Chapter 1 Operations and Productivity 2

Operations
Management
Operations and
Productivity
2008 Prentice Hall, Inc. 11

Learning Objectives
When you complete this chapter
you should be able to:
1. Define operations management

2. Explain the distinction between
goods and services
3. Explain the difference between
production and productivity

Learning Objectives
When you complete this chapter
you should be able to:
4. Compute single-factor
productivity
5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity

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

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

Organizational Charts
Commercial Bank
Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security
Figure 1.1(A)
Organizational Charts
Airline
Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science Figure 1.1(B)
Organizational
Manufacturing
Charts
Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply chain management research
Funds Management
Manufacturing
Tooling; fabrication; assembly Money market
International
Design exchange
Product development and design
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel and recall
Process analysis
Development and installation of
production tools and equipment Figure 1.1(C)
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
What Operations
Managers Do
Basic Management Functions
Planning
Organizing
Staffing
Leading
Controlling
2008 Prentice Hall, Inc. 1 10
Ten Critical Decisions
Ten Decision Areas Chapter(s)
Design of goods and services 5
Managing quality 6, Supplement 6
Process and capacity 7, Supplement 7
design
Location strategy 8
Layout strategy 9
Human resources and 10, Supplement 10
job design
Supply chain 11, Supplement 11
management
Inventory management 12, 14, 16
Scheduling 13, 15
Maintenance 17
Table 1.2
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?
Table 1.2 (cont.)

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?
Table 1.2 (cont.)
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?
Table 1.2 (cont.)
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?
Table 1.2 (cont.)
Intermediate and shortterm
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?
Table 1.2 (cont.)

Where are the OM Jobs?
2008 Prentice Hall, Inc.

Figure 1.2 1 17
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
Significant Events in OM
Figure 1.3

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)
The Heritage of OM
Computer (Atanasoff 1938)
CPM/PERT (DuPont 1957)
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)

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

Frederick W. Taylor
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
Taylors 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

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, book: Bells on Their Toes
Henry Ford
In 1903, created Ford Motor
Company
In 1913, first used moving assembly
line to make Model T
Unfinished product moved by
conveyor past work station
Paid workers very well for 1911
($5/day!)
W. Edwards Deming
Engineer and physicist
Credited with teaching Japan
quality control methods in post-
WW2
Used statistics to analyze process
His methods involve workers in
decisions
Contributions From
Human factors
Industrial engineering
Management science
Biological science
Physical sciences
Information technology

New Challenges in OM
From To
Local or national focus Global focus
Batch shipments Just-in-time
Low bid purchasing Supply chain
partnering
Lengthy product Rapid product
development development,
alliances
Standard products Mass
customization
Job specialization Empowered
employees, teams
Characteristics of Goods
Tangible product
Consistent product
definition
Production usually
separate from
consumption
Can be inventoried
Low customer
interaction

Characteristics of Service
Intangible product
Produced and
consumed at same time
Often unique
High customer
interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed
Goods Versus Services
Attributes of Goods Attributes of Services
(Tangible Product) (Intangible Product)
Can be resold Reselling unusual
Can be inventoried Difficult to inventory
Some aspects of quality Quality difficult to measure
measurable
Selling is distinct from Selling is part of service
production
Product is transportable Provider, not product, is
often transportable
Site of facility important for cost Site of facility important for
customer contact
Often easy to automate Often difficult to automate
Revenue generated primarily Revenue generated primarily
from tangible product from the intangible service
2008 Prentice Hall, Inc.

Table 1.3 1 32
New Trends in OM
Past Causes Future
Local or Reliable worldwide Global focus,
national communication and moving
focus transportation networks production
offshore
Batch (large) Short product life cycles Just-in-time
shipments and cost of capital put performance
pressure on reducing
inventory
Low-bid Supply chain competition Supply chain
purchasing requires that suppliers be partners,
engaged in a focus on the collaboration,
end customer alliances,
outsourcing
Figure 1.6
New Trends in OM
Past Causes Future
Lengthy Shorter life cycles, Rapid product
product Internet, rapid international development,
development communication, computer- alliances,
aided design, and collaborative
international collaboration designs
Standardized Affluence and worldwide Mass
products markets; increasingly customization
flexible production with added
processes emphasis on
quality
Job Changing socioculture Empowered
specialization milieu; increasingly a employees,
knowledge and information teams, and lean
society production
Figure 1.6
New Trends in OM
Past Causes Future
Low-cost Environmental issues, ISO Environmentally
focus 14000, increasing disposal sensitive
costs production, green
manufacturing,
recycled
materials,
remanufacturing
Ethics not Businesses operate more High ethical
at forefront openly; public and global standards and
review of ethics; opposition social
to child labor, bribery, responsibility
pollution expected
Figure 1.6
New Trends in OM
Global focus
Just-in-time performance
Supply chain partnering
Rapid product development
Mass customization
Empowered employees
Environmentally sensitive production
Ethics

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

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

Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used
1,000
= = 4 units/labor-hour
250
One resource input single-factor productivity

Multi-Factor Productivity
Output
Productivity =
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

Example 1.0
Collins Title wants to evaluate its labor and
multifactor productivity with a new
computerized title search system. The company
has a staff of four, each working 8hrs per day
(for the payroll cost $640/day) and overhead
expenses of $400 per day. Collins processes
and closes on 8 titles each day. The new
computerized title search system will allow the
processing of 14 titles per day. Although the
staff, their work hours and pay are the same, the
overhead expenses are now $800 per day.
Compute the single factor and multifactor productivity

Example 2.0
Productivity can be measured in a variety of ways,
such as by 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 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 per day. What will be
the impact on productivity (measure in crates per
labor hour) if the buyer is hired?

Example 3.0
Art Binley has decided to look at his
productivity from a multifactor perspective. To
do so, he has determine 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
cost will remain constant at $350 and $150 per
day respectively. Material cost for the 100 logs
per day are $ 1,000 and will remain the same.
Because he pays an average of $10 per hour
(with fringes). Determine the multifactor
productivity.

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

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
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

Service Productivity
Typically labor intensive

Frequently focused on unique
individual attributes or desires
Often an intellectual task performed by
professionals
Often difficult to mechanize
Often difficult to evaluate for quality

Ethics and Social Responsibility
Challenges facing
operations managers:
Developing and producing safe,

quality products
Maintaining a clean environment
Providing a safe workplace
Honoring community commitments

Seatwork 1.0
John Lucy makes wooden boxes in which to
ship motorcycles. John and three employees
invest a total of 40 hrs per day in making the
120 boxes.
What is their productivity?
John and his employees have discussed redesigning
the process to improve efficiency. If they can
increase the rate to 125 per day. What will be their
new productivity.
What will be their unit increase in productivity per
hour?
What will be their percentage change in productivity?

Seatwork 2.0
This year, Benson Inc. Will produced 57,600 hot
water heaters at its plant in Yulee, Florida, in
order to meet expected global demand. To
accomplish this, each laborer at the Yulee plant
will work 160 hours per month. If the labor
productivity at the plant is 0.15 hot water
heaters per labor hour, how many laborers are
employed at the plant.

Seatwork 3.0
David Upton is president of Upton Manufacturing, a
producer of Go Kart tires. Upon makes 1,000 tires per day
with the following resources.
Labor Hours 400hrs /day @$12.50 per hr
Raw Materials 20,000 pounds per day @$1
per pound
Energy $5,000 per day
Capital Cost $10,000 per day
a. What is the labor productivity per labor hour for these

tires at Upton Manufacturing
b. What is the multifactor productivity for these tires at
Upton Manufacturing?
c. What is the percentage change in multifactor productivity
if Upton can reduce the energy bill by $1,000 per day
without cutting production or changing any other inputs?

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Operations

2008 Prentice Hall, Inc. 11

1. Define operations management

2008 Prentice Hall, Inc. 12

2008 Prentice Hall, Inc. 13

Production is the creation of

2008 Prentice Hall, Inc. 14

2008 Prentice Hall, Inc. 15

Operations Finance Marketing

Operations Finance/ Marketing

Operations Finance/ Marketing

Table 1.2 (cont.)

Table 1.2 (cont.)

2008 Prentice Hall, Inc.

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2008 Prentice Hall, Inc.

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The objective is to improve productivity!

2008 Prentice Hall, Inc. 1 37

Measure of process improvement

2008 Prentice Hall, Inc. 1 38

One resource input single-factor productivity

2008 Prentice Hall, Inc. 1 39

Multiple resource inputs multi-factor productivity

2008 Prentice Hall, Inc. 1 40

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Quality may change while the

2008 Prentice Hall, Inc. 1 44

Basic education appropriate for the

2008 Prentice Hall, Inc. 1 46

Typically labor intensive

2008 Prentice Hall, Inc. 1 47

Developing and producing safe,

2008 Prentice Hall, Inc. 1 48

2008 Prentice Hall, Inc. 1 49

2008 Prentice Hall, Inc. 1 50

a. What is the labor productivity per labor hour for these

2008 Prentice Hall, Inc. 1 51

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