Operations and Productivity

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Learning Objectives
Definition of Operations Management (OM)
Organizational Functions
Why Study OM?
The future of the discipline
Goods Versus Services
Measuring productivity
Career opportunities in operations management

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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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Organizing to Produce
Goods and Services
Essential functions:
1.
2.

Marketing generates demand

Production/operations creates the
product
3. Finance/accounting tracks how
well the organization is doing, pays
bills, collects the money
4. Human Resources provides labor,
wage and salary administration and
job evaluation
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Organizational Charts
Commercial Bank

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

Finance
Investments
Security
Real estate
Accounting
Auditing

Marketing
Loans
Commercial
Industrial
Financial
Personal
Mortgage

Human Resources
Recruitment
Job evaluation
Performance evaluation
Wage and Salary Adm.
Personnel records

Trust Department

Security

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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

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

Human Resources
Recruitment

Marketing
Sales
promotion
Advertising
Sales
Market research

Job evaluation
Performance evaluation
Wage and Salary Adm.
Personnel records

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Why Study OM?

1. OM is one of four 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
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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.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Design of goods and services

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

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The Critical Decisions

1. Design of goods and services
What good or service should we
offer?
How should we design these
products and services?

2. Managing quality
How do we define quality?
Who is responsible for quality?
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The Critical Decisions

3. Process and capacity design
What process and what capacity will
these products require?
What equipment and technology is
necessary for these processes?

4. Location strategy
Where should we put the facility?
On what criteria should we base the
location decision?
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The Critical Decisions

5. Layout strategy
How should we arrange the facility?
How large must the facility be to meet
our plan?

6. Human resources and job design

How do we provide a reasonable
work environment?
How much can we expect our
employees to produce?
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The Critical Decisions

7. Supply-chain management
Should we make or buy this
component?
Who should be our suppliers and how
can we integrate them into our strategy?

8. Inventory, material requirements

planning, and JIT
How much inventory of each item
should we have?
When do we re-order?
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The Critical Decisions

9. Intermediate and shortterm
scheduling
Are we better off keeping people on
the payroll during slowdowns?
Which jobs do we perform next?

10. Maintenance
How do we build reliability into our
processes?
Who is responsible for maintenance?
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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
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Industry and Services as

Percentage of GDP
90

Services

80

Manufacturing

70
60
50
40
30
20
10
Turkey

US

UK

Spain

South Africa

Russian Fed

Mexico

Japan

Hong Kong

Germany

France

Czech Rep

China

Canada

Australia

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New Trends in OM
Ethics
Global focus
Environmentally sensitive production
Rapid product development
Mass customization
Empowered employees
Supply-chain partnering
Just-in-time performance
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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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Efficiency Versus
Effectiveness
The difference between efficient and effective is that
efficiency refers to how well you do something,
whereas effectiveness refers to how useful it is.
Efficiency is doing things right; effectiveness
is doing the right things.

Doing the Right Things is More

Important than Doing Things Right

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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
2011 Pearson Education, Inc. publishing as Prentice Hall

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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
2011 Pearson Education, Inc. publishing as Prentice Hall

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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

2011 Pearson Education, Inc. publishing as Prentice Hall

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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 =
= .25 titles/labor-hr
32
labor-hrs
productivity

2011 Pearson Education, Inc. publishing as Prentice Hall

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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 =
= .25 titles/labor-hr
32
labor-hrs
productivity
14 titles/day
New labor =
32 labor-hrs
productivity
2011 Pearson Education, Inc. publishing as Prentice Hall

1 - 26

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 =
= .25 titles/labor-hr
32
labor-hrs
productivity
14 titles/day
New labor =
= .4375 titles/labor-hr
32
labor-hrs
productivity
2011 Pearson Education, Inc. publishing as Prentice Hall

1 - 27

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 =
$640 + 400
productivity

2011 Pearson Education, Inc. publishing as Prentice Hall

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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
$640
+
400
productivity

2011 Pearson Education, Inc. publishing as Prentice Hall

1 - 29

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
$640
+
400
productivity
14 titles/day
New multifactor =
$640 + 800
productivity
2011 Pearson Education, Inc. publishing as Prentice Hall

1 - 30

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
$640
+
400
productivity
14 titles/day
New multifactor =
= .0097 titles/dollar
$640
+
800
productivity
2011 Pearson Education, Inc. publishing as Prentice Hall

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Measurement Problems
1. Quality may change while the quantity
of inputs and outputs remains constant
(HDTV, iphones)
2. External elements may cause an
increase or decrease in productivity
(using more reliable electric power
system)
3. Precise units of measure may be lacking

2011 Pearson Education, Inc. publishing as Prentice Hall

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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
2011 Pearson Education, Inc. publishing as Prentice Hall

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Key Variables for Improved

Labor Productivity
1. Basic education appropriate for the labor
force
2. Diet of the labor force
3. Social overhead that makes labor
available such as transportation and
sanitation

Challenge is in maintaining and

enhancing skills in the midst of rapidly
changing technology and knowledge
2011 Pearson Education, Inc. publishing as Prentice Hall

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Investment and Productivity

Percent increase in productivity

10
8
6
4
2
0

10

15

20

25

30

35

Percentage investment
2011 Pearson Education, Inc. publishing as Prentice Hall

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Service Productivity
1. Typically labor intensive (teaching,
counseling)
2. Frequently focused on unique individual
desires (customer representatives in banks)
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality

2011 Pearson Education, Inc. publishing as Prentice Hall

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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 stakeholder commitments
2011 Pearson Education, Inc. publishing as Prentice Hall

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Entry-Level Jobs in OM
Purchasing planner/buyer
Production (or operations) supervisor
Production (or operations)
scheduler/controller
Production (or operations) analyst
Inventory analyst
Quality specialist
Others

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