Chap01

Operations ManagementChapter 1 – Chapter 1 – Operations and Operations and ProductivityProductivity

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

The operations function is fashionable!

The consultancy services market – % of world revenues of 40 largest consultancy firms

Marketing / sales2

Operations and process management

31

Corporate strategy17

IT strategy17

Benefits / actuarial16

Organizational design

11

Financial6

UK Employment Demographics Circa 1850-2008

0

10

20

30

40

50

60

70

80

90

1850

1860

1870

1880

1890

1900

1910 19

201930

1940

1950

1960

1970 19

801990 20

00

Year

Prop

ortio

n of

tota

l em

ploy

men

t

Agriculture

Service

Manufacturing

Organizing to Produce Goods and Services

Essential functions: Marketing – generates demand Production/operations – creates the

product Finance/accounting – tracks how well the

organization is doing, pays bills, collects the money

The Operations Function• Inputs to Outputs

• transformation system/value adding process• example:

Aircraft manufacture – function valueSource to destination – place valueDoing an MBA – skill/knowledge value

Value adding process - airlines

© Wiley 2007 7

Inputs Transformation process

Outputs

Pilots, planes, ground crew, passengers, freight, data

Selling tickets, flying people and materials from one place to another, processing schedule data

Tickets sent out, people/materials transport to destination, travel information

Value adding process - supermarkets

© Wiley 2007 8

Inputs Transformation process

Outputs

Employees, wholesale goods, supermarkets, website

Selling retail goods and services, giving customer service

Products taken away by customers, customer enquiries answered

Question

A well-designed conversion process operates as closed loop system. Explain what a closed loop system is and why it is used. Give some examples from you own experience to illustrate your answer.

Example of Closed Loop system

Environment

Corporate Strategy

Operations Strategy

Results

Product Design

Process Design

Planning,Organising, Control,Operations

Example:Market, EconomyCustomersCompetitors

But  need to explain use of feedback for improvements and provide examples when you illustrate your experience.

Feedback Loop

Question

Draw a diagram illustrating the conversion process that is present in a good quality restaurant. The diagram should include inputs, conversion activities, methods of feedback and outputs (products).

- Methods of feedback could be in various forms ( eg customer complaints, high wastage, employee suggestions etc etc)

Question

List 4 examples of resources that could be considered inputs to the conversion process in a brewery and discuss which of these maybe subject to the greatest variability. Assume the conversion process is fully operational.

( Inputs to brewery could include raw materials, fuel, labour and power. Fuel prices presently showing great variability).

The systems approach.. Question

Discuss how the concept of ‘systems’ can help in developing an understanding of operations

• Systems complexity – Boulding’s taxonomy• Inputs transformation & outputs• Interdependent sub-systems ( eg a human body)• Negative feedback to maintain equilibrium (e.g. riding

a bicycle )• Time lag• Sub-optimisation

Pattern in batch operations..VolUMe

Time

1000

500

Average stock = ½ of Q1000/2=500 x RM10=RM5000 per component. &10,000 components = RM5.0million

Need to have wider system boundary..

Factory 1 

Factory 2

Factory 3

Inputs Assembly Division Production

Other parts of the system suffers!As smaller orders may require more ordering costs or set-up costs

If manage decides to reduce stocks and order 100 at a time..

10 Strategic OM Decisions

1. Goods and service design

2. Quality 3. Process and

capacity design4. Location selection5. Layout design

6. Human resources and job design

7. Supply chain management

8. Inventory9. Scheduling10. Maintenance

Class discussion

Form 10 groups, think of an organization you know and advise the class why each of the 10 areas are considered critical.

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.)Table 1.2 (cont.)

The Critical Decisions 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.)Table 1.2 (cont.)

The Critical Decisions Layout strategy

How should we arrange the facility? 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.)Table 1.2 (cont.)

The Critical Decisions 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.)Table 1.2 (cont.)

The Critical Decisions 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.)Table 1.2 (cont.)

Goods and Services and the 10 OM Decisions

OperationsDecisions Goods ServicesGoods and service design

Product is usually tangible

Product is not tangible

Quality Many objective standards

Many subjective standards

Process and capacity design

Customers not involved

Customer may be directly involvedCapacity must match demand

Table 2.1Table 2.1

Goods and Services and the 10 OM Decisions

OperationsDecisions Goods ServicesLocation selection

Near raw materials and labor

Near customers

Layout design

Production efficiency

Enhances product and production

Human resources and job design

Technical skills, consistent labor standards, output based wages

Interact with customers, labor standards vary

Table 2.1Table 2.1

Goods and Services and the 10 OM Decisions

OperationsDecisions Goods ServicesSupply chain Relationship critical

to final productImportant, but may not be critical

Inventory Raw materials, work-in-process, and finished goods may be held

Cannot be stored

Scheduling Level schedules possible

Meet immediate customer demand

Table 2.1Table 2.1

Goods and Services and the 10 OM Decisions

OperationsDecisions Goods ServicesMaintenance Often preventive

and takes place at production site

Often “repair” and takes place at customer’s site

Table 2.1Table 2.1

Where are the OM Jobs?

Figure 1.2Figure 1.2

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 1.3Figure 1.3

The Heritage of OM

Division of labor (Adam Smith 1776; Division of labor (Adam Smith 1776; Charles Babbage 1852)Charles Babbage 1852)

Standardized parts (Whitney 1800)Standardized parts (Whitney 1800) Scientific Management (Taylor 1881)Scientific Management (Taylor 1881) Coordinated assembly line (Ford/ Coordinated assembly line (Ford/

Sorenson 1913)Sorenson 1913) Gantt charts (Gantt 1916)Gantt charts (Gantt 1916) Motion study (Frank and Lillian Gilbreth Motion study (Frank and Lillian Gilbreth

1922)1922) Quality control (Shewhart 1924; Deming Quality control (Shewhart 1924; Deming

1950)1950)

The Heritage of OM

Computer (Atanasoff 1938)Computer (Atanasoff 1938) CPM/PERT (DuPont 1957)CPM/PERT (DuPont 1957) Material requirements planning (Orlicky Material requirements planning (Orlicky

1960)1960) Computer aided design (CAD 1970)Computer aided design (CAD 1970) Flexible manufacturing system (FMS 1975)Flexible manufacturing system (FMS 1975) Baldrige Quality Awards (1980)Baldrige Quality Awards (1980) Computer integrated manufacturing (1990)Computer integrated manufacturing (1990) Globalization (1992)Globalization (1992) Internet (1995)Internet (1995)

Contributions From

Human factors Industrial engineering Management science Biological science Physical sciences Information technology

New Challenges in OM

Global focus Just-in-time Supply chain

partnering Rapid product

development, alliances

Mass customization Empowered

employees, teams

ToToFromFrom Local or national focusLocal or national focus Batch shipmentsBatch shipments Low bid purchasingLow bid purchasing

Lengthy product Lengthy product developmentdevelopment

Standard productsStandard products

Job specializationJob specialization

Industry and Services as Percentage of GDP

ServicesServices ManufacturingManufacturing

Aus

tral

iaA

ustr

alia

Can

ada

Can

ada

Chi

naC

hina

Cze

ch R

epC

zech

Rep

Fran

ceFr

ance

Ger

man

yG

erm

any

Hon

g K

ong

Hon

g K

ong

Japa

nJa

pan

Mex

ico

Mex

ico

Rus

sian

Fed

Rus

sian

Fed

Sout

h A

fric

aSo

uth

Afr

ica

Spai

nSp

ain

UKUK

USUS

90 90 −80 80 −70 70 −60 60 −50 50 −40 40 −30 30 −20 20 −10 10 −

00 −

Goods and ServicesAutomobile

ComputerInstalled carpeting

Fast-food mealRestaurant meal/auto repair

Hospital careAdvertising agency/

investment managementConsulting service/

teachingCounseling

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

100%100% 7575 5050 2525 00 2525 5050 7575 100%100%|| || || || || || || || ||

Figure 1.4Figure 1.4

New Trends in OM

Global focus Just-in-time performance Supply chain partnering Rapid product development Mass customization Empowered employees Environmentally sensitive production Ethics

Productivity Challenge

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

(resources such as labor and capital)(resources such as labor and capital)

The objective is to improve productivity!The objective is to improve productivity!

Important Note!Production is a measure of output

only and not a measure of efficiency

Effects of productivity on profitBefore($)

After10% rise in sales($)

After 10% rise in productivity ($)

Sales 1000 1100 1000

Variable costs

700 770 630

Fixed Costs

200 200 200

Profit 100 130 (+30%)

170(+70%)

Factors affecting productivity improvement

• Internal factors - those which management may modify• Hard factors ( product, plant & equipment, technology, materials and

energy)• Soft factors ( people, organisations, work methods, management

styles)

• External factors ( those beyond control of organisation)• Structural adjustments ( economic, demographic and social)• Natural resources ( manpower,land, energy and raw materials)• Government & infrastructure ( institutional mechanisms, policies and

strategies, infrastructure and public enterprise)

• Class exercise – OM notes

Performance & productivity Measurement

• Productivity = Output / Input• Financial performance measures

• Profitability ( profit margin, ROCE, ROI)• Liquidity ( current ratio, cash position, working capital, quick

ratio)• Turnover ( stock turnover, assets turnover)• Growth ( sales, assets, market share, sales per employee)• Size ( assets, profits, sales, number of employees, market

capitalisation)• Capital ( price-earning(P/E) ratio,market to book value)

• But are financial measures of performance not adequate?

Some measures of productivity• Sales/labour costs• Sales/pay• Sales/sales people• Value of sales/direct labour + indirect labour

+ material + overhead costs• Total pay/personnel department pay• Yards of carpet laid/number of carpet layers• Square feet of floor cleaned/cost of cleaner

Productivity measurements ( cont’d)

• Labour productivity• Units of output per labour hour• Value added per labour hour• Dollar output per labour hour• Production value per labour

dollar

• Energy productivity• Units of output per kilowatt

hour• Unit of output per energy

dollar input• Production value per barrel of

fuel

• Capital productivity• Units of output per dollar input• Dollar output per dollar input• Inventory turnover ( dollar

sales/dollar inventory

• Service productivity• Units of output per overhead

hour• Increased sales(annual)

/training budget• Number of customers

served/staff member

Question What do you consider to be the major challenges facing Operations Managers in the 21st century? Illustrate your answer with examples from your experience.

- primary reason for slow growth in service sector due to management (Drucker, OM Notes). -focus on objective of competitiveness not cost cutting.- globalization of services and rise of consumer demands.- Important areas : service process design, employee satisfaction, service culture, leadership and performance management.

Service Productivity

Typically labor intensiveTypically labor intensive Frequently focused on unique Frequently focused on unique

individual attributes or desiresindividual attributes or desires Often an intellectual task performed by Often an intellectual task performed by

professionalsprofessionals Often difficult to mechanizeOften difficult to mechanize Often difficult to evaluate for qualityOften difficult to evaluate for quality

Some frameworks for developing performance measures

• Kaplan & Norton balanced scorecard framework• Oregon productivity matrix• Sink & Turtle strategic matrix• The Fitzgerald model• Carl Thor ‘ family of measures’ • Curtis & Kastner stakeholder model• Theory of constraints• Neely & Adams performance Q:. Give an account

of Neely’s criticisms of traditional accounting methods? (OM Notes )

• Benchmarking

Question• Several performance frameworks exist within the

study of Operations Management:– Kaplan & Norton balanced scorecards, – Oregon productivity matrix, – Sink & Turtle strategic matrix,– Fitzgerald model,– Carl Thor ‘ family of measures’ ,– Curtis & Kastner stakeholder model– Theory of constraints ( video) ,– Neely & Adams performance.

• discuss how you would go about developing performance measures for an organization using one of these frameworks.

Question

• Pressure for productivity increases in the service sector is rising. Outline briefly with a few key points, what you think might be the implications for the– cost of service products?– variety of services available? – and the quality of service products

Possible solution

1. cost of service products – labour based and productivity linked to employee, otherwise cycle of failure

2. variety of services available? ( specialised usually)

3. and the quality of service products ( intangible and requires customer

participation in the process.