Operations & Productivity

Chapter No.2
Lecture Nos. 3 & 4
April 14, 2015

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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
2

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Organizational Charts
Commercial Bank

Operations

Finance

Marketing

Teller Scheduling
Check Clearing
Collection
Transaction
processing
Facilities
design/layout
Vault operations
Maintenance
Security

Investments
Security
Real estate

Loans
Commercial
Industrial
Financial
Personal
Mortgage

Accounting
Auditing

Trust Department
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Figure 1.1(A)

Organizational Charts
Airline
Operations
Ground support
equipment
Maintenance
Ground Operations
Facility
maintenance
Catering
Flight Operations
Crew scheduling
Flying
Communications
Dispatching
Management science
4

Finance/
accounting
Accounting
Payables
Receivables
General Ledger
Finance
Cash control
International
exchange

Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising

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Figure 1.1(B)

Organizational Charts
Manufacturing

Operations
Facilities
Construction; maintenance
Production and inventory control
Scheduling; materials control
Quality assurance and control
Supply chain management
Manufacturing
Tooling; fabrication; assembly
Design
Product development and design
Detailed product specifications
Industrial engineering
Efficient use of machines, space,
and personnel
Process analysis
Development and installation of
production tools and equipment
5

Finance/
accounting
Disbursements/
credits
Receivables
Payables
General ledger
Funds
Management
Money market
International
exchange
Capital
requirements
Stock issue
Bond issue6/14/15
and recall

Marketing
Sales
promotion
Advertising
Sales
Market
research

Figure 1.1(C)

Options for Increasing

Contribution

Sales
Cost of Goods
Gross Margin
Finance Costs
Subtotal
Taxes at 25%
Contribution

Marketing
Option

Finance/
Accounting
Option

OM
Option

Current

Increase
Sales
Revenue 50%

Reduce
Finance
Costs 50%

Reduce
Production
Costs 20%

$100,000
80,000
20,000
6,000
14,000
3,500
$ 10,500

$150,000
120,000
30,000
6,000
24,000
6,000
$ 18,000

$100,000
80,000
20,000
3,000
17,000
4,250
$ 12,750

$100,000
64,000
36,000
6,000
30,000
7,500
$ 22,500

What Operations
Managers Do
Basic Management Functions
Planning
Organizing
Staffing
Leading
Controlling

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Ten Critical Decisions

Ten Decision Areas

Design of goods and services

Managing quality
Process and capacity
design
Location strategy
Layout strategy
Human resources and
job design
Supply chain
management
Inventory management
Scheduling
Maintenance

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Significant Events in OM

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New Challenges in OM
From
Local or national focus
Batch shipments
Low bid purchasing

To

Lengthy product development

Standard products
Job specialization

10

Global focus
Just-in-time
Supply chain partnering
Rapid product
development, alliances
Mass customization
Empowered employees,
teams

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Characteristics of Goods
Tangible product
Consistent product
definition
Production usually
separate from
consumption
Can be inventoried
Low customer
interaction
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Characteristics of Service
Intangible product
Produced and consumed
at same time
Often unique
High customer interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed
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Industry and Services as

Percentage of GDP
90

Services

80

Manufacturing

70
60
50
40
30
20
10
US

UK

Spain

South Africa

Russian Fed

Mexico

Japan

Hong Kong

Germany

France

Czech Rep

China

Canada

Australia

Goods Versus Services

Attributes of Goods
(Tangible Product)
Can be resold
Can be inventoried
Some aspects of quality
measurable
Selling is distinct from
production
Product is transportable
Site of facility important for cost
Often easy to automate
Revenue generated primarily
from tangible product
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Attributes of Services
(Intangible Product)
Reselling unusual
Difficult to inventory
Quality difficult to measure
Selling is part of service
Provider, not product, is
often transportable
Site of facility important for
customer contact
Often difficult to automate
Revenue generated primarily
from the intangible service
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Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100%
|

75
|

50
|

25
|

Percent of Product that is a Good

15

0
|

25
|

50
|

75
|

100%
|

Percent of Product that is a Service

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Figure 1.4

Manufacturing and Service

Employment
120

Employment (millions)

100
80

Service

60
40
20

Manufacturing

16

|
|
|
|
|
|
|
1950
1970
1990 2010 (est)
1960
1980
2000

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Figure 1.5 (A)

Development of the
Service Economy
United States
Canada
France
Italy
Britain
Japan
W. Germany

|
40

|
50

|
60

Percent
17

|
70

|
80

1970

2008 (est)
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Operations & SC Strategy

Scope of the firms strategy must not only

focus the economic viability of its

shareholders, but should also consider the
environmental and social impact on key
stakeholders
THE TRIPPLE BOTTOM LINE
Social
Economic
Environmental

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Operations & SC Strategy Formulation

1. Develop / Refine the Strategy
a) Define vision, mission, objectives
b) Conduct Strategic Analysis
c)

Define Strategic competitive priorities

2. Translate Strategy into Operations & SC

Initiatives

d) Product design / revision initiatives

e) Sourcing / Location of facilities initialization

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3. Major Focus Points & projects

f) Major operations initiatives
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g) Major logistics / distribution initiatives

Operation & SC Strategy

Competitive Dimensions
Cost or Price
Quality
Delivery Speed
Delivery Reliability
Coping with changes in Demand
Flexibility & New-Product introduction

20

Speed
Other Product Specific Criteria Support
The Notion of Trade Offs
Straddling: when a company seeks to
match the benefits of a successful
position
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while maintaining its existing position.

Productivity
A measure of

21

how well
resources are
used , but it is
a relative
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Productivity Challenge
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources
such as labour and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output only and not a
measure of efficiency

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The Economic System

Inputs

Processes

Outputs

Labour,
capital,
management

The economic system

transforms inputs to outputs at
about an annual _____
increase in productivity per
year. The productivity increase
is the result of a mix of capital,
labour and management .

Goods
and
services

Feedback loop
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Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
save time. Some
improvements:

24

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
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Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:

Operations improvements have helped Starbucks

increase yearly revenue per outlet by $200,000 to
Stop requiring signatures
$940,000 in six years. Saved 8 seconds
on credit card purchases
per transaction
Productivity has improved by 27%, or about 4.5%
under $25
per year.

25

Change the size of the ice

scoop

Saved 14 seconds
per drink

New espresso machines

Saved 12 seconds
per shot
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Productivity
Productivity =

Units produced
Input used

Measure of process improvement

Represents output relative to input
Only through productivity increases
can our standard of living improve
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Productivity Calculations
Labour Productivity
Productivity =

Units produced
Labour-hours used

1,000
=
= 4 units/labour-hour
250
One resource input single-factor productivity
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Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
Also known as total factor productivity
Output and inputs are often expressed in
dollars
Multiple resource inputs multi-factor productivity
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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

Old labour
productivity

29

8 titles/day
Overhead = $400/day

8 titles/day
32 labour-hrs

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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

Old labour
productivity

30

8 titles/day
32 labour-hrs

8 titles/day
Overhead = $400/day

= .25 titles/labour-hr

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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Overhead = $800/day

Old labour
productivity

New labour
productivity
31

8 titles/day
32 labour-hrs

= .25 titles/labour-hr

14 titles/day
32 labour-hrs
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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Overhead = $800/day

Old labour
productivity

New labour
productivity
32

8 titles/day
32 labour-hrs
14 titles/day
32 labour-hrs

= .25 titles/labour-hr

= .4375 titles/labour-hr
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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

33

Overhead = $800/day

8 titles/day
$640 + 400

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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

34

Overhead = $800/day

8 titles/day
$640 + 400

= .0077 titles/dollar

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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

New multifactor
productivity
35

Overhead = $800/day

8 titles/day
$640 + 400

14 titles/day
$640 + 800

= .0077 titles/dollar

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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

New multifactor
productivity
36

Overhead = $800/day

8 titles/day
$640 + 400

= .0077 titles/dollar

14 titles/day
$640 + 800

= .0097 titles/dollar
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Productivity Variables
Labor - contributes
about 10% of the annual
increase
Capital - contributes
about 38% of the annual
increase
Management contributes about 52%
of the annual increase
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Key Variables for Improved

Labor Productivity
Basic education appropriate for the labor
force
Diet of the labor force
Social overhead that makes labor
available
Maintaining and enhancing skills in the
midst of rapidly changing technology and
knowledge
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Investment and Productivity

Percent increase in productivity

10
8
6
4
2
0
10

15

20

25

30

Percentage investment
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35

Service Productivity
Typically labor intensive
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
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Productivity at Taco Bell

Improvements:

41

Revised the menu

Designed meals for easy preparation
Shifted some preparation to suppliers
Efficient layout and automation
Training and employee empowerment

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Productivity at Taco Bell

Improvements:
Revised the menu
Designed meals for easy preparation
Results:
Shifted some preparation to suppliers
Efficient layout and automation
Preparation time cut to 8 seconds
Training and employee empowerment
Management span of control increased from 5 to 30
In-store labour cut by 15 hours/day
Stores handle twice the volume with half the labour
Fast-food low-cost leader

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Ethics and Social Responsibility

Challenges facing
operations managers:
Developing and producing safe, quality
products
Maintaining a clean environment
Providing a safe workplace
Honouring community commitments
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