OM Chapter 01

© 2008 Prentice Hall, Inc. 1 – 1

11 Introduction to Operations Management

Introduction to Operations Management

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 HeylPowerPoint slides by Jeff Heyl


OutlineOutline

1.1. What Is Operations Management ?What Is Operations Management ?

2.2. Organizing to Produce Goods & ServicesOrganizing to Produce Goods & Services

3.3. Why Study OM ?Why Study OM ?

4.4. What Operations Managers DoWhat Operations Managers Do

5.5. The Heritage of Operations ManagementThe Heritage of Operations Management

6.6. Operations in the Service SectorOperations in the Service Sector

7.7. Exciting New Trends in Operations ManagementExciting New Trends in Operations Management

8.8. Productivity ChallengeProductivity Challenge


1. What Is Operations Management ?1. What Is Operations Management ?

ProductionProduction is the creation of is the creation of

goodsgoods and and servicesservices

Operations management (OM)Operations management (OM) is the is the set of activities that creates value in the set of activities that creates value in the

form of goods and services by form of goods and services by transforming inputs into outputstransforming inputs into outputs


2. Organizing to Produce Goods & Services2. Organizing to Produce Goods & Services

Essential functions:Essential functions: MarketingMarketing – generates demand – generates demand

Production/operationsProduction/operations – creates the product – creates the product

Finance/accountingFinance/accounting – tracks how well the organization is – tracks how well the organization is doing, pays bills, collects the moneydoing, pays bills, collects the money

Operations FinanceMarketing

Organization

Basic Functions of the Business OrganizationBasic Functions of the Business Organization


Supply & DemandSupply & Demand

Supply Demand>

Supply Demand<

Supply Demand=

WastefulCostly

Opportunity LossCustomer Dissatisfaction

Ideal

Operations & Supply Chains Sales & Marketing


MarketingSales promotionAdvertisingSalesMarket research

Organizational Charts – Example (Organizational Charts – Example (ManufacturingManufacturing))e.g. Toyota, Frito-Lay, PTT, SCGe.g. Toyota, Frito-Lay, PTT, SCG

OperationsFacilities Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and controlSupply chain managementManufacturing 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

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)


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

Organizational Charts – Example (Organizational Charts – Example (ServiceService))e.g. THAI, Air Asia, etc.e.g. THAI, Air Asia, etc.


3. Why Study OM ?3. Why Study OM ?

OM is one of OM is one of three major functionsthree major functions (marketing, finance, and (marketing, finance, and operations) of any organizationoperations) of any organization

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

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

Operations FinanceMarketing

Organization

CEOCEO

CMOCMO COOCOO CFOCFO


OpportunitiesOpportunities


ExampleExample: Options for Increasing Contribution: Options for Increasing Contribution

SalesSales $100,000$100,000 $150,000$150,000 $100,000$100,000 $100,000$100,000

Cost of Goods Cost of Goods –– 80,000 80,000 –– 120,000 120,000 –– 80,000 80,000 –– 64,000 64,000

(80% of sales)(80% of sales)

Gross MarginGross Margin 20,00020,000 30,00030,000 20,00020,000 36,00036,000

Finance CostsFinance Costs –– 6,000 6,000 –– 6,000 6,000 –– 3,000 3,000 –– 6,000 6,000

SubtotalSubtotal 14,00014,000 24,00024,000 17,00017,000 30,00030,000

Taxes at 25%Taxes at 25% –– 3,500 3,500 –– 6,000 6,000 –– 4,250 4,250 –– 7,500 7,500

ContributionContribution $ 10,500$ 10,500 $ 18,000$ 18,000 $ 12,750$ 12,750 $ 22,500$ 22,500

Finance/Finance/MarketingMarketing AccountingAccounting OMOM

OptionOption OptionOption OptionOption

IncreaseIncrease ReduceReduce ReduceReduceSalesSales FinanceFinance ProductionProduction

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

OM is such a OM is such a costlycostly part of an organization !!! part of an organization !!!


4. What Operations Managers Do4. What Operations Managers Do

PlanningPlanning

OrganizingOrganizing

StaffingStaffing

LeadingLeading

ControllingControlling

Basic Management FunctionsBasic Management Functions


The 10 OM Critical DecisionsThe 10 OM Critical Decisions

Design of goods and services (Ch.5)Design of goods and services (Ch.5) What good or serviceWhat good or service should we offer? should we offer? How should we design these products and services? How should we design these products and services?

Managing quality (Ch. 6, Supplement 6)Managing quality (Ch. 6, Supplement 6) How do we define qualityHow do we define quality?? Who is responsible for quality?Who is responsible for quality?

Process and capacity design (Ch. 7, Supplement 7)Process and capacity design (Ch. 7, Supplement 7) What process and what capacity will these products require?What process and what capacity will these products require? What What equipment and technologyequipment and technology is necessary for these is necessary for these

processes?processes?

Location strategy (Ch. 8)Location strategy (Ch. 8) WhereWhere should we put the facility? should we put the facility? On what criteria should we base the location decision?On what criteria should we base the location decision?

Layout strategy (Ch. 9)Layout strategy (Ch. 9) HowHow should we should we arrange the facilityarrange the facility??

How large must the facility be to meet our plan?How large must the facility be to meet our plan?


The 10 OM Critical DecisionsThe 10 OM Critical Decisions

Human resources and job design (Ch. 10)Human resources and job design (Ch. 10) How do we provide a reasonable How do we provide a reasonable work environmentwork environment??

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

Supply chain management (Ch. 11, Supplement 11)Supply chain management (Ch. 11, Supplement 11) Should we Should we make or buymake or buy this component? this component? Who are our Who are our supplierssuppliers and who can integrate into our e-commerce and who can integrate into our e-commerce

program?program? Inventory, material requirements planning, and JIT Inventory, material requirements planning, and JIT (Ch. 12, 14, 16)(Ch. 12, 14, 16)

How much inventoryHow much inventory of each item should we have? of each item should we have? When do we When do we re-orderre-order??

Intermediate and shortIntermediate and short––term scheduling (Ch. 13, 15)term scheduling (Ch. 13, 15) Are we better off keeping people on the payroll during Are we better off keeping people on the payroll during

slowdownsslowdowns??

Which jobs do we perform nextWhich jobs do we perform next??

Maintenance (Ch. 17)Maintenance (Ch. 17) WhoWho is responsible for maintenance? is responsible for maintenance?

WhenWhen do we do maintenance? do we do maintenance?


5. The Heritage of Operations Management5. The Heritage of Operations Management

Figure 1.3Figure 1.3

Significant Events in OMSignificant Events in OM

Maximizing outputsMaximizing outputs

Meeting customers’ expectationMeeting customers’ expectation

Providing choices to customersProviding choices to customers


• Frederick Winslow TaylorFrederick Winslow Taylor – Father of Scientific Management – Father of Scientific Management

– Believed in a Believed in a “science of management”“science of management” based on observation, based on observation,

measurement, analysis and improvement of work methods, and measurement, analysis and improvement of work methods, and

economic incentiveseconomic incentives

– Management is responsible for Management is responsible for planningplanning, carefully , carefully selectingselecting and and

training workerstraining workers, finding the best way to perform each job, , finding the best way to perform each job,

achieving achieving cooperationcooperation between management and workers, and between management and workers, and

separating management activities from work activitiesseparating management activities from work activities

– Emphasis was on Emphasis was on maximizing outputmaximizing output

• Henry FordHenry Ford - employed scientific management techniques to his - employed scientific management techniques to his factoriesfactories

• Moving assembly lineMoving assembly line

Ford assembly plant (Model T) – thenFord assembly plant (Model T) – then

Ford assembly plant (Mustang) – nowFord assembly plant (Mustang) – now

• Mass productionMass production


OM Progress With Contributions FromOM Progress With Contributions From

Industrial engineeringIndustrial engineering

Management scienceManagement science

Quantitative Analysis (e.g. statistics, Quantitative Analysis (e.g. statistics,

linear programming, PERT, decision linear programming, PERT, decision

analysis, transportation model, etc.)analysis, transportation model, etc.)

EconomicsEconomics

Physical sciences (e.g. biology, Physical sciences (e.g. biology,

anatomy, chemistry, physics, etc.)anatomy, chemistry, physics, etc.)

Human factorsHuman factors

Information and Communication Information and Communication

technology (ICT) technology (ICT)


Tangible Act-Oriented

Goods Services

Manufacturing and Service Organizations differ chiefly because manufacturing is goods-oriented and service is act-oriented.

Manufacturing vs. Service?Manufacturing vs. Service?

6. Operations in the Service Sector6. Operations in the Service Sector


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 at Produced and consumed at same timesame time

Often uniqueOften unique

High customer interactionHigh customer interaction

Inconsistent product definitionInconsistent product definition

Often knowledge-basedOften knowledge-based

Frequently dispersedFrequently dispersed


120120 –

100 100 –

80 80 –

60 60 –

40 40 –

20 20 –

0 0 –| | | | | | |

19501950 19701970 19901990 2010 (est)2010 (est)19601960 19801980 20002000

Em

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(mil

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Manufacturing and Service Employment (U.S.)Manufacturing and Service Employment (U.S.)

Figure 1.5 (A)Figure 1.5 (A)

ManufacturingManufacturing

ServiceService


Manufacturing Employment and Production (U.S.)Manufacturing Employment and Production (U.S.)

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

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Manufacturingemployment

(left scale)

Industrial Industrial productionproduction

(right scale)(right scale)

OutputOutput

InputInput


Industry and Services as Percentage of GDPIndustry and Services as Percentage of GDP

Services Manufacturing

Au

stra

liaA

ust

ralia

Can

ada

Can

ada

Ch

ina

Ch

ina

Cze

ch R

epC

zech

Rep

Fra

nce

Fra

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Ger

man

yG

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any

Ho

ng

Ko

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Ho

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Ko

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Jap

anJa

pan

Mex

ico

Mex

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Ru

ssia

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edR

uss

ian

Fed

So

uth

Afr

ica

So

uth

Afr

ica

Sp

ain

Sp

ain

UK

UK

US

US

90 −

80 −

70 −

60 −

50 −

40 −

30 −

20 −

10 −

0 −


Goods and ServicesGoods and Services

AutomobileAutomobile

ComputerComputer

Installed carpetingInstalled carpeting

Fast-food mealFast-food meal

Restaurant meal/auto repairRestaurant meal/auto repair

Hospital careHospital care

Advertising agency/Advertising agency/investment managementinvestment management

Consulting service/Consulting service/teachingteaching

CounselingCounseling

Percent of Product that is a Good Percent of Product that is a Service

100% 75 50 25 0 25 50 75 100%| | | | | | | | |


Changing ChallengesChanging Challenges

Traditional Traditional ApproachApproach

Reasons for Reasons for ChangeChange

Current Current ChallengeChallenge

Ethics and Ethics and regulations regulations not at the not at the forefrontforefront

Public concern over Public concern over pollution, corruption, child pollution, corruption, child labor, etc.labor, etc.

High ethical and social responsibility; increased legal and professional standards

Local or Local or national focusnational focus

Growth of reliable, low Growth of reliable, low cost communication and cost communication and transportationtransportation

Global focus, international collaboration

Lengthy Lengthy product product developmentdevelopment

Shorter life cycles; growth Shorter life cycles; growth of global communication; of global communication; CAD, InternetCAD, Internet

Rapid product development; design collaboration

7. Exciting New Trends in Operations Management7. Exciting New Trends in Operations Management






Low cost Low cost production, production, with little with little concern for concern for environment; environment; free resources free resources (air, water) (air, water) ignoredignored

Public sensitivity to Public sensitivity to environment; ISO 14000 environment; ISO 14000 standard; increasing standard; increasing disposal costsdisposal costs

Environmentally sensitive production; green manufacturing; sustainability

Low-cost Low-cost standardized standardized productsproducts

Rise of consumerism; Rise of consumerism; increased affluence; increased affluence; individualismindividualism

Mass customization






Emphasis on Emphasis on specialized, specialized, often manual often manual taskstasks

Recognition of the Recognition of the employee's total employee's total contribution; knowledge contribution; knowledge societysociety

Empowered employees; enriched jobs

““In-house” In-house” production; production; low-bid low-bid purchasingpurchasing

Rapid technological Rapid technological change; increasing change; increasing competitive forcescompetitive forces

Supply-chain partnering; joint ventures, alliances

Large lot Large lot productionproduction

Shorter product life Shorter product life cycles; increasing need to cycles; increasing need to reduce inventoryreduce inventory

Just-In-Time performance; lean; continuous improvement


Feedback loop

Outputs

Goods and

services

Transformation

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 (0.95%), labor (0.25%), and management

(1.3%).

The Economic SystemThe Economic System

Inputs

Labor,capital,

management

Figure 1.6

8. Productivity Challenge8. Productivity Challenge


ProductivityProductivity

Productivity is the ratio of outputs (goods and services) Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital)divided by the inputs (resources such as labor and capital)

Improve Improve productivityproductivity means improving means improving efficiencyefficiency

Productivity =Productivity = Units producedUnits produced

Input usedInput used

EfficientEfficient means doing the job well i.e. with a minimum of means doing the job well i.e. with a minimum of resources and wasteresources and waste

EffectiveEffective means doing the right thing means doing the right thing

Productivity measures are useful forProductivity measures are useful for– Tracking an operating unit’s performance over timeTracking an operating unit’s performance over time

– Judging the performance of an entire industry or countryJudging the performance of an entire industry or country


Productivity CalculationsProductivity Calculations

Productivity =Productivity =Units producedUnits produced

Labor-hours usedLabor-hours used

= = = = 44 units/labor-hour units/labor-hour1,0001,000

250250

Labor ProductivityLabor Productivity

ExampleExample : Units produced = 1,000 : Units produced = 1,000 and labor-hours used is 250and labor-hours used is 250

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


Practice Problem 1.1 : Productivity Practice Problem 1.1 : Productivity (pp 1.2)(pp 1.2)

C. A. Ratchet, the local auto mechanic, finds that it usually takes him C. A. Ratchet, the local auto mechanic, finds that it usually takes him 2 2 hourshours to diagnose and fix a typical problem. to diagnose and fix a typical problem.

What is his daily productivity (assume an 8 hour day)? What is his daily productivity (assume an 8 hour day)? AnsAns : 4 problems/day : 4 problems/day

Mr. Ratchet believes he can purchase a small computer trouble-shooting Mr. Ratchet believes he can purchase a small computer trouble-shooting device, which will allow him to find and fix a problem in the incredible device, which will allow him to find and fix a problem in the incredible (at least to his customers!) time of (at least to his customers!) time of 1 hour1 hour. He will, however, have to . He will, however, have to spend an extra hour each morning adjusting the computerized spend an extra hour each morning adjusting the computerized diagnostic device. diagnostic device.

What will be the impact on his productivity if he purchases the device? What will be the impact on his productivity if he purchases the device? AnsAns : new productivity = 7 problems/day : new productivity = 7 problems/day

productivity increase of 75 %productivity increase of 75 %


Multi-Factor Productivity Multi-Factor Productivity

OutputOutput

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

Productivity =Productivity =

Also known as Also known as total factor productivitytotal factor productivity

Output and inputs are often expressed in Output and inputs are often expressed in dollarsdollars

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


ExampleExample - Collins Title Productivity - Collins Title Productivity

Collins Title wants to evaluate its Collins Title wants to evaluate its labor and multifactor productivitylabor and multifactor productivity with a new computerized title-search system. with a new computerized title-search system.

The company has a staff of four, each working 8 hours per day (for The company has a staff of four, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400/day.a payroll cost of $640/day) and overhead expenses of $400/day.

Collins processes and closes on 8 titles each day. The new Collins processes and closes on 8 titles each day. The new computerized system will allow the processing of 14 titles per day. computerized system will allow the processing of 14 titles per day. The staff, their work hours, and pay are the same, but the overhead The staff, their work hours, and pay are the same, but the overhead expenses are now $800/day. expenses are now $800/day.


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

Old System:Old System:

1414 titles/day titles/day Overhead = Overhead = $800$800/day/day

New System:New System:

88 titles/day titles/day

3232 labor-hrs labor-hrs==

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

14 14 titles/daytitles/day

3232 labor-hrs labor-hrs==

New labor New labor productivityproductivity = = .4375.4375 titles/labor-hr titles/labor-hr


3232 labor-hrs labor-hrs


3232 labor-hrs labor-hrs

Labor productivityLabor productivity



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

Old System:Old System:

1414 titles/day titles/day Overhead = Overhead = $800$800/day/day

New System:New System:


$640 + 400$640 + 400


$640 + 800$640 + 800

==Old multifactor Old multifactor

productivityproductivity

==New multifactor New multifactor

productivityproductivity

= = .0077.0077 titles/dollar titles/dollar

= = .0097.0097 titles/dollar titles/dollar


$640 + 400$640 + 400


$640 + 800$640 + 800

Multifactor productivityMultifactor productivity



Practice Problem 1.2 : Multifactor Productivity Practice Problem 1.2 : Multifactor Productivity (pp 1.3, 1.5)(pp 1.3, 1.5)

Joanna French is currently working a total of 12 hours per day to produce 240 Joanna French is currently working a total of 12 hours per day to produce 240 dolls. She thinks that by changing the paint used for the facial features dolls. She thinks that by changing the paint used for the facial features and fingernails that she can increase her rate to 360 dolls per day. Total and fingernails that she can increase her rate to 360 dolls per day. Total material cost for each doll is approximately $3.50; she has to invest $20 material cost for each doll is approximately $3.50; she has to invest $20 in the necessary supplies (expendables) per day; energy costs are in the necessary supplies (expendables) per day; energy costs are assumed to be only $4.00 per day; and she thinks she should be making assumed to be only $4.00 per day; and she thinks she should be making $10 per hour for her time. $10 per hour for her time.

(a)(a) Viewing this from a total (multifactor) productivity perspective, what is her Viewing this from a total (multifactor) productivity perspective, what is her productivity at present and with the new paintproductivity at present and with the new paint? ? (Ans: 0.24, 0.26)(Ans: 0.24, 0.26)

(b)(b) How would total (multifactor) productivity change if using the new paint How would total (multifactor) productivity change if using the new paint

raised Ms. French’s material costs by $0.50 per doll?raised Ms. French’s material costs by $0.50 per doll? (Ans: 0.23)(Ans: 0.23)

(c)(c) If she uses the new paint, by what amount could Ms. French’s If she uses the new paint, by what amount could Ms. French’s material material costscosts increase without reducing total (multifactor) productivity? increase without reducing total (multifactor) productivity? (Ans: by $0.27)(Ans: by $0.27)


Ethics and Social ResponsibilityEthics and Social Responsibility

Challenges facing operations managers:Challenges facing operations managers:

Developing and producing Developing and producing safe, quality productssafe, quality products

Maintaining a Maintaining a clean environmentclean environment

Providing a Providing a safe workplacesafe workplace

Honoring Honoring stakeholder commitmentsstakeholder commitments


Video Case 1.1Video Case 1.1Frito-Lay: Operations Management in ManufacturingFrito-Lay: Operations Management in Manufacturing

More than three dozen brands, 15 brands sell more than $100 million annually, 7 sell over $1 billion

Planning processes covers 3 to 18 months

Unique processes and specially designed equipment

High fixed costs require high volumes and high utilization

Demand profile based on historical sales, forecasts, innovations, promotion, local demand data

Match total demand to capacity, expansion plans, and costs

Quarterly aggregate plan goes to 38 plants in 18 regions

Each plant develops 4-week plan for product lines and production runs


• First opened in 1971First opened in 1971– Now – 129 restaurants in over 40 countriesNow – 129 restaurants in over 40 countries

• Rock music memorabiliaRock music memorabilia

• Creates value in the form of good food and Creates value in the form of good food and entertainmententertainment

• 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

Video Case 1.2Video Case 1.2Hard Rock Cafe: Operations Management in ServicesHard Rock Cafe: Operations Management in Services


Identify how each of the 10 decisions of OM is applied at Identify how each of the 10 decisions of OM is applied at Frito LayFrito Lay VS VS Hard Rock CafeHard Rock Cafe

Discussion PointDiscussion Point

Operations DecisionsOperations Decisions GoodsGoods ServicesServices

Goods and service Goods and service designdesign

Product is usually tangibleProduct is usually tangible Product is not tangibleProduct is not tangible

QualityQuality Many objective standardsMany objective standards Many subjective standardsMany subjective standards

Process and capacity Process and capacity designdesign

Customers not involvedCustomers not involved Customer may be directly involvedCustomer may be directly involved

Capacity must match demandCapacity must match demand

Location selectionLocation selection Near raw materials and laborNear raw materials and labor Near customersNear customers

Layout designLayout design Production efficiencyProduction efficiency Enhances product and productionEnhances product and production

Human resources and Human resources and job designjob design

Technical skills, consistent labor Technical skills, consistent labor standards, output based wagesstandards, output based wages

Interact with customers, labor Interact with customers, labor standards varystandards vary

Supply chain Supply chain Relationship critical to final Relationship critical to final productproduct

Important, but may not be criticalImportant, but may not be critical

InventoryInventory Raw materials, work-in-process, Raw materials, work-in-process, and finished goods may be heldand finished goods may be held

Cannot be storedCannot be stored

SchedulingScheduling Level schedules possibleLevel schedules possible Meet immediate customer demandMeet immediate customer demand

MaintenanceMaintenance Often preventive and takes place Often preventive and takes place at production siteat production site

Often “repair” and takes place at Often “repair” and takes place at customer’s sitecustomer’s site

Documents

OM Chapter 01