Operations Management Chapter 1 Operations and Productivity 2008

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Operations Management Chapter 1 – Operations and Productivity © 2008 Prentice Hall, Inc. 1–

Operations Management Chapter 1 – Operations and Productivity © 2008 Prentice Hall, Inc. 1– 1

What Is Operations Management? Production is the creation of goods and services Operations management

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 © 2008 Prentice Hall, Inc. 1–

Organizing to Produce Goods and Services þ Essential functions: þ Marketing – generates demand

Organizing to Produce Goods and Services þ Essential functions: þ Marketing – generates demand þ Production/operations – creates the product þ Finance/accounting – tracks how well the organization is doing, pays bills, collects the money © 2008 Prentice Hall, Inc. 1– 3

Why Study OM? þ OM is one of three major functions (marketing, finance, and

Why Study OM? þ OM is one of three major functions (marketing, finance, and operations) of any organization þ We want (and need) to know how goods and services are produced þ We want to understand what operations managers do þ OM is such a costly part of an organization © 2008 Prentice Hall, Inc. 1– 4

Options for Increasing Contribution Marketing Option Current Sales Cost of Goods Gross Margin Finance

Options for Increasing Contribution Marketing Option Current Sales Cost of Goods Gross Margin Finance Costs Subtotal Taxes at 25% Contribution © 2008 Prentice Hall, Inc. $100, 000 – 80, 000 20, 000 – 6, 000 14, 000 – 3, 500 $ 10, 500 Finance/ Accounting Option Increase Reduce Sales Finance Revenue 50% Costs 50% $150, 000 – 120, 000 30, 000 – 6, 000 24, 000 – 6, 000 $ 18, 000 $100, 000 – 80, 000 20, 000 – 3, 000 17, 000 – 4, 250 $ 12, 750 OM Option Reduce Production Costs 20% $100, 000 – 64, 000 36, 000 – 6, 000 30, 000 – 7, 500 $ 22, 500 1– 5

What Operations Managers Do Basic Management Functions þ Planning þ Organizing þ Staffing þ

What Operations Managers Do Basic Management Functions þ Planning þ Organizing þ Staffing þ Leading þ Controlling © 2008 Prentice Hall, Inc. 1–

Ten Critical Decisions þ þ þ þ þ Ten Decision Areas Design of goods

Ten Critical Decisions þ þ þ þ þ Ten Decision Areas Design of goods and services Managing quality Process and capacity design Location strategy Layout strategy Human resources and job design Supply chain management Inventory management Scheduling Maintenance Chapter(s) 5 6, Supplement 6 7, Supplement 7 8 9 10, Supplement 10 11, Supplement 11 12, 14, 16 13, 15 17 Table 1. 2 © 2008 Prentice Hall, Inc. 1– 7

The Critical Decisions þ Design of goods and services þ What good or service

The Critical Decisions þ Design of goods and services þ What good or service should we offer? þ How should we design these products and services? þ Managing quality þ How do we define quality? þ Who is responsible for quality? Table 1. 2 (cont. ) © 2008 Prentice Hall, Inc. 1– 8

The Critical Decisions þ Process and capacity design þ What process and what capacity

The Critical Decisions þ Process and capacity design þ What process and what capacity will these products require? þ What equipment and technology is necessary for these processes? þ Location strategy þ Where should we put the facility? þ On what criteria should we base the location decision? Table 1. 2 (cont. ) © 2008 Prentice Hall, Inc. 1– 9

The Critical Decisions þ Layout strategy þ How should we arrange the facility? þ

The Critical Decisions þ Layout strategy þ How should we arrange the facility? þ How large must the facility be to meet our plan? þ Human resources and job design þ How do we provide a reasonable work environment? þ How much can we expect our employees to produce? Table 1. 2 (cont. ) © 2008 Prentice Hall, Inc. 1 – 10

The Critical Decisions þ Supply chain management þ Should we make or buy this

The Critical Decisions þ Supply chain management þ Should we make or buy this component? þ Who are our suppliers and who can integrate into our e-commerce program? þ Inventory, material requirements planning, and JIT þ How much inventory of each item should we have? þ When do we re-order? Table 1. 2 (cont. ) © 2008 Prentice Hall, Inc. 1 – 11

The Critical Decisions þ Intermediate and short–term scheduling þ Are we better off keeping

The Critical Decisions þ Intermediate and short–term scheduling þ Are we better off keeping people on the payroll during slowdowns? þ Which jobs do we perform next? þ Maintenance þ Who is responsible for maintenance? þ When do we do maintenance? Table 1. 2 (cont. ) © 2008 Prentice Hall, Inc. 1 – 12

Where are the OM Jobs? þ þ þ þ þ © 2008 Prentice Hall,

Where are the OM Jobs? þ þ þ þ þ © 2008 Prentice Hall, Inc. Technology/methods Facilities/space utilization Strategic issues Response time People/team development Customer service Quality Cost reduction Inventory reduction Productivity improvement 1 – 13

Significant Events in OM Figure 1. 3 © 2008 Prentice Hall, Inc. 1 –

Significant Events in OM Figure 1. 3 © 2008 Prentice Hall, Inc. 1 – 14

The Heritage of OM þ Division of labor (Adam Smith 1776; Charles Babbage 1852)

The Heritage of OM þ Division of labor (Adam Smith 1776; Charles Babbage 1852) þ Standardized parts (Whitney 1800) þ Scientific Management (Taylor 1881) þ Coordinated assembly line (Ford/ Sorenson 1913) þ Gantt charts (Gantt 1916) þ Motion study (Frank and Lillian Gilbreth 1922) þ Quality control (Shewhart 1924; Deming 1950) © 2008 Prentice Hall, Inc. 1 – 15

The Heritage of OM þ Computer (Atanasoff 1938) þ CPM/PERT (Du. Pont 1957) þ

The Heritage of OM þ Computer (Atanasoff 1938) þ CPM/PERT (Du. Pont 1957) þ Material requirements planning (Orlicky 1960) þ Computer aided design (CAD 1970) þ Flexible manufacturing system (FMS 1975) þ Baldrige Quality Awards (1980) þ Computer integrated manufacturing (1990) þ Globalization (1992) þ Internet (1995) © 2008 Prentice Hall, Inc. 1 – 16

Eli Whitney þ Born 1765; died 1825 þ In 1798, received government contract to

Eli Whitney þ Born 1765; died 1825 þ In 1798, received government contract to make 10, 000 muskets þ Showed that machine tools could make standardized parts to exact specifications þ Musket parts could be used in any musket © 2008 Prentice Hall, Inc. 1 – 17

Frederick W. Taylor þ Born 1856; died 1915 þ Known as ‘father of scientific

Frederick W. Taylor þ Born 1856; died 1915 þ Known as ‘father of scientific management’ þ In 1881, as chief engineer for Midvale Steel, studied how tasks were done þ Began first motion and time studies þ Created efficiency principles © 2008 Prentice Hall, Inc. 1 – 18

Taylor’s Principles Management Should Take More Responsibility for: þ Matching employees to right job

Taylor’s Principles Management Should Take More Responsibility for: þ Matching employees to right job þ Providing the proper training þ Providing proper work methods and tools þ Establishing legitimate incentives for work to be accomplished © 2008 Prentice Hall, Inc. 1 – 19

Frank & Lillian Gilbreth þ Frank (1868 -1924); Lillian (18781972) þ Husband-wife engineering team

Frank & Lillian Gilbreth þ Frank (1868 -1924); Lillian (18781972) þ Husband-wife engineering team þ Further developed work measurement methods þ Applied efficiency methods to their home and 12 children! þ Book & Movie: “Cheaper by the Dozen, ” book: “Bells on Their Toes” © 2008 Prentice Hall, Inc. 1 – 20

Henry Ford þ Born 1863; died 1947 þ In 1903, created Ford Motor Company

Henry Ford þ Born 1863; died 1947 þ In 1903, created Ford Motor Company þ In 1913, first used moving assembly line to make Model T þ Unfinished product moved by conveyor past work station þ Paid workers very well for 1911 ($5/day!) © 2008 Prentice Hall, Inc. 1 – 21

W. Edwards Deming þ Born 1900; died 1993 þ Engineer and physicist þ Credited

W. Edwards Deming þ Born 1900; died 1993 þ Engineer and physicist þ Credited with teaching Japan quality control methods in post. WW 2 þ Used statistics to analyze process þ His methods involve workers in decisions © 2008 Prentice Hall, Inc. 1 – 22

Contributions From þ Human factors þ Industrial engineering þ Management science þ Biological science

Contributions From þ Human factors þ Industrial engineering þ Management science þ Biological science þ Physical sciences þ Information technology © 2008 Prentice Hall, Inc. 1 – 23

New Challenges in OM From þ Local or national focus þ Batch shipments þ

New Challenges in OM From þ Local or national focus þ Batch shipments þ Low bid purchasing þ Lengthy product development þ Standard products þ Job specialization © 2008 Prentice Hall, Inc. To þ Global focus þ Just-in-time þ Supply chain partnering þ Rapid product development, alliances þ Mass customization þ Empowered employees, teams 1 – 24

Characteristics of Goods þ Tangible product þ Consistent product definition þ Production usually separate

Characteristics of Goods þ Tangible product þ Consistent product definition þ Production usually separate from consumption þ Can be inventoried þ Low customer interaction © 2008 Prentice Hall, Inc. 1 – 25

Characteristics of Service þ Intangible product þ Produced and consumed at same time þ

Characteristics of Service þ Intangible product þ Produced and consumed at same time þ Often unique þ High customer interaction þ Inconsistent product definition þ Often knowledge-based þ Frequently dispersed © 2008 Prentice Hall, Inc. 1 – 26

Industry and Services as Percentage of GDP 90 − Services 80 − Manufacturing 70

Industry and Services as Percentage of GDP 90 − Services 80 − Manufacturing 70 − 60 − 50 − 40 − 30 − 20 − © 2008 Prentice Hall, Inc. US UK Spain South Africa Russian Fed Mexico Japan Hong Kong Germany France Czech Rep China Canada 0− Australia 10 − 1 – 27

Goods Versus Services Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product) Can

Goods Versus Services Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product) Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable Reselling unusual Difficult to inventory Quality difficult to measure Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product © 2008 Prentice Hall, Inc. 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 1 – 28

Goods and Services Automobile Computer Installed carpeting Fast-food meal Restaurant meal/auto repair Hospital care

Goods and Services Automobile Computer Installed carpeting Fast-food meal Restaurant meal/auto repair Hospital care Advertising agency/ investment management Consulting service/ teaching Counseling 100% | 75 | 50 | 25 | 50 | 75 | 100% | Percent of Product that is a Good Percent of Product that is a Service Figure 1. 4 © 2008 Prentice Hall, Inc. 1 – 29

New Trends in OM Past Causes Future Local or national focus Reliable worldwide communication

New Trends in OM Past Causes Future Local or national focus Reliable worldwide communication and transportation networks Global focus, moving production offshore Batch (large) shipments Short product life cycles and cost of capital put pressure on reducing inventory Just-in-time performance Low-bid purchasing Supply chain competition requires that suppliers be engaged in a focus on the end customer Supply chain partners, collaboration, alliances, outsourcing Figure 1. 6 © 2008 Prentice Hall, Inc. 1 – 30

New Trends in OM Past Lengthy product development Standardized products Job specialization Causes Shorter

New Trends in OM Past Lengthy product development Standardized products Job specialization Causes Shorter life cycles, Internet, rapid international communication, computeraided design, and international collaboration Affluence and worldwide markets; increasingly flexible production processes Changing socioculture milieu; increasingly a knowledge and information society Future Rapid product development, alliances, collaborative designs Mass customization with added emphasis on quality Empowered employees, teams, and lean production Figure 1. 6 © 2008 Prentice Hall, Inc. 1 – 31

New Trends in OM Past Causes Low-cost focus Environmental issues, ISO 14000, increasing disposal

New Trends in OM Past Causes Low-cost focus Environmental issues, ISO 14000, increasing disposal costs Ethics not at forefront Businesses operate more openly; public and global review of ethics; opposition to child labor, bribery, pollution Future Environmentally sensitive production, green manufacturing, recycled materials, remanufacturing High ethical standards and social responsibility expected Figure 1. 6 © 2008 Prentice Hall, Inc. 1 – 32

New Trends in OM þ þ þ þ © 2008 Prentice Hall, Inc. Global

New Trends in OM þ þ þ þ © 2008 Prentice Hall, Inc. Global focus Just-in-time performance Supply chain partnering Rapid product development Mass customization Empowered employees Environmentally sensitive production Ethics 1 – 33

Productivity Challenge Productivity is the ratio of outputs (goods and services) divided by the

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 © 2008 Prentice Hall, Inc. 1 – 34

The Economic System Inputs Processes Outputs Labor, capital, management The U. S. economic system

The Economic System Inputs Processes 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. 7 © 2008 Prentice Hall, Inc. 1 – 35

Productivity Units produced Productivity = Input used þ Measure of process improvement þ Represents

Productivity Units produced Productivity = Input used þ Measure of process improvement þ Represents output relative to input þ Only through productivity increases can our standard of living improve © 2008 Prentice Hall, Inc. 1 – 36

Productivity Calculations Labor Productivity Units produced Productivity = Labor-hours used 1, 000 = =

Productivity Calculations Labor Productivity Units produced Productivity = Labor-hours used 1, 000 = = 4 units/labor-hour 250 One resource input single-factor productivity © 2008 Prentice Hall, Inc. 1 – 37

Multi-Factor Productivity Output Productivity = Labor + Material + Energy + Capital + Miscellaneous

Multi-Factor Productivity Output Productivity = Labor + Material + Energy + Capital + Miscellaneous þ Also known as total factor productivity þ Output and inputs are often expressed in dollars Multiple resource inputs multi-factor productivity © 2008 Prentice Hall, Inc. 1 – 38

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day 8 titles/day Overhead = $400/day 8 titles/day Old labor = productivity 32 labor-hrs © 2008 Prentice Hall, Inc. 1 – 39

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day 8 titles/day Overhead = $400/day 8 titles/day Old labor = productivity 32 labor-hrs =. 25 titles/labor-hr © 2008 Prentice Hall, Inc. 1 – 40

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/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 © 2008 Prentice Hall, Inc. 1 – 41

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/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 © 2008 Prentice Hall, Inc. 1 – 42

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = productivity $640 + 400 © 2008 Prentice Hall, Inc. 1 – 43

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = =. 0077 titles/dollar productivity $640 + 400 © 2008 Prentice Hall, Inc. 1 – 44

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day 8 titles/day Old multifactor = =. 0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = productivity $640 + 800 © 2008 Prentice Hall, Inc. 1 – 45

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost =

Collins Title Productivity Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/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 © 2008 Prentice Hall, Inc. 1 – 46

Measurement Problems þ Quality may change while the quantity of inputs and outputs remains

Measurement Problems þ Quality may change while the quantity of inputs and outputs remains constant þ External elements may cause an increase or decrease in productivity þ Precise units of measure may be lacking © 2008 Prentice Hall, Inc. 1 – 47

Productivity Variables þ Labor - contributes about 10% of the annual increase þ Capital

Productivity Variables þ Labor - contributes about 10% of the annual increase þ Capital - contributes about 38% of the annual increase þ Management contributes about 52% of the annual increase © 2008 Prentice Hall, Inc. 1 – 48

Key Variables for Improved Labor Productivity þ Basic education appropriate for the labor force

Key Variables for Improved Labor Productivity þ Basic education appropriate for the labor force þ Diet of the labor force þ Social overhead that makes labor available þ Maintaining and enhancing skills in the midst of rapidly changing technology and knowledge © 2008 Prentice Hall, Inc. 1 – 49

Labor Skills About half of the 17 -year-olds in the US cannot correctly answer

Labor Skills About half of the 17 -year-olds in the US cannot correctly answer questions of this type Figure 1. 8 © 2008 Prentice Hall, Inc. 1 – 50

Investment and Productivity Percent increase in productivity 10 8 6 4 2 0 10

Investment and Productivity Percent increase in productivity 10 8 6 4 2 0 10 15 20 25 30 35 Percentage investment © 2008 Prentice Hall, Inc. 1 – 51

Service Productivity þ Typically labor intensive þ Frequently focused on unique individual attributes or

Service Productivity þ Typically labor intensive þ Frequently focused on unique individual attributes or desires þ Often an intellectual task performed by professionals þ Often difficult to mechanize þ Often difficult to evaluate for quality © 2008 Prentice Hall, Inc. 1 – 52

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

Ethics and Social Responsibility Challenges facing operations managers: þ Developing and producing safe, quality products þ Maintaining a clean environment þ Providing a safe workplace þ Honoring community commitments © 2008 Prentice Hall, Inc. 1–