Handout dls csb-produma_24_may2012

DLS-COSB PRODUMA Handout LECTURE 1 - 24May2012 Page 1 of 12

Introduction to Operations The Hard Rock Cafe
Management
 First opened in 1971
 Now – 129 restaurants in over 40 countries
 Rock music memorabilia
 Creates value in the form of good food
Prof. Ramon H. Enriquez and entertainment
 3,500+ custom meals per day in Orlando
 How does an item get on the menu?
 Role of the Operations Manager

1-1 1-2

What Is Operations Organizing to Produce
Management? Goods and Services
 Essential functions:
Production is the creation of
goods and services 1. Marketing – generates demand
Operations management (OM) is 2. Production/operations – creates
/
the product
the set of activities that create
value in the form of goods and 3. Finance/accounting – tracks how
services by transforming inputs well the organization is doing,
pays bills, collects the money
into outputs

1-3 1-4

Organizational Charts Organizational Charts
Commercial Bank Airline

Operations Finance/ Marketing
Operations Finance Marketing accounting
Ground support Traffic
Teller Investments Loans equipment Accounting administration
Scheduling Secu ty
Security Co
Commercial
e ca Maintenance Payables Reservations
Check Clearing Real estate Industrial Receivables Schedules
Ground Operations
Collection General Ledger Tariffs (pricing)
Financial Facility
Transaction maintenance Finance Sales
Accounting Personal
processing Catering Cash control Advertising
Facilities Mortgage International
Flight Operations
design/layout exchange
Auditing Crew scheduling
Vault operations Flying
Trust Department Communications
Maintenance
Dispatching
Security
Figure 1.1(A)
Management science Figure 1.1(B)
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Organizational Charts
Manufacturing
Why Study OM?
1. OM is one of three major functions of
Operations Finance/ Marketing any organization, we want to study
Facilities
Construction; maintenance
accounting Sales
promotion
how people organize themselves for
Disbursements/
Production and inventory control credits Advertising productive enterprise
Scheduling; materials control Receivables Sales
Payables
Quality assurance and control
Supply-chain management
General ledger Market
research
2.
2 We want (and need) to know how
W t( d d) t k h
Manufacturing
Funds Management goods and services are produced
Tooling; fabrication; assembly Money market
International
Design
Product development and design
exchange 3. We want to understand what
Capital requirements
Detailed product specifications
Industrial engineering Stock issue
operations managers do
Efficient use of machines, space, Bond issue
and personnel and recall 4. OM is such a costly part of an
Process analysis
Development and installation of
production tools and equipment Figure 1.1(C)
organization
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Options for Increasing What Operations
Contribution Managers Do
Finance/
Marketing Accounting OM
Option Option Option Basic Management Functions
Increase Reduce Reduce
Sales Finance Production  Planning
Current Revenue 50% Costs 50% Costs 20%
Sales $100,000 $150,000 $100,000 $100,000  Organizing
Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000
Gross Margin 20,000 30,000 20,000 36,000  Staffing
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
Subtotal 14,000 24,000 17,000 30,000  Leading
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500  Controlling
Table 1.1
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Ten Critical Decisions The Critical Decisions
1. Design of goods and services
2. Managing quality
1. Design of goods and services
3. Process and capacity  What good or service should we
design
4. Location strategy offer?
5.
5 Layout strategy  How should we design these
6. Human resources and
job design products and services?
7. Supply-chain
management 2. Managing quality
8. Inventory, MRP, JIT
 How do we define quality?
9. Scheduling
10. Maintenance  Who is responsible for quality?

Table 1.2 Table 1.2 (cont.)
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The Critical Decisions The Critical Decisions
3. Process and capacity design 5. Layout strategy
 How should we arrange the facility?
 What process and what capacity will
these products require?  How large must the facility be to meet
our plan?
 What equipment and technology is
q p gy
necessary for these processes? 6. Human resources and job design
4. Location strategy  How do we provide a reasonable
work environment?
 Where should we put the facility?
 How much can we expect our
 On what criteria should we base the employees to produce?
location decision?

Table 1.2 (cont.) Table 1.2 (cont.)
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The Critical Decisions The Critical Decisions
7. Supply-chain management 9. Intermediate and short–term
 Should we make or buy this scheduling
component?  Are we better off keeping people on
 Who should be our suppliers and how the payroll during slowdowns?
can we integrate them into our strategy?  Which jobs do we perform next?
8. Inventory, material requirements 10. Maintenance
planning, and JIT
 How do we build reliability into our
 How much inventory of each item processes?
should we have?
 Who is responsible for maintenance?
 When do we re-order?
Table 1.2 (cont.) Table 1.2 (cont.)
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Significant Events in OM New Challenges in OM
From To
 Local or national focus  Global focus
 Batch shipments  Just-in-time
 Low bid purchasing  Supply-chain
partnering
t i
 Lengthy product  Rapid product
development development,
alliances
 Standard products  Mass
customization
 Job specialization  Empowered
Figure 1.3 employees, teams
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Characteristics of Goods Characteristics of Service
 Tangible product  Intangible product
 Consistent product  Produced and
definition consumed at same time
 Production usually  Often unique
separate from  High customer
consumption interaction
 Can be inventoried  Inconsistent product
 Low customer definition
interaction  Often knowledge-based
 Frequently dispersed
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Industry and Services as Goods and Services
Percentage of GDP Automobile
Computer
90 −
Services Manufacturing Installed carpeting
80 −
70 − Fast-food meal
60 − Restaurant meal/auto repair
50 − Hospital care
40 − Advertising agency/
30 − investment management
20 − Consulting service/
10 − teaching
0− Counseling
Germany

US
Canada

UK
Australia

China

Czech Rep

France

Hong Kong

South Africa
Japan

Mexico

Russian Fed

Spain

100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

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

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Manufacturing and Service Productivity Challenge
Employment
120 –
Productivity is the ratio of outputs (goods
100 – and services) divided by the inputs
Employment (millions)

(resources such as labor and capital)
80 – Service

60 – The objective is to improve productivity!
40 –

Manufacturing Important Note!
20 –
Production is a measure of output
0– | | | | | | | only and not a measure of efficiency
1950 1970 1990 2010 (est)
1960 1980 2000
Figure 1.4 (A)
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The Production System Improving Productivity at
Starbucks
Inputs Transformation Outputs
A team of 10 analysts
Labor, Goods continually look for ways
capital, Conversion Process and
management services to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
Feedback loop scoop per drink
Figure 1.6 New espresso machines Saved 12 seconds
per shot
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Improving Productivity at Productivity
Starbucks
A team of 10 analysts Units produced
continually look for ways Productivity =
to shave time. Some
Input used
improvements:
Operations improvements have
helped Starbucks increase yearly
 Measure of process improvement
Stop requiring signatures Saved 8 seconds
on credit card purchases outlet by $200,000 to
revenue per per transaction  Represents output relative to input
under $25 $940,000 in six years.
Change the size of the ice has improved by 27%,
Productivity Saved 14 seconds  Only through productivity increases
scoop or about 4.5% per year.
per drink can our standard of living improve
New espresso machines Saved 12 seconds
per shot
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Productivity Calculations Multi-Factor Productivity
Labor Productivity Output
Productivity =
Units produced
Labor + Material + Energy
Productivity = + Capital + Miscellaneous
Labor-hours used
 Also known as total factor productivity
1,000  Output and inputs are often expressed
= = 4 units/labor-hour in dollars
250

One resource input  single-factor productivity Multiple resource inputs  multi-factor productivity

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Measurement Problems Productivity Variables
1. Quality may change while the 1. Labor - contributes
quantity of inputs and outputs about 10% of the
remains constant annual increase
2. External elements may cause an
2 E t l l t 2.
2 Capital - contributes
increase or decrease in about 38% of the
productivity annual increase
 Precise units of measure may be 3. Management -
lacking contributes about 52%
of the annual increase
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Key Variables for Improved Service Productivity
Labor Productivity
1. Typically labor intensive
1. Basic education appropriate for the
labor force 2. Frequently focused on unique
individual attributes or desires
2. Diet of the labor force
3. Often an intellectual task performed by
3
3. Social overhead that makes labor professionals
available
4. Often difficult to mechanize
 Challenge is in maintaining and
5. Often difficult to evaluate for quality
enhancing skills in the midst of rapidly
changing technology and knowledge

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Ethics and The Global Environment
Social Responsibility and Operations Strategy
Challenges facing
operations managers:
 Developing and producing safe,
safe
quality products
 Maintaining a clean environment
Prof. Ramon H. Enriquez
 Providing a safe workplace
 Honoring stakeholder commitments

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Some Boeing Suppliers (787) Some Boeing Suppliers (787)
Firm Country Component Firm Country Component
Latecoere France Passenger doors Cobham UK Fuel pumps and valves
Labinel France Wiring Rolls-Royce UK Engines
Dassault France Design and Smiths Aerospace UK Central computer
PLM software system
y
Messier-Bugatti France Electric brakes BAE SYSTEMS UK Electronics
Thales France Electrical power Alenia Aeronautics Italy Upper center
conversion system fuselage &
and integrated horizontal stabilizer
standby flight display Toray Industries Japan Carbon fiber for
Messier-Dowty France Landing gear structure wing and tail units
Diehl Germany Interior lighting
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Some Boeing Suppliers (787) Some Boeing Suppliers (787)
Firm Country Component Firm Country Component
Fuji Heavy Japan Center wing box Korean Aviation South Wingtips
Industries Korea
Kawasaki Heavy Japan Forward fuselage, Saab Sweden Cargo access doors
Industries fixed section of wing,
landing
l di gear well ll
Teijin Seiki Japan Hydraulic actuators
Mitsubishi Heavy Japan Wing box
Industries
Chengdu Aircraft China Rudder
Group
Hafei Aviation China Parts
1 - 70 1 - 71

Global Strategies Growth of World Trade
 Boeing – sales and production are 35 –

worldwide 30 – Collapse of the
Berlin Wall
 Benetton – moves inventory to stores 25 –

around the world faster than its
ent

20 –
Perce

competition by building flexibility into 15 –
design, production, and distribution
10 –
 Sony – purchases components from 5–
suppliers in Thailand, Malaysia, and
0 –| | | | | | | | | | |
around the world 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 (est*)
Year
Figure 2.1
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Some Multinational Reasons to Globalize
Corporations
% Sales % Assets
Outside Outside Reasons to Globalize
Home Home Home % Foreign Tangible 1. Reduce costs (labor, taxes, tariffs, etc.)
Company Country Country Country Workforce
Reasons 2. Improve supply chain
p
Citicorp USA 34 46 NA
3. Provide better goods and services
3 P id b tt d d i
Colgate- USA 72 63 NA
Palmolive 4. Understand markets
Dow USA 60 50 NA Intangible 5. Learn to improve operations
Chemical
Reasons 6. Attract and retain global talent
Gillette USA 62 53 NA
Honda Japan 63 36 NA
IBM USA 57 47 51

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Cultural and Ethical Issues
Developing Missions and
 Cultures can be quite different Strategies
 Attitudes can be quite different
towards Mission statements tell an
 Punctuality  Thievery organization where it is going
 Lunch breaks  Bribery
The Strategy tells the
 Environment  Child labor organization how to get there
 Intellectual
property

1 - 84 1 - 90

Mission Arnold Palmer Hospital
 Mission - where are
Arnold Palmer Hospital for
you going?
Children provides state-of-the-art,
 Organization’s family centered healthcare
y
purpose for being focused on restoring the joy of
 Answers ‘What do childhood in an environment of
we provide society?’ compassion, healing, and hope.
 Provides boundaries
and focus

Figure 2.2
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Factors Affecting Mission Sample Missions
Philosophy
and Values Sample Company Mission
To manufacture and service an innovative, growing, and
Profitability profitable worldwide microwave communications business
Environment
and Growth that exceeds our customers’ expectations.

Mission Sample Operations Management Mission
Customers Public Image To produce products consistent with the company’s mission
as the worldwide low-cost manufacturer.

Benefit to
Society

Figure 2.3
1 - 95 1 - 96

Sample Missions Sample Missions
Sample OM Department Missions Sample OM Department Missions
Product design To design and produce products and Location To locate, design, and build efficient and
services with outstanding quality and economical facilities that will yield high
inherent customer value. value to the company, its employees, and the
community.
Quality management To attain the exceptional value that is
consistent with our company mission and Layout design To achieve, through skill, imagination, and
marketing objectives by close attention to resourcefulness in layout and work methods,
design, procurement, production, and field production effectiveness and efficiency
service operations while supporting a high quality of work life.

Process design To determine, design, and produce the Human resources To provide a good quality of work life, with
production process and equipment that will well-designed, safe, rewarding jobs, stable
be compatible with low-cost product, high employment, and equitable pay, in exchange
quality, and good quality of work life at for outstanding individual contribution from
economical cost. employees at all levels.

Figure 2.3 Figure 2.3
1 - 97 1 - 98

Sample Missions Strategic Process
Sample OM Department Missions Organization’s
Supply-chain To collaborate with suppliers to develop Mission
management innovative products from stable, effective,
and efficient sources of supply.
Inventory To achieve low investment in inventory
consistent with high customer service levels
g
and high facility utilization. Functional
Area Missions
Scheduling To achieve high levels of throughput and
timely customer delivery through effective
scheduling.
Maintenance To achieve high utilization of facilities and
equipment by effective preventive
maintenance and prompt repair of facilities Finance/
Marketing Operations
and equipment. Accounting

Figure 2.3
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Strategy Strategies for Competitive
Advantage
 Action plan to
achieve mission
 Differentiation – better, or at
 Functional areas
g
have strategies least different
 Strategies exploit  Cost leadership – cheaper
opportunities and  Response – rapid response
strengths, neutralize
threats, and avoid
weaknesses

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Competing on Competing on Cost
Differentiation
Provide the maximum value as
Uniqueness can go beyond both the
perceived by customer. Does not
physical characteristics and service
imply low quality.
attributes to encompass everything
that impacts customer s perception
customer’s  Southwest Airlines – secondary
S th t Ai li d
of value airports, no frills service, efficient
utilization of equipment
 Safeskin gloves – leading edge products  Wal-Mart – small overhead, shrinkage,
 Walt Disney Magic Kingdom – distribution costs
experience differentiation  Franz Colruyt – no bags, low light, no
 Hard Rock Cafe – dining experience music, doors on freezers

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OM’s Contribution to Strategy
Competing on Response 10 Operations Competitive
Decisions Approach Example Advantage

Product DIFFERENTIATION
 Flexibility is matching market changes in Innovative design … Safeskin’s innovative gloves
Broad product line … Fidelity Security’s mutual funds
design innovation and volumes Quality After-sales service … Caterpillar’s heavy equipment
service
Experience … Hard Rock Café’s dining
 A way of life at Hewlett-Packard Process
experience

Location COST LEADERSHIP
 Reliability is meeting schedules Low overhead … Franz-Colruyt’s warehouse-type Differentiation
stores
t
Layout (better)
Effective capacity
 German machine industry use … Southwest Airline’s
Human aircraft utilization
 Timeliness is quickness resource Inventory
management … Wal Mart’s sophisticated
Response
(faster)
in design, production, Supply chain
distribution system
Cost
RESPONSE leadership
and delivery Inventory Flexibility … Hewlett-Packard’s response to (cheaper)
volatile world market
Reliability … FedEx’s “absolutely, positively,
 Johnson Electric, Scheduling on time”
Pizza Hut, Motorola Quickness … Pizza Hut’s 5-minute guarantee
at lunchtime
Maintenance Figure 2.4

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Goods and Services and Goods and Services and
the 10 OM Decisions the 10 OM Decisions
Operations Operations
Decisions Goods Services Decisions Goods Services
Goods and Product is usually Product is not Location Near raw Near customers
service tangible tangible selection materials and
design labor
Quality Many objective Many subjective Layout Production Enhances product
standards standards design efficiency and production
Process Customers not Customer may be Human Technical skills, Interact with
and involved directly involved resources consistent labor customers, labor
capacity Capacity must and job standards, output standards vary
design match demand design based wages

Table 2.1 1 - 108
Table 2.1 1 - 109

Goods and Services and Goods and Services and
the 10 OM Decisions the 10 OM Decisions
Operations Operations
Decisions Goods Services Decisions Goods Services
Supply Relationship Important, but Maintenance Often preventive Often “repair” and
chain critical to final may not be and takes place takes place at
p oduct
product c t ca
critical at p oduct o s te custo e s s te
production site customer’s site
Inventory Raw materials, Cannot be stored
work-in-process,
and finished
goods may be
held
Scheduling Level schedules Meet immediate
possible customer demand
Table 2.1 Table 2.1
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Managing Global Service Product Life Cycle
Operations Introduction Growth Maturity Decline
Best period to Practical to change Poor time to Cost control
egy/Issues

increase market price or quality change image, critical
share image price, or quality
Requires a different perspective on: R&D engineering is Strengthen niche Competitive costs
critical become critical
Defend market
Company Strate

 Capacity planning Internet search engines
position Drive-through
restaurants
CD-ROMs
 Location planning iPods LCD &
Xbox 360 plasma TVs
 Facilities design and layout Sales
Avatars
 Scheduling Boeing 787 Analog
TVs
Twitter
Figure 2.5
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Product Life Cycle SWOT Analysis
Introduction Growth Maturity Decline
Product design Forecasting Standardization Little product
and critical Fewer product differentiation
development Product and changes, more Cost Mission
y/Issues

critical process minor changes minimization
Frequent reliability Optimum Overcapacity
product and Internal
process design
Competitive capacity in the External
OM Strategy

product
d t industry
i d t
changes improvements
Increasing
stability of Prune line to
Strengths Opportunities
Short production and options process eliminate
runs Increase capacity items not Analysis
Long production
High production Shift toward runs returning
costs product focus good margin
Limited models
Product
Reduce
Internal External
Enhance improvement
Attention to distribution and cost cutting capacity Weaknesses Threats
quality
Strategy
Figure 2.5
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Strategy Development Process Strategy Development and
Analyze the Environment Implementation
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
 Identify key success factors
 Build and staff the organization
Determine the Corporate Mission
State the reason for the firm’s existence and identify the  Integrate OM with other activities
value it wishes to create.

Form a Strategy
The operations manager’s job is to implement
Build a competitive advantage, such as low price, design, or
an OM strategy, provide competitive
volume flexibility, quality, quick delivery, dependability, after- advantage, and increase productivity
sale service, broad product lines.

Figure 2.6
1 - 123 1 - 124

Four International
Operations Strategies
High Figure 2.9
Global Strategy Transnational Strategy
Cost Reduction Considerations

 Standardized product  Move material, people, ideas
 Economies of scale across national boundaries
 Cross-cultural learning  Economies of scale
 Cross-cultural learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator
Examples
Coca-Cola
Nestlé
End of Presentation
C

Multidomestic Strategy
International Strategy  Use existing
 Import/export or domestic model globally
license existing  Franchise, joint ventures,
product subsidiaries

Examples Examples
U.S. Steel Heinz The Body Shop
Harley Davidson McDonald’s Hard Rock Cafe

Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
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