Heizer 9 ch1 f

© 2008 Prentice Hall, Inc. 1 – 1

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

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e


OutlineOutline Global Company Profile: Hard Rock Global Company Profile: Hard Rock

CafeCafe What Is Operations Management?What Is Operations Management? Organizing to Produce Goods and Organizing to Produce Goods and

Services Services Why Study OM?Why Study OM? What Operations Managers DoWhat Operations Managers Do

How This Book Is OrganizedHow This Book Is Organized


Outline - ContinuedOutline - Continued The Heritage of Operations The Heritage of Operations

ManagementManagement Operations in the Service SectorOperations in the Service Sector

Differences between Goods and Differences between Goods and ServicesServices

Growth of ServicesGrowth of Services Service PayService Pay

Exciting New Trends in Operations Exciting New Trends in Operations ManagementManagement


Outline - ContinuedOutline - Continued The Productivity ChallengeThe Productivity Challenge

Productivity MeasurementProductivity Measurement Productivity VariablesProductivity Variables Productivity and the Service Sector Productivity and the Service Sector

Ethics and Social ResponsibilityEthics and Social Responsibility


Learning ObjectivesLearning ObjectivesWhen you complete this chapter When you complete this chapter you should be able to:you should be able to:

1.1. Define operations managementDefine operations management2.2. Explain the distinction between Explain the distinction between

goods and servicesgoods and services3.3. Explain the difference between Explain the difference between

production and productivityproduction and productivity


Learning ObjectivesLearning ObjectivesWhen you complete this chapter When you complete this chapter you should be able to:you should be able to:

4.4. Compute single-factor Compute single-factor productivityproductivity

5.5. Compute multifactor productivityCompute multifactor productivity6.6. Identify the critical variables in Identify the critical variables in

enhancing productivityenhancing productivity


The Hard Rock CafeThe Hard Rock Cafe First opened in 1971First opened in 1971

Now – 121 restaurants in over 40 countriesNow – 121 restaurants in over 40 countries Rock music memorabiliaRock music memorabilia Creates value in the form of good food Creates value in the form of good food

and entertainmentand entertainment 3,5003,500++ custom meals per day in Orlando custom meals per day in Orlando How does an item get on the menu?How does an item get on the menu? Role of the Operations ManagerRole of the Operations Manager


What Is Operations What Is Operations Management?Management?

ProductionProduction is the creation of is the creation of goods and servicesgoods and services

Operations management (OM)Operations management (OM) is the set of activities that is the set of activities that

creates value in the form of creates value in the form of goods and services by goods and services by

transforming inputs into transforming inputs into outputsoutputs


Organizing to Produce Goods Organizing to Produce Goods and Servicesand Services

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

the productthe product Finance/accounting – tracks how Finance/accounting – tracks how

well the organization is doing, pays well the organization is doing, pays bills, collects the moneybills, collects the money


Organizational ChartsOrganizational Charts

OperationsTeller SchedulingCheck ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

Figure 1.1(A)Figure 1.1(A)



OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science

Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange

Airline

Figure 1.1(B)Figure 1.1(B)

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising


MarketingSales promotionAdvertisingSalesMarket research


OperationsFacilities Construction; maintenanceProduction and inventory control Scheduling; materials controlQuality assurance and controlSupply chain managementManufacturing Tooling; fabrication; assemblyDesign Product development and design Detailed product specificationsIndustrial engineering Efficient use of machines, space, and personnelProcess analysis Development and installation of production tools and equipment

Finance/ accountingDisbursements/ credits Receivables Payables General ledgerFunds Management Money market International exchangeCapital requirements Stock issue Bond issue and recall

Manufacturing

Figure 1.1(C)Figure 1.1(C)


Why Study OM?Why Study OM? OM is one of three major functions OM is one of three major functions

(marketing, finance, and operations) (marketing, finance, and operations) of any organizationof any organization

We want (We want (and needand need) to know how ) to know how goods and services are producedgoods and services are produced

We want to understand what We want to understand what operations managers dooperations managers do

OM is such a costly part of an OM is such a costly part of an organizationorganization


Options for Increasing Options for Increasing ContributionContribution

SalesSales $100,000$100,000 $150,000$150,000 $100,000$100,000 $100,000$100,000Cost of Goods Cost of Goods –– 80,000 80,000 –– 120,000 120,000 –– 80,000 80,000 –– 64,000 64,000Gross MarginGross Margin 20,00020,000 30,00030,000 20,00020,000 36,00036,000Finance CostsFinance Costs –– 6,000 6,000 –– 6,000 6,000 –– 3,000 3,000 –– 6,000 6,000SubtotalSubtotal 14,00014,000 24,00024,000 17,00017,000 30,00030,000Taxes at 25%Taxes at 25% –– 3,500 3,500 –– 6,000 6,000 –– 4,250 4,250 –– 7,500 7,500ContributionContribution $ 10,500$ 10,500 $ 18,000$ 18,000 $ 12,750$ 12,750 $ 22,500$ 22,500

Finance/Finance/MarketingMarketing AccountingAccounting OMOMOptionOption OptionOption OptionOption

IncreaseIncrease ReduceReduce ReduceReduceSalesSales FinanceFinance ProductionProduction

CurrentCurrent Revenue 50%Revenue 50% Costs 50%Costs 50% Costs 20%Costs 20%


What Operations What Operations Managers DoManagers Do

PlanningPlanning OrganizingOrganizing StaffingStaffing LeadingLeading ControllingControlling

Basic Management FunctionsBasic Management Functions


Ten Critical DecisionsTen Critical DecisionsTen Decision AreasTen Decision Areas Chapter(s)Chapter(s)

Design of goods and servicesDesign of goods and services 55 Managing qualityManaging quality 6, Supplement 66, Supplement 6 Process and capacity Process and capacity 7, Supplement 77, Supplement 7

design design Location strategyLocation strategy 88 Layout strategyLayout strategy 99 Human resources and Human resources and 10, Supplement 1010, Supplement 10

job design job design Supply chain Supply chain 11, Supplement 1111, Supplement 11

management management Inventory managementInventory management 12, 14, 1612, 14, 16 SchedulingScheduling 13, 1513, 15 MaintenanceMaintenance 1717

Table 1.2Table 1.2


The Critical DecisionsThe Critical Decisions Design of goods and servicesDesign of goods and services

What good or service should we offer?What good or service should we offer? How should we design these products How should we design these products

and services? and services? Managing qualityManaging quality

How do we define quality?How do we define quality? Who is responsible for quality?Who is responsible for quality?

Table 1.2 (cont.)Table 1.2 (cont.)


The Critical DecisionsThe Critical Decisions Process and capacity designProcess and capacity design

What process and what capacity will What process and what capacity will these products require?these products require?

What equipment and technology is What equipment and technology is necessary for these processes?necessary for these processes?

Location strategyLocation strategy Where should we put the facility?Where should we put the facility? On what criteria should we base the On what criteria should we base the

location decision?location decision?Table 1.2 (cont.)Table 1.2 (cont.)


The Critical DecisionsThe Critical Decisions Layout strategyLayout strategy

How should we arrange the facility?How should we arrange the facility? How large must the facility be to meet How large must the facility be to meet

our plan?our plan? Human resources and job designHuman resources and job design

How do we provide a reasonable work How do we provide a reasonable work environment?environment?

How much can we expect our How much can we expect our employees to produce?employees to produce?



The Critical DecisionsThe Critical Decisions Supply chain managementSupply chain management

Should we make or buy this component?Should we make or buy this component? Who are our suppliers and who can Who are our suppliers and who can

integrate into our e-commerce program?integrate into our e-commerce program? Inventory, material requirements Inventory, material requirements

planning, and JITplanning, and JIT How much inventory of each item should How much inventory of each item should

we have?we have? When do we re-order?When do we re-order?



The Critical DecisionsThe Critical Decisions Intermediate and shortIntermediate and short––term term

schedulingscheduling Are we better off keeping people on Are we better off keeping people on

the payroll during slowdowns?the payroll during slowdowns? Which jobs do we perform next?Which jobs do we perform next?

MaintenanceMaintenance Who is responsible for maintenance?Who is responsible for maintenance? When do we do maintenance?When do we do maintenance?



Where are the OM Jobs?Where are the OM Jobs?

Figure 1.2Figure 1.2


Where are the OM Jobs?Where are the OM Jobs? Technology/methodsTechnology/methods Facilities/space utilizationFacilities/space utilization Strategic issuesStrategic issues Response timeResponse time People/team developmentPeople/team development Customer serviceCustomer service QualityQuality Cost reductionCost reduction Inventory reductionInventory reduction Productivity improvementProductivity improvement


Significant Events in OMSignificant Events in OM



The Heritage of OMThe 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/ Sorenson Coordinated assembly line (Ford/ Sorenson

1913)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 OMThe 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)


Eli WhitneyEli Whitney Born 1765; died 1825Born 1765; died 1825 In 1798, received government In 1798, received government

contract to make 10,000 musketscontract to make 10,000 muskets Showed that machine tools could Showed that machine tools could

make standardized parts to exact make standardized parts to exact specificationsspecificationsMusket parts could be used in any Musket parts could be used in any

musketmusket


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

management’management’ In 1881, as chief engineer for In 1881, as chief engineer for

Midvale Steel, studied how tasks Midvale Steel, studied how tasks were donewere doneBegan first motion and time studiesBegan first motion and time studies

Created efficiency principlesCreated efficiency principles


Taylor’s PrinciplesTaylor’s Principles

Matching employees to right jobMatching employees to right job Providing the proper trainingProviding the proper training Providing proper work methods and Providing proper work methods and

toolstools Establishing legitimate incentives for Establishing legitimate incentives for

work to be accomplishedwork to be accomplished

Management Should Take More Management Should Take More Responsibility for:Responsibility for:


Frank & Lillian GilbrethFrank & Lillian Gilbreth Frank (1868-1924); Lillian (1878-Frank (1868-1924); Lillian (1878-

1972)1972) Husband-and-wife engineering Husband-and-wife engineering

teamteam Further developed work Further developed work

measurement methodsmeasurement methods Applied efficiency methods to their Applied efficiency methods to their

home and 12 children! home and 12 children! Book & Movie: “Cheaper by the Book & Movie: “Cheaper by the

Dozen,” book: “Bells on Their Toes”Dozen,” book: “Bells on Their Toes”


Born 1863; died 1947Born 1863; died 1947 In 1903, created Ford Motor In 1903, created Ford Motor

CompanyCompany In 1913, first used moving assembly In 1913, first used moving assembly

line to make Model Tline to make Model TUnfinished product moved by conveyor Unfinished product moved by conveyor

past work stationpast work station Paid workers very well for 1911 Paid workers very well for 1911

($5/day!)($5/day!)

Henry FordHenry Ford


W. Edwards DemingW. Edwards Deming Born 1900; died 1993Born 1900; died 1993 Engineer and physicistEngineer and physicist Credited with teaching Japan Credited with teaching Japan

quality control methods in post-quality control methods in post-WW2WW2

Used statistics to analyze processUsed statistics to analyze process His methods involve workers in His methods involve workers in

decisionsdecisions


Contributions FromContributions From

Human factorsHuman factors Industrial engineeringIndustrial engineering Management scienceManagement science Biological scienceBiological science Physical sciencesPhysical sciences Information technology Information technology


New Challenges in OMNew Challenges in OM

Global focusGlobal focus Just-in-timeJust-in-time Supply chain Supply chain

partneringpartnering Rapid product Rapid product

development, development, alliancesalliances

Mass Mass customizationcustomization

Empowered Empowered employees, teamsemployees, 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


Characteristics of GoodsCharacteristics of Goods Tangible productTangible product Consistent product Consistent product

definitiondefinition Production usually Production usually

separate from separate from consumptionconsumption

Can be inventoriedCan be inventoried Low customer Low customer

interactioninteraction


Characteristics of ServiceCharacteristics of Service Intangible productIntangible product Produced and consumed Produced and consumed

at same timeat same time Often uniqueOften unique High customer High customer

interactioninteraction Inconsistent product Inconsistent product

definitiondefinition Often knowledge-basedOften knowledge-based Frequently dispersedFrequently dispersed


Industry and Services as Industry and Services as Percentage of GDPPercentage of GDP

ServicesServices ManufacturingManufacturing

Aust

ralia

Aust

ralia

Cana

daCa

nada

Chin

aCh

ina

Czec

h Re

pCz

ech

Rep

Fran

ceFr

ance

Germ

any

Germ

any

Hong

Kon

gHo

ng K

ong

Japa

nJa

pan

Mex

ico

Mex

ico

Russ

ian

Fed

Russ

ian

Fed

Sout

h Af

rica

Sout

h Af

rica

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 Versus ServicesGoods Versus Services

Table 1.3Table 1.3

Can be resoldCan be resoldCan be inventoriedCan be inventoriedSome aspects of quality Some aspects of quality measurablemeasurableSelling is distinct from Selling is distinct from productionproductionProduct is transportableProduct is transportable

Site of facility important for costSite of facility important for cost

Often easy to automateOften easy to automateRevenue generated primarily Revenue generated primarily from tangible productfrom tangible product

Attributes of GoodsAttributes of Goods(Tangible Product)(Tangible Product)

Attributes of ServicesAttributes of Services (Intangible Product) (Intangible Product)

Reselling unusualReselling unusualDifficult to inventoryDifficult to inventoryQuality difficult to measureQuality difficult to measure

Selling is part of service Selling is part of service

Provider, not product, isProvider, not product, isoften transportableoften transportableSite of facility important forSite of facility important forcustomer contactcustomer contactOften difficult to automateOften difficult to automateRevenue generated primarily Revenue generated primarily from the intangible servicefrom the intangible service


Goods and ServicesGoods 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%|| || || || || || || || ||



120120 –

100 100 –

80 80 –

60 60 –

40 40 –

20 20 –

0 0 – | | | | | | |19501950 19701970 19901990 2010 (est)2010 (est)

19601960 19801980 20002000

Empl

oym

ent (

mill

ions

)Em

ploy

men

t (m

illio

ns)

Manufacturing and Service Manufacturing and Service EmploymentEmployment

Figure 1.5 (A)Figure 1.5 (A)

ManufacturingManufacturing

ServiceService


Manufacturing Employment Manufacturing Employment and Productionand Production

Figure 1.5 (B)Figure 1.5 (B)

40 40 –30 30 –20 20 –10 10 –

0 0 – | | | | | | |19501950 19701970 19901990 2010 (est)2010 (est)

19601960 19801980 20002000

– 150150

– 125125

– 100100

– 7575

– 5050

– 2525

– 00

Empl

oym

ent (

mill

ions

)Em

ploy

men

t (m

illio

ns)

Ind

ex:

1997 = 1

00Inde

x: 1

997

= 10

0

Manufacturingemployment

(left scale)

Industrial Industrial productionproduction

(right scale)(right scale)


Development of the Development of the Service EconomyService Economy

Figure 1.5 (C)Figure 1.5 (C)

United StatesCanadaFrance

ItalyBritain

JapanW. Germany

1970 2008 (est)

| | | | |40 50 60 70 80

Percent


Organizations in Each SectorOrganizations in Each Sector

Service SectorService Sector ExampleExample% of all % of all

JobsJobsEducation, Education, Legal, Medical, Legal, Medical, and otherand other

Notre Dame University, Notre Dame University, San Diego Zoo, Arnold San Diego Zoo, Arnold Palmer HospitalPalmer Hospital

25.525.5

Trade (retail, Trade (retail, wholesale)wholesale)

Walgreen’s, Wal-Mart, Walgreen’s, Wal-Mart, Nordstrom’sNordstrom’s

15.115.1

Utilities, Utilities, TransportationTransportation

Pacific Gas & Electric, Pacific Gas & Electric, American Airlines, Santa American Airlines, Santa Fe R.R., Roadway ExpressFe R.R., Roadway Express

5.25.2

Table 1.4Table 1.4


Organizations in Each SectorOrganizations in Each SectorService SectorService Sector ExampleExample

% of all % of all JobsJobs

Professional Professional and Business and Business ServicesServices

Snelling and Snelling, Waste Snelling and Snelling, Waste Management, Pitney-BowesManagement, Pitney-Bowes

10.110.1

Finance, Finance, Information, Information, Real EstateReal Estate

Citicorp, American Express, Citicorp, American Express, Prudential, Aetna, Trammel Prudential, Aetna, Trammel Crow, EDS, IBMCrow, EDS, IBM

9.69.6

Food, Lodging, Food, Lodging, EntertainmentEntertainment

Olive Garden, Hard Rock Cafe, Olive Garden, Hard Rock Cafe, Motel 6, Hilton Hotels, Walt Motel 6, Hilton Hotels, Walt Disney, Paramount PicturesDisney, Paramount Pictures

8.58.5

Public Public AdministrationAdministration

U.S., State of Alabama, Cook U.S., State of Alabama, Cook CountyCounty

4.64.6

Table 1.4Table 1.4


Organizations in Each SectorOrganizations in Each SectorManufacturing Manufacturing SectorSector ExampleExample

% of all % of all JobsJobs

ManufacturingManufacturing General Electric, Ford, General Electric, Ford, U.S. Steel, IntelU.S. Steel, Intel

11.511.5

ConstructionConstruction Bechtel, McDermottBechtel, McDermott 7.97.9AgricultureAgriculture King RanchKing Ranch 1.61.6

MiningMining Homestake MiningHomestake Mining 0.40.4SectorSector Percent of all jobsPercent of all jobs

ServiceService 78.6%78.6%ManufacturingManufacturing 21.4%21.4%

Table 1.4Table 1.4


New Trends in OMNew Trends in OM

Local or Local or national national focusfocus

Reliable worldwide Reliable worldwide communication and communication and transportation networkstransportation networks

Global focus, Global focus, moving moving production production offshoreoffshore

Batch (large) Batch (large) shipmentsshipments

Short product life cycles Short product life cycles and cost of capital put and cost of capital put pressure on reducing pressure on reducing inventoryinventory

Just-in-time Just-in-time performanceperformance

Low-bid Low-bid purchasingpurchasing

Supply chain competition Supply chain competition requires that suppliers be requires that suppliers be engaged in a focus on the engaged in a focus on the end customerend customer

Supply chain Supply chain partners, partners, collaboration, collaboration, alliances, alliances, outsourcingoutsourcing


PastPast CausesCauses FutureFuture



Lengthy Lengthy product product developmentdevelopment

Shorter life cycles, Shorter life cycles, Internet, rapid Internet, rapid international international communication, computer-communication, computer-aided design, and aided design, and international collaborationinternational collaboration

Rapid product Rapid product development, development, alliances, alliances, collaborative collaborative designsdesigns

Standardized Standardized productsproducts

Affluence and worldwide Affluence and worldwide markets; increasingly markets; increasingly flexible production flexible production processesprocesses

Mass Mass customization customization with added with added emphasis on emphasis on qualityquality

Job Job specializationspecialization

Changing socioculture Changing socioculture milieu; increasingly a milieu; increasingly a knowledge and knowledge and information societyinformation society

Empowered Empowered employees, employees, teams, and lean teams, and lean productionproduction





Low-cost Low-cost focusfocus

Environmental issues, ISO Environmental issues, ISO 14000, increasing disposal 14000, increasing disposal costscosts

Environmentally Environmentally sensitive sensitive production, green production, green manufacturing, manufacturing, recycled recycled materials, materials, remanufacturingremanufacturing

Ethics not Ethics not at at forefrontforefront

Businesses operate more Businesses operate more openly; public and global openly; public and global review of ethics; opposition review of ethics; opposition to child labor, bribery, to child labor, bribery, pollutionpollution

High ethical High ethical standards and standards and social social responsibility responsibility expectedexpected




New Trends in OMNew Trends in OM Global focusGlobal focus Just-in-time performanceJust-in-time performance Supply chain partneringSupply chain partnering Rapid product developmentRapid product development Mass customizationMass customization Empowered employeesEmpowered employees Environmentally sensitive productionEnvironmentally sensitive production EthicsEthics


Productivity ChallengeProductivity 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


FeedbackFeedback looploop

OutputsOutputs

Goods and

services

ProcessesProcesses

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%).

The Economic SystemThe Economic SystemInputsInputs

Labor,capital,

management



Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:Stop requiring signatures Stop requiring signatures on credit card purchases on credit card purchases under $25under $25

Saved 8 seconds Saved 8 seconds per transactionper transaction

Change the size of the ice Change the size of the ice scoopscoop

Saved 14 seconds Saved 14 seconds per drinkper drink

New espresso machinesNew espresso machines Saved 12 seconds Saved 12 seconds per shotper shot


Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:Stop requiring signatures Stop requiring signatures on credit card purchases on credit card purchases under $25under $25

Saved 8 seconds Saved 8 seconds per transactionper transaction

Change the size of the ice Change the size of the ice scoopscoop

Saved 14 seconds Saved 14 seconds per drinkper drink

New espresso machinesNew espresso machines Saved 12 seconds Saved 12 seconds per shotper shot

Operations improvements have Operations improvements have helped Starbucks increase yearly helped Starbucks increase yearly revenue per outlet by $200,000 to revenue per outlet by $200,000 to $940,000 in six years.$940,000 in six years.Productivity has improved by 27%, Productivity has improved by 27%, or about 4.5% per year.or about 4.5% per year.


Measure of process improvementMeasure of process improvement Represents output relative to inputRepresents output relative to input Only through productivity increases Only through productivity increases

can our standard of living improvecan our standard of living improve

ProductivityProductivity

Productivity =Productivity =Units producedUnits produced

Input usedInput used


Example 1Example 1

Supposed that a units produced is 1000 Supposed that a units produced is 1000 and labor – hour is 250 compute for and labor – hour is 250 compute for the productivitythe productivity


Productivity CalculationsProductivity Calculations

Productivity =Productivity = Units producedUnits producedLabor-hours usedLabor-hours used

= = = = 44 units/labor-hour units/labor-hour1,0001,000250250

Labor ProductivityLabor Productivity

One resource input One resource input single-factor productivity single-factor productivity


Multi-Factor Productivity Multi-Factor Productivity OutputOutput

Labor + Material + Energy Labor + Material + Energy + Capital + Miscellaneous+ Capital + Miscellaneous

Productivity =Productivity =

Also known as total factor productivityAlso known as total factor productivity Output and inputs are often expressed Output and inputs are often expressed

in dollarsin dollars

Multiple resource inputs Multiple resource inputs multi-factor productivity multi-factor productivity


Example 2Example 2• Collins title company has a staff of 4 each Collins title company has a staff of 4 each

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


Collins Title ProductivityCollins Title Productivity

Staff of Staff of 44 works works 8 8 hrs/dayhrs/day 88 titles/day titles/dayPayroll cost = Payroll cost = $640$640/day/day Overhead = Overhead = $400$400/day/day

Old System:Old System:

==Old labor Old labor productivityproductivity

88 titles/day titles/day3232 labor-hrs labor-hrs



Staff of Staff of 44 works works 88 hrs/day hrs/day 88 titles/day titles/dayPayroll cost = Payroll cost = $640$640/day/day Overhead = Overhead = $400$400/day/day


88 titles/day titles/day3232 labor-hrs labor-hrs==Old labor Old labor

productivityproductivity = = .25.25 titles/labor-hr titles/labor-hr



Staff of Staff of 44 works works 8 8 hrs/dayhrs/day 88 titles/day titles/dayPayroll cost = Payroll cost = $640$640/day/day Overhead = Overhead = $400$400/day/day


1414 titles/day titles/day Overhead = Overhead = $800$800/day/dayNew System:New System:


productivityproductivity

==New labor New labor productivityproductivity

= .25 titles/labor-hr= .25 titles/labor-hr

1414 titles/day titles/day3232 labor-hrs labor-hrs








14 14 titles/daytitles/day3232 labor-hrs labor-hrs==New labor New labor







==Old multifactor Old multifactor productivityproductivity

88 titles/day titles/day$640 + 400$640 + 400






88 titles/day titles/day$640 + 400$640 + 400==Old multifactor Old multifactor

productivityproductivity = = .0077.0077 titles/dollar titles/dollar






88 titles/day titles/day$640 + 400$640 + 400==Old multifactor Old multifactor

productivityproductivity

==New multifactor New multifactor productivityproductivity

= = .0077.0077 titles/dollar titles/dollar









==Old multifactor Old multifactor productivityproductivity

==New multifactor New multifactor productivityproductivity




Activity 1Activity 1

• The South Dakota Clay Pigeon Corporation showed the following results for The South Dakota Clay Pigeon Corporation showed the following results for last year.last year.

• Finished Units Produced Finished Units Produced : $1,000,000: $1,000,000• Work in progress unitsWork in progress units : 50,000: 50,000• Labor CostsLabor Costs : 250,000: 250,000• Material CostsMaterial Costs : 200,000: 200,000• Cost of CapitalCost of Capital : 100,000: 100,000• Energy CostEnergy Cost : 25,000: 25,000• Other ExpensesOther Expenses : 75,000: 75,000

a) What was the total factor productivity?a) What was the total factor productivity?b) Multifactor productivity measures for total output to labor materials.b) Multifactor productivity measures for total output to labor materials.c) What was the multifactor productivity measure for finished output to c) What was the multifactor productivity measure for finished output to labor and materials.labor and materials.d) What was the partial productivity measure for total output to energy.d) What was the partial productivity measure for total output to energy.e ) What was the partial productivity ratio for finished units to energy.e ) What was the partial productivity ratio for finished units to energy.


Measurement ProblemsMeasurement Problems

QualityQuality may change while the may change while the quantity of inputs and outputs quantity of inputs and outputs remains constantremains constant

External elementsExternal elements may cause an may cause an increase or decrease in productivityincrease or decrease in productivity

Precise unitsPrecise units of measure may be of measure may be lackinglacking


Productivity VariablesProductivity Variables LaborLabor - contributes - contributes

about about 10%10% of the of the annual increaseannual increase

CapitalCapital - contributes - contributes about about 38%38% of the of the annual increaseannual increase

ManagementManagement - - contributes about contributes about 52%52% of the annual increaseof the annual increase


Key Variables for Improved Key Variables for Improved Labor ProductivityLabor Productivity

Basic education appropriate for the Basic education appropriate for the labor forcelabor force

Diet of the labor forceDiet of the labor force Social overhead that makes labor Social overhead that makes labor

availableavailable Maintaining and enhancing skills in the Maintaining and enhancing skills in the

midst of rapidly changing technology midst of rapidly changing technology and knowledgeand knowledge


Labor SkillsLabor SkillsAbout half of the 17-year-olds in the US cannot About half of the 17-year-olds in the US cannot correctly answer questions of this typecorrectly answer questions of this type



Investment and Productivity Investment and Productivity

1010

88

66

44

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Percentage investmentPercentage investment1010 1515 2020 2525 3030 3535


Service ProductivityService Productivity

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

attributes or desiresattributes 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


Productivity at Taco BellProductivity at Taco BellImprovements:Improvements:

Revised the menu Revised the menu Designed meals for easy preparationDesigned meals for easy preparation Shifted some preparation to suppliersShifted some preparation to suppliers Efficient layout and automationEfficient layout and automation Training and employee empowermentTraining and employee empowerment


Productivity at Taco BellProductivity at Taco BellImprovements:Improvements:

Revised the menu Revised the menu Designed meals for easy preparationDesigned meals for easy preparation Shifted some preparation to suppliersShifted some preparation to suppliers Efficient layout and automationEfficient layout and automation Training and employee empowermentTraining and employee empowerment

Results: Preparation time cut to 8 seconds Management span of control

increased from 5 to 30 In-store labor cut by 15 hours/day Stores handle twice the volume with

half the labor Fast-food low-cost leader


Ethics and Social ResponsibilityEthics and Social Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing and producing safe, Developing and producing safe, quality productsquality products

Maintaining a clean environmentMaintaining a clean environment Providing a safe workplaceProviding a safe workplace Honoring community commitmentsHonoring community commitments

Heizer 9 ch1 f

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