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Chapter 1

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Chapter 1

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Ibro Balti

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1

Operations
Management

▶ What Is Operations Management?

▶ Organizing to Produce Goods and
Services
▶ The Supply Chain
▶ Why Study OM?
▶ What Operations Managers Do

© 2014 Pearson Education 1-2

Outline - Continued
▶ The Heritage of Operations Management
▶ Operations for Goods and Services
▶ Growth of Services
▶ Service Pay
▶ The Productivity Challenge
▶ Productivity Measurement
▶ Productivity Variables
▶ Productivity and the Service Sector

© 2014 Pearson Education 1-3

Outline - Continued
▶ New Challenges in Operations
Management
▶ Ethics, Social Responsibility, and
Sustainability

© 2014 Pearson Education 1-4

Operations Management
at Hard Rock Cafe

▶ First opened in 1971

▶ Now – 150 restaurants in over 53 countries

▶ Rock music memorabilia

▶ Creates value in the form of good food and
entertainment
▶ 3,500+ custom meals per day in Orlando
▶ How does an item get on the menu?
▶ Role of the Operations Manager
© 2014
© 2014
Pearson
Pearson
Education
Education 1-5
What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs

© 2014 Pearson Education 1-6

Organizing to Produce
Goods and Services
▶ Essential functions:
1. Marketing – generates demand
2. Production/operations – creates
the product
3. Finance/accounting – tracks how
well the organization is doing, pays
bills, collects the money

© 2014 Pearson Education 1-7

Organizational Charts
Figure 1.1

© 2014 Pearson Education 1-8

Organizational Charts
Figure 1.1

© 2014 Pearson Education 1-9

Organizational Charts
Figure 1.1

© 2014 Pearson Education 1 - 10

The Supply Chain
▶ A global network of organizations and
activities that supply a firm with goods and
services
▶ Members of the supply chain collaborate to
achieve high levels of customer satisfaction,
efficiency and competitive advantage.
Figure 1.2

Farmer Syrup Bottler Distributor Retailer

producer

© 2014 Pearson Education 1 - 11

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. 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
© 2014 Pearson Education 1 - 12
What Operations
Managers Do
Basic Management Functions

▶ Planning
▶ Organizing
▶ Staffing
▶ Leading
▶ Controlling

© 2014 Pearson Education 1 - 13

Ten Strategic Decisions
TABLE 1.2
DECISION CHAPTER(S)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17

© 2014 Pearson Education 1 - 14

The Strategic Decisions
1. Design of goods and services
▶ Defines what is required of operations
▶ Product design determines quality,
sustainability and human resources
2. Managing quality
▶ Determine the customer’s quality
expectations
▶ Establish policies and procedures to
identify and achieve that quality
Table 1.2 (cont.)

© 2014 Pearson Education 1 - 15

The Strategic Decisions
3. Process and capacity design
▶ How is a good or service produced?
▶ Commits management to specific
technology, quality, resources, and
investment.
4. Location strategy
▶ Nearness to customers, suppliers, and
talent.
▶ Considering costs, infrastructure, logistics,
and government. Table 1.2 (cont.)

© 2014 Pearson Education 1 - 16

The Strategic Decisions
5. Layout strategy
▶ Integrate capacity needs, personnel levels,
technology, and inventory
▶ Determine the efficient flow of materials,
people, and information.
6. Human resources and job design
▶ Recruit, motivate, and retain personnel with
the required talent and skills.
▶ Integral and expensive part of the total
system design.
Table 1.2 (cont.)

© 2014 Pearson Education 1 - 17

The Strategic Decisions
7. Supply-chain management
▶ Integrate supply chain into the firm’s strategy.
▶ Determine what is to be purchased, from
whom, and under what conditions.
8. Inventory management
▶ Inventory ordering and holding decisions.
▶ Optimize considering customer satisfaction,
supplier capability, and production schedules.

Table 1.2 (cont.)

© 2014 Pearson Education 1 - 18

The Strategic Decisions
9. Scheduling
▶ Determine and implement intermediate-
and short-term schedules.
▶ Utilize personnel and facilities while
meeting customer demands.
10. Maintenance
▶ Consider facility capacity, production
demands, and personnel.
▶ Maintain a reliable and stable process.
Table 1.2 (cont.)

© 2014 Pearson Education 1 - 19

Where are the OM Jobs?
▶ Technology/methods
▶ Facilities/space utilization
▶ Strategic issues
▶ Response time
▶ People/team development
▶ Customer service
▶ Quality
▶ Cost reduction
▶ Inventory reduction
▶ Productivity improvement
© 2014 Pearson Education 1 - 20
Opportunities
Figure 1.3

© 2014 Pearson Education 1 - 21

Significant Events in OM

Figure 1.4
© 2014 Pearson Education 1 - 22
The Heritage of OM
▶ Division of labor (Adam Smith 1776; Charles
Babbage 1852)
▶ Standardized parts (Whitney 1800)
▶ Scientific Management (Taylor 1881)
▶ Coordinated assembly line (Ford/ Sorenson 1913)
▶ Gantt charts (Gantt 1916)
▶ Motion study (Frank and Lillian Gilbreth 1922)
▶ Quality control (Shewhart 1924; Deming 1950)

© 2014 Pearson Education 1 - 23

The Heritage of OM
▶ Computer (Atanasoff 1938)
▶ CPM/PERT (DuPont 1957, Navy 1958)
▶ Material requirements planning (Orlicky 1960)
▶ Computer aided design (CAD 1970)
▶ Flexible manufacturing system (FMS 1975)
▶ Baldrige Quality Awards (1980)
▶ Computer integrated manufacturing (1990)
▶ Globalization (1992)
▶ Internet (1995)

© 2014 Pearson Education 1 - 24

Eli Whitney
▶ Born 1765; died 1825
▶ In 1798, received government
contract to make 10,000 muskets
▶ Showed that machine tools could
make standardized parts to exact
specifications
▶ Musket parts could be used in any
musket

© 2014 Pearson Education 1 - 25

Frederick W. Taylor
▶ Born 1856; died 1915
▶ Known as ‘father of scientific
management’
▶ In 1881, as chief engineer for
Midvale Steel, studied how tasks
were done
▶ Began first motion and time studies
▶ Created efficiency principles
© 2014 Pearson Education 1 - 26
Taylor’s Principles
Management Should Take More
Responsibility for:
► Matching employees to right job
► Providing the proper training
► Providing proper work methods and
tools
► Establishing legitimate incentives for
work to be accomplished

© 2014 Pearson Education 1 - 27

Frank & Lillian Gilbreth
▶ Frank (1868-1924); Lillian (1878-1972)
▶ Husband-and-wife engineering team
▶ Further developed work measurement
methods
▶ Applied efficiency methods to their
home and 12 children!
▶ Book & Movie: “Cheaper by the Dozen,”
“Bells on Their Toes”

© 2014 Pearson Education 1 - 28

Henry Ford
▶ Born 1863; died 1947
▶ In 1903, created Ford Motor Company
▶ 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!)

© 2014 Pearson Education 1 - 29

W. Edwards Deming
▶ Born 1900; died 1993
▶ Engineer and physicist
▶ Credited with teaching Japan quality
control methods in post-WW2
▶ Used statistics to analyze process
▶ His methods involve workers in
decisions

© 2014 Pearson Education 1 - 30

Contributions From
▶ Human factors
▶ Industrial engineering
▶ Management science
▶ Biological science
▶ Physical sciences
▶ Information technology

© 2014 Pearson Education 1 - 31

Operations for
Goods and Services
▶ Manufacturers produce tangible product,
services often intangible
▶ Operations activities often very similar
▶ Distinction not always clear
▶ Few pure services

© 2014 Pearson Education 1 - 32

Differences Between Goods and
Services
TABLE 1.3
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty Product can usually be kept in inventory (beauty care
salon produces a haircut that is consumed as it is products)
produced
Unique: Your investments and medical care are Similar products produced (iPods)
unique
High customer interaction: Often what the customer Limited customer involvement in production
is paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and Standard tangible product tends to make automation
medical services are hard to automate feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products are easy
education, and medical services to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value
© 2014 Pearson Education 1 - 33
Productivity Challenge
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources
such as labor and capital)

The objective is to improve productivity!

Important Note!
Production is a measure of output only
and not a measure of efficiency

© 2014 Pearson Education 1 - 34

The Economic System
Inputs Transformation Outputs

Labor, The U.S. economic system Goods

capital, transforms inputs to outputs at and
management about an annual 2.5% increase services
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%).

Feedback loop

Figure 1.6

© 2014 Pearson Education 1 - 35

Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
© 2014 Pearson Education
per shot 1 - 36
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
revenue per outlet
on credit card purchases bytransaction
per $250,000 to
under $25 $1,000,000 in seven years.
Change the size Productivity
of the ice has improved
Saved 14by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
© 2014 Pearson Education
per shot 1 - 37
Productivity
Units produced
Productivity =
Input used

▶ Measure of process improvement

▶ Represents output relative to input
▶ Only through productivity increases
can our standard of living improve

© 2014 Pearson Education 1 - 38

Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

© 2014 Pearson Education 1 - 39

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

© 2014 Pearson Education 1 - 40

Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs

© 2014 Pearson Education 1 - 41

Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day