Operations Management

1. © 2008 Prentice Hall, Inc. 1 – 1
Operations
Management
Chapter 1 –Chapter 1 –
Operations andOperations and
ProductivityProductivity
PowerPoint presentation to accompanyPowerPoint presentation to accompany
Heizer/RenderHeizer/Render
Principles of Operations Management, 7ePrinciples of Operations Management, 7e
Operations Management, 9eOperations Management, 9e

2. © 2008 Prentice Hall, Inc. 1 – 2
OutlineOutline
 Global Company Profile: Hard RockGlobal Company Profile: Hard Rock
CafeCafe
 What Is Operations Management?What Is Operations Management?
 Organizing to Produce Goods andOrganizing to Produce Goods and
ServicesServices
 Why Study OM?Why Study OM?
 What Operations Managers DoWhat Operations Managers Do
 How This Book Is OrganizedHow This Book Is Organized

3. © 2008 Prentice Hall, Inc. 1 – 3
Outline - ContinuedOutline - Continued
 The Heritage of OperationsThe Heritage of Operations
ManagementManagement
 Operations in the Service SectorOperations in the Service Sector
 Differences between Goods andDifferences between Goods and
ServicesServices
 Growth of ServicesGrowth of Services
 Service PayService Pay
 Exciting New Trends in OperationsExciting New Trends in Operations
ManagementManagement

4. © 2008 Prentice Hall, Inc. 1 – 4
Outline - ContinuedOutline - Continued
 The Productivity ChallengeThe Productivity Challenge
 Productivity MeasurementProductivity Measurement
 Productivity VariablesProductivity Variables
 Productivity and the Service SectorProductivity and the Service Sector
 Ethics and Social ResponsibilityEthics and Social Responsibility

5. © 2008 Prentice Hall, Inc. 1 – 5
Learning ObjectivesLearning Objectives
When you complete this chapterWhen you complete this chapter
you should be able to:you should be able to:
1.1. Define operations managementDefine operations management
2.2. Explain the distinction betweenExplain the distinction between
goods and servicesgoods and services
3.3. Explain the difference betweenExplain the difference between
production and productivityproduction and productivity

6. © 2008 Prentice Hall, Inc. 1 – 6
Learning ObjectivesLearning Objectives
When you complete this chapterWhen you complete this chapter
you should be able to:you should be able to:
4.4. Compute single-factorCompute single-factor
productivityproductivity
5.5. Compute multifactor productivityCompute multifactor productivity
6.6. Identify the critical variables inIdentify the critical variables in
enhancing productivityenhancing productivity

7. © 2008 Prentice Hall, Inc. 1 – 7
The Hard Rock CafeThe Hard Rock Cafe
 First opened in 1971First opened in 1971
 Now – 121 restaurants in over 40 countriesNow – 121 restaurants in over 40 countries
 Rock music memorabiliaRock music memorabilia
 Creates value in the form of good foodCreates value in the form of good food
and entertainmentand entertainment
 3,5003,500++
custom meals per day in Orlandocustom 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

8. © 2008 Prentice Hall, Inc. 1 – 8
What Is OperationsWhat Is Operations
Management?Management?
ProductionProduction is the creation ofis the creation of
goods and servicesgoods and services
Operations management (OM)Operations management (OM) is theis the
set of activities that creates value inset of activities that creates value in
the form of goods and services bythe form of goods and services by
transforming inputs into outputstransforming inputs into outputs

9. © 2008 Prentice Hall, Inc. 1 – 9
Organizing to ProduceOrganizing to Produce
Goods and ServicesGoods and Services
 Essential functions:Essential functions:
 Marketing – generates demandMarketing – generates demand
 Production/operations – createsProduction/operations – creates
the productthe product
 Finance/accounting – tracks howFinance/accounting – tracks how
well the organization is doing, payswell the organization is doing, pays
bills, collects the moneybills, collects the money

10. © 2008 Prentice Hall, Inc. 1 – 10
Organizational ChartsOrganizational Charts
Operations
Teller
Scheduling
Check Clearing
Collection
Transaction
processing
Facilities
design/layout
Vault operations
Maintenance
Security
Finance
Investments
Security
Real estate
Accounting
Auditing
Marketing
Loans
Commercial
Industrial
Financial
Personal
Mortgage
Trust Department
Commercial Bank
Figure 1.1(A)Figure 1.1(A)

11. © 2008 Prentice Hall, Inc. 1 – 11
Organizational ChartsOrganizational Charts
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
Airline
Figure 1.1(B)Figure 1.1(B)
Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising

12. © 2008 Prentice Hall, Inc. 1 – 12
Marketing
Sales
promotion
Advertising
Sales
Market
research
Organizational ChartsOrganizational Charts
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
Manufacturing
Figure 1.1(C)Figure 1.1(C)

13. © 2008 Prentice Hall, Inc. 1 – 13
Why Study OM?Why Study OM?
 OM is one of three major functionsOM is one of three major functions
(marketing, finance, and operations)(marketing, finance, and operations)
of any organizationof any organization
 We want (We want (and needand need) to know how) to know how
goods and services are producedgoods and services are produced
 We want to understand whatWe want to understand what
operations managers dooperations managers do
 OM is such a costly part of anOM is such a costly part of an
organizationorganization

14. © 2008 Prentice Hall, Inc. 1 – 14
What OperationsWhat Operations
Managers DoManagers Do
 PlanningPlanning
 OrganizingOrganizing
 StaffingStaffing
 LeadingLeading
 ControllingControlling
Basic Management FunctionsBasic Management Functions

15. © 2008 Prentice Hall, Inc. 1 – 15
Ten Critical DecisionsTen Critical Decisions
Ten Decision AreasTen Decision Areas Chapter(s)Chapter(s)
 Design of goods and servicesDesign of goods and services 55
 Managing qualityManaging quality 6, Supplement 66, Supplement 6
 Process and capacityProcess and capacity 7, Supplement 77, Supplement 7
designdesign
 Location strategyLocation strategy 88
 Layout strategyLayout strategy 99
 Human resources andHuman resources and 10, Supplement 1010, Supplement 10
job designjob design
 Supply chainSupply chain 11, Supplement 1111, Supplement 11
managementmanagement
 Inventory managementInventory management 12, 14, 1612, 14, 16
 SchedulingScheduling 13, 1513, 15
 MaintenanceMaintenance 1717
Table 1.2Table 1.2

16. © 2008 Prentice Hall, Inc. 1 – 16
The Critical DecisionsThe Critical Decisions
 Design of goods and servicesDesign of goods and services
 What good or service should weWhat good or service should we
offer?offer?
 How should we design these productsHow should we design these products
and services?and services?
 Managing qualityManaging quality
 How do we define quality?How do we define quality?
 Who is responsible for quality?Who is responsible for quality?
Table 1.2 (cont.)Table 1.2 (cont.)

17. © 2008 Prentice Hall, Inc. 1 – 17
The Critical DecisionsThe Critical Decisions
 Process and capacity designProcess and capacity design
 What process and what capacity willWhat process and what capacity will
these products require?these products require?
 What equipment and technology isWhat equipment and technology is
necessary for these processes?necessary for these processes?
 Location strategyLocation strategy
 Where should we put the facility?Where should we put the facility?
 On what criteria should we base theOn what criteria should we base the
location decision?location decision?
Table 1.2 (cont.)Table 1.2 (cont.)

18. © 2008 Prentice Hall, Inc. 1 – 18
The Critical DecisionsThe Critical Decisions
 Layout strategyLayout strategy
 How should we arrange the facility?How should we arrange the facility?
 How large must the facility be to meetHow large must the facility be to meet
our plan?our plan?
 Human resources and job designHuman resources and job design
 How do we provide a reasonable workHow do we provide a reasonable work
environment?environment?
 How much can we expect ourHow much can we expect our
employees to produce?employees to produce?
Table 1.2 (cont.)Table 1.2 (cont.)

19. © 2008 Prentice Hall, Inc. 1 – 19
The Critical DecisionsThe Critical Decisions
 Supply chain managementSupply chain management
 Should we make or buy this component?Should we make or buy this component?
 Who are our suppliers and who canWho are our suppliers and who can
integrate into our e-commerce program?integrate into our e-commerce program?
 Inventory, material requirementsInventory, material requirements
planning, and JITplanning, and JIT
 How much inventory of each item shouldHow much inventory of each item should
we have?we have?
 When do we re-order?When do we re-order?
Table 1.2 (cont.)Table 1.2 (cont.)

20. © 2008 Prentice Hall, Inc. 1 – 20
The Critical DecisionsThe Critical Decisions
 Intermediate and shortIntermediate and short––termterm
schedulingscheduling
 Are we better off keeping people onAre we better off keeping people on
the payroll during slowdowns?the payroll during slowdowns?
 Which jobs do we perform next?Which jobs do we perform next?
 MaintenanceMaintenance
 Who is responsible for maintenance?Who is responsible for maintenance?
 When do we do maintenance?When do we do maintenance?
Table 1.2 (cont.)Table 1.2 (cont.)

21. © 2008 Prentice Hall, Inc. 1 – 21
Where are the OM Jobs?Where are the OM Jobs?
Figure 1.2Figure 1.2

22. © 2008 Prentice Hall, Inc. 1 – 22
Significant Events in OMSignificant Events in OM
Figure 1.3Figure 1.3

23. © 2008 Prentice Hall, Inc. 1 – 23
The Heritage of OMThe Heritage of OM
 Division of labor (Adam Smith 1776;Division of labor (Adam Smith 1776;
Charles Babbage 1852)Charles Babbage 1852)
 Interchangeable parts (Whitney 1800)Interchangeable parts (Whitney 1800)
 Scientific Management (Taylor 1881)Scientific Management (Taylor 1881)
Personnel selection, planning andPersonnel selection, planning and
scheduling, motion study, and the field ofscheduling, motion study, and the field of
ergonomics, management should assumeergonomics, management should assume
more responsibility for: matching employeesmore responsibility for: matching employees
to the right job; providing the proper training;to the right job; providing the proper training;
providing proper work methods and tools,providing proper work methods and tools,
and establishing legitimate incentives forand establishing legitimate incentives for
work to be accomplished.work to be accomplished.

24. © 2008 Prentice Hall, Inc. 1 – 24
The Heritage of OMThe Heritage of OM
 Coordinated/Moving assembly line (Ford/ SorensenCoordinated/Moving assembly line (Ford/ Sorensen
1913)1913)
 Gantt charts (Gantt 1916)Gantt charts (Gantt 1916)
 Knowledge of statistics with the need for QualityKnowledge of statistics with the need for Quality
control (Shewhart 1924; Deming 1950)control (Shewhart 1924; Deming 1950)
 Material requirements planning (Orlicky 1960)Material requirements planning (Orlicky 1960)
 Computer aided design (CAD 1970)Computer aided design (CAD 1970)
 Flexible manufacturing system (FMS 1975)Flexible manufacturing system (FMS 1975)
 Baldrige Quality Awards (1980)Baldrige Quality Awards (1980)
 Computer integrated manufacturing (1990)Computer integrated manufacturing (1990)
 Globalization (1992)Globalization (1992)
 Internet (1995)Internet (1995)

25. © 2008 Prentice Hall, Inc. 1 – 25
Eli WhitneyEli Whitney
 Born 1765; died 1825Born 1765; died 1825
 In 1798, received governmentIn 1798, received government
contract to make 10,000 musketscontract to make 10,000 muskets
 Showed that machine tools couldShowed that machine tools could
make standardized parts to exactmake standardized parts to exact
specificationsspecifications
Musket parts could be used in anyMusket parts could be used in any
musketmusket

26. © 2008 Prentice Hall, Inc. 1 – 26
Frederick W. TaylorFrederick W. Taylor
 Born 1856; died 1915Born 1856; died 1915
 Known as ‘father of scientificKnown as ‘father of scientific
management’management’
 In 1881, as chief engineer forIn 1881, as chief engineer for
Midvale Steel, studied how tasksMidvale Steel, studied how tasks
were donewere done
Began first motion and time studiesBegan first motion and time studies
 Created efficiency principlesCreated efficiency principles

27. © 2008 Prentice Hall, Inc. 1 – 27
Taylor’s PrinciplesTaylor’s Principles
 Matching employees to right jobMatching employees to right job
 Providing the proper trainingProviding the proper training
 Providing proper work methods andProviding proper work methods and
toolstools
 Establishing legitimate incentives forEstablishing legitimate incentives for
work to be accomplishedwork to be accomplished
Management Should Take MoreManagement Should Take More
Responsibility for:Responsibility for:

28. © 2008 Prentice Hall, Inc. 1 – 28
Frank & Lillian GilbrethFrank & Lillian Gilbreth
 Frank (1868-1924); Lillian (1878-1972)Frank (1868-1924); Lillian (1878-1972)
 Husband-and-wife engineering teamHusband-and-wife engineering team
 Further developed work measurementFurther developed work measurement
methodsmethods
 Applied efficiency methods to theirApplied efficiency methods to their
home and 12 children!home and 12 children!
 Book & Movie: “Cheaper by the Dozen,”Book & Movie: “Cheaper by the Dozen,”
book: “Bells on Their Toes”book: “Bells on Their Toes”

29. © 2008 Prentice Hall, Inc. 1 – 29
 Born 1863; died 1947Born 1863; died 1947
 In 1903, created Ford MotorIn 1903, created Ford Motor
CompanyCompany
 In 1913, first used moving assemblyIn 1913, first used moving assembly
line to make Model Tline to make Model T
Unfinished product moved byUnfinished product moved by
conveyor past work stationconveyor past work station
 Paid workers very well for 1911Paid workers very well for 1911
($5/day!)($5/day!)
Henry FordHenry Ford

30. © 2008 Prentice Hall, Inc. 1 – 30
Characteristics of GoodsCharacteristics of Goods
 Tangible productTangible product
 Consistent productConsistent product
definitiondefinition
 Production usuallyProduction usually
separate fromseparate from
consumptionconsumption
 Can be inventoriedCan be inventoried
 Product isProduct is
transportabletransportable

31. © 2008 Prentice Hall, Inc. 1 – 31
Characteristics of ServiceCharacteristics of Service
 Intangible productIntangible product
 Produced andProduced and
consumed at same timeconsumed at same time
 Often uniqueOften unique
 High customerHigh customer
interactioninteraction
 Inconsistent productInconsistent product
definitiondefinition
 Often knowledge-basedOften knowledge-based

32. © 2008 Prentice Hall, Inc. 1 – 32
Industry and Services asIndustry and Services as
Percentage of GDPPercentage of GDP
ServicesServices ManufacturingManufacturing
AustraliaAustralia
CanadaCanada
ChinaChina
CzechRepCzechRep
FranceFrance
GermanyGermany
HongKongHongKong
JapanJapan
MexicoMexico
RussianFedRussianFed
SouthAfricaSouthAfrica
SpainSpain
UKUK
USUS
9090 −
8080 −
7070 −
6060 −
5050 −
4040 −
3030 −
2020 −
1010 −
00 −

33. © 2008 Prentice Hall, Inc. 1 – 33
Goods Versus ServicesGoods Versus Services
Table 1.3Table 1.3
Can be resoldCan be resold
Can be inventoriedCan be inventoried
Some aspects of qualitySome aspects of quality
measurablemeasurable
Selling is distinct fromSelling is distinct from
productionproduction
Product is transportableProduct is transportable
Site of facility important for costSite of facility important for cost
Often easy to automateOften easy to automate
Revenue generated primarilyRevenue generated primarily
from tangible productfrom tangible product
Attributes of GoodsAttributes of Goods
(Tangible Product)(Tangible Product)
Attributes of ServicesAttributes of Services
(Intangible Product)(Intangible Product)
Reselling unusualReselling unusual
Difficult to inventoryDifficult to inventory
Quality difficult to measureQuality difficult to measure
Selling is part of serviceSelling is part of service
Provider, not product, isProvider, not product, is
often transportableoften transportable
Site of facility important forSite of facility important for
customer contactcustomer contact
Often difficult to automateOften difficult to automate
Revenue generated primarilyRevenue generated primarily
from the intangible servicefrom the intangible service

34. © 2008 Prentice Hall, Inc. 1 – 34
Goods and ServicesGoods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
Percent of Product that is a GoodPercent of Product that is a Good Percent of Product that is a ServicePercent of Product that is a Service
100%100% 7575 5050 2525 00 2525 5050 7575 100%100%
|| || || || || || || || ||
Figure 1.4Figure 1.4

35. © 2008 Prentice Hall, Inc. 1 – 35
120120 –
100100 –
8080 –
6060 –
4040 –
2020 –
00 –
| | | | | | |
19501950 19701970 19901990 2010 (est)2010 (est)
19601960 19801980 20002000
Employment(millions)Employment(millions)
Manufacturing and ServiceManufacturing and Service
EmploymentEmployment
Figure 1.5 (A)Figure 1.5 (A)
ManufacturingManufacturing
ServiceService

36. © 2008 Prentice Hall, Inc. 1 – 36
Manufacturing EmploymentManufacturing Employment
and Productionand Production
Figure 1.5 (B)Figure 1.5 (B)
4040 –
3030 –
2020 –
1010 –
00 – | | | | | | |
19501950 19701970 19901990 2010 (est)2010 (est)
19601960 19801980 20002000
– 150150
– 125125
– 100100
– 7575
– 5050
– 2525
– 00
Employment(millions)Employment(millions)
Index:1997=100Index:1997=100
Manufacturing
employment
(left scale)
IndustrialIndustrial
productionproduction
(right scale)(right scale)

37. © 2008 Prentice Hall, Inc. 1 – 37
Organizations in Each SectorOrganizations in Each Sector
Service SectorService Sector ExampleExample
% of all% of all
JobsJobs
Education,Education,
Legal, Medical,Legal, Medical,
and otherand other
Notre Dame University,Notre Dame University,
San Diego Zoo, ArnoldSan Diego Zoo, Arnold
Palmer HospitalPalmer Hospital
25.525.5
Trade (retail,Trade (retail,
wholesale)wholesale)
Walgreen’s, Wal-Mart,Walgreen’s, Wal-Mart,
Nordstrom’sNordstrom’s
15.115.1
Utilities,Utilities,
TransportationTransportation
Pacific Gas & Electric,Pacific Gas & Electric,
American Airlines, SantaAmerican Airlines, Santa
Fe R.R., RoadwayFe R.R., Roadway
ExpressExpress
5.25.2
Table 1.4Table 1.4

38. © 2008 Prentice Hall, Inc. 1 – 38
Organizations in Each SectorOrganizations in Each Sector
Service SectorService Sector ExampleExample
% of all% of all
JobsJobs
ProfessionalProfessional
and Businessand Business
ServicesServices
Snelling and Snelling, WasteSnelling and Snelling, Waste
Management, Pitney-BowesManagement, Pitney-Bowes
10.110.1
Finance,Finance,
Information,Information,
Real EstateReal Estate
Citicorp, American Express,Citicorp, American Express,
Prudential, Aetna, TrammelPrudential, Aetna, Trammel
Crow, EDS, IBMCrow, EDS, IBM
9.69.6
Food, Lodging,Food, Lodging,
EntertainmentEntertainment
Olive Garden, Hard Rock Cafe,Olive Garden, Hard Rock Cafe,
Motel 6, Hilton Hotels, WaltMotel 6, Hilton Hotels, Walt
Disney, Paramount PicturesDisney, Paramount Pictures
8.58.5
PublicPublic
AdministrationAdministration
U.S., State of Alabama, CookU.S., State of Alabama, Cook
CountyCounty
4.64.6
Table 1.4Table 1.4

39. © 2008 Prentice Hall, Inc. 1 – 39
Organizations in Each SectorOrganizations in Each Sector
ManufacturingManufacturing
SectorSector ExampleExample
% of all% of all
JobsJobs
ManufacturingManufacturing General Electric, Ford,General Electric, Ford,
U.S. Steel, IntelU.S. Steel, Intel
11.511.5
ConstructionConstruction Bechtel, McDermottBechtel, McDermott 7.97.9
AgricultureAgriculture King RanchKing Ranch 1.61.6
MiningMining Homestake MiningHomestake Mining 0.40.4
SectorSector Percent of all jobsPercent of all jobs
ServiceService 78.6%78.6%
ManufacturingManufacturing 21.4%21.4%
Table 1.4Table 1.4

40. © 2008 Prentice Hall, Inc. 1 – 40
New Trends in OMNew Trends in OM
Local orLocal or
nationalnational
focusfocus
Reliable worldwideReliable worldwide
communication andcommunication and
transportation networkstransportation networks
Global focus,Global focus,
movingmoving
productionproduction
offshoreoffshore
Batch (large)Batch (large)
shipmentsshipments
Short product life cyclesShort product life cycles
and cost of capital putand cost of capital put
pressure on reducingpressure on reducing
inventoryinventory
Just-in-timeJust-in-time
performanceperformance
Low-bidLow-bid
purchasingpurchasing
Supply chain competitionSupply chain competition
requires that suppliers berequires that suppliers be
engaged in a focus on theengaged in a focus on the
end customerend customer
Supply chainSupply chain
partners,partners,
collaboration,collaboration,
alliances,alliances,
outsourcingoutsourcing
Figure 1.6Figure 1.6
PastPast CausesCauses FutureFuture

41. © 2008 Prentice Hall, Inc. 1 – 41
New Trends in OMNew Trends in OM
LengthyLengthy
productproduct
developmentdevelopment
Shorter life cycles,Shorter life cycles,
Internet, rapid internationalInternet, rapid international
communication, computer-communication, computer-
aided design, andaided design, and
international collaborationinternational collaboration
Rapid productRapid product
development,development,
alliances,alliances,
collaborativecollaborative
designsdesigns
StandardizedStandardized
productsproducts
Affluence and worldwideAffluence and worldwide
markets; increasinglymarkets; increasingly
flexible productionflexible production
processesprocesses
MassMass
customizationcustomization
with addedwith added
emphasis onemphasis on
qualityquality
JobJob
specializationspecialization
Changing sociocultureChanging socioculture
milieu; increasingly amilieu; increasingly a
knowledge and informationknowledge and information
societysociety
EmpoweredEmpowered
employees,employees,
teams, and leanteams, and lean
productionproduction
Figure 1.6Figure 1.6
PastPast CausesCauses FutureFuture

42. © 2008 Prentice Hall, Inc. 1 – 42
New Trends in OMNew Trends in OM
Low-costLow-cost
focusfocus
Environmental issues, ISOEnvironmental issues, ISO
14000, increasing disposal14000, increasing disposal
costscosts
EnvironmentallyEnvironmentally
sensitivesensitive
production, greenproduction, green
manufacturing,manufacturing,
recycledrecycled
materials,materials,
remanufacturingremanufacturing
Ethics notEthics not
at forefrontat forefront
Businesses operate moreBusinesses operate more
openly; public and globalopenly; public and global
review of ethics; oppositionreview of ethics; opposition
to child labor, bribery,to child labor, bribery,
pollutionpollution
High ethicalHigh ethical
standards andstandards and
socialsocial
responsibilityresponsibility
expectedexpected
Figure 1.6Figure 1.6
PastPast CausesCauses FutureFuture

43. © 2008 Prentice Hall, Inc. 1 – 43
New Trends in OMNew Trends in OM
 Global focusGlobal focus
 Just-in-time performanceJust-in-time performance
 Supply chain partneringSupply chain partnering
 Rapid product developmentRapid product development
 Mass customizationMass customization
 Empowered employeesEmpowered employees
 Environmentally sensitive productionEnvironmentally sensitive production
 EthicsEthics

44. © 2008 Prentice Hall, Inc. 1 – 44
Productivity ChallengeProductivity Challenge
Productivity is the ratio of outputs (goodsProductivity is the ratio of outputs (goods
and services) divided by the inputsand services) divided by the inputs
(resources such as labor and capital)(resources such as labor and capital)
The objective is to improve productivity!The objective is to improve productivity!
Important Note!
Production is a measure of output
only and not a measure of efficiency

45. © 2008 Prentice Hall, Inc. 1 – 45
FeedbackFeedback looploop
OutputsOutputs
Goods
and
services
ProcessesProcesses
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%).
The Economic SystemThe Economic System
InputsInputs
Labor,
capital,
management
Figure 1.7Figure 1.7

46. © 2008 Prentice Hall, Inc. 1 – 46
Improving Productivity atImproving Productivity at
StarbucksStarbucks
A team of 10 analystsA team of 10 analysts
continually look for wayscontinually look for ways
to shave time. Someto shave time. Some
improvements:improvements:
Stop requiring signaturesStop requiring signatures
on credit card purchaseson credit card purchases
under $25under $25
Saved 8 secondsSaved 8 seconds
per transactionper transaction
Change the size of the iceChange the size of the ice
scoopscoop
Saved 14 secondsSaved 14 seconds
per drinkper drink
New espresso machinesNew espresso machines Saved 12 secondsSaved 12 seconds
per shotper shot

47. © 2008 Prentice Hall, Inc. 1 – 47
Improving Productivity atImproving Productivity at
StarbucksStarbucks
A team of 10 analystsA team of 10 analysts
continually look for wayscontinually look for ways
to shave time. Someto shave time. Some
improvements:improvements:
Stop requiring signaturesStop requiring signatures
on credit card purchaseson credit card purchases
under $25under $25
Saved 8 secondsSaved 8 seconds
per transactionper transaction
Change the size of the iceChange the size of the ice
scoopscoop
Saved 14 secondsSaved 14 seconds
per drinkper drink
New espresso machinesNew espresso machines Saved 12 secondsSaved 12 seconds
per shotper shot
Operations improvements haveOperations improvements have
helped Starbucks increase yearlyhelped Starbucks increase yearly
revenue per outlet by $200,000 torevenue per outlet by $200,000 to
$940,000 in six years.$940,000 in six years.
Productivity has improved by 27%,Productivity has improved by 27%,
or about 4.5% per year.or about 4.5% per year.

48. © 2008 Prentice Hall, Inc. 1 – 48
 Measure of process improvementMeasure of process improvement
 Represents output relative to inputRepresents output relative to input
 Only through productivity increases canOnly through productivity increases can
our standard of living improveour standard of living improve
ProductivityProductivity
Productivity =Productivity =
Units producedUnits produced
Input usedInput used

49. © 2008 Prentice Hall, Inc. 1 – 49
Productivity CalculationsProductivity Calculations
Productivity =Productivity =
Units producedUnits produced
Labor-hours usedLabor-hours used
= == = 44 units/labor-hourunits/labor-hour
1,0001,000
250250
Labor ProductivityLabor Productivity
One resource inputOne resource input  single-factor productivitysingle-factor productivity

50. © 2008 Prentice Hall, Inc. 1 – 50
Multi-Factor ProductivityMulti-Factor Productivity
OutputOutput
Labor + Material + EnergyLabor + Material + Energy
+ Capital + Miscellaneous+ Capital + Miscellaneous
Productivity =Productivity =
 Also known as total factor productivityAlso known as total factor productivity
 Output and inputs are often expressedOutput and inputs are often expressed
in dollarsin dollars
Multiple resource inputsMultiple resource inputs  multi-factor productivitymulti-factor productivity

51. © 2008 Prentice Hall, Inc. 1 – 51
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
==
Old laborOld labor
productivityproductivity
88 titles/daytitles/day
3232 labor-hrslabor-hrs

52. © 2008 Prentice Hall, Inc. 1 – 52
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
88 titles/daytitles/day
3232 labor-hrslabor-hrs
==
Old laborOld labor
productivityproductivity == .25.25 titles/labor-hrtitles/labor-hr

53. © 2008 Prentice Hall, Inc. 1 – 53
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
1414 titles/daytitles/day Overhead =Overhead = $800$800/day/day
New System:New System:
88 titles/daytitles/day
3232 labor-hrslabor-hrs
==
Old laborOld labor
productivityproductivity
==
New laborNew labor
productivityproductivity
= .25 titles/labor-hr= .25 titles/labor-hr
1414 titles/daytitles/day
3232 labor-hrslabor-hrs

54. © 2008 Prentice Hall, Inc. 1 – 54
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
1414 titles/daytitles/day Overhead =Overhead = $800$800/day/day
New System:New System:
88 titles/daytitles/day
3232 labor-hrslabor-hrs
==
Old laborOld labor
productivityproductivity == .25.25 titles/labor-hrtitles/labor-hr
1414 titles/daytitles/day
3232 labor-hrslabor-hrs
==
New laborNew labor
productivityproductivity == .4375.4375 titles/labor-hrtitles/labor-hr

55. © 2008 Prentice Hall, Inc. 1 – 55
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
1414 titles/daytitles/day Overhead =Overhead = $800$800/day/day
New System:New System:
==
Old multifactorOld multifactor
productivityproductivity
88 titles/daytitles/day
$640 + 400$640 + 400

56. © 2008 Prentice Hall, Inc. 1 – 56
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
1414 titles/daytitles/day Overhead =Overhead = $800$800/day/day
New System:New System:
88 titles/daytitles/day
$640 + 400$640 + 400
==
Old multifactorOld multifactor
productivityproductivity == .0077.0077 titles/dollartitles/dollar

57. © 2008 Prentice Hall, Inc. 1 – 57
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
1414 titles/daytitles/day Overhead =Overhead = $800$800/day/day
New System:New System:
88 titles/daytitles/day
$640 + 400$640 + 400
==
Old multifactorOld multifactor
productivityproductivity
==
New multifactorNew multifactor
productivityproductivity
== .0077.0077 titles/dollartitles/dollar
1414 titles/daytitles/day
$640 + 800$640 + 800

58. © 2008 Prentice Hall, Inc. 1 – 58
Collins Title ProductivityCollins Title Productivity
Staff ofStaff of 44 worksworks 88 hrs/dayhrs/day 88 titles/daytitles/day
Payroll cost =Payroll cost = $640$640/day/day Overhead =Overhead = $400$400/day/day
Old System:Old System:
1414 titles/daytitles/day Overhead =Overhead = $800$800/day/day
New System:New System:
88 titles/daytitles/day
$640 + 400$640 + 400
1414 titles/daytitles/day
$640 + 800$640 + 800
==
Old multifactorOld multifactor
productivityproductivity
==
New multifactorNew multifactor
productivityproductivity
== .0077.0077 titles/dollartitles/dollar
== .0097.0097 titles/dollartitles/dollar

59. © 2008 Prentice Hall, Inc. 1 – 59
Measurement ProblemsMeasurement Problems
 QualityQuality may change while themay change while the
quantity of inputs and outputsquantity of inputs and outputs
remains constantremains constant
 External elementsExternal elements may cause anmay cause an
increase or decrease inincrease or decrease in
productivityproductivity
 Precise unitsPrecise units of measure may beof measure may be
lackinglacking

60. © 2008 Prentice Hall, Inc. 1 – 60
Productivity VariablesProductivity Variables
 LaborLabor - contributes- contributes
aboutabout 10%10% of theof the
annual increaseannual increase
 CapitalCapital - contributes- contributes
aboutabout 38%38% of theof the
annual increaseannual increase
 ManagementManagement --
contributes aboutcontributes about 52%52%
of the annual increaseof the annual increase

61. © 2008 Prentice Hall, Inc. 1 – 61
Key Variables for ImprovedKey Variables for Improved
Labor ProductivityLabor Productivity
 Basic education appropriate for theBasic education appropriate for the
labor forcelabor force
 Diet of the labor forceDiet of the labor force
 Social overhead that makes laborSocial overhead that makes labor
availableavailable
 Maintaining and enhancing skills in theMaintaining and enhancing skills in the
midst of rapidly changing technologymidst of rapidly changing technology
and knowledgeand knowledge

62. © 2008 Prentice Hall, Inc. 1 – 62
Labor SkillsLabor Skills
About half of the 17-year-olds in the US cannotAbout half of the 17-year-olds in the US cannot
correctly answer questions of this typecorrectly answer questions of this type
Figure 1.8Figure 1.8

63. © 2008 Prentice Hall, Inc. 1 – 63
Investment and ProductivityInvestment and Productivity
1010
88
66
44
22
00
PercentincreaseinproductivityPercentincreaseinproductivity
Percentage investmentPercentage investment
1010 1515 2020 2525 3030 3535

64. © 2008 Prentice Hall, Inc. 1 – 64
Service ProductivityService Productivity
 Typically labor intensiveTypically labor intensive
 Frequently focused on uniqueFrequently focused on unique
individual attributes or desiresindividual attributes or desires
 Often an intellectual task performed byOften an intellectual task performed by
professionalsprofessionals
 Often difficult to mechanizeOften difficult to mechanize
 Often difficult to evaluate for qualityOften difficult to evaluate for quality

65. © 2008 Prentice Hall, Inc. 1 – 65
Productivity at Taco BellProductivity at Taco Bell
Improvements:Improvements:
 Revised the menuRevised the menu
 Designed meals for easy preparationDesigned meals for easy preparation
 Shifted some preparation to suppliersShifted some preparation to suppliers
 Efficient layout and automationEfficient layout and automation
 Training and employee empowermentTraining and employee empowerment

66. © 2008 Prentice Hall, Inc. 1 – 66
Productivity at Taco BellProductivity at Taco Bell
Improvements:Improvements:
 Revised the menuRevised the menu
 Designed meals for easy preparationDesigned meals for easy preparation
 Shifted some preparation to suppliersShifted some preparation to suppliers
 Efficient layout and automationEfficient layout and automation
 Training and employee empowermentTraining and employee empowerment
Results:
 Preparation time cut to 8 seconds
 Management span of control
increased from 5 to 30
 In-store labor cut by 15 hours/day
 Stores handle twice the volume with
half the labor
 Fast-food low-cost leader

67. © 2008 Prentice Hall, Inc. 1 – 67
Ethics and Social ResponsibilityEthics and Social Responsibility
Challenges facingChallenges facing
operations managers:operations managers:
 Developing and producing safe,Developing and producing safe,
quality productsquality products
 Maintaining a clean environmentMaintaining a clean environment
 Providing a safe workplaceProviding a safe workplace
 Honoring community commitmentsHonoring community commitments