Outline

Operations
Management Global Company Profile: Hard Rock
Cafe
What Is Operations Management?
Operations and
Organizing to Produce Goods and
Productivity Services
Why Study OM?
What Operations Managers Do

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Outline - Continued Outline - Continued

The Heritage of Operations
Management The Productivity Challenge
Productivity Measurement
Operations in the Service Sector
Productivity Variables
Differences between Goods and
Services Productivity and the Service Sector
Growth of Services Ethics and Social Responsibility
Service Pay
Exciting New Trends in Operations
Management
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Learning Objectives Learning Objectives

When you complete this chapter When you complete this chapter
you should be able to: you should be able to:

1. Define operations management 4. Compute single-factor

2. Explain the distinction between
goods and services
3. Explain the difference between
production and productivity
productivity
5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity

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1
 The Hard Rock Cafe What Is Operations
Management?
First opened in 1971
Now – 129 restaurants in over 40 countries Production is the creation of
Rock music memorabilia goods (=products) and services
Creates value in the form of good food Operations management (OM) is
and entertainment the set of activities that create
3,500+ custom meals per day in Orlando value in the form of goods and
How does an item get on the menu? services by transforming inputs
Role of the Operations Manager
into outputs

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Organizing to Produce Organizational Charts

Goods and Services Commercial Bank

Essential functions:
Operations Finance Marketing
1. Marketing – generates/focuses Teller Investments Loans
Scheduling
demand Check Clearing
Security Commercial
Real estate Industrial
2. Production/operations – creates Collection Financial
the product Transaction Accounting Personal
processing
Facilities Mortgage
3. Finance/accounting – tracks how design/layout
well the organization is doing, Vault operations
Auditing
Trust Department
pays bills, collects the money Maintenance
Security

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Organizational Charts Organizational

Manufacturing
Charts
Airline
Operations Finance/ Marketing
Operations Finance/ Marketing Facilities accounting Sales
accounting Construction; maintenance Disbursements/ promotion
Ground support Traffic Production and inventory control credits
equipment Advertising
Accounting administration Scheduling; materials control Receivables Sales
Maintenance Payables Reservations Quality assurance and control Payables
Receivables Schedules General ledger Market
Ground Operations Supply-chain management research
General Ledger Tariffs (pricing) Funds Management
Facility Manufacturing
maintenance Finance Sales Tooling; fabrication; assembly Money market
Catering Advertising International
Cash control Design exchange
Flight Operations International Product development and design
exchange Detailed product specifications Capital requirements
Crew scheduling Industrial engineering Stock issue
Flying Efficient use of machines, space, Bond issue
Communications and personnel and recall
Dispatching Process analysis
Development and installation of
production tools and equipment
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2
 Why Study OM? Options for Increasing
Contribution
1. OM is one of the major functions of
any organization, we want to study Marketing
Finance/
Accounting OM
how people organize themselves for Option Option Option
productive enterprise Increase Reduce Reduce
Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%
2. We want (and need) to know how
goods and services are produced Sales
Cost of Goods
$100,000
– 80,000
$150,000
– 120,000
$100,000
– 80,000
$100,000
– 64,000

3. We want to understand what Gross Margin

Finance Costs
20,000
– 6,000
30,000
– 6,000
20,000
– 3,000
36,000
– 6,000
operations managers do Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
4. OM is such a costly part of an Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
organization
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What Operations Ten Critical Decisions

Managers Do 1. Design of goods and services
2. Managing quality
Basic Management Functions 3. Process and capacity design
4. Location strategy
Planning 5. Layout strategy
6. Human resources and job design
Organizing 7. Supply-chain management
8. Inventory, MRP, JIT
Staffing
9. Scheduling
Leading 10. Maintenance
All of these dealt with below
Controlling
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The Critical Decisions The Critical Decisions

1. Design of goods and services
What good or service should we
offer?
How should we design these
products and services?
2. Managing quality
How do we define quality?
Who is responsible for quality?
3. Process and capacity design
What process and what capacity will
these products require?
What equipment and technology is
necessary for these processes?
4. Location strategy
Where should we put the facility?
On what criteria should we base the
location decision?

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3
 The Critical Decisions
5. Layout strategy
How should we arrange the facility?
How large must the facility be to meet
our plan?
6. Human resources and job design
The Critical Decisions
7. Supply-chain management
Should we make or buy this
component?
Who should be our suppliers and how
can we integrate them into our strategy?

How do we provide a reasonable 8. Inventory, material requirements

work environment? planning, and JIT (Just In Time)
How much can we expect our How much inventory of each item
employees to produce? should we have?
When do we re-order?

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The Critical Decisions Where are the OM Jobs?

Technology/methods
9. Intermediate and short–term
Facilities/space utilization
scheduling
Strategic issues
Are we better off keeping people on
the payroll during slowdowns? Response time
Which jobs do we perform next? People/team development
10. Maintenance Customer service
How do we build reliability into our Quality
processes? Cost reduction
Who is responsible for maintenance? Inventory reduction
Productivity improvement
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Opportunities
Certifications
APICS, the American Production and
Inventory Control Society
American Society of Quality (ASQ)
Institute for Supply Management (ISM)
Project Management Institute (PMI)
Council of Supply Chain Management
Professionals
Charter Institute of Purchasing and
Supply (CIPS)

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4
 The Heritage of OM
Division of labor (Adam Smith 1776;
Charles Babbage 1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Coordinated assembly line (Ford/
Sorenson 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth
1922)
Quality control (Shewhart 1924; Deming
1950)
Some of these mentioned further below
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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
Musket parts could be used in any
musket
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Taylor’s Principles
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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The Heritage of OM
Computers 1940s (Alan Turing)
CPM/PERT (DuPont 1957, Navy 1958)
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 (1980s)
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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 and time studies
Created efficiency principles
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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 and 12 children!
Book & Movie: “Cheaper by the
Dozen,” “Bells on Their Toes”
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5
 Henry Ford W. Edwards Deming
Born 1863; died 1947
Born 1900; died 1993
In 1903, created Ford Motor
Company Engineer and physicist

In 1913, first used moving assembly Credited with teaching Japan

line to make Model T quality control methods in post-
WW2
Unfinished product moved by
conveyor past work station Used statistics to analyze process
Paid workers very well for 1911 His methods involve workers in
($5/day! for an 8 hour shift) decisions
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Characteristics of Goods Characteristics of Service

Tangible Intangible
Consistent Produced and
definition consumed at same time
Production usually Often unique
separate from High customer
consumption interaction
Can be inventoried Often server
Low customer knowledge-based
interaction Frequently dispersed
geographically
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Industry and Services as Goods and Services

Percentage of GDP Automobile
Computer
90 −
Services Manufacturing Installed carpeting
80 −
70 − Fast-food meal
60 − Restaurant meal/auto repair
50 − Hospital care
40 − Advertising agency/
30 − investment management
20 − Consulting service/
10 − teaching
0− Counseling
Australia

Canada

China

UK
France

Germany
Czech Rep

South Africa
Hong Kong

Japan

Mexico

Spain
Russian Fed

US

100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

Percent of Product that is a Good Percent of Product that is a Service

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6
 Manufacturing and Service Manufacturing Employment
Employment and Production
120 –
– 150
Industrial
100 – production

Employment (millions)
– 125
Employment (millions)

(right scale)

Index: 1997 = 100

80 – Service – 100

60 – – 75

40 – 40 – Manufacturing – 50
employment
30 – (left scale)
Manufacturing 20 – – 25
20 –
10 –
0 – | | | | | | –| 0
0– | | | | | | | 1950 1970 1990 2010
1950 1970 1990 2010 1960 1980 2000
1960 1980 2000

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Changing Challenges Changing Challenges

Traditional Reasons for Current Traditional Reasons for Current
Approach Change Challenge Approach Change Challenge
Ethics and Public concern over High ethical and Low cost Public sensitivity to Environmentally
regulations pollution, corruption, social production, environment; ISO 14000 sensitive
not at the child labor, etc. responsibility; with little standard; increasing production; green
forefront increased legal concern for disposal costs manufacturing;
and professional environment; sustainability
standards free
Local or Growth of reliable, low Global focus, resources
national cost communication international (air, water)
focus and transportation collaboration ignored
Low-cost Rise of consumerism; Mass
standardized increased affluence; customization
Lengthy Shorter life cycles; Rapid product products individualism
product growth of global development;
development communication; CAD, design
Internet collaboration

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Changing Challenges Productivity Challenge

Traditional Reasons for Current
Approach Change Challenge Productivity is the ratio of outputs (goods
Emphasis on
specialized,
Recognition of the
employee's total
Empowered
employees;
and services) divided by the inputs
often manual contribution; knowledge enriched jobs (resources such as labor and capital)
tasks society
“In-house” Rapid technological Supply-chain
production; change; increasing partnering; joint The objective is to improve productivity!
low-bid competitive forces ventures,
purchasing alliances
Large lot Shorter product life Just-In-Time
production cycles; increasing need performance; Important Note!
to reduce inventory lean; continuous Production is a measure of output
improvement
only and not a measure of efficiency

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7
 The Economic System Improving Productivity at
Starbucks
Inputs Transformation Outputs
A team of 10 analysts
Labor, The U.S. economic system Goods continually look for ways
capital, transforms inputs to outputs and
management at about an annual 2.5% services to shave time. Some
increase in productivity per
year. The productivity
improvements:
increase is the result of a
mix of capital (38% of 2.5%), Stop requiring signatures Saved 8 seconds
labor (10% of 2.5%), and on credit card purchases per transaction
management (52% of 2.5%).
under $25
Change the size of the ice Saved 14 seconds
Feedback loop scoop per drink
New espresso machines Saved 12 seconds
per shot
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Improving Productivity at Productivity

Starbucks
A team of 10 analysts Units produced
continually look for ways Productivity =
to shave time. Some
Input used
improvements:
Operations improvements have
helped Starbucks
Stop requiring signatures increase
Saved yearly
8 seconds
Measure of process improvement
revenue per outlet
on credit card purchases perby $200,000 to
transaction Represents output relative to input
under $25 $940,000 in six years.
Change the sizeProductivity
of the ice hasSaved
improved by 27%,
14 seconds Only through productivity increases
scoop or about 4.5% per
peryear.
drink can our standard of living improve
New espresso machines Saved 12 seconds
per shot
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Productivity Calculations Multi-Factor Productivity

Labor Productivity Output
Productivity =
Units produced
Labor + Material + Energy
Productivity = + Capital + Miscellaneous
Labor-hours used
Also known as total factor productivity
1,000 Output and inputs are often expressed
= = 4 units/labor-hour in dollars
250

One resource input single-factor productivity Multiple resource inputs multi-factor productivity

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

Old labor 8 titles/day Old labor 8 titles/day

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

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Collins Title Productivity Collins Title Productivity

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

Old labor 8 titles/day Old labor 8 titles/day

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

New labor 14 titles/day New labor 14 titles/day

= = = .4375 titles/labor-hr
productivity 32 labor-hrs productivity 32 labor-hrs
so better
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Collins Title Productivity Collins Title Productivity

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

Old multifactor 8 titles/day Old multifactor 8 titles/day

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

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9
 Collins Title Productivity Collins Title Productivity
Old System: Old System:
Staff of 4 works 8 hrs/day 8 titles/day Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day Payroll cost = $640/day Overhead = $400/day
New System: New System:
14 titles/day Overhead = $800/day 14 titles/day Overhead = $800/day

Old multifactor 8 titles/day Old multifactor 8 titles/day

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

New multifactor 14 titles/day New multifactor 14 titles/day

= = = .0097 titles/dollar
productivity $640 + 800 productivity $640 + 800
so better
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Measurement Problems Productivity Variables

1. Quality may change while the 1. Labor - contributes
quantity of inputs and outputs about 10% of the
remains constant annual increase
2. External elements may cause an 2. Capital - contributes
increase or decrease in about 38% of the
productivity annual increase
Precise units of measure may be 3. Management -
lacking contributes about 52%
of the annual increase
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Key Variables for Improved Labor Skills

Labor Productivity
About half of the 17-year-olds in the U.S. cannot
correctly answer questions of this type
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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10
Investment and Productivity Service Productivity

10
1. Typically labor intensive
2. Frequently focused on unique
Percent increase in productivity

8
individual attributes or desires
6 3. Often an intellectual task performed by
professionals
4
4. Often difficult to mechanize
2
5. Often difficult to evaluate for quality
0
10 15 20 25 30 35
Percentage investment

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Productivity at Taco Bell Productivity at Taco Bell

Improvements: Results:
Revised the menu Preparation
Revised the time
menucut to 8 seconds
Designed meals for easy preparation Management
Designed mealsspanforofeasy
control increased
preparation
from 5 to 30
Shifted some preparation to suppliers Shifted some preparation to suppliers
In-store labor cut by 15 hours/day
Efficient layout and automation Efficient layout and automation
Stores handle twice the volume with half
Training and employee empowerment Training
the laborand employee empowerment
New water and energy saving grills New water300
Conserve andmillion
energygallons
savingofgrills
water and
200 million KwH of electricity each year
saving $17 million annually

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Ethics and
Social Responsibility
Challenges facing
operations managers:
Developing and producing safe,
quality products
Maintaining a clean environment
Providing a safe workplace
Honouring stakeholder commitments

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11