Contribution
Marketing
Finance &
OM Option
Option
Current
Sales
Cost of
Goods Sold
Gross
Margin
Finance
Costs
Net
Margin
Taxes @
25%
Contribution

$100,000

Sales
Revenue :
+50%
$150,000

-80,000

Accounting
Option
Finance
Production
Costs: -50% Costs: -20%
$100,000

$100,000

-120,000

-80,000

-64,000

20,000

30,000

20,000

36,000

-6,000

-6,000

-3,000

-6,000

14,000

24,000

17,000

30,000

-3,500

-6,000

-4,250

-7,500

10,500

18,000

12,750

22,500

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What Operations Managers Do

Plan - Organize - Staff - Lead - Control

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Ten Critical Decisions

Service, product design..
Quality management
Process, capacity design..
Location .
Layout design ..
Human resources, job design..
Supply-chain management
Inventory management .
Scheduling
Maintenance .
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Ch. 5
Ch. 6, 6S
Ch. 7, 7S
Ch. 8
Ch. 9
Ch. 10, 10S
Ch. 11,11s
Ch. 12, 14, 16
Ch. 3, 13, 15
Ch. 17

The Critical Decisions

Quality management
Who is responsible for quality?
How do we define quality?

Service and product design

What product or service should we offer?

How should we design these products and
services?

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The Critical Decisions - Continued

Process and capacity design
What processes will these products require and in
what order?
What equipment and technology is necessary for
these processes?

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

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The Critical Decisions - Continued

Layout design

How should we arrange the facility?

How large a facility is required?

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 - Continued

Supply chain management

Should we make or buy this item?

Who are our good suppliers and how many should
we have?

Inventory, material requirements planning,

How much inventory of each item should we have?

When do we re-order?

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The Critical Decisions - Continued

Intermediate, short term, and project
scheduling

Is subcontracting production a good idea?

Are we better off keeping people on the payroll
during slowdowns?

Maintenance

Who is responsible for maintenance?

When do we do maintenance?

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Where are the OM Jobs

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Where are the OM Jobs

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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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The Heritage of Operations Management

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Significant Events in Operations

Management

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The Heritage of
Operations Management
Division of labor (Adam Smith 1776 and Charles Babbage 1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Coordinated assembly line (Ford/Sorenson/Avery 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922
Quality control (Shewhart 1924; Deming 1950)
Computer (Atanasoff 1938)
CPM/PERT (DuPont 1957)

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The Heritage of Operations

Management - Continued
Material requirements planning (Orlicky 1960)
Computer aided design (CAD 1970)
Flexible manufacturing system (FMS 1975)
Baldrige Quality Awards (1980)
Computer integrated manufacturing (1990)
Globalization(1992)
Internet (1995)

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Eli Whitney
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

1995 Corel Corp.

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Musket parts could be used in any

musket

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Frederick W. Taylor
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 & time studies

Created efficiency principles

1995 Corel Corp.

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Taylor: Management Should Take

More Responsibility for
Matching employees to right job
Providing the proper training
Providing proper work methods and tools
Establishing legitimate incentives for work
to be accomplished

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Frank & Lillian Gilbreth

Frank (1868-1924); Lillian
(1878-1972)
Husband-and-wife
engineering team
Further developed work
measurement methods
Applied efficiency methods
to their home & 12 children!
(Book & Movie: Cheaper by
the Dozen, book: Bells on
Their Toes)
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1995 Corel Corp.

Henry Ford
Born 1863; died 1947
In 1903, created Ford
Motor Company
In 1913, first used
moving assembly line
to make Model T

Make them all

alike!

1995 Corel
Corp.

Unfinished product
moved by conveyor
past work station

Paid workers very well for 1911 ($5/day!)

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W. Edwards Deming
Born 1900; died 1993
Engineer & physicist
Credited with teaching Japan
quality control methods in
post-WW2
Used statistics to analyze
process
His methods involve workers
in decisions
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Contributions From
Human factors
Industrial engineering
Management science
Biological science
Physical sciences
Information science

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Significant Events in OM
Division of labor (Smith, 1776)
Standardized parts (Whitney, 1800)
Scientific management (Taylor, 1881)
Coordinated assembly line (Ford 1913)
Gantt charts (Gantt, 1916)
Motion study (the Gilbreths, 1922)
Quality control (Shewhart, 1924)
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Significant Events - Continued

CPM/PERT (Dupont, 1957)
MRP (Orlicky, 1960)
CAD
Flexible manufacturing systems (FMS)
Manufacturing automation protocol (MAP)
Computer integrated manufacturing (CIM)

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New Challenges in OM
From
Local or national focus
Batch shipments
Low bid purchasing

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

Lengthy product
development
Standard products
Job specialization

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Operations in the Service Sector

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Characteristics of Goods
Tangible product
Consistent product
definition
Production usually
separate from
consumption
Can be inventoried
Low customer
interaction
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1995 Corel Corp.

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Characteristics of Service
Intangible product
Produced & consumed at
same time
Often unique
High customer interaction
Inconsistent product definition
Often knowledge-based
Frequently dispersed
1995 Corel Corp.

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Service Economies

Proportion of Employment in the Service Sector

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Goods Versus Services

Goods
Can be resold
Can be inventoried

Some aspects of
quality measurable
Selling is distinct
from production
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Service
Reselling unusual
Difficult to
inventory
Quality difficult to
measure
Selling is part of
service

Goods Versus Services Continued

Goods

Service

Provider, not product

is transportable
Site of facility
important for
customer contact
Often difficult to
Often easy to
automate
automate
Revenue generated
Revenue generated
primarily from
primarily from tangible
product
intangible service.
Product is
transportable
Site of facility
important for cost

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Goods Contain Services / Services

Contain Goods
Automobile
Computer
Installed Carpeting
Fast-food Meal
Restaurant Meal
Auto Repair
Hospital Care
Advertising Agency
Investment Management
Consulting Service
Counseling
100

75

50

25

Percent of Product that is a Good

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25

50

75

100

Percent of Product that is a Service

Organizations in Each Sector Table 1.4

Service Sector

Example

% of
all
Jobs

Professional
services, education,
legal, medical

New York City PS108, Notre Dame

University, San Diego Zoo

24.3

Trade (retail,
wholesale)

Walgreens, Wal-Mart, Nordstroms

20.6

Utilities,
transportation

Pacific Gas & Electric, American

Airlines, Santa Fe R.R, Roadway
Express

7.2

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Organizations in Each Sector Table 1.4

Service Sector

Example

% of
all
Jobs

Business & Repair

Services

Snelling & Snelling, Waste

Management, Pitney-Bowes

7.1

Finance, Insurance,
Real Estate

Citicorp, American Express,

Prudential, Aetna, Trammel Crow

6.5

Food, Lodging,
Entertainment

McDonalds, Hard Rock Caf,

Motel 6, Hilton Hotels, Walt Disney
Paramount Pictures

5.2

Public Administration U.S., State of Alabama, Cook

County

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4.5

Organizations in Each Sector Table 1.4

Manufacturing
Sector

Example

General

General Electric, Ford, U.S. Steel,

Intel

14.8

Construction

Bechtel, McDermott

7.0

Agriculture

King Ranch

2.4

Mining

Homestake Mining

0.4

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% of
all
Jobs

Organizations in Each Sector Table 1.4

Summary
Sector

% of all Jobs

Service

75.4%

Manufacturing

24.6%

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Development of the Service Economy

U.S. Employment, % Share
80

U.S. Exports of Services

In Billions of Dollars

Services as a Percent of GDP

United States

%70

Canada

250

France

200

Italy

150

20

Britain

100

10

Japan

50

60

Services

50
40
30

Industry

Farming

1850 75 1900 25 50 75 2000

W Germany
1970
2000

40 50 60 70
Percent

Year 2000 data is estimated

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1970 75 80 85 90 95 2000

Exciting New Challenges in Operations

Management

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Changing Challenges for the

Operations Manager
Past

Causes

Local or
national
focus
Batch (large)
shipments

Low-cost, reliable worldwide

communication and
transportation networks
Cost of capital puts pressure on
reducing investment in
inventory
Quality emphasis requires that
suppliers be engaged in product
improvement
Shorter life cycles, rapid
international communication,
computer-aided design, and
international collaboration

Low-bid
purchasing
Lengthy
product
development

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Future
Global Focus
Just-in-time
shipments
Supply-chain
partners
Rapid product
development,
alliances,
collaborative
designs

Changing Challenges for the

Operations Manager
Past
Standardized
products
Job
specialization
Low cost
focus

Causes
Affluence and worldwide markets;
increasingly flexible production
processes
Changing sociocultural milieu.
Increasingly a knowledge and
information society.
Environmental issues, ISO 14000,
increasing disposal costs

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Future
Mass
customization
Empowered
employees,
teams, and lean
production
Environmentally
sensitive
production,
Green
manufacturing,
recycled
materials,
remanufacturing

The Productivity Challenge

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The Economic System Transforms

Inputs to Outputs
Inputs
Land, Labor,
Capital,
Management

Process
The economic system
transforms inputs to outputs
at about an annual 2.5%
increase in productivity
(capital 38% of 2.5%), labor
(10% of 2.5%), management
(52% of 2.5%)
Feedback loop

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Outputs
Goods and
Services

Typical Impact of Quality

Improvement
As productivity improved

Costs were pared

Cost per unit decreased

Parts per man hour

Wages increased

Average worker's annual cash

compensation increased

$2.25

115
110

27000

$2.00

105

26000
$1.75

100
95

25000
24000

$1.50
Year A

Year B

Year C

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Year A

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Year B

Year C

Year A

Year B

Year C

Productivity
Measure of process improvement
Represents output relative to input

Productivity

Units produced
= Input used

Only through increased productivity, our

standard of living can improve

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Multi-Product Productivity

Productivity

Output
Labor + material + energy + capital + miscellaneous

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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 32% 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 in the midst
of rapidly changing technology and
knowledge
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Jobs in the U.S

6%

5%

6%

Education, Health, etc.

5%

Manufacturing

3%
1%

Retail Trade
State & Local Gov't

14%

Finance, Insurance
26%

Wholesale Trade
Transport, Public Util.
Construction

16%

Federal Government

18%

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Mining

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Comparison of Productivity

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Investment and Productivity

in Selected Nations
10

U.S.
U.K.
Canada

Percent increase in productivity

(Mfg)

Italy
Belgium
France

6
4

Netherlands
2

Japan
Best fit

0
10

15

20

25

30

Nonresidential fixed investment to GNP (%)

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35

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

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The Challenge of Social Responsibility

Increasing emphasis on business and
social responsibility

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