Operations

Management
Operations and
Productivity
 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
 Ten Critical Decisions
Ten Decision Areas
 Design of goods and services
 Managing quality
 Process and capacity
design
 Location strategy
 Layout strategy
 Human resources and
 Supply chain
management
 Inventory management
 Scheduling
 Maintenance

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.)

 The Critical Decisions
 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.)
 The Critical Decisions
 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 Table 1.2 (cont.)
employees to produce?
 The Critical Decisions
 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.)
 The Critical Decisions
 Intermediate and short–term
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?

Figure 1.2
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
 True /false
All organizations, including service firms such as banks
and hospitals, have a production function.

Operations management is the set of activities that

create value in the form of goods and services by
transforming inputs into outputs.

An example of a "hidden" production function is money

transfers at banks.

One reason to study operations management is to learn

how people organize themselves for
productive enterprise.
The operations manager performs the management
activities of planning, organizing, staffing,
leading, and controlling of the OM function.

"How much inventory of this item should we have?"

is within the critical decision area of
managing quality.

In order to have a career in operations

management, one must have a degree in statistics
or quantitative methods.
 MCQS

© 2008 Prentice Hall, Inc. 1 – 21

 Operations management is
applicable
a. mostly to the service sector
b. to services exclusively
c. mostly to the manufacturing sector
d. to all firms, whether manufacturing
and service
e. to the manufacturing sector
exclusively
 Which of the following are
the primary functions of all
organizations?
a. operations, marketing, and human
resources
b. marketing, human resources, and
finance/accounting
c. sales, quality control, and operations
d. marketing, operations, and
finance/accounting
e. research and development,
finance/accounting, and purchasing
 Budgeting, paying the bills,
and collection of funds are
activities associated with the
a. management function
b. control function
c. finance/accounting function
d. production/operations function
e. staffing function
 Which of the following would
not be an operations function
in a fast-food restaurant?
a. advertising and promotion
b. designing the layout of the facility
c. maintaining equipment
d. making hamburgers and fries
e. purchasing ingredients
 The marketing function's
main concern is with
a. producing goods or providing
services
b. procuring materials, supplies, and
equipment
c. building and maintaining a positive
image
d. generating the demand for the
organization's products or services
e. securing monetary resources
 Reasons to study
Operations Management
include
a. studying why people organize
themselves for free enterprise
b. knowing how goods and services
are consumed
c. understanding what human resource
managers do
d. learning about a costly part of the
enterprise
e. all of the above
 Reasons to study
Operations Management
include learning about
• a. why people organize themselves
for productive enterprise
• b. how goods and services are
produced
• c. what operations managers do
• d. a costly part of the enterprise
• e. all of the above
 The five elements in the
management process are
• a. plan, direct, update, lead, and supervise
• b. accounting/finance, marketing,
operations, and management
• c. organize, plan, control, staff, and
manage
• d. plan, organize, staff, lead, and control
• e. plan, lead, organize, manage, and
control
 Which of the following is
not an element of the
management process?
a. controlling
b. leading
c. planning
d. pricing
e. staffing
 An operations manager is
not likely to be involved in
• a. the design of goods and services to
satisfy customers' wants and needs
• b. the quality of goods and services to
satisfy customers' wants and needs
• c. the identification of customers' wants
and needs
• d. work scheduling to meet the due dates
promised to customers
• e. maintenance schedules
 All of the following decisions fall
within the scope of operations
management except for
• a. financial analysis
• b. design of goods and processes
• c. location of facilities
• d. managing quality
• e. All of the above fall within the
scope of operations management
 The Ten Critical Decisions of
Operations Management include

• a. Layout strategy
• b. Maintenance
• c. Process and capacity design
• d. Managing quality
• e. all of the above
 Which of the following is not one
of The Ten Critical Decisions of
Operations Management?
• a. Layout strategy
• b. Maintenance
• c. Process and capacity design
• d. Mass customization
• e. Supply chain management
 The Ten Critical Decisions of
Operations Management include

• a. Finance/accounting
• b. Advertising
• c. Process and capacity design
• d. Pricing
• e. all of the above
 Fill in the blanks

_____________________________ is
the set of activities that transforms
inputs into goods and services.

© 2008 Prentice Hall, Inc. 1 – 36

 Marketing, Production, and
_____________________________
are the three functions that all
organizations must perform to
create goods and services.

© 2008 Prentice Hall, Inc. 1 – 37

 • "Should we make or buy this
component?" is an issue in the
_____________________________
• critical decision area.

© 2008 Prentice Hall, Inc. 1 – 38

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
 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
 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
 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
 Born 1863; died 1947
 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
 Born 1900; died 1993
 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
(Tangible Product)
Can be resold
Can be inventoried
Some aspects of quality
measurable
Selling is distinct from
production
Product is transportable
Site of facility important for cost
Often easy to automate
Revenue generated primarily
from tangible product
Attributes of Services
(Intangible Product)
Reselling unusual
Difficult to inventory
Quality difficult to measure
Selling is part of service
Provider, not product, is
often transportable
Site of facility important for
customer contact
Often difficult to automate
Revenue generated primarily
from the intangible service
Table 1.3
 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 rupees

Multiple resource inputs  multi-factor 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 -

 Capital -

 Management -

© 2008 Prentice Hall, Inc. 1 – 59

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
 True /false
• In order to have a career in
operations management, one must
have a degree in statistics or
quantitative methods.

© 2008 Prentice Hall, Inc. 1 – 63

 True /false
• Henry Ford is known as the Father of
Scientific Management.

© 2008 Prentice Hall, Inc. 1 – 64

 True /false
• Shewhart’s contributions to
operations management came during
the Scientific Management Era.

© 2008 Prentice Hall, Inc. 1 – 65

 True /false
• Students wanting to pursue a career
in operations management will find
multidisciplinary knowledge
beneficial.

© 2008 Prentice Hall, Inc. 1 – 66

 True /false
• Customer interaction is often high
for manufacturing processes, but low
for services.

© 2008 Prentice Hall, Inc. 1 – 67

 True /false
• Productivity is more difficult to
improve in the service sector.

© 2008 Prentice Hall, Inc. 1 – 68

 True /false
• Manufacturing now constitutes the
largest economic sector in
postindustrial societies.

© 2008 Prentice Hall, Inc. 1 – 69

 True /false
• A knowledge society is one that has
migrated from work based on
knowledge to one based on manual
work.

© 2008 Prentice Hall, Inc. 1 – 70

 True /false
• Productivity is the total value of all
inputs to the transformation process
divided by the total value of the
outputs produced.

© 2008 Prentice Hall, Inc. 1 – 71

 True /false
• Measuring the impact of a capital
acquisition on productivity is an
example of multi-factor productivity.

© 2008 Prentice Hall, Inc. 1 – 72

 True /false
• Ethical and social dilemmas arise
because stakeholders of a business
have conflicting perspectives.

© 2008 Prentice Hall, Inc. 1 – 73

 Fill in the blanks

Henry Ford and

_____________________________
are credited with the development of
the moving assembly line.

© 2008 Prentice Hall, Inc. 1 – 74

 When a tangible product is not
included in a service, it is called a
_____________________________.

© 2008 Prentice Hall, Inc. 1 – 75

 _____________________________ is the
ability of the organization to be flexible
enough to cater
to the individual whims of consumers.

© 2008 Prentice Hall, Inc. 1 – 76

 _____________________________
is the operations management
trend that moves more decision
making to the individual worker.

© 2008 Prentice Hall, Inc. 1 – 77

 ____________________________ is the

total of all outputs produced by the

transformation

process divided by the total of the

inputs.

© 2008 Prentice Hall, Inc. 1 – 78

 When a tangible product is not included in a
service, it is called a
_____________________________.

© 2008 Prentice Hall, Inc. 1 – 79

 _________________________
____ is the ability of the
organization to be flexible
enough to cater
to the individual whims of
consumers.

© 2008 Prentice Hall, Inc. 1 – 80

 _________________________
___ is the total of all outputs
produced by the
transformation
process divided by the total
of the inputs.

© 2008 Prentice Hall, Inc. 1 – 81

 Walter Shewhart is listed among the important
people of operations management because of his
contributions to
a. assembly line production
b. measuring the productivity in the service sector
c. just-in-time inventory methods
d. statistical quality control
e. all of the above

© 2008 Prentice Hall, Inc. 1 – 82

 Walter Shewhart, in the _____, provided the
foundations for ______ in operations
management.
a. 1920s; statistical sampling
b. United Kingdom; mass production
c. U.S. Army; logistics
d. nineteenth century; interchangeable parts
e. none of the above

© 2008 Prentice Hall, Inc. 1 – 83

 Eli Whitney, in the _____, provided the foundations
for ______ in operations management.
a. 1920s; statistical sampling
b. United Kingdom; mass production
c. U.S. Army; logistics
d. nineteenth century; interchangeable parts
e. none of the above

© 2008 Prentice Hall, Inc. 1 – 84

 The person most responsible for popularizing
interchangeable parts in manufacturing was
a. Frederick Winslow Taylor
b. Henry Ford
c. Eli Whitney
d. Whitney Houston
e. Lillian Gilbreth

© 2008 Prentice Hall, Inc. 1 – 85

 The "Father of Scientific Management" is
a. Henry Ford
b. Frederick W. Taylor
c. W. Edwards Deming
d. Frank Gilbreth
e. just a figure of speech, not a reference to a
person

© 2008 Prentice Hall, Inc. 1 – 86

 Henry Ford is noted for his contributions to
a. standardization of parts
b. statistical quality control
c. assembly line operations
d. scientific management
e. time and motion studies

© 2008 Prentice Hall, Inc. 1 – 87

 Who among the following is associated with
contributions to quality control in operations
management?
a. Charles Babbage
b. Henry Ford
c. Frank Gilbreth
d. W. Edwards Deming
e. Henri Fayol

© 2008 Prentice Hall, Inc. 1 – 88

 The field of operations management is shaped by
advances in which of the following fields?
a. chemistry and physics
b. industrial engineering and management
science
c. biology and anatomy
d. information technology
e. all of the above

© 2008 Prentice Hall, Inc. 1 – 89

 Which of the following statements is true?
a. Almost all services and almost all goods are a
mixture of a service and a tangible product.
b. A pure good has no tangible product
component.
c. A pure service has only a tangible product
component.
d. There is no such thing as a pure good.
e. None of the above is a true statement

© 2008 Prentice Hall, Inc. 1 – 90

 Typical differences between goods and services do
not include
a. cost per unit
b. ability to inventory items
c. timing of production and consumption
d. customer interaction
e. knowledge content

© 2008 Prentice Hall, Inc. 1 – 91

 Which is not true regarding differences between
goods and services?
a. Services are generally produced and consumed
simultaneously; tangible goods are not.
b. Services tend to be more knowledge-based than
products.
c. Services tend to have a more inconsistent
product definition than goods.
d. Goods tend to have higher customer interaction
than services.
e. None of the above is true.

© 2008 Prentice Hall, Inc. 1 – 92

 Which of the following is not a typical attribute of
goods?
a. output can be inventoried
b. often easy to automate
c. aspects of quality difficult to measure
d. output can be resold
e. production and consumption are separate

© 2008 Prentice Hall, Inc. 1 – 93

 Which of the following services is least likely to be
unique, i.e., customized to a particular
individual's needs?
a. dental care
b. hairdressing
c. legal services
d. elementary education
e. computer consulting

© 2008 Prentice Hall, Inc. 1 – 94

 Which of the following is not a typical service
attribute?
a. intangible product
b. easy to store
c. customer interaction is high
d. simultaneous production and consumption
e. difficult to resell

© 2008 Prentice Hall, Inc. 1 – 95

 Current trends in operations management
include all of the following except
a. just-in-time performance
b. rapid product development
c. mass customization
d. empowered employees
e. All of the above are current trends.

© 2008 Prentice Hall, Inc. 1 – 96

 Which of the following is not a current trend in
operations management?
a. just-in-time performance
b. global focus
c. supply chain partnering
d. mass customization
e. All of the above are current trends.

© 2008 Prentice Hall, Inc. 1 – 97

 One new trend in operations management is
a. global focus
b. mass customization
c. empowered employees
d. rapid product development
e. All of the above are new trends in operations
management

© 2008 Prentice Hall, Inc. 1 – 98

 A foundry produces circular utility access
hatches (manhole covers). If 120 covers are
produced in
a 10-hour shift, the productivity of the line is
a. 1.2 covers/hr
b. 2 covers/hr
c. 12 covers/hr
d. 1200 covers/hr
e. none of the above

© 2008 Prentice Hall, Inc. 1 – 99

 Gibson Valves produces cast bronze valves on an
assembly line. If 1600 valves are produced in an
8-hour shift, the productivity of the line is
a. 2 valves/hr
b. 40 valves/hr
c. 80 valves/hr
d. 200 valves/hr
e. 1600 valves/hr

© 2008 Prentice Hall, Inc. 1 – 100

 Gibson Valves produces cast bronze valves on an
assembly line, currently producing 1600 valves
each 8-hour shift. If the productivity is increased
by 10%, it would then be
a. 180 valves/hr
b. 200 valves/hr
c. 220 valves/hr
d. 880 valves/hr
e. 1760 valves/hr

© 2008 Prentice Hall, Inc. 1 – 101

 Productivity measurement is complicated by
a. the competition's output
b. the fact that precise units of measure are often
unavailable
c. stable quality
d. the workforce size
e. the type of equipment used

© 2008 Prentice Hall, Inc. 1 – 102

 The total of all outputs produced by the
transformation process divided by the total of the
inputs is
a. utilization
b. greater in manufacturing than in services
c. defined only for manufacturing firms
d. multifactor productivity
e. none of the above

© 2008 Prentice Hall, Inc. 1 – 103

 Which of the following inputs has the greatest
potential to increase productivity?
a. labor
b. globalization
c. management
d. capital
e. none of the above

© 2008 Prentice Hall, Inc. 1 – 104

 Productivity can be improved by
a. increasing inputs while holding outputs steady
b. decreasing outputs while holding inputs
steady
c. increasing inputs and outputs in the same
proportion
d. decreasing inputs while holding outputs
steady
e. none of the above

© 2008 Prentice Hall, Inc. 1 – 105

 Three commonly used productivity variables are
a. quality, external elements, and precise units of
measure
b. labor, capital, and management
c. technology, raw materials, and labor
d. education, diet, and social overhead
e. quality, efficiency, and low cost

© 2008 Prentice Hall, Inc. 1 – 106

 Productivity tends to be more difficult to improve in
the service sector because the work is
a. often difficult to automate
b. typically labor-intensive
c. frequently processed individually
d. often an intellectual task performed by
professionals
e. all of the above

© 2008 Prentice Hall, Inc. 1 – 107