Introduction To OM Chapter 1

Heizer, Render, Griffin
Operations Management
Second Canadian Edition
Slides adapted by Michael Zhang
Chapter 1
Operations and
Productivity
Copyright © 2017 Pearson Canada Inc.

Outline
 What Is Operations Management?

 Organizing To Produce Goods And Services
 Why Study OM?
 What Operations Managers Do
 How This Book Is Organized
ADM 3301 ~ Rim Jaber 2

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

Outline - Continued
 The Productivity Challenge
 Productivity Measurement
 Productivity Variables
 Productivity and the Service Sector
 Ethics and Social Responsibility

Learning Objectives
When you complete this chapter,
you should be able to:
 Define Operations management (OM)

 Explain the distinction between
goods and services
 Explain the difference between
Production and productivity
Learning Objectives
Describe or Explain :
 A brief history of operations
management
 Career opportunities in operations
management
 The future of the discipline
Learning Objectives
 Compute single-factor productivity

 Compute multifactor productivity
 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

• Transformations:
– Physical transformations--manufacturing
– Locational transformations--transportation
– Exchange operations--retailing
– Storage operations--warehousing
– Physiological operations--health care
– Informational transformations--
telecommunications

Organizing to Produce Goods and
Services
 To create goods and services, all
organizations require three essential
functions:
 Marketing
 Production/operations
 Finance/accounting

ORGANIZATIONAL
FUNCTIONS
• Marketing
– Gets customers,
Generates demand
• Operations
– Creates the goods or services
• Finance/Accounting
– Tracks how well the
organization is doing,
pays bills, collects the © 1995 Corel Corp.
money ADM 3301 ~ Rim Jaber 11

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)
Airline
Operations Finance/ Marketing

Ground support accounting Traffic
equipment Accounting administration
Maintenance Payables Reservations
Receivables Schedules
Ground Operations
General Ledger Tariffs (pricing)
Facility
maintenance Finance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Figure 1.1(B)
Management science
Manufacturing
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) 14
INTERDEPENDENCY OF THE
THREE MAJOR FUNCTIONS
• The success of an organization depends not only
on how well each area performs, but also on
how well the areas interface with each other.
• Example:
– Marketing is responsible for assessing customer
wants and needs, and for communicating those to
operations people (short term) and to design people
(long term).

INTERDEPENDENCY OF THE
THREE MAJOR FUNCTIONS
– Marketing needs from operations the
manufacturing or service lead time.
– Finance and operations management
cooperate by exchanging information and
expertise in: Budgeting, Economic
analysis of investment proposals, and
Provision of funds.

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
Options for Increasing
Contribution
Table 1.1
What Operations
Managers Do
Basic Management Functions
 Planning
 Organizing
 Staffing
 Leading
 Controlling
Ten Critical Decisions
Ten Decision Areas Chapter(s)
 Design of goods and services 5
 Managing quality 6, 6 Supplement
 Process and capacity 7, 7 Supplement
design
 Location strategy 8
 Layout strategy 9
 Human resources and 10, 10 Supplement
job design
 Supply-chain 11, 11 Supplement
management
 Inventory management, 12, 14, 16
MRP, JIT
 Scheduling 13, 15 Table 1.2
 Maintenance ADM 3301 ~ Rim Jaber
17 20
Ten Critical Decisions
Ten Decision Areas Chapter(s)
 Design of goods and services 5
 Managing quality 6, 6 Supplement
 Process and capacity 7, 7 Supplement
design
 Location strategy 8
 Layout strategy 9
 Human resources and 10, 10 Supplement
job design
 Supply-chain 11, 11 Supplement
management
 Inventory management, 12, 14, 16
MRP, JIT
 Scheduling 13, 15 Table 1.2
 Maintenance ADM 3301 ~ Rim Jaber
17 21
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 and
material flow?
 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 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?
 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
Copyright © 2017 Pearson
Canada Inc.
Certifications
 APICS, the American Production and

Inventory Control Society
 Excellence Canada
 Standards Council of Canada
 Institute for Supply Management
(ISM)
 Project Management Institute (PMI)
 Council of Supply Chain Management
Professionals

The Heritage of Operations Management

Significant Events in OM
Figure 1.3
SIGNIFICANT EVENTS IN OM
The Industrial Revolution:
– 1776: Division of Labor (Adam Smith)
– 1800: Standardized Parts (Eli Whitney)
Scientific Management:
– 1881: Scientific Management (Frederick Taylor)
– 1913: Coordinated Assembly Line (Henri Ford)
Industrial Psychology:
– 1922: Motion Study (Frank & Lillian Gilberth)
– 1933: Effect of Environment on Employee Productivity
and Motivation (Elton Mayo)
Decision Models and Management Science:
– 1916: Gantt Charts (Henry Gantt)
– 1917: Inventory Control (F.W. Harris)
– 1924: Quality Control (Walter Shewhart)
– 1934: Sampling Techniques (L.H.C. Tippet)
– 1940: Operations Research (in England)
– 1947: Linear Programming (Dantzig)
– 1950: Quality Control ( Edwards Deming)
– 1950-1960: Simulation, Queueing Theory, Decision Theory,
Mathematical Programming, Program Evaluation and Review
Technique (PERT), Critical Path Method (CPM), Materials
Requirements Planning (MRP) 33
– 1970-1980: Software for Inventory Control, Scheduling,
Forecasting
– 1980-1990: Just in Time (JIT), Total Quality Management
(TQM), Computer Integrated Manufacturing (CIM),
Flexible Manufacturing Systems (FMS), Computer Aided
Design (CAD), Computer Aided Manufacturing (CAM),
Manufacturing Automation Protocol (MAP), robotics
– 1992: Globalization
– 1995: Internet
– 2000: Smart systems
Future based upon:
management science/ information science/ business analyatics
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
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!)
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”
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
Other Historical Disciplines
Impacting OM
 Industrial Engineering
 Management Science (operations research)
 Statistics and Economics
 Physical Sciences (new materials/technology)
 Information Technology (computer-aided
design, enterprise resource planning,
computer integrated manufacturing)
 Flexible manufacturing system
 Globalization
 Internet

Canada Inc.
Operations in the Manufacturing or
Service Sector

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
Service Or Good?
• “If you drop it on your foot, it won’t hurt you.”
(Good or service?)
• “Services never include goods and goods never
include services.” (True or false?)
• What about McDonald’s?
– Identify the (physical) product of McDonald's?
– Service or Manufacturing?
– The company certainly manufactures tangible
products, Why then would we consider McDonald’s
a service business?

MANUFACTURING (PRODUCING
GOODS) VERSUS SERVICE
• Manufacturing and Service are often
similar in terms of what is done, but
different in terms of how it is done.
• Manufacturing and service organizations

differ chiefly because manufacturing is
product-oriented and service is act-
oriented.

GOODS VERSUS SERVICES
Goods Service
• Can be resold • Reselling unusual
• Can be inventoried • Difficult to inventory
• Some aspects of • Quality difficult to
quality measurable measure
• Selling is distinct • Selling is part of
from production service

GOODS VERSUS SERVICES -
CONTINUED
Goods Service
• Product is • Provider, not product
transportable is transportable
• Site of facility • Site of facility
important for important for
cost customer contact
• Often easy to • Often difficult to
automate automate
• Revenue • Revenue generated
generated primarily from
primarily from intangible service.
tangible product ADM 3301 ~ Rim Jaber 48
Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counselling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |
Percent of Product that is a Good Percent of Product that is a Service

Canada Inc.
Industry and Services as
Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
Germany
Czech Rep
Japan
Russian Fed
Hong Kong
UK
France
Spain
Canada
China
South Africa
Mexico
US
Australia

Manufacturing and Service
Employment
Copyright © 2017 Pearson Figure 1.5(a)

Canada Inc.
Manufacturing Employment and
Production
Copyright © 2017 Pearson Figure 1.5(b)

Canada Inc.
Development of the
Service Economy
Copyright © 2017 Pearson Figure 1.5(c)

Canada Inc.
Organizations in Each Sector
Service-
Producing % of all
Sector Example Jobs
Healthcare Sick Kids Hospital 12
Trade Hudson Bay Company; Real 15
Canadian SuperStore
Transportation/ WestJet; Maritime-Ontario 5
warehousing Freight Lines Ltd.
Finance/ Royal Bank; Manulife 6
Insurance
Professional Borden Ladner Gervais Law
services Firm 8
Table 1.3
Service-
Producing % of all
Sector Example Jobs
Business, Edmonton Waste Management 4
Building, Other Centre; Carlson Wagonlit Travel
support services
Educational McGill University 7
services
Information, Calgary Flames, Princess of 5
Culture, Wales Theatre
Recreation
Accommodation, Tim Horton’s, Royal York Hotel 6
Food services
Table 1.3
% of all
Other Sectors Example Jobs
Manufacturing Magna International inc. 10
sector
Construction PCL Construction Mgmnt. 7
sector
Agriculture, Farming Operations; Canadian 5
Forestry, Mining, Mining Company; Dome Pacific
Oil and gas, Logging Ltd.; Ontario Power
Utilities Generation
Other Services, Joe’s Barber Shop,; ABC 10
Public Landscaping; Province of
administration Manitoba
Table 1.3
Exciting New Challenges in Operations
Management

Changing Challenges
Traditional Reasons for Current
Approach Change Challenge
Ethics and Public concern over High ethical and
regulations pollution, corruption, social
not at the child labour, etc. responsibility;
forefront increased legal
and professional
standards
Local or Growth of reliable, low Global focus,
national cost communication international
focus and transportation collaboration
Lengthy Shorter life cycles; Rapid product

product growth of global development;
development communication; CAD, design
internet collaboration

Canada Inc.
Figure 1.5
Changing Challenges
Low cost Public sensitivity to Environmentally
production, environment; ISO 14000 sensitive
with little standard; increasing production; green
concern for disposal costs manufacturing;
environment; sustainability
free
resources
(air, water)
ignored
Low-cost Rise of consumerism; Mass
standardized increased affluence; customization
products individualism

Canada Inc.
Figure 1.5
Changing Challenges
Emphasis on Recognition of the Empowered
specialized, employee's total employees;
often manual contribution; knowledge enriched jobs
tasks society
“In-house” Rapid technological Supply-chain
production; change; increasing partnering; joint
low-bid competitive forces ventures,
purchasing alliances
Large lot Shorter product life Just-in-time
production cycles; increasing need performance;
to reduce inventory lean; continuous
improvement

Canada Inc.
Figure 1.5
New Trends in OM
• Ethics
• Global focus
• Environmentally sensitive production
• Mass customization
• Empowered employees
• Supply-chain partnering
• Just-in-time performance

Canada Inc.
The Productivity Challenge

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 this

measure of efficiency
Important Note!
Production is a measure of output
only and not a measure of efficiency
The Economic System
Transforms Inputs to Outputs
Inputs Process Outputs
Land, Labor, •The Canadian economic system Goods and
transforms inputs to outputs at
Capital, Services
about an annual 2.2% increase in
Management productivity per year. The
productivity increase is the result
of a mix of capital (38% of 2.2%),
labour (10% of 2.2%), and
management (52% of 2.2%).
Feedback loop
Figure 1.6
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
per shot
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:
Operations improvements have helped
Stop requiring signatures
Starbucks increaseSaved
yearly8revenue
seconds per
on credit card purchases
outlet by $200,000per transaction
to $940,000 in six
under $25 years.
Change the sizeProductivity
of the ice has improved
Saved 14by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
per shot
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
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

=
productivity 32 labor-hrs

Old System:

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

Old System:
New System:
14 titles/day Overhead = $800/day

=
New labor 14 titles/day

=
Old System:
New System:

=
New labor 14 titles/day

= = .4375 titles/labor-hr
Old System:
New System:
Old multifactor 8 titles/day

=
productivity $640 + 400

Old System:
New System:

= = .0077 titles/dollar

Old System:
New System:

New multifactor 14 titles/day

=
Old System:
New System:

New multifactor 14 titles/day

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 32%
of the annual increase
 Management - contributes about
52% of the annual increase

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
Service Productivity
1. Typically labour 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

Canada Inc.
Productivity at Taco Bell
Improvements:
 Revised the menu
 Designed meals for easy preparation
 Shifted some preparation to suppliers
 Efficient layout and automation
 Training and employee empowerment
 New water and energy saving grills

Canada Inc.
Improvements:
 Revised the menu
 Designed meals for easy preparation
 Shifted some preparation to suppliers
 Efficient layout and automation
 Training and employee empowerment
 New water and energy saving grills

Canada Inc.
Results:
 Preparation time cut to 8 seconds
 Management span of control increased
from 5 restaurants to 30
 In-store labour cut by 15 hours/day
 Stores handle twice the volume with half
the labour
 Conserve over a billion litres of water and
200 million KwH of electricity each year
saving $17 million annually

Canada Inc.
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

Canada Inc.
Summary
 The operations function creates goods
and services
 Operations, marketing, finance are three
functions basic to all organizations
 Operations management has a long
history and keeps evolving
 Operations managers are key players
for improved productivity
 Affluent societies devote more of their
resources to services
 In Canada more than ¾ of the workforce
are in the service sector
Canada Inc.

Introduction To OM Chapter 1

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Heizer, Render, Griffin

Copyright © 2017 Pearson Canada Inc.

 What Is Operations Management?

ADM 3301 ~ Rim Jaber 2

ADM 3301 ~ Rim Jaber 3

 Ethics and Social Responsibility

ADM 3301 ~ Rim Jaber 4

 Define Operations management (OM)

 Compute single-factor productivity

ADM 3301 ~ Rim Jaber 7

Production is the creation of goods

ADM 3301 ~ Rim Jaber 8

ADM 3301 ~ Rim Jaber 9

ADM 3301 ~ Rim Jaber 10

money ADM 3301 ~ Rim Jaber 11

Operations Finance Marketing

Operations Finance/ Marketing

Operations Finance/ Marketing

ADM 3301 ~ Rim Jaber 15

ADM 3301 ~ Rim Jaber 16

Table 1.2 (cont.)

ADM 3301 ~ Rim Jaber 24

Table 1.2 (cont.)

ADM 3301 ~ Rim Jaber 26

ADM 3301 ~ Rim Jaber 27

 APICS, the American Production and

ADM 3301 ~ Rim Jaber 29

ADM 3301 ~ Rim Jaber 30

Copyright © 2017 Pearson

ADM 3301 ~ Rim Jaber 42

ADM 3301 ~ Rim Jaber 45

• Manufacturing and service organizations

ADM 3301 ~ Rim Jaber 46

ADM 3301 ~ Rim Jaber 47

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

Copyright © 2017 Pearson Canada Inc.

Copyright © 2017 Pearson Figure 1.5(a)

Copyright © 2017 Pearson Figure 1.5(b)

Copyright © 2017 Pearson Figure 1.5(c)

ADM 3301 ~ Rim Jaber 57

Lengthy Shorter life cycles; Rapid product

Copyright © 2017 Pearson

Copyright © 2017 Pearson

Copyright © 2017 Pearson

Copyright © 2017 Pearson

ADM 3301 ~ Rim Jaber 62

The objective is to improve this

 Measure of process improvement

ADM 3301 ~ Rim Jaber 67

Old labor 8 titles/day

ADM 3301 ~ Rim Jaber 70

Old labor 8 titles/day

ADM 3301 ~ Rim Jaber 71

Old labor 8 titles/day

New labor 14 titles/day

Old labor 8 titles/day

New labor 14 titles/day

Old multifactor 8 titles/day

ADM 3301 ~ Rim Jaber 74

Old multifactor 8 titles/day

ADM 3301 ~ Rim Jaber 75

Old multifactor 8 titles/day

New multifactor 14 titles/day