Operations and Productivity

Define operations management

Explain the distinction between goods
and services
Explain the difference between
production and productivity
Compute single-factor productivity
Compute multifactor productivity
Identify the critical variables in
enhancing productivity
1-2

 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
1-3

Essential functions:

Marketing generates demand

Production/operations creates
the product

Finance/accounting tracks how

well the organization is doing,
pays bills, collects the money
1-4

1-5

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

Airline
Operations
Ground support
equipment
Maintenance
Ground Operations
Facility
maintenance
Catering
Flight Operations
Crew scheduling
Flying
Communications
Dispatching
Management science

Finance/
accounting
Accounting
Payables
Receivables
General Ledger
Finance
Cash control
International
exchange

Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising

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

Process analysis

Development and installation of

production tools and equipment

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

 OM is one of three major functions

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
1-9

Planning

Organizing

Staffing

Leading

Controlling
1 - 10

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Design of goods and services

Managing quality
Process and capacity design
Location strategy
Layout strategy
Human resources and job design
Supply-chain management
Inventory, material requirements
planning, and JIT
Intermediate and shortterm
scheduling
Maintenance
1 - 11

Tangible product
Production usually
separate from
consumption
Low customer
interaction
Can be inventoried
High in search
characteristics

Goods

Intangible product
Produced & consumed
at the same time
Often unique
High customer
interaction
Frequently dispersed
perishable
High in experience
characteristics

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
|

Percent of Product that is a Good

0
|

25
|

50
|

75
|

100%
|

Percent of Product that is a Service

US

UK

Services

Spain

South Africa

Russian Fed

Mexico

Japan

Hong Kong

Germany

France

80

Czech Rep

China

Canada

Australia

90

Manufacturing

70

60

50

40

30

20

10

1 - 14

Service Sector

Example

% of all
Jobs

Education,
Legal, Medical,
other

San Diego Zoo, Arnold

Palmer Hospital

25.8

Trade (retail,
wholesale)

Walgreens, Wal-Mart,
Nordstroms

14.9

Utilities,
Transportation

Pacific Gas & Electric,

American Airlines

5.2

Professional and Snelling and Snelling, Waste

Business
Management, Inc.
Services

10.7

1 - 15

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

1 - 16

Other Sectors

% of all
Jobs

Example

Manufacturing
Sector

General Electric, Ford,

U.S. Steel, Intel

11.2

Construction
Sector

Bechtel, McDermott

8.1

Agriculture
Sector

King Ranch

1.4

Mining Sector

Homestake Mining

0.5
Total

21.2
1 - 17

Traditional
Approach

Reasons for
Change

Current
Challenge

Ethics and
regulations
not at the
forefront

Public concern over

pollution, corruption,
child labor, etc.

High ethical and

social
responsibility;
increased legal
and professional
standards

Local or
national
focus

Growth of reliable, low

cost communication
and transportation

Global focus,
international
collaboration

Lengthy
product
development

Shorter life cycles;

growth of global
communication; CAD,
Internet

Rapid product
development;
design
collaboration

Traditional
Approach

Reasons for
Change

Current
Challenge

Low cost
production,
with little
concern for
environment;
free
resources
(air, water)
ignored

Public sensitivity to
environment; ISO 14000
standard; increasing
disposal costs

Environmentally
sensitive
production; green
manufacturing;
sustainability

Low-cost
standardized
products

Rise of consumerism;
increased affluence;
individualism

Mass
customization

Traditional
Approach

Reasons for
Change

Current
Challenge

Emphasis on
specialized,
often manual
tasks

Recognition of the
employee's total
contribution; knowledge
society

Empowered
employees;
enriched jobs

In-house
production;
low-bid
purchasing

Rapid technological
change; increasing
competitive forces

Supply-chain
partnering; joint
ventures, alliances

Large lot
production

Shorter product life

cycles; increasing need
to reduce inventory

Just-In-Time
performance;
lean; continuous
improvement

1 - 20

Productivity is the ratio of outputs (goods

and services) divided by the inputs
(resources such as labour and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output
only and not a measure of efficiency

1 - 21

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

1 - 22

A team of 10 analysts
continually look for ways
to shave time. Some
Operations improvements have
improvements:

helped signatures
Starbucks increase
yearly
Stop requiring
Saved 8 seconds
on credit
card purchases
per $200,000
transaction to
revenue
per outlet by
under$940,000
$25
in six years.
Change the size of the ice
scoopProductivity has

Saved 14 seconds
improved
per drink by

27%,
or
about
4.5%
per
year.
New espresso machines
Saved 12 seconds
per shot

1 - 23

Productivity =

Units produced
Input used

1 - 24

Productivity =

Units produced
Labor-hours used

1,000
= 250 = 4 units/labor-hour
One resource input single-factor productivity

Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous
Also known as total factor
productivity

Multiple resource inputs multi-factor productivity

Collins title wants to evaluate its labor and

multifactor productivity with a new
computerized title search system. The
company has a staff of 4, each working 8
hours per day ( for a payroll cost of
$640/day) and overhead expenses of $400
per day. Collins processes and closes on 8
titles each day. The new system will allow
the processing of 14 tiles per day. Although
the staff, their work hours, and pay are the
same, the overhead expenses are now $800
per day.
1 - 27

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Old labor =
productivity 32 labor-hrs

8 titles/day
Overhead = $400/day

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

8 titles/day
Old labor =
= .25 titles/labor-hr
32
labor-hrs
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 =
= .25 titles/labor-hr
32
labor-hrs
productivity
14 titles/day
New labor =
32 labor-hrs
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 =
= .25 titles/labor-hr
32
labor-hrs
productivity
14 titles/day
New labor =
= .4375 titles/labor-hr
32
labor-hrs
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 =
$640 + 400
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
$640
+
400
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
$640
+
400
productivity
14 titles/day
New multifactor =
$640 + 800
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
$640
+
400
productivity
14 titles/day
New multifactor =
= .0097 titles/dollar
$640
+
800
productivity

1. Quality may change while the

quantity of inputs and outputs
remains constant
2. External elements may cause an
increase or decrease in
productivity
3. Precise units of measure may be lacking

1 - 36

1. Labor - contributes
about 10% of the
annual increase
2. Capital - contributes
about 38% of the
annual increase
3. Management contributes about
52% of the annual
increase
1 - 37

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
1 - 38

About half of the 17-year-olds in the U.S.

cannot correctly answer questions of this
type

1 - 39

 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
1 - 40

Results:
Improvements:
Preparation time cut to 8 seconds
Revised the menu

In-store labor cut by 15 hours/day

Designed meals for easy preparation

Stores
handle
twice
the volume
with
Shifted
some
preparation
to suppliers
half the labor
Efficient layout and automation
Conserve
300
gallons
of water
Training
andmillion
employee
empowerment
and 200 million KwH of electricity

water and energy saving grills

eachNew
year
saving $17 million annually

1 - 41

Challenges facing operations managers:

Developing and producing safe, quality
products
Maintaining a clean environment
Providing a safe workplace
Honouring stakeholder commitments

1 - 42