Introduction to

Operations Management
 Learning outcomes
At the end of the session students should be able to:
Define operations management
Explain the differences between goods and services
Define mission and strategy
Define an operations strategy and its role as a source of
competitive advantage in a global marketplace
Identify and explain four global operations strategy options
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
 Organising to produce goods and
services

To create goods and services all organisations

perform 3 essential functions:
Marketing – generates demand
– Takes order for product or service
– Nothing happens until there is a sale
Production/operations – creates the product
Finance/accounting – tracks how well the
organisation is doing, pays bills, collects the
money
 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 organisation
 Critical decisions of OM
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?
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?
Layout strategy
– How should we arrange the facility?
– How large must the facility be to meet our plan?
 The critical decisions

Human resources and job design

– How do we provide a reasonable work environment?
– How much can we expect our employees to produce?
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?
 Significant events in
Operations Management
Significant events in OM
 The heritage of OM

Division of labor (Adam Smith 1776; Charles Babbage

1852)
Standardised 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
Credited for early popularisation of interchangeable parts
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
 Frank & Lillian Gilbreth

Frank (1868-1924); Lillian (1878-1972)

Husband-and-wife engineering team
‘Father of motion study’ – Frank
– Principle that there is one best method to
perform task
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
– Men stood still and material moved
Assembly line made possible the mass production
of complex consumer products
 W. Edwards Deming

Born 1900; died 1993

Engineer and physicist
Credited with teaching Japan quality control methods in
post-WW2
Used statistics to analyse process
His methods involve workers in decisions
Key is to practice continual improvement and think of
manufacturing as a system, not as bits and pieces
Goods and Services
 All operations are input–
transformation–output processes

Inputs Transformation Outputs

process

Op managers manage transformation processes, with inputs and

outputs
All operations produce products and services by changing inputs into
outputs using an ‘input-transformation-output’ process
Put simply, operations are processes that take in a set of input
resources which are used to transform something, or are transformed
themselves, into outputs of products and services
 Characteristics of goods

Tangible product
Consistent product definition
Production usually separate from
consumption
Can be inventoried
Low customer interaction
Some aspects of quality are
measurable
Product is transportable
Often easy to automate
 Characteristics of services
Intangible product
Produced and consumed simultaneously
Often unique
High customer interaction
Inconsistent product definition
Often knowledge-based so difficult to automate
Frequently dispersed
 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 0 25 50 75 100%
| | | | | | | | |

% of product that is a good % of product that is a service

 New trends in OM

From To
Local or national
Global focus
focus
Just-in-time
Batch (large) Supply chain
shipments partnering
Low bid purchasing Rapid product
Lengthy product development
development Mass customization
Standard products Empowered
Job specialisation employees, teams
 New trends in OM

Past Causes Future

Local or Reliable worldwide Global focus,
national communication and moving
focus transportation networks production
offshore
Batch Short product life cycles Just-in-time
(large) and cost of capital put performance
shipments pressure on reducing
inventory
Low-bid Supply chain competition Supply chain
purchasing requires that suppliers be partners,
engaged in a focus on the collaboration,
end customer alliances,
outsourcing
 New trends in OM

Past Causes Future

Lengthy Shorter life cycles, Rapid product
product Internet, rapid international development,
development communication, computer- alliances,
aided design, and collaborative
international collaboration designs
Standardized Affluence and worldwide Mass
products markets; increasingly customization
flexible production with added
processes emphasis on
quality
Job Changing socioculture; Empowered
specialization increasingly a knowledge employees,
and information society teams, and lean
production
 New trends in OM

Past Causes Future

Low-cost Environmental issues, ISO Environmentally
focus 14000, increasing disposal sensitive
costs production, green
manufacturing,
recycled
materials,
remanufacturing

Ethics not Businesses operate more High ethical

at openly; public and global standards and
forefront review of ethics; social
opposition to child labor, responsibility
bribery, pollution expected
Productivity
 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 challenge
Production – the making of goods and services
– High production does not imply high productivity
– High production implies more people are working and
that employment levels are high (low unemployment)
Only through increase in productivity can standard of
living improve
Only through increases in productivity can labour, capital
etc. receive additional payment
– If returns to labour, capital etc. increase without
increased productivity, prices rise
– Alternatively, increase in productivity = lower prices as
more is produced with same resources
 Productivity measurement
Units produced
Productivity =
Input used
Input measures – labour-hours, capital ($ invested),
materials (tons), or energy (kW of electricity used)

Example: if units produced = 1000; labour-hrs used = 250

then

Units produced
Productivity =
Labor-hours used

1,000
= 250
= 4 units/labour-hour
 Single- and multi-factor productivity
Single factor productivity = one resource input
Multi-factor productivity – multiple resource inputs

Output
Productivity =
 Inputs

Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous

Multifactor productivity – also known as total factor

productivity
To aid computation individual inputs are often
expressed in dollars and summed
 Example: Multifactor productivity
Company A has a staff of 4, each working 8 hr per day
(payroll cost = $640/day) with expenses of $400 per day. A
total of 8 tiles are processed each day. The company
recently purchased a computerised system that will allow
14 tiles to be processed each day. Although the staff, their
work hours and pay will be the same, overhead expenses
are now $800 per day.
How will labour productivity change?
What will be new multifactor productivity? By what
percentage will it increase or decrease?
 Solution: Multifactor productivity
Labour productivity (old) = 8 tiles per day/32 labour-hr =
0.25tiles per labour-hr
Labour productivity (new) = 14 tiles per day/32 labour-hr =
0.4375 tiles per labour-hr
Labour prod increased by 75% (0.4375-0.25)/0.25 = 75%

Multifactor productivity (old) = 8 tiles per day/640+400 = .

0077tiles per $
Multifactor productivity (new) = 14 tiles per day/640+ 800
= .0097tiles per $
Multifactor prod increased by 26%

If overhead now goes to $960 rather than $800, what is the

multifactor productivity? (0.00875)
 Exercise 1
Kleen Karpet cleaned 65 rugs in October, consuming the
following resources:

Labour 520 hr at $13/hr

Solvent 100 gallons at $5/gal
Machine rental 20 days at $50/day

a. What is the labour productivity per dollar?

b. What is the multifactor productivity?
 Exercise 2
Productivity can be measured in a variety of ways, such
as by labour, capital, energy, material usage and so on. At
Modern Lumber Inc., Art Binley, president and producer of
apple crates sold to growers, has been able, with his
current equipment, to produce 240 crates per 100 logs. He
currently purchases 100 logs per day, and each log
requires 3 labour-hrs to process.
He believes that he can hire a professional buyer who can
buy a better-quality log at the same cost. If this is the
case, he can increase his production to 260 crates per
100 logs. His labour-hrs will increase by 8 hrs- per day.
What will be the impact on productivity (measured in
crates per labour-hr) if the buyer is hired?
 Exercise 3

Art Binley has decided to look at his productivity from a

multifactor productivity perspective. To do so, he has
determined his labour, capital, energy, and material
usage and has decided to use dollars as the common
denominator.
His total labour-hrs are now 300 per day and will increase
to 308 per day. His capital and energy costs will remain
constant at $350 and $150 per day, respectively. Material
costs for the 100logs per day are $1,000 and will remain
the same.
If he pays an average of $10 per hr, determine Binley’s
productivity increase
 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

Productivity variables – the 3 factors critical to productivity

improvement – labour, capital and the art and science of
management
– Labour - contributes about 10% of the annual increase
– Capital - contributes about 38% of the annual increase
– Management - contributes about 52% of the annual
increase
 1. Labour
3 key variables for improved labour productivity
Basic education appropriate for the labour force
Diet of the labour force
Social overhead that makes labour available such as
transportation
Challenge for developed countries - maintaining and
enhancing skills in the midst of rapidly changing technology
and knowledge
 2. Capital

Capital investments provide equipment and tools used in

production
Inflation and taxes increase cost of capital making capital
investment increasingly expensive
When capital invested per employee drops – productivity
drops
Using labour rather than capital – reduces unemployment
in the short run, but makes economies less productive
and therefore lower wages in long run
Capital investment – necessary but seldom sufficient for
increased productivity
 3. Management
Responsible for ensuring that labour and capital are
effectively used to increase productivity
Post-industrial societies – knowledge societies
Knowledge society – a society in which much of the
labour force has migrated from manual work to work
based on knowledge
– Poorly educated labour, inadequate capital and dated
technology - country cannot be a world-class
competitor with these
 Productivity and service sector
Productivity of service sector difficult to improve because
work in the service sector is:
Typically labor intensive e.g. counseling, teaching
Frequently focused on unique individual attributes or
desires e.g. investment advice
Often an intellectual task performed by professionals e.g.
medical diagnosis
Often difficult to mechanize e.g. a haircut
Often difficult to evaluate for quality e.g. performance of a
law firm
More intellectual and personal the task, more difficult to
achieve increases in productivity
 Extra question for the inspired!
A grocery chain is considering the installation of a set of 4 self-
checkout lanes. The new self-checkout lane setup will replace 2 old
cashier lanes that were staffed by a cashier and bagger on each lane.
One cashier mans all 4 self-checkouts (answering questions,
checking for un-scanned items, taking coupons, etc). Checkout on
the new lanes takes 2 minutes (customers bag their own orders) while
checkout with the old lanes took only 45 seconds. In addition the
electricity costs for both setups are $.05 per checkout while bagging
(material) costs are $.1 per checkout with the old system and $.15 for
the new system. The new lanes also require $100 in capital costs.
Assume that the lanes are always in use for 8 hours per day (1 shift)
and that a worker makes $10/hour.
a. How many checkouts did the old system provide in a shift?
b. How many checkouts does the new system provide?
c. What is the multifactor productivity for each system?