Operation Management

1. Dawood University of EngineeringDawood University of Engineering
and Technologyand Technology
By Sadam Hussain shahani
152Transparency Masters to accompany Heizer/Render –
Principles of Operations Management, 5e, and Operations
Management, 7e
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
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2. Transparency Masters to accompany Heizer/Render – Principles of
Operations Management, 5e, and Operations Management, 7e
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
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OperationsOperations
ManagementManagement
Operations and ProductivityOperations and Productivity

3. Transparency Masters to accompany Heizer/Render – Principles of
Operations Management, 5e, and Operations Management, 7e
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OutlineOutline
♦PROFILE: HARD ROCK CAFE
♦WHAT IS OPERATIONS MANAGEMENT?
♦ORGANIZING TO PRODUCE GOODS AND
SERVICES
♦WHY STUDY OM?
♦WHAT OPERATIONS MANAGERS DO
♦ How This Book Is Organized
♦WHERE ARE THE OM JOBS?

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Outline - ContinuedOutline - Continued
♦THE HERITAGE OF OPERATIONS MANAGEMENT
♦OPERATIONS IN THE SERVICE SECTOR
♦ Differences between Goods and Services
♦ Growth of Services
♦ Service Pay
♦EXCITING NEW TRENDS IN OPERATIONS
MANAGEMENT

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Outline - ContinuedOutline - Continued
♦THE PRODUCTIVITY CHALLENGE
♦ Productivity Measurement
♦ Productivity Variables
♦ Productivity and the Service Sector
♦THE CHALLENGE OF SOCIAL RESPONSIBILITY

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Learning ObjectivesLearning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:
♦ Production and productivity
♦ Operations Management (OM)
♦ What operations managers do
♦ Services

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Learning Objectives - ContinuedLearning Objectives - Continued
When you complete this chapter, you should be
able to :
Describe or Explain:
♦ A brief history of operations management
♦ Career opportunities in operations management
♦ The future of the discipline
♦ Measuring productivity

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The Hard Rock CafeThe Hard Rock Cafe
♦ First opened in 1971
♦ Now – 110 restaurants in over 40 countries
♦ Rock music memorabilia
♦ Creates value in the form of good food and entertainment
♦ 3,500+
custom meals per day
♦ How does an item get on the menu?
♦ Role of the Operations Manager

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10. Transparency Masters to accompany Heizer/Render – Principles of
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Operations Management, 5e, and Operations Management, 7e
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12. Transparency Masters to accompany Heizer/Render – Principles of
Operations Management, 5e, and Operations Management, 7e
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What Is Operations Management?What Is Operations Management?
Production is the creation of goods and
services
Operations management is the set of
activities that creates value in the form
of goods and services by transforming
inputs into outputs
Two additional points:
1. Any activity is an “operation”
2. No company produces only “goods” - service is a
greater or lesser part of any product. (Discuss this in
more detail later)

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Organizing to Produce Goods andOrganizing to Produce Goods and
ServicesServices
Operations Management as the process whereby resources,
flowing within a defined system, are combined and transformed by
a controlled manner to add value in accordance with policies
communicated by management.
Objectives of Operations Management can be categorized into
Customer Service and Resource Utilisation.

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Operations Management, 5e, and Operations Management, 7e
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17. ♦CUSTOMER SERVICE
♦ The first objective of operating systems is to utilize
resources for the satisfaction of customer wants.
Therefore, customer service is a key objective of
operations management. The operating system must
provide something to a specification, which can satisfy the
customer in terms of cost and timing. Thus, providing the
‘right thing at a right price at the right time’ can satisfy
primary objective.
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Operations Management, 5e, and Operations Management, 7e
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Organizing to Produce Goods andOrganizing to Produce Goods and
ServicesServices
♦Essential functions:
♦ Marketing – generates demand
♦ Operations –creates the product
♦ Finance/accounting – tracks organizational
performance, pays bills, collects money

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Organizational FunctionsOrganizational Functions
♦Marketing
♦ Gets customers
♦Operations
♦ creates product or service
♦Finance/Accounting
♦ Obtains funds
♦ Tracks money
© 1995 Corel Corp.

20. Sample Organization ChartSample Organization Chartss
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Organizational ChartsOrganizational Charts
Commercial Bank
Operations
Teller Scheduling
Check Clearing
Transactions
processing
Facilities
design/layout
Vault operations
Maintenance
Security
Finance
Investments
Security
Real Estate
Accounting
Auditing
Marketing
Loans
Commercial
Industrial
Financial
Personal
Mortgage
Trust Department

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Functions - BankFunctions - Bank
Operations Finance/
Accounting
Marketing
Check
Clearing
Teller
Scheduling
Transactions
Processing
Security
Commercial Bank
© 1984-1994
T/Maker Co.

23. Sample Organization ChartSample Organization Chartss
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Functions - AirlineFunctions - Airline
Operations Finance/
Accounting
Marketing
Ground
Support
Flight
Operations
Facility
Maintenance
Catering
Airline
© 1984-1994 T/Maker Co.

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Organizational ChartsOrganizational 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
rates
Marketing
Traffic administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising

26. Sample Organization ChartSample Organization Chartss
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Operations Management, 5e, and Operations Management, 7e
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Functions - ManufacturerFunctions - Manufacturer
Operations Finance/
Accounting
Marketing
Production
Control
Manufacturing Quality
Control
Purchasing
Manufacturing

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Organizational ChartsOrganizational Charts
Manufacturing
Operations
Facilities:
Construction:maintenance
Production & inventory control
Scheduling: materials 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 issues and recall
Marketing
Sales
promotions
Advertising
Sales
Market
research

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Why Study OM?Why Study OM?

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Why Study OM?Why Study OM?
♦OM is one of three major functions
(marketing, finance, and operations) of any
organization.
♦We want (and need) to know how goods and
services are produced.
♦We want to understand what operations
managers do.
♦OM is such a costly part of an organization.

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Options for IncreasingOptions for Increasing
ContributionContribution
Marketing
Option
Finance &
Accounting
Option
OM Option
Current Sales
Revenue :
+50%
Finance
Costs: -50%
Production
Costs: -20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of
Goods Sold
-80,000 -120,000 -80,000 -64,000
Gross
Margin
20,000 30,000 20,000 36,000
Finance
Costs
-6,000 -6,000 -3,000 -6,000
Net
Margin
14,000 24,000 17,000 30,000
Taxes @
25%
-3,500 -6,000 -4,250 -7,500
Contribution 10,500 18,000 12,750 22,500
Students can do the math! It may be useful to show a more detailed
breakdown of cost-of-goods-sold, and illustrate the contribution to cost-of-
goods sold of marketing, finance/accounting, and operations. It may also be
helpful to use this data to introduce and illustrate fixed and variable costs and
their relationship to net contribution.

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What Operations Managers DoWhat Operations Managers Do
Plan - Organize - Staff - Lead - Control

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Ten Critical DecisionsTen Critical Decisions
♦ Service, product design……………..
♦ Quality management…………………
♦ Process, capacity design…………..
♦ Location …………….…………………
♦ Layout design ………………………..
♦ Human resources, job design……..
♦ Supply-chain management…………
♦ Inventory management …………….
♦ Scheduling ……………………………
♦ Maintenance ………………………….
Ch. 5
Ch. 6, 6S
Ch. 7, 7S
Ch. 8
Ch. 9
Ch. 10, 10S
Ch. 11,11s
Ch. 12, 14, 16
Ch. 3, 13, 15
Ch. 17

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The Critical DecisionsThe Critical Decisions
♦Quality management
♦ Who is responsible for quality?
♦ How do we define quality?
♦Service and product design
♦ What product or service should we offer?
♦ How should we design these products and
services?

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The Critical Decisions - ContinuedThe Critical Decisions - Continued
♦Process and capacity design
♦ What processes will these products require and in
what order?
♦ What equipment and technology is necessary for
these processes?
♦Location
♦ Where should we put the facility
♦ On what criteria should we base this location
decision?

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The Critical Decisions - ContinuedThe Critical Decisions - Continued
♦Layout design
♦ How should we arrange the facility?
♦ How large a facility is required?
♦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 - ContinuedThe Critical Decisions - Continued
♦Supply chain management
♦ Should we make or buy this item?
♦ Who are our good suppliers and how many should
we have?
♦Inventory, material requirements planning,
♦ How much inventory of each item should we have?
♦ When do we re-order?

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The Critical Decisions - ContinuedThe Critical Decisions - Continued
♦Intermediate, short term, and project
scheduling
♦ Is subcontracting production a good idea?
♦ Are we better off keeping people on the payroll
during slowdowns?
♦Maintenance
♦ Who is responsible for maintenance?
♦ When do we do maintenance?

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Where are the OM JobsWhere are the OM Jobs

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Where are the OM JobsWhere are the OM Jobs

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Where Are the OM Jobs?Where Are the OM Jobs?
♦Technology/methods
♦Facilities/space utilization
♦Strategic issues
♦Response time
♦People/team development
♦Customer service
♦Quality
♦Cost reduction
♦Inventory reduction
♦Productivity improvement

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The Heritage of Operations ManagementThe Heritage of Operations Management

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Significant Events in OperationsSignificant Events in Operations
ManagementManagement

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The Heritage ofThe Heritage of
Operations ManagementOperations Management
Division of labor (Adam Smith 1776 and Charles Babbage 1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Coordinated assembly line (Ford/Sorenson/Avery 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922
Quality control (Shewhart 1924; Deming 1950)
Computer (Atanasoff 1938)
CPM/PERT (DuPont 1957)

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The Heritage of OperationsThe Heritage of Operations
Management - ContinuedManagement - Continued
Material requirements planning (Orlicky 1960)
Computer aided design (CAD 1970)
Flexible manufacturing system (FMS 1975)
Baldrige Quality Awards (1980)
Computer integrated manufacturing (1990)
Globalization(1992)
Internet (1995)

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Eli WhitneyEli Whitney
♦ Born 1765; died 1825
♦ In 1798, received government
contract to make 10,000
muskets
♦ Showed that machine tools
could make standardized parts
to exact specifications
♦ Musket parts could be used in any
musket
© 1995 Corel Corp.

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Frederick W. TaylorFrederick W. Taylor
♦ Born 1856; died 1915
♦ Known as ‘father of scientific
management’
♦ In 1881, as chief engineer for Midvale
Steel, studied how tasks were done
♦ Began first motion & time studies
♦ Created efficiency principles
© 1995 Corel Corp.

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Taylor: Management Should TakeTaylor: Management Should Take
More Responsibility forMore Responsibility for
♦Matching employees to right job
♦Providing the proper training
♦Providing proper work methods and tools
♦Establishing legitimate incentives for work
to be accomplished

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Frank & Lillian GilbrethFrank & Lillian Gilbreth
♦ Frank (1868-1924); Lillian
(1878-1972)
♦ Husband-and-wife
engineering team
♦ Further developed work
measurement methods
♦ Applied efficiency methods
to their home & 12 children!
♦ (Book & Movie: “Cheaper by
the Dozen,” book: “Bells on
Their Toes”) © 1995 Corel Corp.

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♦ Born 1863; died 1947
♦ In 1903, created Ford
Motor Company
♦ In 1913, first used
moving assembly line
to make Model T
♦ Unfinished product
moved by conveyor
past work station
♦ Paid workers very well for 1911 ($5/day!)
Henry FordHenry Ford
‘‘Make them all
alike!’
© 1995 Corel
Corp.

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W. Edwards DemingW. Edwards Deming
♦ Born 1900; died 1993
♦ Engineer & physicist
♦ Credited with teaching Japan
quality control methods in
post-WW2
♦ Used statistics to analyze
process
♦ His methods involve workers
in decisions

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Contributions FromContributions From
♦Human factors
♦Industrial engineering
♦Management science
♦Biological science
♦Physical sciences
♦Information science

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Significant Events in OMSignificant Events in OM
♦ Division of labor (Smith, 1776)
♦ Standardized parts (Whitney, 1800)
♦ Scientific management (Taylor, 1881)
♦ Coordinated assembly line (Ford 1913)
♦ Gantt charts (Gantt, 1916)
♦ Motion study (the Gilbreths, 1922)
♦ Quality control (Shewhart, 1924)

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Significant Events - ContinuedSignificant Events - Continued
♦ CPM/PERT (Dupont, 1957)
♦ MRP (Orlicky, 1960)
♦ CAD
♦ Flexible manufacturing systems (FMS)
♦ Manufacturing automation protocol (MAP)
♦ Computer integrated manufacturing (CIM)

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New Challenges in OMNew Challenges in OM
♦ Local or national focus
♦ Batch shipments
♦ Low bid purchasing
♦ Lengthy product
development
♦ Standard products
♦ Job specialization
♦ Global focus
♦ Just-in-time
♦ Supply chain
partnering
♦ Rapid product
development, alliances
♦ Mass customization
♦ Empowered
employees, teams
FromFrom ToTo

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Operations in the Service SectorOperations in the Service Sector

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Characteristics of GoodsCharacteristics of Goods
♦ Tangible product
♦ Consistent product
definition
♦ Production usually
separate from
consumption
♦ Can be inventoried
♦ Low customer
interaction © 1995 Corel Corp.

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Characteristics of ServiceCharacteristics of Service
♦ Intangible product
♦ Produced & consumed at
same time
♦ Often unique
♦ High customer interaction
♦ Inconsistent product
definition
♦ Often knowledge-based
♦ Frequently dispersed
© 1995 Corel Corp.

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Service EconomiesService Economies
Proportion of Employment in the Service SectorProportion of Employment in the Service Sector
0
10
20
30
40
50
60
70
80
Country

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Goods Versus ServicesGoods Versus Services
♦Can be resold
♦Can be inventoried
♦Some aspects of
quality measurable
♦Selling is distinct
from production
♦Reselling unusual
♦Difficult to
inventory
♦Quality difficult to
measure
♦Selling is part of
service
GoodsGoods ServiceService

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Goods Versus Services -Goods Versus Services -
ContinuedContinued
♦Product is
transportable
♦Site of facility
important for cost
♦Often easy to
automate
♦Revenue generated
primarily from
tangible product
♦Provider, not product
is transportable
♦Site of facility
important for
customer contact
♦Often difficult to
automate
♦Revenue generated
primarily from
intangible service.
GoodsGoods ServiceService

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Goods Contain Services / ServicesGoods Contain Services / Services
Contain GoodsContain Goods
0 25 50 75 100255075100
Automobile
Computer
Installed Carpeting
Fast-food Meal
Restaurant Meal
Auto Repair
Hospital Care
Advertising Agency
Investment Management
Consulting Service
Counseling
Percent of Product that is a Good Percent of Product that is a Service

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Organizations in Each Sector –Organizations in Each Sector – Table 1.4Table 1.4
Service Sector Example % of
all
Jobs
Professional
services, education,
legal, medical
New York City PS108, Notre Dame
University, San Diego Zoo
24.3
Trade (retail,
wholesale)
Walgreen’s, Wal-Mart, Nordstroms 20.6
Utilities,
transportation
Pacific Gas & Electric, American
Airlines, Santa Fe R.R, Roadway
Express
7.2

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Organizations in Each Sector –Organizations in Each Sector – Table 1.4Table 1.4
Service Sector Example % of
all
Jobs
Business & Repair
Services
Snelling & Snelling, Waste
Management, Pitney-Bowes
7.1
Finance, Insurance,
Real Estate
Citicorp, American Express,
Prudential, Aetna, Trammel Crow
6.5
Food, Lodging,
Entertainment
McDonald’s, Hard Rock Café,
Motel 6, Hilton Hotels, Walt Disney
Paramount Pictures
5.2
Public
Administration
U.S., State of Alabama, Cook
County
4.5

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Organizations in Each Sector –Organizations in Each Sector – Table 1.4Table 1.4
Manufacturing
Sector
Example % of
all
Jobs
General General Electric, Ford, U.S. Steel,
Intel
14.8
Construction Bechtel, McDermott 7.0
Agriculture King Ranch 2.4
Mining Homestake Mining 0.4

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Organizations in Each Sector –Organizations in Each Sector – Table 1.4Table 1.4
SummarySummary
Sector % of all Jobs
Service 75.4%
Manufacturing 24.6%

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1850 75 1900 25 50 75 2000 40 50 60 70 1970 75 80 85 90 95 2000
Percent
United States
Canada
France
Italy
Britain
Japan
W Germany
1970
2000
Services
Industry
Farming
250
200
150
100
50
0
80
%70
60
50
40
30
20
10
0
U.S. Employment, % Share Services as a Percent of GDP U.S. Exports of Services
In Billions of Dollars
Year 2000 data is estimated
Development of the Service EconomyDevelopment of the Service Economy

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Exciting New Challenges in OperationsExciting New Challenges in Operations
ManagementManagement

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Changing Challenges for theChanging Challenges for the
Operations ManagerOperations Manager
Past Causes Future
Local or
national
focus
Low-cost, reliable worldwide
communication and
transportation networks
Global Focus
Batch (large)
shipments
Cost of capital puts pressure on
reducing investment in
inventory
Just-in-time
shipments
Low-bid
purchasing
Quality emphasis requires that
suppliers be engaged in product
improvement
Supply-chain
partners
Lengthy
product
development
Shorter life cycles, rapid
international communication,
computer-aided design, and
international collaboration
Rapid product
development,
alliances,
collaborative
designs

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Changing Challenges for theChanging Challenges for the
Operations ManagerOperations Manager
Past Causes Future
Standardized
products
Affluence and worldwide markets;
increasingly flexible production
processes
Mass
customization
Job
specialization
Changing sociocultural milieu.
Increasingly a knowledge and
information society.
Empowered
employees,
teams, and lean
production
Low cost
focus
Environmental issues, ISO 14000,
increasing disposal costs
Environmentally
sensitive
production,
Green
manufacturing,
recycled
materials,
remanufacturing

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The Productivity ChallengeThe Productivity Challenge

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The Economic SystemThe Economic System
Transforms Inputs to OutputsTransforms Inputs to Outputs
The economic system
transforms inputs to outputs
at about an annual 2.5%
increase in productivity
(capital 38% of 2.5%), labor
(10% of 2.5%), management
(52% of 2.5%)
Land, Labor,
Capital,
Management
Goods and
Services
Feedback loop
Inputs Process Outputs

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Typical Impact of QualityTypical Impact of Quality
ImprovementImprovement
Parts per man hour
95
100
105
110
115
Year A Year B Year C
Cost per unit decreased
$1.50
$1.75
$2.00
$2.25
Year A Year B Year C
Average worker's annual cash
compensation increased
24000
25000
26000
27000
Year A Year B Year C
As productivity improved Costs were pared Wages increased

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♦ Measure of process improvement
♦ Represents output relative to input
♦ Only through productivity increases can our
standard of living improve
ProductivityProductivity
ProductivityProductivity UnitsUnits producedproduced
Input usedInput used==

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Multi-Product ProductivityMulti-Product Productivity
Productivity =
Output
Labor + material + energy + capital + miscellaneous

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Measurement ProblemsMeasurement Problems
♦Quality may change while the quantity of
inputs and outputs remains constant
♦External elements may cause an increase or
decrease in productivity
♦Precise units of measure may be lacking

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Productivity VariablesProductivity Variables
♦Labor - contributes about 10% of the annual
increase
♦Capital - contributes about 32% of the annual
increase
♦Management - contributes about 52% of the
annual increase

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Key Variables for Improved LaborKey Variables for Improved Labor
ProductivityProductivity
♦Basic education appropriate for the labor
force
♦Diet of the labor force
♦Social overhead that makes labor available
♦Maintaining and enhancing skills in the midst
of rapidly changing technology and
knowledge

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Jobs in the U.SJobs in the U.S
26%
18%
16%
14%
6%
6% 5% 5%
3%
1%
Education, Health, etc.
Manufacturing
Retail Trade
State & Local Gov't
Finance, Insurance
Wholesale Trade
Transport, Public Util.
Construction
Federal Government
Mining

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Comparison of ProductivityComparison of Productivity

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0
2
4
6
8
10
10 15 20 25 30 35
Nonresidential fixed investment to GNP (%)
U.S.
U.K.
Canada
Italy
Belgium
France
Netherlands
Japan
Best fit
Percentincreaseinproductivity
(Mfg)
Investment and ProductivityInvestment and Productivity
in Selected Nationsin Selected Nations

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Service ProductivityService Productivity
♦Typically labor intensive
♦Frequently individually processed
♦Often an intellectual task performed by
professionals
♦Often difficult to mechanize
♦Often difficult to evaluate for quality

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The Challenge of Social ResponsibilityThe Challenge of Social Responsibility
Increasing emphasis on business and
social responsibility