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CHAPTER ONE

Introduction to Operations Management and Productivity

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Learning Objectives
When you complete this chapter, you should be able to:

Define Operations Management Describe Operations Management Jobs and Careers Describe the Differences between Goods & Services Describe Operations Management Strategy Decisions Define the Productivity, and compute SingleSingle-Factor and MultiMulti-Factor Productivity Describe the Business Ethics and Social Responsibility

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Chapter Outline
Operations Management at Hard Rock Cafe

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Hard Rock Cafe (HRC)

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1.1

Operations Management at HRC

Founded in 1971 by Americans Peter Morton & Isaac Tigrett - first opened in Orlando, Florida
175 restaurants in over 53 countries - the largest in Orlando

Rock music memorabilia (Eric Clapton) started 1979 In 2006 - sold to the Seminole Tribe of Florida Creates value in the form of good food and entertainment 3,500+ custom meals per day How does an item get on the menu? - Role of the Operations Manager Operations managers, using the best people they can recruit and train, also prepare effective employee schedules and design efficient layouts. OM is demanding, challenging, and exciting. Ultimately, operations managers determine how well we live.
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1.2

What is Operations Management?

OM is the set of activities that creates value in the form of goods and services by transforming inputs into outputs in most efficient and effective way, also considered as a transformation process (Fig.1.1). It is a discipline that applies to organizations like HRC as well as manufacturers like Proton, Sony, Panasonic, and Toyota.

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1.2

What is Operations Management?

The OM techniques are applied throughout the world to virtually all productive enterprises. Production is the creation of goods and services. Activities creating goods and services take place in all organizations. Regardless of whether the end product is a good or service, the activities that go on in the organization are often referred to as operations, or operations management. To create goods and services, all organizations perform three functions; functions ; the importance ingredients not only for production but also for an organizations survival: Marketing generates demand Production/operations creates the product Finance/accounting tracks how well the organization is doing, pays bills, and collects the money.
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1.2.1

What Study Operations Management?

Four reasons why we study operations management:

1. one of the 3 major functions of any organization and integrally related to all other business functions (how people organize themselves for productive enterprise) 2. we want to know how goods & services are produced 3. to understand what operations managers do (develop the skills to become such a manager) 4. it is such a costly part of an organization (a large % of the revenue is spent in the OM function). function).

OM provides a major opportunity to improve profitability and enhance services.

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1.2.2

What are the Operations Managers?

Good managers perform basic functions of management process; planning planning, , organizing, staffing, leading leading, , & controlling Operations managers apply this management process to the decisions they make in the OM function Operations managers are leaders of their companies or departments; their works are most versatile & expansive An operations manager is someone who runs the operations of a business or company on a daily basis An operations managers purpose is to find out ways by which the company can become more productive by: Preparing program budgets Facilitating programs around company
Controlling the inventory Handling logistics Interviewing candidates & supervising employees

Successful operations managers have a strong sense of leadership, along with fast/effective problemproblem-solving abilities Another importance aspect of an operations manager is great communication skills
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1.3

Operations Management Jobs/Careers

Traditionally, OM has been considered as plant management in a manufacturing organization. Today, this is no longer true. true. There has been an increase in the no. of OM people in the service sector, sector, and many have taken jobs in consulting consulting. . They also have been given the opportunity to be supply chain managers at corporate headquarters. Operations managers have strong interest in technology, quantitative analysis, & enterprise control. control. As Sales Managers and Marketing Managers, Production and Operations Managers often enjoy leading people. They have an engineering engineering-like approach to business problems as evidenced by their interest in the application of technology and quantitative analysis. Their high score in enterprise control indicates the fact that process. they like to own a process.
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1.3

Operations Management Jobs/Careers

Several skills & attributes are important to success in the operations environment:
Technical knowledge Strong interpersonal skills. Leadership General business knowledge (multi (multi-disciplinary) Strong problem solving abilities (creativity) (creativity) Negotiation skills (negotiate effectively with different parties) Presentation skills.

Careers in OM in the corporate environment could potentially mean more balanced lifestyle than in consulting environment environment. . Although the corporate manufacturing problems can interfere with personal plans, there is less travel. travel. OM tasks are often in manufacturing facilities. Promotion may require relocation to other facilities. The positions in supply chain exist both at HQs & manufacturing facilities. OM in the corporate environment is not as rewarding as other fields. However, it provides a lot of diversity, power & influence. As global manufacturing becomes more important, international opportunities are becoming fairly common. 1 11

1.3

Operations Management Jobs/Careers

For Master graduates, graduates, OM offers excellent career potential in the short and long term. However, it is unlikely you will be able to come into a prominent position immediately after graduation. Companies must trust the judgment of their highhigh-level managers - the positions earned after several years of experience. Movements in an operations function can be very rapid, however, if the performance is strong. strong. If you feel that OM is where you want to build a career, you may want to focus all your resources to obtain such opportunities right after completing your study. Operations jobs are not limited to managing production lines in a factory. As organizations developing complex & global supply chains, challenging & exciting opportunities are opening up in SCM SCM. .
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1.3

Operations Management Jobs/Careers

Other operations management jobs include: OM consulting Internal auditing groups Operations strategy Distribution & logistics planning Inventory planning & control Supply chain mgt. Business process improvement/reengineering Strategic planning Manufacturing Strategy Support activities in the services/financial industry The Operations area is a good entry point in an organization in order to move towards more general management positions. Technical experience in terms of internships or other education is very helpful in landing operations positions; it is helpful to have a strong background in math, math, comp.science &/or &/or engineering. The no. of companies recruiting operations people is relatively small, but the no. of companies hiring for OM jobs is increasing. Manufacturing organizations need top talent & salaries are rising, and employers have started realizing the importance of talented people with leadership potential in operations positions. In order to build their leadership pipeline, an increasing no. of employers have started an Operations Leadership Program. Program.
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1.3

Operations Management Jobs/Careers

Figure 1.2

Operations Management Jobs or Careers

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1.4

Producing Goods and Services

How to produce goods and services? There are three important functions; functions ; marketing, operations, operations, finance. Operations function has important role in producing goods/services. Marketing has a function to generate demand, demand, or at least accept bookings for a good or service. Finance has a function to track organizational performance, performance, pay bills, and collect money. In an enterprise organization, operations function performed by a particular section. section.

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1.4.1

Goods versus Services

A product (good or service) is anything that can be offered to a market that might satisfy a want or need. Table 1.1 shows the differences between goods and services.

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1.4.2

Characteristics of Goods and Services

Goods:
Tangible product a physical object such as clothing. Consistent product definition a unique name and image, and consistent in terms of characteristics & quality with low variability. Production usually separate from consumption a finished good must be produced first before it can be consumed. Can be inventoried a finished good can be stored and delivered to customers whenever it is required. Low customer interaction customers cannot interfere during the production process of a good.

Services:
Intangible product such as an insurance policy. Produced and consumed at same time a massage therapist using touch to manipulate the muscles of the body. Often unique an insurance product benefits are not the same. High customer interaction the customer interaction is high and demands uniqueness; this is what the customer is paying for. Inconsistent product definition may be rigorous as in an insurance policy, but inconsistent because the clients may decide the types of coverage. Often knowledgeknowledge-based. Frequently dispersed.
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1.5

OM Strategy Decisions

Operations managers apply the basic functions of management process (planning, (planning, organizing, staffing, leading, leading, controlling) controlling) to the decisions they make in the OM function. The ten major strategy decisions of OM are as follows; each decision area is discussed in a separate chapter. (i) Goods and Services Design (ii) Quality Management (iii) Process and Capacity Design (iv) Location Selection Strategies (v) Layout Design Strategies (vi) Human Resource Management (vii) Supply Chain Management (viii) Inventory Management (ix) Production Scheduling (x) Maintenance and Reliability
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1.6

The Productivity

The creation of goods and services requires changing resources into goods and services. The more efficiently we make this change, the more productive we are & the more value is added to the good/service provided. Malaysias productivity performance 2010 grew by 5.8% (Fig.1.5) - was driven mainly by both manufacturing (9.4%) (9.4%) & services (4.7%). (4.7%). Manufacturing sector recorded a much higher growth than national growth of 5.8% caused mainly by improved industrial production. production.

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1.6

The Productivity

During 20012001-2010, 2010, the growth in Total Factor Productivity (TFP) was 1.5%; contribution of TFP to Malaysian economic growth was 32.9% while capital contributed 37.7% and labor 29.4%. An indication that economic growth was fuelled by more capital capitalintensive inputs rather than labor labor-intensive production - indicating that the country is moving towards both investment in state of the knowledge-based economy. economy. art technologies & inculcating a knowledgeTFP is an important variable that must be taken into account in determining the economic growth. growth. Factors such as capital and labor are important for a countrys economic development. development. Equally important in driving economic progress is continuous innovation and productivity enhancement. enhancement. TFP reflects initiatives undertaken by firms, firms, among others include business process innovations such as management techniques, effective plant layout, pricing structure, branding and advancement in technologies.
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1.6

The Productivity

Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital). The operations managers job is to enhance (improve) this ratio of outputs to inputs. Improving productivity means improving efficiency. efficiency. Can be achieved in two ways; ways; reducing inputs or increasing outputs. High production may imply high employment, but not productivity. Increase productivity can improve the standard of living. living.

1.6.1

Single-Factor Productivity
Single - Factor Poductivity = Units produced Input used
(1.1)

Single-factor productivity (SFP) is a synonym for partial productivity Singlemeasure. It relates output to one particular type of resource input. An example of a singlesingle-factor productivity index is labor productivity. productivity.
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1.6.1

Single-Factor Productivity

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1.6.2

Multi-Factor Productivity

Multi-factor Multiproductivity (MFP) includes all inputs; inputs; also known as total factor productivity (TFP). Outputs and inputs are often expressed in dollars. It measures the changes in output per unit of combined inputs; inputs; i.e., the ratio of all outputs produced to all inputs employed.
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1.6.3

Productivity and the Service Sector

It is a challenge to measure the productivity in service sector. sector. The productivity of the service sector is difficult to improve for a number of issues: The productivity is typically labor intensive. It is frequently focused on unique individual attributes or desires. Often an intellectual task performed by professionals. Often difficult to mechanize. Often difficult to evaluate for quality. Productivity in manufacturing sector has been analyzed for more than two centuries. Productivity in the service sector was not analyzed until at the end of the twentieth century. The application of productivity concept in the service sector is more complicated than its application in manufacturing. The productivity in manufacturing is analyzed in the scope of organization, but in the service sector this scope is larger and involves an external element customer customer. . Some service organizations reduce an input element by including customer to their activity and thus boosting service productivity.
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1.6.3

Productivity and the Service Sector

In manufacturing manufacturing, , the quality aspect is not determined because input and output are measured by units. The quality in service sector is very important since customers often evaluate a given service not only by its amount. If only one unit of service is acquired, output is mostly measured only by the quality aspect. Input is usually determined both by the quantity and quality aspects. Quantity and quality aspects of productivity are differ in different sectors of service organizations. Input elements in the service sector such as materials, machines and energy are not as significant as in manufacturing. The key element in service sector is labor because it is more personnelpersonnel -intensive compared to manufacturing. Output in manufacturing is determined by quantity (units) and improved by increasing the production size (output). Output in service sector usually has no high values by the quantity aspect; therefore it is mostly enhanced by the challenge to provide higher quality services to the customer (better (better satisfaction). satisfaction).
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1.7

Ethics and Social Responsibility

Many use the terms ethics & social responsibility interchangeably though they do not mean the same thing. Business ethics relates to an individuals or a groups decisions that society evaluates as right or wrong, wrong, whereas social responsibility concerns the impact of the entire businesss activities on society society. . Global warming, recycling, and sustainability are social responsibility issues; issues ; employee misconduct in performing business activities is a significant concern of business ethics. ethics. Both business ethics and social responsibility are essential parts of being a good corporate citizen. citizen. The most basic ethical & social responsibility concerns have been codified by laws and regulations that encourage businesses to conform to societys standards, values, and attitudes. At a minimum, minimum, managers are expected to obey all laws and regulations. Most legal issues arise as choices that society deems unethical, irresponsible, or otherwise unacceptable. However, all actions deemed unethical by society are not necessarily illegal; illegal ; both legal & ethical concerns change over time.
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1.7

Ethics and Social Responsibility

Business law refers to the laws and regulations that govern the conduct of business. business. Many problems & conflicts in business can be avoided if owners, managers, employees know more about business law & legal system. Business ethics, social responsibility, and laws act as a compliance system requiring businesses & employees act responsibly in society. Identifying ethical & social responsible responses is not always clearclearcut. Among many ethical challenges facing operations managers: Efficiently developing and producing safe, quality products. Maintaining a clean environment. Providing a safe workplace. Honoring community commitments. Managers must do all of this in an ethical and socially responsible way while meeting the demands of the marketplace. If operations managers have a moral awareness and focus on increasing productivity in a system where all stakeholders have a voice, many of the ethical challenges will be successfully addressed. resources, employees will be committed committed, , Organization will use fewer resources, market will be satisfied satisfied, , and the ethical climate will be enhanced enhanced. .
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1.7.1

Business Ethics

At its simplest simplest, , ethics involves learning what is right or wrong, wrong, and then doing the right thing, thing, but the right thing is not as straightforward as conveyed in business ethics literature. Most ethical dilemmas in the workplace are not simply a matter boss? of Should I lie to my boss? Business ethics is defined as the principles and standards that determine acceptable conduct in business organizations. The acceptability of behavior in business is determined by customers, customers, competitors, government regulators, interest groups, and the public, as well as each individuals personal moral principles and values. automatically. Business has found that good ethics doesnt happen automatically. Employees need a shared vision that results in all employees abiding by the companys code of ethics and policies on business conduct. Companies use benchmarking benchmarking, , by comparing themselves with others in their industry, to gain insights about how to improve their code of ethics programs.
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1.7.1

Business Ethics

Providing the criteria for evaluating codes of ethics also assists companies in developing and revising their codes. Organizations are expected to establish ethical standards and provide compliance systems to maintain appropriate conduct within all levels of the organization. It is important to understand that business ethics goes beyond legal issues. issues. Ethical conduct builds trust among individuals and in business relationships. Establishing trust and confidence is much more difficult in organizations that have reputations for acting unethically. government, Ethical issues are not limited to profit organizations. In government, several politicians and some highhigh-ranking officials have been forced to resign in disgrace over ethical indiscretions. Learning to recognize ethical issues is the most important step in understanding business ethics.
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1.7.1

Business Ethics

An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, wrong, ethical or unethical. unethical. In business, such a choice often involves weighing monetary profit against what a person considers appropriate conduct. The best way to judge the ethics of a decision is to look at a situation from a customers or competitors viewpoint. A person often needs several years of experience in business to understand what is acceptable or ethical. ethical. Ethics is also related to the culture in which a business operates. Experience with the culture in which a business operates is critical to understanding what is ethical or unethical. Ethical issues can be more complex now than in the past. One of the principal causes of unethical behavior in organizations is overly aggressive financial or business objectives. Many ethical issues in business can be categorized in the context of their relation with abusive and intimidating behavior, conflicts of interest, fairness & honesty, communications, & business associations.
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1.7.2

Social Responsibility

Social responsibility is defined as a businesss obligation to maximize its positive impact and minimize its negative impact on society. Many companies are starting to recognize that providing jobs and profits are not sufficient to be a responsible member of society. It is important to be socially responsible; responsible; i.e., to work with stakeholders such as employees, customers, communities, and governments to make sure that the company does its part to minimize negative impacts on society and maximize contributions to important issues that are being addressed worldwide. There are four dimensions of social responsibility; economic, legal, ethical, and voluntary. voluntary. A business whose sole objective is to maximize profits is not likely to consider its social responsibility, although its activities are legal. Voluntary responsibilities are additional activities that may not be required but which promote human welfare or goodwill. Legal and economic concerns have long been acknowledged in business, but voluntary and ethical issues are more recent concerns.
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1.7.2

Social Responsibility

Corporate citizenship is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their various stakeholders. One of the major corporate citizenship issues is the focus on preserving the environment. Although the concept of social responsibility is receiving more and more attention, it is still not universally accepted. accepted. As with ethics, managers consider social responsibility on a daily basis. It is a dynamic area with issues changing constantly in response to societys demands. There is much evidence that it is associated with improved business performance. performance. Consumers are refusing to buy from businesses that receive publicity about misconduct. A number of studies have found a direct relationship between social responsibility and profitability, profitability, as well as a link between employee commitment and customer loyalty (two major concerns of any firm trying to increase profits).
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