Operations & Supply Chain Management MGMT 6563

Week 1

OPERATIONS AND PRODUCTIVITY

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The Hard Rock Cafe

First opened in 1971
Now 121 restaurants in over 40 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
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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
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Organizational Charts
Commercial Bank
Operations
Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security
2008 Prentice Hall, Inc.

Finance
Investments Security Real estate Accounting

Marketing
Loans Commercial Industrial Financial Personal Mortgage Trust Department
Figure 1.1(A)
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Auditing

Organizational Charts
Airline Operations
Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science
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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
2008 Prentice Hall, Inc.

Figure 1.1(C)
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Options for Increasing Contribution

Marketing Option Finance/ Accounting Option OM Option Reduce Production Costs 20% $100,000 64,000 36,000 6,000 30,000 7,500 $ 22,500 Increase Reduce Sales Finance Revenue 50% Costs 50% $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

Current
Sales Cost of Goods Gross Margin Finance Costs Subtotal Taxes at 25% Contribution $100,000 80,000 20,000 6,000 14,000 3,500 $ 10,500

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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 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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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)
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The Heritage of OM
Computer (Atanasoff 1938)

CPM/PERT (DuPont 1957)

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)
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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
2008 Prentice Hall, Inc.

To
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 80 70 60 50 40 Services

Manufacturing

30
20 10 0

Hong Kong

Japan

Russian Fed

Czech Rep

France

Germany

Canada

Mexico

South Africa

China

Spain

UK

Australia

US
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Goods Versus Services

Attributes of Goods (Tangible Product) Attributes of Services (Intangible 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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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
|

0
|

25
|

50
|

75
|

100%
|

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

Figure 1.4
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Manufacturing and Service Employment

120 100 80

Employment (millions)

Service

60
40 20 0

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

Figure 1.5 (A)

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Development of the Service Economy

United States Canada France Italy Britain Japan W. Germany 1970 2008 (est)
1 20

40

50

60 70 Percent

80

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New Trends in OM
Past
Local or national focus
Batch (large) shipments

Causes
Reliable worldwide communication and transportation networks
Short product life cycles and cost of capital put pressure on reducing inventory Supply chain competition requires that suppliers be engaged in a focus on the end customer

Future
Global focus, moving production offshore
Just-in-time performance

Low-bid purchasing

Supply chain partners, collaboration, alliances, outsourcing

Figure 1.6
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New Trends in OM
Past
Lengthy product development Standardized products

Causes
Shorter life cycles, Internet, rapid international communication, computeraided design, and international collaboration Affluence and worldwide markets; increasingly flexible production processes Changing socioculture milieu; increasingly a knowledge and information society

Future
Rapid product development, alliances, collaborative designs Mass customization with added emphasis on quality Empowered employees, teams, and lean production

Job specialization

Figure 1.6
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New Trends in OM
Past
Low-cost focus

Causes
Environmental issues, ISO 14000, increasing disposal costs

Future
Environmentally sensitive production, green manufacturing, recycled materials, remanufacturing High ethical standards and social responsibility expected

Ethics not at forefront

Businesses operate more openly; public and global review of ethics; opposition to child labor, bribery, pollution

Figure 1.6
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New Trends in OM
Global focus Just-in-time performance Supply chain partnering Rapid product development Mass customization Empowered employees Environmentally sensitive production Ethics
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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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The Economic System

Inputs
Labor, capital, management

Processes
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, labor and management .

Outputs
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:
Stop requiring signatures on credit card purchases under $25 Change the size of the ice scoop Saved 8 seconds per transaction Saved 14 seconds per drink

New espresso machines

2008 Prentice Hall, Inc.

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 outlet $200,000 to on credit card purchases perby transaction $940,000 in six years. under $25

Productivity improved by 27%, Change the size of the ice has Saved 14 seconds or about 4.5% per year. scoop per drink New espresso machines
2008 Prentice Hall, Inc.

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
Productivity = Units produced Labor-hours used 1,000 250 = 4 units/labor-hour

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

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
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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 = = .4375 titles/labor-hr productivity 32 labor-hrs
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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 = 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
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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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Labor Skills
About half of the 17-year-olds in the US cannot correctly answer questions of this type

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Investment and Productivity

10 Percent increase in productivity 8 6 4 2 0

10

15

20

25

30

35

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

Honoring community commitments

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