1 Introduction to Operations Management DPT 335 PRODUCTION

1 Introduction to Operations Management DPT 335 PRODUCTION PLANNING AND CONTROL 1 -1

Learning Objectives When you complete this chapter you should be able to: DEFINE and EXPLAIN the scope of operations management, management process, decision making, historical evaluation of operation management 1 -2

The Hard Rock Cafe u First opened in 1971 u Now – 150 restaurants in over 53 countries u Rock music memorabilia u Creates value in the form of good food and entertainment u 3, 500+ custom meals per day in Orlando u How does an item get on the menu? u Role of the Operations Manager © 2011 Pearson Education 1 -3

What Is Operations Management? Production is the creation of goods and services Operations management (OM) is the set of activities that create value in the form of goods and services by transforming inputs into outputs 1 -4

Organizing to Produce Goods and Services u Essential functions: 1. 2. Marketing – generates demand Production/operations – creates the product 3. Finance/accounting – tracks how well the organization is doing, pays bills, collects the money 1 -5

Organizational Charts Commercial Bank Operations Finance Marketing Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security Investments Security Real estate Loans Commercial Industrial Financial Personal Mortgage Accounting Auditing Trust Department Figure 1. 1(A) 1 -6

Organizational Charts Airline Operations Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science © 2011 Pearson Education Finance/ accounting Accounting Payables Receivables General Ledger Finance Cash control International exchange Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising Figure 1. 1(B) 1 -7

Organizational Charts Manufacturing Operations Facilities Construction; maintenance Production and inventory control Scheduling; materials control Quality assurance and 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 Finance/ accounting Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall Marketing Sales promotion Advertising Sales Market research Process analysis Development and installation of production tools and equipment © 2011 Pearson Education Figure 1. 1(C) 1 -8

Why Study OM? 1. OM is one of three major functions (operations, finance & marketing) of any organization, we want to study how people organize themselves for productive enterprise 2. We want (and need) to know how goods and services are produced 3. We want to understand what operations managers do 4. OM is such a costly part of an organization 1 -9

Options for Increasing Contribution Finance/ Marketing Accounting Option OM Increase Reduce Sales Finance Production Current Revenue 50% Costs 20% Sales $100, 000 $150, 000 $100, 000 Cost of Goods – 80, 000– 120, 000 – 80, 000– 64, 000 Gross Margin 20, 000 30, 000 20, 000 36, 000 Finance Costs – 6, 000 – 3, 000 – 6, 000 Subtotal 14, 000 24, 000 17, 000 30, 000 Taxes at 25% – 3, 500 – 6, 000 – 4, 250 – 7, 500 Contribution $ 10, 500$ 18, 000$ 12, 750$ 22, 500 Table 1. 1 1 - 10

What Operations Managers Do Basic Management Functions u Planning u Organizing u Staffing u Leading u Controlling 1 - 11

Ten Critical Decisions Ten Decision Areas 1. Design of goods and services 2. Managing quality 3. Process and capacity design 4. Location strategy 5. Layout strategy 6. Human resources and job design 7. Supply-chain management 8. Inventory, MRP, JIT 9. Scheduling 10. Maintenance 1 - 12

The Critical Decisions 1. Design of goods and services u What good or service should we offer? u How should we design these products and services? 2. Managing quality u How do we define quality? u Who is responsible for quality? Table 1. 2 (cont. ) © 2011 Pearson Education 1 - 13

The Critical Decisions 3. Process and capacity design u What process and what capacity will these products require? u What equipment and technology is necessary for these processes? 4. Location strategy u Where should we put the facility? u On what criteria should we base the location decision? Table 1. 2 (cont. ) © 2011 Pearson Education 1 - 14

The Critical Decisions 5. Layout strategy u How should we arrange the facility? u How large must the facility be to meet our plan? 6. Human resources and job design u How do we provide a reasonable work environment? u How much can we expect our employees to produce? Table 1. 2 (cont. ) © 2011 Pearson Education 1 - 15

The Critical Decisions 7. Supply-chain management u Should we make or buy this component? u Who should be our suppliers and how can we integrate them into our strategy? 8. Inventory, material requirements planning, and JIT u How much inventory of each item should we have? u When do we re-order? Table 1. 2 (cont. ) © 2011 Pearson Education 1 - 16

The Critical Decisions 9. Intermediate and short–term scheduling u Are we better off keeping people on the payroll during slowdowns? u Which jobs do we perform next? 10. Maintenance u How do we build reliability into our processes? u Who is responsible for maintenance? Table 1. 2 (cont. ) © 2011 Pearson Education 1 - 17

Significant Events in OM Figure 1. 3 © 2011 Pearson Education 1 - 18

The Heritage of OM u Division of labor (Adam Smith 1776; Charles Babbage 1852) u Standardized parts (Whitney 1800) u Scientific Management (Taylor 1881) u Coordinated assembly line (Ford/ Sorenson 1913) u Gantt charts (Gantt 1916) u Motion study (Frank and Lillian Gilbreth 1922) u Quality control (Shewhart 1924; Deming 1950) © 2011 Pearson Education 1 - 19

The Heritage of OM u Computer (Atanasoff 1938) u CPM/PERT (Du. Pont 1957, Navy 1958) u Material requirements planning (Orlicky 1960) u Computer aided design (CAD 1970) u Flexible manufacturing system (FMS 1975) u Baldrige Quality Awards (1980) u Computer integrated manufacturing (1990) u Globalization (1992) u Internet (1995) © 2011 Pearson Education 1 - 20

Eli Whitney u Born 1765; died 1825 u In 1798, received government contract to make 10, 000 muskets u Showed that machine tools could make standardized parts to exact specifications u Musket parts could be used in any musket © 2011 Pearson Education 1 - 21

Frederick W. Taylor u Born 1856; died 1915 u Known as ‘father of scientific management’ u In 1881, as chief engineer for Midvale Steel, studied how tasks were done u Began first motion and time studies u Created efficiency principles © 2011 Pearson Education 1 - 22

Taylor’s Principles Management Should Take More Responsibility for: u Matching employees to right job u Providing the proper training u Providing proper work methods and tools u Establishing legitimate incentives for work to be accomplished © 2011 Pearson Education 1 - 23

Frank & Lillian Gilbreth u Frank (1868 -1924); Lillian (1878 -1972) u Husband-wife engineering team u Further developed work measurement methods u Applied efficiency methods to their home and 12 children! u Book & Movie: “Cheaper by the Dozen, ” “Bells on Their Toes” © 2011 Pearson Education 1 - 24

Henry Ford u Born 1863; died 1947 u In 1903, created Ford Motor Company u In 1913, first used moving assembly line to make Model T u. Unfinished product moved by conveyor past work station u Paid workers very well for 1911 ($5/day!) © 2011 Pearson Education 1 - 25

W. Edwards Deming u Born 1900; died 1993 u Engineer and physicist u Credited with teaching Japan quality control methods in post. WW 2 u Used statistics to analyze process u His methods involve workers in decisions © 2011 Pearson Education 1 - 26

Contributions From u Human factors u Industrial engineering u Management science u Biological science u Physical sciences u Information technology © 2011 Pearson Education 1 - 27

New Challenges in OM From To u Local or national focus u Global focus u Batch shipments u Just-in-time u Low bid purchasing u Supply-chain partnering u Lengthy product development u Rapid product development, alliances u Standard products u Mass customization u Job specialization u Empowered employees, teams © 2011 Pearson Education 1 - 28

Organizations in Each Sector Service Sector % of all Jobs Example Finance, Information, Real Estate Citicorp, American Express, Prudential, Aetna 9. 6 Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 8. 5 Public Administration U. S. , State of Alabama, Cook County 4. 6 Total 78. 8 Table 1. 3 © 2011 Pearson Education 1 - 29

New Trends in OM u Ethics u Global focus u Environmentally sensitive production u Rapid product development u Environmentally sensitive production u Mass customization u Empowered employees u Supply-chain partnering u Just-in-time performance © 2011 Pearson Education 1 - 30

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 © 2011 Pearson Education 1 - 31

The Economic System Inputs Transformation Outputs Labor, capital, management The U. S. economic system transforms inputs to outputs at about an annual 2. 5% increase in productivity per year. The productivity increase is the result of a mix of capital (38% of 2. 5%), labor (10% of 2. 5%), and management (52% of 2. 5%). Goods and services Feedback loop Figure 1. 6 © 2011 Pearson Education 1 - 32

Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Stop requiring signatures on credit card purchases under $25 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machines Saved 12 seconds per shot © 2011 Pearson Education 1 - 33

Improving Productivity at Starbucks A team of 10 analysts continually look for ways to shave time. Some improvements: Operations improvements have helped Starbucks increase yearly Stop requiring signatures Saved 8 seconds revenue per outlet $200, 000 to on credit card purchases perby transaction $940, 000 in six years. under $25 improved by 27%, Change the size. Productivity of the ice has. Saved 14 seconds or about 4. 5% per scoop peryear. drink New espresso machines © 2011 Pearson Education Saved 12 seconds per shot 1 - 34

Productivity Units produced Productivity = Input used u Measure of process improvement u Represents output relative to input u Only through productivity increases can our standard of living improve © 2011 Pearson Education 1 - 35

Productivity Calculations Labor Productivity = = Units produced Labor-hours used 1, 000 250 = 4 units/labor-hour One resource input single-factor productivity © 2011 Pearson Education 1 - 36

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day 8 titles/day Old labor = productivity 32 labor-hrs © 2011 Pearson Education 1 - 37

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day 8 titles/day Old labor = productivity 32 labor-hrs =. 25 titles/labor-hr © 2011 Pearson Education 1 - 38

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day Old labor = productivity 32 labor-hrs =. 25 titles/labor-hr 14 titles/day New labor = productivity 32 labor-hrs © 2011 Pearson Education 1 - 39

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day Old labor = productivity 32 labor-hrs =. 25 titles/labor-hr 14 titles/day New labor = =. 4375 titles/labor-hr productivity 32 labor-hrs © 2011 Pearson Education 1 - 40

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day Old multifactor = productivity $640 + 400 © 2011 Pearson Education 1 - 41

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day Old multifactor = =. 0077 titles/dollar productivity $640 + 400 © 2011 Pearson Education 1 - 42

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day Old multifactor = =. 0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = productivity $640 + 800 © 2011 Pearson Education 1 - 43

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day Old multifactor = =. 0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor =. 0097 titles/dollar = productivity $640 + 800 © 2011 Pearson Education 1 - 44

Measurement Problems 1. Quality may change while the quantity of inputs and outputs remains constant 2. External elements may cause an increase or decrease in productivity u Precise units of measure may be lacking © 2011 Pearson Education 1 - 45

Ethics and Social Responsibility Challenges facing operations managers: u Developing and producing safe, quality products u Maintaining a clean environment u Providing a safe workplace u Honoring stakeholder commitments © 2011 Pearson Education 1 - 46