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Operations and Productivity

OPMG 310 Spring 2012

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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 create value in the form of goods and services by transforming inputs into outputs
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Organizational Charts
Airline Operations
Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science

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

Marketing
Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

Figure 1.1(B)
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Organizational Charts Manufacturing

Operations
Facilities
Construction; maintenance

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

Marketing
Sales promotion Advertising Sales Market research

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

Figure 1.1(C)
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What Operations Managers Do

Basic Management Functions  Planning  Organizing  Staffing  Leading  Controlling
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Ten Critical Decisions

Ten Decision Areas 1. Design of goods and services 2. Managing quality 3. Process and capacity design 4. Location strategy 5. Layout strategy 6. Human resources and job design 7. Supply-chain management 8. Inventory, MRP, JIT 9. Scheduling 10. Maintenance Chapter(s) 5 6, Supplement 6 7, Supplement 7 8 9 10 11, Supplement 11 12, 14, 16 13, 15 17

Table 1.2
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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
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Opportunities

Figure 1.2
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Significant Events in OM

Figure 1.3
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New Challenges in OM
From
 Local or national focus  Batch shipments  Low bid purchasing  Lengthy product development  Standard products  Job specialization

To
 Global focus  Just-in-time  Supply-chain partnering  Rapid product development, alliances  Mass customization  Empowered employees, teams
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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%
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75
|

50
|

25
|

0
|

25
|

50
|

75
|

100%
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Percent of Product that is a Good

Percent of Product that is a Service

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Development of the Service Economy

United State

Canad Franc

Ita Brita

Japa W. German

40

50

1970

2010 (est)

60 70 Percent

80

Figure 1.4 (C) 1 - 12

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

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Improving Productivity at Starbucks

A team of 10 analysts continually look for ways to shave time. Some improvements:
Stop requiring signatures on credit card purchases under $25 Change the size of the ice scoop New espresso machines Saved 8 seconds per transaction Saved 14 seconds per drink 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 Stop requiring signatures Saved 8 seconds revenue per on credit card purchases outlet by $200,000 to per transaction $940,000 in six years. under $25 Productivity Change the size of the ice has improved by 27%, Saved 14 seconds or about 4.5% per year. scoop per drink New espresso machines Saved 12 seconds per shot
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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
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Productivity Calculations
Labor Productivity
Units produced Productivity = Labor-hours used 1,000 = = 4 units/labor-hour 250 One resource input single-factor productivity
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MultiMulti-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

Collins Title wants to evaluate its labor and multi-factor productivity with a new computerized title-search system. 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 per day. Collins processes and closes on 8 titles each day. The new computerized title-search system will allow the processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the overhead expenses are now $800 per day.
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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

8 titles/day Old labor = productivity 32 labor-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

8 titles/day Old labor = productivity 32 labor-hrs = .25 titles/labor-hr

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Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day

8 titles/day Old labor = productivity 32 labor-hrs = .25 titles/labor-hr 14 titles/day New labor = productivity 32 labor-hrs labor1 - 22

Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day

8 titles/day Old labor = productivity 32 labor-hrs = .25 titles/labor-hr 14 titles/day New labor = = .4375 titles/labor-hr productivity 32 labor-hrs % change :
0.4375  0.25 new  old v100% ! 75% increase v100% ! 0.25 old 1 - 23

Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day

8 titles/day Old multifactor = productivity $640 + 400

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Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day

8 titles/day Old multifactor = = .0077 titles/dollar productivity $640 + 400

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Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day

8 titles/day Old multifactor = .0077 titles/dollar = productivity $640 + 400 14 titles/day New multifactor = productivity $640 + 800
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Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day Payroll cost = $640/day New System: 14 titles/day 8 titles/day Overhead = $400/day Overhead = $800/day

8 titles/day Old multifactor = .0077 titles/dollar = productivity $640 + 400 14 titles/day New multifactor = = .0097 titles/dollar productivity $640 + 800 % change :

0.0097  0.0077 new  old v100% ! 26% increase v100% ! 0.0077 old
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Productivity Variables
1. Labor - contributes about 10% of the annual increase 2. Capital - contributes about 38% of the annual increase 3. Management contributes about 52% of the annual increase
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Productivity at Taco Bell

Improvements:
 Revised the menu  Designed meals for easy preparation  Shifted some preparation to suppliers  Efficient layout and automation  Training and employee empowerment  New water and energy saving grills

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Productivity at Taco Bell

Results: Improvements:
 Preparation time cut to 8 seconds Revised the menu  Management span of control increased Designed meals for easy preparation from 5 to 30 Shifted some preparation to suppliers  In-store labor cut by 15 hours/day Efficient layout and automation  Stores handle twice the volume with half Training the labor and employee empowerment New water and energy saving grills  Conserve 300 million gallons of water and 200 million KwH of electricity each year saving $17 million annually

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Problem 1
A company that makes shopping carts for supermarkets and other stores recently purchased some new equipment that reduces the labor content of the jobs needed to produce the shopping carts. Prior to buying the new equipment, the company used five workers, who produced an average of 80 carts per hour. Workers receive $10 per hour, and machine cost was $40 per hour. With the new equipment, it was possible to transfer one of the workers to another department, and equipment cost increased by $10 per hour while output increased by four carts per hour. a) Compute labor productivity of the system. Use carts per worker per hour as the measure of labor productivity. b) Compute the multifactor productivity under each system. Use carts per dollar cost (labor plus equipment) as the measure. c) Comment on the changes in productivity according to the two measures, and on which one you believe is the more pertinent for this situation.

Problem 2
A company offers ID theft protection using leads obtained from client banks. Three employees work 40 hours a week on the leads, at a pay rate of $25 per hour per employee. Each employee identifies an average of 3,000 potential leads a week from a list of 5,000. An average of 4 percent actually sign up for the service, paying a one-time fee of $70. Material costs are $1,000 per week, and overhead costs are $9,000 per week. Calculate the multifactor productivity for this operation in fees generated per dollar input.

Problem 3
An operation has a 10 percent scrap rate (i.e. 10% of the pieces produced are discarded because of defects). As a result, 72 pieces per hour are produced. What is the potential increase in labor productivity that could be achieved by eliminating the scrap (i.e. 0% scrap rate)?

Question: What are effective ways to motivate hourly employees vs. salaried managers?
If productivity of these workers is below expectation, what are good and poor ways to try to motivate them? What methods might work well with blue collar employees but not white collar employees, and vice-versa? What methods might work well in the short run but not in the long run, and vice-versa?

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OPMG 310 Fall 2011

Operations Strategy in a Global Environment

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Outline
 Developing Missions And Strategies
 Mission  Strategy

 Achieving Competitive Advantage Through Operations

 Competing On Differentiation  Competing On Cost  Competing On Response

 Ten Strategic OM Decisions

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Global Strategies
 Boeing sales and production are worldwide  Benetton moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution  Sony purchases components from suppliers in Thailand, Malaysia, and around the world

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Reasons to Globalize
Reasons to Globalize Tangible 1. Reduce costs (labor, taxes, tariffs, etc.) Reasons 2. Improve supply chain 3. Provide better goods and services 4. Understand markets Intangible 5. Learn to improve operations Reasons 6. Attract and retain global talent

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Cultural and Ethical Issues

 Cultures can be quite different  Attitudes can be quite different towards
 Punctuality  Lunch breaks  Environment  Intellectual property
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 Thievery  Bribery  Child labor

Companies Want To Consider

 National literacy rate  Rate of innovation  Rate of technology change  Number of skilled workers  Political stability  Product liability laws  Export restrictions  Variations in language  Work ethic  Tax rates  Inflation  Availability of raw materials  Interest rates  Population  Number of miles of highway  Phone system
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Developing Missions and Strategies

Mission statements tell an organization where it is going The Strategy tells the organization how to get there

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Mission
 Mission - where are you going?
 Organizations purpose for being  Answers What do we provide society?  Provides boundaries and focus
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Mission: AUC School of Business

The School of Business strives to create an environment that fosters the development of principled and innovative business leaders and entrepreneurs who can make a difference.

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Mission of the Management Department Our mission is to develop business leaders who are dedicated to the betterment of society by providing a high quality business education to top caliber students from all segments of Egyptian society as well as from other countries while focusing on continuous improvement and a commitment to excellence in learning, intellectual contributions and service.
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Factors Affecting Mission

Philosophy and Values Environment Mission Customers Benefit to Society
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Profitability and Growth

Public Image

Sample Missions
Sample Company Mission
To manufacture and service an innovative, growing, and profitable worldwide microwave communications business that exceeds our customers expectations.

Sample Operations Management Mission

To produce products consistent with the companys mission as the worldwide low-cost manufacturer.

Figure 2.3
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Sample Missions
Sample OM Department Missions
Product design To design and produce products and services with outstanding quality and inherent customer value. To attain the exceptional value that is consistent with our company mission and marketing objectives by close attention to design, procurement, production, and field service operations To determine, design, and produce the production process and equipment that will be compatible with low-cost product, high quality, and good quality of work life at economical cost.
Figure 2.3
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Quality management

Process design

Strategic Process
Organizations Mission

Functional Area Missions

Marketing

Operations

Finance/ Accounting

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Strategy
 Action plan to achieve mission  Functional areas have strategies  Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

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Strategies for Competitive Advantage

 Differentiation better, or at least different
 Hard Rock Cafe dining experience

 Cost leadership cheaper

 Southwest Airlines secondary airports, no frills service, efficient utilization of equipment

 Response rapid response

 McDonalds
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OM OMs Contribution to Strategy

10 Operations Decisions Product Quality Process Location Layout Human resource Supply chain Inventory Scheduling Maintenance RESPONSE Flexibility Reliability Quickness Approach DIFFERENTIATION Innovative design Broad product line After-sales service Experience COST LEADERSHIP Low overhead Effective capacity use Inventory management Example Safeskins innovative gloves Fidelity Securitys mutual funds Caterpillars heavy equipment service Hard Rock Cafs dining experience Franz-Colruyts warehouse-type stores Southwest Airlines aircraft utilization Wal Marts sophisticated distribution system Hewlett-Packards response to volatile world market FedExs absolutely, positively, on time Pizza Huts 5-minute guarantee at lunchtime
Response (faster) Cost leadership (cheaper)

Competitive Advantage

Differentiation (better)

Figure 2.4
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(AUC Management Department)In support of this mission the department: -Provides a high quality contemporary-style business education that blends a global perspective with national cultures and is relevant to the business needs of Egypt and the region. -Provides programs that encourage the development of an entrepreneurial spirit that emphasizes creativity, innovation, individual initiative and teamwork -Provides a learning environment that fosters faculty/student communication and promotes lifelong learning and career development -Encourages faculty development activities that improve teaching, maintain competence and that keep faculty current with ideas and concepts in their field. -Seeks to develop a portfolio of intellectual contributions to learning and pedagogy, to practice, and to the theory and knowledge base of the disciplines. -Encourages the establishment of close partnerships with the business community through consultancies and service that enhance the intellectual and economic quality of Egypt while enriching the learning process.

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Managing Global Service Operations

Requires a different perspective on:
 Capacity planning  Location planning  Facilities design and layout  Scheduling

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Process Design
High Process-focused Mass Customization JOB SHOPS Customization at high Volume (Print shop, emergency room, machine shop, (Dell Computers PC, fine-dining Repetitive (modular) cafeteria) restaurant) focus ASSEMBLY LINE (Cars, appliances, TVs, fast-food Product focused restaurants) CONTINUOUS (Steel, beer, paper, bread, institutional kitchen)

Variety of Products

Moderate

Low Low Moderate Volume High

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Issues In Operations Strategy

 Resources view  Value Chain analysis  Porters Five Forces model  Operating in a system with many external factors  Constant change

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Product Life Cycle

Introduction Company Strategy/Issues
Best period to increase market share R&D engineering is critical

Growth
Practical to change price or quality image Strengthen niche

Maturity
Poor time to change image, price, or quality

Decline
Cost control critical

Competitive costs become critical Defend market position Drive-through

Internet search engines iPods Xbox 360 Sales Avatars Boeing 787 Twitter LCD & plasma TVs

restaurants CD-ROMs

Analog TVs Figure 2.5

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Product Life Cycle

Introduction
Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality

Growth
Forecasting critical Product and process reliability

Maturity

Decline
Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity

Standardization Fewer product changes, more minor changes Optimum capacity Competitive product Increasing improvements stability of and options process Increase capacity Long production runs Shift toward product focus Product improvement Enhance and cost cutting distribution

OM Strategy/Issues

Figure 2.5
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SWOT Analysis
Mission Internal Strengths Analysis Internal Weaknesses Strategy External Threats External Opportunities

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Strategy Development Process

Analyze the Environment
Identify the strengths, weaknesses, opportunities, and threats. Understand the environment, customers, industry, and competitors.

Determine the Corporate Mission

State the reason for the firms existence and identify the value it wishes to create.

Form a Strategy
Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, aftersale service, broad product lines. Figure 2.6
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Key Success Factors

Support a Core Competence and Implement Strategy by Identifying and Executing the Key Success Factors in the Functional Areas Marketing Service Distribution Promotion Channels of distribution Product positioning (image, functions) Finance/Accounting Leverage Cost of capital Working capital Receivables Payables Financial control Lines of credit Production/Operations

Decisions Product Quality Process Location Layout Human resource Supply chain Inventory Schedule Maintenance

Sample Options Customized, or standardized Define customer expectations and how to achieve them Facility size, technology, capacity Near supplier or near customer Work cells or assembly line Specialized or enriched jobs Single or multiple suppliers When to reorder, how much to keep on hand Stable or fluctuating production rate Repair as required or preventive maintenance

Chapter 5 6, S6 7, S7 8 9 10 11, S11 12, 14, 16 13, 15 17

Figure 2.7

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