1 Operations and Productivity Power Point presentation to

1 Operations and Productivity Power. Point presentation to accompany Heizer and Render Operations Management, 10 e Principles of Operations Management, 8 e Power. Point slides by Jeff Heyl © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -1

Outline u Global Company Profile: Hard Rock Cafe u What Is Operations Management? u Organizing to Produce Goods and Services u Why Study OM? u What Operations Managers Do © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -2

Outline - Continued u The Heritage of Operations Management u Operations in the Service Sector u Differences between Goods and Services u Growth of Services u Service Pay u Exciting New Trends in Operations Management © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -3

Outline - Continued u The Productivity Challenge u Productivity Measurement u Productivity Variables u Productivity and the Service Sector u Ethics and Social Responsibility © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -4

Learning Objectives When you complete this chapter you should be able to: 1. Define operations management 2. Explain the distinction between goods and services 3. Explain the difference between production and productivity © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -5

Learning Objectives When you complete this chapter you should be able to: 4. Compute single-factor productivity 5. Compute multifactor productivity 6. Identify the critical variables in enhancing productivity © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -6

The Hard Rock Cafe u First opened in 1971 u Now – 129 restaurants in over 40 countries u Rock music memorabilia u Creates value in the form of good food and entertainment u 3, 500+ custom meals per day in Orlando u How does an item get on the menu? u Role of the Operations Manager © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -7

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -8

Organizing to Produce Goods and Services u 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 -9

Organizational Charts Commercial Bank Operations Finance Marketing Teller Scheduling Check Clearing Collection Transaction processing Facilities design/layout Vault operations Maintenance Security Investments Security Real estate Loans Commercial Industrial Financial Personal Mortgage Accounting Auditing Trust Department Figure 1. 1(A) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 10

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising Figure 1. 1(B) 1 - 11

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 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 Process analysis Development and installation of production tools and equipment © 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 1. 1(C) 1 - 12

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 13

Options for Increasing Contribution Marketing Option 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall Finance/ Accounting Option 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 OM Option Reduce Production Costs 20% $100, 000 – 64, 000 36, 000 – 6, 000 30, 000 – 7, 500 $ 22, 500 Table 1. 1 1 - 14

What Operations Managers Do Basic Management Functions u Planning u Organizing u Staffing u Leading u Controlling © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 15

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall Chapter(s) 5 6, Supplement 6 7, Supplement 7 8 9 10 11, Supplement 11 12, 14, 16 13, 15 17 Table 1. 2 1 - 16

The Critical Decisions 1. Design of goods and services u What good or service should we offer? u How should we design these products and services? 2. Managing quality u How do we define quality? u Who is responsible for quality? Table 1. 2 (cont. ) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 17

The Critical Decisions 3. Process and capacity design u What process and what capacity will these products require? u What equipment and technology is necessary for these processes? 4. Location strategy u Where should we put the facility? u On what criteria should we base the location decision? Table 1. 2 (cont. ) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 18

The Critical Decisions 5. Layout strategy u How should we arrange the facility? u How large must the facility be to meet our plan? 6. Human resources and job design u How do we provide a reasonable work environment? u How much can we expect our employees to produce? Table 1. 2 (cont. ) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 19

The Critical Decisions 7. Supply-chain management u Should we make or buy this component? u Who should be our suppliers and how can we integrate them into our strategy? 8. Inventory, material requirements planning, and JIT u How much inventory of each item should we have? u When do we re-order? Table 1. 2 (cont. ) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 20

The Critical Decisions 9. Intermediate and short–term scheduling u Are we better off keeping people on the payroll during slowdowns? u Which jobs do we perform next? 10. Maintenance u How do we build reliability into our processes? u Who is responsible for maintenance? Table 1. 2 (cont. ) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 21

Where are the OM Jobs? u Technology/methods u Facilities/space utilization u Strategic issues u Response time u People/team development u Customer service u Quality u Cost reduction u Inventory reduction u Productivity improvement © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 22

Opportunities Figure 1. 2 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 23

Certifications u APICS, the American Production and Inventory Control Society u American Society of Quality (ASQ) u Institute for Supply Management (ISM) u Project Management Institute (PMI) u Council of Supply Chain Management Professionals u Charter Institute of Purchasing and Supply (CIPS) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 24

Significant Events in OM Figure 1. 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 25

The Heritage of OM u Division of labor (Adam Smith 1776; Charles Babbage 1852) u Standardized parts (Whitney 1800) u Scientific Management (Taylor 1881) u Coordinated assembly line (Ford/ Sorenson 1913) u Gantt charts (Gantt 1916) u Motion study (Frank and Lillian Gilbreth 1922) u Quality control (Shewhart 1924; Deming 1950) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 26

The Heritage of OM u Computer (Atanasoff 1938) u CPM/PERT (Du. Pont 1957, Navy 1958) u Material requirements planning (Orlicky 1960) u Computer aided design (CAD 1970) u Flexible manufacturing system (FMS 1975) u Baldrige Quality Awards (1980) u Computer integrated manufacturing (1990) u Globalization (1992) u Internet (1995) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 27

Eli Whitney u Born 1765; died 1825 u In 1798, received government contract to make 10, 000 muskets u Showed that machine tools could make standardized parts to exact specifications u Musket parts could be used in any musket © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 28

Frederick W. Taylor u Born 1856; died 1915 u Known as ‘father of scientific management’ u In 1881, as chief engineer for Midvale Steel, studied how tasks were done u Began first motion and time studies u Created efficiency principles © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 29

Taylor’s Principles Management Should Take More Responsibility for: u Matching employees to right job u Providing the proper training u Providing proper work methods and tools u Establishing legitimate incentives for work to be accomplished © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 30

Frank & Lillian Gilbreth u Frank (1868 -1924); Lillian (1878 -1972) u Husband-wife engineering team u Further developed work measurement methods u Applied efficiency methods to their home and 12 children! u Book & Movie: “Cheaper by the Dozen, ” “Bells on Their Toes” © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 31

Henry Ford u Born 1863; died 1947 u In 1903, created Ford Motor Company u In 1913, first used moving assembly line to make Model T u. Unfinished product moved by conveyor past work station u Paid workers very well for 1911 ($5/day!) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 32

W. Edwards Deming u Born 1900; died 1993 u Engineer and physicist u Credited with teaching Japan quality control methods in post. WW 2 u Used statistics to analyze process u His methods involve workers in decisions © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 33

Contributions From u Human factors u Industrial engineering u Management science u Biological science u Physical sciences u Information technology © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 34

New Challenges in OM From To u Local or national focus u Global focus u Batch shipments u Just-in-time u Low bid purchasing u Supply-chain partnering u Lengthy product development u Rapid product development, alliances u Standard products u Mass customization u Job specialization u Empowered employees, teams © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 35

Characteristics of Goods u Tangible product u Consistent product definition u Production usually separate from consumption u Can be inventoried u Low customer interaction © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 36

Characteristics of Service u Intangible product u Produced and consumed at same time u Often unique u High customer interaction u Inconsistent product definition u Often knowledge-based u Frequently dispersed © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 37

Industry and Services as Percentage of GDP 90 − Services 80 − Manufacturing 70 − 60 − 50 − 40 − 30 − 20 − © 2011 Pearson Education, Inc. publishing as Prentice Hall US UK Spain South Africa Russian Fed Mexico Japan Hong Kong Germany France Czech Rep China Canada 0− Australia 10 − 1 - 38

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 | Percent of Product that is a Good © 2011 Pearson Education, Inc. publishing as Prentice Hall 0 | 25 | 50 | 75 | 100% | Percent of Product that is a Service 1 - 39

Manufacturing and Service Employment (millions) 120 – 100 – Service 80 – 60 – 40 – Manufacturing 20 – 0– | | | | 1950 1970 1990 2010 (est) 1960 1980 2000 Figure 1. 4 (A) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 40

Industrial production (right scale) – 150 – 125 – 100 – 75 40 30 20 10 0 – – – Manufacturing – 50 employment (left scale) Index: 1997 = 100 Employment (millions) Manufacturing Employment and Production – 25 | 1950 | | | –| 0 1970 1990 2010 (est) 1960 1980 2000 Figure 1. 4 (B) © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 41

Development of the Service Economy United States Canada France Italy Britain Japan W. Germany 2010 (est) © 2011 Pearson Education, Inc. publishing as Prentice Hall | 40 1970 | 50 | | 60 70 Percent | 80 Figure 1. 4 (C) 1 - 42

Organizations in Each Sector Service Sector Example % of all Jobs Education, Legal, Medical, other San Diego Zoo, Arnold Palmer Hospital 25. 8 Trade (retail, wholesale) Walgreen’s, Wal-Mart, Nordstrom’s 14. 9 Utilities, Transportation Pacific Gas & Electric, American Airlines 5. 2 Professional and Snelling, Waste Business Management, Inc. Services 10. 7 Table 1. 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 43

Organizations in Each Sector Service Sector % of all Jobs Example Finance, Information, Real Estate Citicorp, American Express, Prudential, Aetna 9. 6 Food, Lodging, Entertainment Olive Garden, Motel 6, Walt Disney 8. 5 Public Administration U. S. , State of Alabama, Cook County 4. 6 Total 78. 8 Table 1. 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 44

Organizations in Each Sector Other Sectors % of all Jobs Example Manufacturing Sector General Electric, Ford, U. S. Steel, Intel 11. 2 Construction Sector Bechtel, Mc. Dermott 8. 1 Agriculture Sector King Ranch 1. 4 Mining Sector Homestake Mining 0. 5 Total 21. 2 Table 1. 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 45

Changing Challenges Traditional Approach Reasons for Change Current Challenge Ethics and regulations not at the forefront Public concern over pollution, corruption, child labor, etc. Local or national focus Growth of reliable, low cost communication and transportation High ethical and social responsibility; increased legal and professional standards Global focus, international collaboration Lengthy product development Shorter life cycles; growth of global communication; CAD, Internet Rapid product development; design collaboration © 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 1. 5 1 - 46

Changing Challenges Traditional Approach Low cost production, with little concern for environment; free resources (air, water) ignored Low-cost standardized products Reasons for Change Current Challenge Public sensitivity to environment; ISO 14000 standard; increasing disposal costs Environmentally sensitive production; green manufacturing; sustainability Rise of consumerism; increased affluence; individualism Mass customization © 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 1. 5 1 - 47

Changing Challenges Traditional Approach Reasons for Change Current Challenge Emphasis on specialized, often manual tasks Recognition of the employee's total contribution; knowledge society Empowered employees; enriched jobs “In-house” production; low-bid purchasing Rapid technological change; increasing competitive forces Supply-chain partnering; joint ventures, alliances Large lot production Shorter product life cycles; increasing need to reduce inventory Just-In-Time performance; lean; continuous improvement © 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 1. 5 1 - 48

New Trends in OM u Ethics u Global focus u Environmentally sensitive production u Rapid product development u Environmentally sensitive production u Mass customization u Empowered employees u Supply-chain partnering u Just-in-time performance © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 49

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 50

The Economic System Inputs Transformation Outputs Labor, capital, management 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 (38% of 2. 5%), labor (10% of 2. 5%), and management (52% of 2. 5%). Goods and services Feedback loop Figure 1. 6 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 51

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 Saved 8 seconds per transaction Change the size of the ice scoop Saved 14 seconds per drink New espresso machines Saved 12 seconds per shot © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 52

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall Saved 12 seconds per shot 1 - 53

Productivity = Units produced Input used u Measure of process improvement u Represents output relative to input u Only through productivity increases can our standard of living improve © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 54

Productivity Calculations Labor Productivity Units produced Productivity = = Labor-hours used 1, 000 250 = 4 units/labor-hour One resource input single-factor productivity © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 55

Multi-Factor Productivity Output Productivity = Labor + Material + Energy + Capital + Miscellaneous u Also known as total factor productivity u Output and inputs are often expressed in dollars Multiple resource inputs multi-factor productivity © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 56

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 1 - 57

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 58

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 59

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 60

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 61

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 62

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 63

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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 64

Measurement Problems 1. Quality may change while the quantity of inputs and outputs remains constant 2. External elements may cause an increase or decrease in productivity u Precise units of measure may be lacking © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 65

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 1 - 66

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 u Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 67

Labor Skills About half of the 17 -year-olds in the U. S. cannot correctly answer questions of this type Figure 1. 7 © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 68

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 1 - 69

Service Productivity 1. Typically labor intensive 2. Frequently focused on unique individual attributes or desires 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 1 - 70

Productivity at Taco Bell Improvements: u Revised the menu u Designed meals for easy preparation u Shifted some preparation to suppliers u Efficient layout and automation u Training and employee empowerment u New water and energy saving grills © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 71

Productivity at Taco Bell Results: Improvements: u Preparation time cut to 8 seconds þ Revised the menu u Management span of control increased þ Designed meals for easy preparation from 5 to 30 þ Shifted some preparation to suppliers u In-store labor cut by 15 hours/day þ Efficient layout and automation u Stores handle twice the volume with half þ the labor and employee empowerment Training þ New water and energy saving grills u Conserve 300 million gallons of water and 200 million Kw. H of electricity each year saving $17 million annually © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 72

Ethics and Social Responsibility Challenges facing operations managers: u Developing and producing safe, quality products u Maintaining a clean environment u Providing a safe workplace u Honoring stakeholder commitments © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 73

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. © 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 74