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11 Operations and Productivity
Operations and Productivity
P P i t t ti tP P i t t ti t
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PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e
PowerPoint slides by Jeff Heyl
OutlineOutlineGlobal Company Profile: Hard Rock CafeWhat Is Operations Management?
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Organizing to Produce Goods and Services Why Study OM?What Operations Managers Do
Outline Outline -- ContinuedContinuedThe Heritage of Operations ManagementOperations in the Service Sector
Differences between Goods and
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Differences between Goods and ServicesGrowth of ServicesService Pay
Exciting New Trends in Operations Management
Outline Outline -- ContinuedContinued
The Productivity ChallengeProductivity MeasurementProductivity Variables
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Productivity and the Service Sector Ethics and Social Responsibility
Learning ObjectivesLearning Objectives
When you complete this chapter When you complete this chapter you should be able to:you should be able to:
1. Define operations management
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2. Explain the distinction between goods and services
3. Explain the difference between production and productivity
Learning ObjectivesLearning Objectives
When you complete this chapter When you complete this chapter you should be able to:you should be able to:
4. Compute single-factor d ti it
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productivity5. Compute multifactor productivity6. Identify the critical variables in
enhancing productivity
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The Hard Rock CafeThe Hard Rock Cafe
First opened in 1971Now – 129 restaurants in over 40 countries
Rock music memorabilia
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Creates value in the form of good food and entertainment3,500+ custom meals per day in OrlandoHow does an item get on the menu?Role of the Operations Manager
What Is Operations What Is Operations Management?Management?
ProductionProduction is the creation of goods and services
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Operations management (OM)Operations management (OM) is the set of activities that create value in the form of goods and
services by transforming inputs into outputs
Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services
Essential functions:1.1. MarketingMarketing – generates demand
//
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2.2. Production/operationsProduction/operations – creates the product
3.3. Finance/accountingFinance/accounting – tracks how well the organization is doing, pays bills, collects the money
Organizational ChartsOrganizational Charts
OperationsTeller Scheduling
FinanceInvestmentsSecurity
MarketingLoans
Commercial
Commercial Bank
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Check ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity
Secu tyReal estate
Accounting
Auditing
Co e c aIndustrialFinancialPersonalMortgage
Trust Department
Figure 1.1(A)
Organizational ChartsOrganizational Charts
OperationsGround support
equipmentMaintenance
Finance/ accountingAccounting
Payables
Airline
MarketingTraffic administration
Reservations
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MaintenanceGround Operations
Facilitymaintenance
CateringFlight OperationsCrew schedulingFlyingCommunicationsDispatching
Management science
PayablesReceivablesGeneral Ledger
FinanceCash controlInternational
exchange
Figure 1.1(B)
ReservationsSchedulesTariffs (pricing)
SalesAdvertising
MarketingSales
promotionAdvertisingSales
Organizational ChartsOrganizational Charts
OperationsFacilities
Construction; maintenanceProduction and inventory control
Scheduling; materials controlQuality assurance and control
Finance/ accountingDisbursements/
creditsReceivablesPayables
Manufacturing
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Market research
Quality assurance and controlSupply-chain managementManufacturing
Tooling; fabrication; assemblyDesign
Product development and designDetailed product specifications
Industrial engineeringEfficient use of machines, space,
and personnelProcess analysis
Development and installation ofproduction tools and equipment
PayablesGeneral ledger
Funds ManagementMoney marketInternational
exchangeCapital requirements
Stock issueBond issue
and recall
Figure 1.1(C)
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Why Study OM?Why Study OM?1. OM is one of three major functions of
any organization, we want to study how people organize themselves for productive enterprise
2 W t ( d d) t k h
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2. We want (and need) to know how goods and services are produced
3. We want to understand what operations managers do
4. OM is such a costly part of an organization
Options for Increasing Options for Increasing ContributionContribution
Finance/Marketing Accounting OM
Option Option Option
Increase Reduce ReduceSales Finance Production
Current Revenue 50% Costs 50% Costs 20%
1 - 14© 2011 Pearson Education, Inc. publishing as Prentice HallTable 1.1
Sales $100,000 $150,000 $100,000 $100,000Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000Gross Margin 20,000 30,000 20,000 36,000Finance Costs – 6,000 – 6,000 – 3,000 – 6,000Subtotal 14,000 24,000 17,000 30,000Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
Current Revenue 50% Costs 50% Costs 20%
What Operations What Operations Managers DoManagers Do
Planning
Basic Management FunctionsBasic Management Functions
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OrganizingStaffingLeadingControlling
Ten Critical DecisionsTen Critical DecisionsTen Decision Areas Chapter(s)
1. Design of goods and services 52. Managing quality 6, Supplement 63. Process and capacity 7, Supplement 7
design 4. Location strategy 8
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gy5. Layout strategy 96. Human resources and 10
job design 7. Supply-chain 11, Supplement 11
management8. Inventory, MRP, JIT 12, 14, 169. Scheduling 13, 1510. Maintenance 17 Table 1.2
The Critical DecisionsThe Critical Decisions1. Design of goods and services
What good or service should we offer?How should we design these
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How should we design these products and services?
2. Managing qualityHow do we define quality?Who is responsible for quality?
Table 1.2 (cont.)
The Critical DecisionsThe Critical Decisions3. Process and capacity design
What process and what capacity will these products require?What equipment and technology is
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q p gynecessary for these processes?
4. Location strategyWhere should we put the facility?On what criteria should we base the location decision?
Table 1.2 (cont.)
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The Critical DecisionsThe Critical Decisions5. Layout strategy
How should we arrange the facility?How large must the facility be to meet our plan?
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6. Human resources and job designHow do we provide a reasonable work environment?How much can we expect our employees to produce?
Table 1.2 (cont.)
The Critical DecisionsThe Critical Decisions7. Supply-chain management
Should we make or buy this component?Who should be our suppliers and how can we integrate them into our strategy?
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can we integrate them into our strategy?8. Inventory, material requirements
planning, and JITHow much inventory of each item should we have?When do we re-order?
Table 1.2 (cont.)
The Critical DecisionsThe Critical Decisions9. Intermediate and short–term
schedulingAre we better off keeping people on the payroll during slowdowns?
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Which jobs do we perform next?10.Maintenance
How do we build reliability into our processes?Who is responsible for maintenance?
Table 1.2 (cont.)
Where are the OM Jobs?Where are the OM Jobs?Technology/methodsFacilities/space utilizationStrategic issuesResponse timeP l /t d l t
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People/team developmentCustomer serviceQualityCost reductionInventory reductionProductivity improvement
OpportunitiesOpportunities
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Figure 1.2
CertificationsCertificationsAPICS, the American Production and Inventory Control SocietyAmerican Society of Quality (ASQ)Institute for Supply Management (ISM)
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Project Management Institute (PMI)Council of Supply Chain Management ProfessionalsCharter Institute of Purchasing and Supply (CIPS)
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Significant Events in OMSignificant Events in OM
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Figure 1.3
The Heritage of OMThe Heritage of OMDivision of labor (Adam Smith 1776; Charles Babbage 1852)Standardized parts (Whitney 1800)Scientific Management (Taylor 1881)Coordinated assembly line (Ford/
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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 OMThe Heritage of OMComputer (Atanasoff 1938)CPM/PERT (DuPont 1957, Navy 1958)Material requirements planning (Orlicky 1960)Computer aided design (CAD 1970)
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Flexible manufacturing system (FMS 1975)Baldrige Quality Awards (1980)Computer integrated manufacturing (1990)Globalization (1992)Internet (1995)
Eli WhitneyEli Whitney
Born 1765; died 1825In 1798, received government contract to make 10,000 muskets
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Showed that machine tools could make standardized parts to exact specifications
Musket parts could be used in any musket
Frederick W. TaylorFrederick W. Taylor
Born 1856; died 1915Known as ‘father of scientific management’
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In 1881, as chief engineer for Midvale Steel, studied how tasks were done
Began first motion and time studiesCreated efficiency principles
Taylor’s PrinciplesTaylor’s Principles
Matching employees to right job
Management Should Take More Management Should Take More Responsibility for:Responsibility for:
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Providing the proper trainingProviding proper work methods and toolsEstablishing legitimate incentives for work to be accomplished
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Frank & Lillian GilbrethFrank & Lillian GilbrethFrank (1868-1924); Lillian (1878-1972)Husband-and-wife engineering teamFurther developed work measurement methods
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measurement methodsApplied efficiency methods to their home and 12 children! Book & Movie: “Cheaper by the Dozen,” “Bells on Their Toes”
Born 1863; died 1947In 1903, created Ford Motor CompanyIn 1913 first used moving assembly
Henry FordHenry Ford
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In 1913, first used moving assembly line to make Model T
Unfinished product moved by conveyor past work station
Paid workers very well for 1911 ($5/day!)
W. Edwards DemingW. Edwards Deming
Born 1900; died 1993Engineer and physicistCredited with teaching Japan
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g pquality control methods in post-WW2Used statistics to analyze processHis methods involve workers in decisions
Contributions FromContributions From
Human factorsIndustrial engineeringManagement science
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Management scienceBiological sciencePhysical sciencesInformation technology
New Challenges in OMNew Challenges in OM
Global focusJust-in-timeSupply-chain
t i
ToToFromFromLocal or national focusBatch shipmentsLow bid purchasing
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partneringRapid product development, alliancesMass customizationEmpowered employees, teams
Lengthy product development
Standard products
Job specialization
Characteristics of GoodsCharacteristics of GoodsTangible productConsistent product definitionProduction usually
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Production usually separate from consumptionCan be inventoriedLow customer interaction
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Characteristics of ServiceCharacteristics of ServiceIntangible productProduced and consumed at same timeOften unique
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High customer interactionInconsistent product definitionOften knowledge-basedFrequently dispersed
Industry and Services as Industry and Services as Percentage of GDPPercentage of GDP
Services Manufacturing90 −80 −70 −60 −50 −
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Aust
ralia
Can
ada
Chi
na
Cze
ch R
ep
Fran
ce
Ger
man
y
Hon
g K
ong
Japa
n
Mex
ico
Rus
sian
Fed
Sout
h Af
rica
Spai
n
UK US
50 40 −30 −20 −10 −
0 −
Goods and ServicesGoods and ServicesAutomobile
ComputerInstalled carpeting
Fast-food mealRestaurant meal/auto repair
Hospital care
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Hospital careAdvertising agency/
investment managementConsulting service/
teachingCounseling
Percent of Product that is a Good Percent of Product that is a Service
100% 75 50 25 0 25 50 75 100%| | | | | | | | |
120 –
100 –
80 –m
illio
ns)
Manufacturing and Service Manufacturing and Service EmploymentEmployment
ServiceService
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60 –
40 –
20 –
0 – | | | | | | |1950 1970 1990 2010 (est)
1960 1980 2000
Empl
oym
ent (
Figure 1.4 (A)
Manufacturing
Manufacturing Employment Manufacturing Employment and Productionand Production
– 150150
– 125125
– 100100
(mill
ions
)
= 10
0=
100
Industrial Industrial productionproduction
(right scale)(right scale)
1 - 41© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 1.4 (B)
40 –30 –20 –10 –
0 – | | | | | | |1950 1970 1990 2010 (est)
1960 1980 2000
– 7575
– 5050
– 2525
– 00
Empl
oym
ent (
Inde
x: 1
997
Inde
x: 1
997
Manufacturingemployment
(left scale)
Development of the Development of the Service EconomyService Economy
United StaCanFra
1 - 42© 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 1.4 (C)
ItBritJap
W. Germ
1970 2010 (est)
| | | | |
40 50 60 70 80Percent
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Organizations in Each SectorOrganizations in Each SectorService SectorService Sector ExampleExample
% of all % of all JobsJobs
Education, Legal, Medical, other
San Diego Zoo, Arnold Palmer Hospital
25.8
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Trade (retail, wholesale)
Walgreen’s, Wal-Mart, Nordstrom’s
14.9
Utilities, Transportation
Pacific Gas & Electric, American Airlines
5.2
Professional and Business Services
Snelling and Snelling, Waste Management, Inc.
10.7
Table 1.3
Organizations in Each SectorOrganizations in Each SectorService SectorService Sector ExampleExample
% of all % of all JobsJobs
Finance, Information, Real Estate
Citicorp, American Express, Prudential, Aetna
9.6
F d L d i Oli G d M t l 6 W lt 8 5
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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
Table 1.3
Organizations in Each SectorOrganizations in Each Sector
Other SectorsOther Sectors ExampleExample% of all % of all
JobsJobs
Manufacturing Sector
General Electric, Ford, U.S. Steel, Intel
11.2
Construction Bechtel, McDermott 8.1
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Sector
Agriculture Sector
King Ranch 1.4
Mining Sector Homestake Mining 0.5
Total 21.2
Table 1.3
Changing ChallengesChanging ChallengesTraditional 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
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standardsLocal 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
Figure 1.5
Changing ChallengesChanging ChallengesTraditional Approach
Reasons for Change
Current Challenge
Low cost production, with little concern for environment;
Public sensitivity to environment; ISO 14000 standard; increasing disposal costs
Environmentally sensitive production; green manufacturing; sustainability
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free resources (air, water) ignoredLow-cost standardized products
Rise of consumerism; increased affluence; individualism
Mass customization
Figure 1.5
Changing ChallengesChanging ChallengesTraditional 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” Rapid technological Supply chain
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“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
Figure 1.5
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New Trends in OMNew Trends in OMEthicsGlobal focusRapid product developmentEnvironmentally sensitive production
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Mass customizationEmpowered employeesSupply-chain partneringJust-in-time performance
Productivity ChallengeProductivity Challenge
Productivity is the ratio of outputs (goods and services) divided by the inputs
(resources such as labor and capital)
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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
Outputs
Goods and
services
Transformation
The U.S. economic system transforms inputs to outputs
at about an annual 2.5% increase in productivity per
The Economic SystemThe Economic SystemInputs
Labor,capital,
management
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Feedback loop
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%).
Figure 1.6
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:
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improvements:improvements:Stop requiring signatures on credit card purchases under $25
Saved 8 seconds per transaction
Change the size of the ice scoop
Saved 14 seconds per drink
New espresso machines Saved 12 seconds per 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:
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improvements:improvements:Stop requiring signatures on credit card purchases under $25
Saved 8 seconds per transaction
Change the size of the ice scoop
Saved 14 seconds per drink
New espresso machines Saved 12 seconds per shot
Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years.Productivity has improved by 27%, or about 4.5% per year.
ProductivityProductivity
Productivity =Units produced
Input used
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Measure of process improvementRepresents output relative to inputOnly through productivity increases can our standard of living improve
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Productivity CalculationsProductivity Calculations
Productivity =Units produced
Labor-hours used
Labor ProductivityLabor Productivity
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= = 4 units/labor-hour1,000250
One resource input single-factor productivity
MultiMulti--Factor Productivity Factor Productivity
OutputLabor + Material + Energy + Capital + Miscellaneous
Productivity =
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Also known as total factor productivityOutput and inputs are often expressed in dollars
Multiple resource inputs multi-factor productivity
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
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=Old labor productivity
8 titles/day32 labor-hrs
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
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8 titles/day32 labor-hrs=Old labor
productivity = .25 titles/labor-hr
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titl /d O h d $800/dNew System:New System:
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14 titles/day Overhead = $800/day
8 titles/day32 labor-hrs=Old labor
productivity
=New labor productivity
= .25 titles/labor-hr
14 titles/day14 titles/day32 labor32 labor--hrshrs
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titl /d O h d $800/dNew System:New System:
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14 titles/day Overhead = $800/day
8 titles/day32 labor-hrs=Old labor
productivity = .25 titles/labor-hr
14 titles/day32 labor-hrs=New labor
productivity = .4375 titles/labor-hr
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titl /d O h d $800/dNew System:New System:
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14 titles/day Overhead = $800/day
=Old multifactor productivity
8 titles/day$640 + 400
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titl /d O h d $800/dNew System:New System:
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14 titles/day Overhead = $800/day
8 titles/day$640 + 400=Old multifactor
productivity = .0077 titles/dollar
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titl /d O h d $800/dNew System:New System:
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14 titles/day Overhead = $800/day
8 titles/day$640 + 400=Old multifactor
productivity
=New multifactor productivity
= .0077 titles/dollar
14 titles/day14 titles/day$640 + 800$640 + 800
Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titl /d O h d $800/dNew System:New System:
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14 titles/day Overhead = $800/day
8 titles/day$640 + 400
14 titles/day$640 + 800
=Old multifactor productivity
=New multifactor productivity
= .0077 titles/dollar
= .0097 titles/dollar
Measurement ProblemsMeasurement Problems1.1. QualityQuality may change while the
quantity of inputs and outputs remains constant
22 E t l l tE t l l t
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2.2. External elementsExternal elements may cause an increase or decrease in productivity
Precise unitsPrecise units of measure may be lacking
Productivity VariablesProductivity Variables1.1. LaborLabor - contributes
about 10% of the annual increase
22 CapitalCapital - contributes
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2.2. CapitalCapital - contributes about 38% of the annual increase
3.3. ManagementManagement -contributes about 52% of the annual increase
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Key Variables for Improved Key Variables for Improved Labor ProductivityLabor Productivity
1. Basic education appropriate for the labor force
2. Diet of the labor force
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3. Social overhead that makes labor availableChallenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge
Labor SkillsLabor SkillsAbout half of the 17About half of the 17--yearyear--olds in the U.S. cannot olds in the U.S. cannot correctly answer questions of this typecorrectly answer questions of this type
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Figure 1.7
Investment and Productivity Investment and Productivity
10
8
6prod
uctiv
ity
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6
4
2
0Perc
ent i
ncre
ase
in p
Percentage investment10 15 20 25 30 35
Service ProductivityService Productivity
1. Typically labor intensive2. Frequently focused on unique
individual attributes or desires3 Often an intellectual task performed by
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3. Often an intellectual task performed by professionals
4. Often difficult to mechanize5. Often difficult to evaluate for quality
Productivity at Taco BellProductivity at Taco Bell
Improvements:Revised the menu Designed meals for easy preparationShifted some preparation to suppliers
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Shifted some preparation to suppliersEfficient layout and automationTraining and employee empowermentNew water and energy saving grills
Productivity at Taco BellProductivity at Taco Bell
Improvements:Revised the menu Designed meals for easy preparationShifted some preparation to suppliers
Results:Preparation time cut to 8 secondsManagement span of control increased from 5 to 30
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Shifted some preparation to suppliersEfficient layout and automationTraining and employee empowermentNew water and energy saving grills
In-store labor cut by 15 hours/dayStores handle twice the volume with half the laborConserve 300 million gallons of water and Conserve 300 million gallons of water and 200 million KwH of electricity each year 200 million KwH of electricity each year saving $17 million annuallysaving $17 million annually
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Ethics andEthics andSocial ResponsibilitySocial Responsibility
Challenges facing Challenges facing operations managers:operations managers:
Developing and producing safe
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Developing and producing safe, quality productsMaintaining a clean environmentProviding a safe workplaceHonoring stakeholder commitments
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