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1 - 1© 2014 Pearson Education, Inc.
Operations and
Productivity
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition
PowerPoint slides by Jeff Heyl
11
© 2014 Pearson Education, Inc.

PART ONE
Introduction to Operations
Management

Outline
▶ Global Company Profile: Hard Rock Cafe
▶ What Is Operations Management?
▶ Organizing to Produce Goods and Services
▶ The Supply Chain
▶ Why Study OM?
▶ What Operations Managers Do

Outline - Continued
▶ The Heritage of Operations Management
▶ Operations for Goods and Services
▶ Growth of Services
▶ Service Pay
▶ The Productivity Challenge
▶ Productivity Measurement
▶ Productivity Variables
▶ Productivity and the Service Sector
▶ New Challenges in Operations Management
▶ Ethics, Social Responsibility, and
Sustainability

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
4. Compute single-factor productivity
5. Compute multifactor productivity
6. Identify the critical variables in enhancing productivity

Operations Management
at Hard Rock Cafe
▶ Operations managers throughout the world are producing
products every day to provide for the well-being of society.
These products take on a multitude of forms. They may be
washing machines at Whirlpool, motion pictures at
DreamWorks, rides at Disney World, or food at Hard Rock
Cafe. These firms produce thousands of complex products
every day—to be delivered as the customer ordered them,
when the customer wants them, and where the customer
wants them. This is a challenging task, and the operations
manager’s job, whether at Whirlpool, DreamWorks, Disney,
or Hard Rock, is demanding.

Operations Management
at Hard Rock Cafe
▶ First opened in 1971 in London
▶ Now – 150 restaurants in over 53 countries
▶ It made its name with Rock music memorabilia
▶ Creates value in the form of good food and
entertainment
▶ 3,500+
custom products (meals) per day in Orlando
▶ How does an item get on the menu?
▶ Role of the Operations Manager
© 2014 Pearson Education, Inc.

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
Operations Management is the management of systems
or processes that create goods and/or provide services
As we progress through this text, we will discover how to
manage operations in an economy in which both
customers and suppliers are located throughout the
world. We will see how operations managers create the
goods and services that enrich our lives.

What Is Operations
Management?
Activities creating goods and services take place in all
organizations. In manufacturing firms, the production activities
that create goods are usually quite obvious. In them, we can
see the creation of a tangible product such as a Sony TV or a
Harley-Davidson motorcycle.
In an organization that does not create a tangible good or
product, the production function may be less obvious. We
often call these activities services. The product may take such
forms as the transfer of funds from a savings account to a
checking account, the transplant of a liver, the filling of an
empty seat on an airplane, or the education of a student.
Regardless of whether the end product is a good or service,
the production activities that go on in the organization are often
referred to as operations, or operations management .

Organizing to Produce
Goods and Services
▶ To create goods and services, all organizations
perform three Essential functions:
1. Marketing – generates demand or at least take the
order
2. Production/operations – creates the product, and
delivers the product
3. Finance/accounting – tracks how well the
organization is doing, pays bills, collects the money

Organizational Charts
Figure 1.1
Organization Charts for two Service Organizations
and one Manufacturing Organization
(A) a bank, (B) an airline, and (C) a manufacturing
organization. The blue areas are OM activities.

Figure 1.1

The Supply Chain
▶ Through the three functions—marketing,
operations, and finance—value for the
customer is created. However, firms seldom
create this value by themselves. Instead, they
rely on a variety of suppliers who provide
everything from raw materials to accounting
services. These suppliers, when taken
together, can be thought of as a supply chain

The Supply Chain
▶ A global network of organizations and activities
that supply a firm with goods and services
▶ When Members of the supply chain
collaborate to achieve high levels of customer
satisfaction, we have a tremendous force for
efficiency and competitive advantage.
▶ Competition in the 21st century is not between
companies; it is between supply chains
Figure 1.2
Farmer Syrup Bottler Distributor Retailer
producer

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
Indeed, OM provides a major opportunity for
an organization to improve its profitability

Example 1: EXAMINING THE OPTIONS
FOR INCREASING CONTRIBUTION
▶ Fisher Technologies is a small firm that must double its dollar
contribution to fixed cost and profit in order to be profitable
enough to purchase the next generation of production
equipment.
▶ Management has determined that if the firm fails to increase
contribution, the old equipment will force Fisher to go out of
business.
▶ APPROACH: Table 1.1 shows a simple profit-and-loss
statement and three strategic options (marketing,
finance/accounting, and operations) for the firm.

Options for Increasing
Contribution
TABLE 1.1
MARKETING
OPTION
FINANCE
/ACCOUNTING
OPTION OM OPTION
CURRENT
INCREASE
SALES
REVENUE 50%
REDUCE
FINANCE COSTS
50%
REDUCE
PRODUCTION
COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –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
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

▶ The first option is a marketing option, where excellent
marketing management may increase sales by 50%,
contribution will in turn increase 7500/10500=71%. But increasing
sales 50% may be difficult; it may even be impossible.
▶ The second option is a finance/accounting option , where
finance costs are cut in half through good financial
management. But even a reduction of 50% is still inadequate
for generating the necessary increase in contribution.
Contribution is increased by only 21%.
▶ The third option is an OM option, where management reduces
production costs by 20% and increases contribution by 114%.

▶ SOLUTION: Given the conditions of our brief example, Fisher
Technologies has increased contribution from $10,500 to
$22,500.
▶ INSIGHT: The OM option not only yields the greatest
improvement in contribution but also may be the only feasible
option. Increasing sales by 50% and decreasing finance cost
by 50% may both be virtually impossible. Reducing operations
cost by 20% may be difficult but feasible.
▶ LEARNING EXERCISE: What is the impact of only a 15%
decrease in costs in the OM option?
▶ [Answer: A $19,500 contribution; an 86% increase.]
▶ Example1 underscores the importance of the effective
operations activity of a firm. Development of increasingly
effective operations is the approach taken by many companies
as they face growing global competition.

What Operations
Managers Do
Basic Management Functions
▶ Planning
▶ Organizing
▶ Staffing
▶ Leading
▶ Controlling
Operations managers apply this management process to the decisions
they make in the OM function. The 10 strategic OM decisions are
introduced in Table 1.2 .Successfully addressing each of these decisions
requires planning, organizing, staffing, leading, and controlling.

Ten Strategic Decisions
TABLE 1.2
DECISION CHAPTER(S)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17

The Strategic Decisions
1. Design of goods and services
▶ Defines what is required of operations in each
of the other OM decisions. For instance,
▶ Product design determines quality, cost,
sustainability and human resources
2. Managing quality
▶ Determine the customer’s quality expectations
▶ Establish policies and procedures to identify
and achieve that quality
Table 1.2 (cont.)

3. Process and capacity design
▶ How is a good or service produced?
▶ Commits management to specific technology,
quality, resources, and investment.
4. Location strategy
▶ Nearness to customers, suppliers, and talent.
▶ Considering costs, infrastructure, logistics,
and government.
Table 1.2 (cont.)

5. Layout strategy
▶ Integrate capacity needs, personnel levels,
technology, and inventory
▶ Determine the efficient flow of materials, people,
and information.
6. Human resources and job design
▶ Recruit, motivate, and retain personnel with the
required talent and skills.
▶ Integral and expensive part of the total system
design.
Table 1.2 (cont.)

7. Supply-chain management
▶ Integrate supply chain into the firm’s strategy.
▶ Determine what is to be purchased, from
whom, and under what conditions.
8. Inventory management
▶ Inventory ordering and holding decisions.
▶ Optimize considering customer satisfaction,
supplier capability, and production schedules.
Table 1.2 (cont.)

9. Scheduling
▶ Determine and implement intermediate-
and short-term schedules.
▶ Utilize personnel and facilities while
meeting customer demands.
10. Maintenance
▶ Consider facility capacity, production
demands, and personnel.
▶ Maintain a reliable and stable process.
Table 1.2 (cont.)

Where are the OM Jobs?
▶ How does one get started on a career in operations?
The 10 strategic OM decisions identified in Table 1.2
are made by individuals who work in the disciplines
shown in the blue areas of Figure 1.1 .
▶ Business students who know their accounting,
statistics, finance, and OM have an opportunity to
assume entry-level positions in all of these areas.
▶ The more background an OM student has in
accounting, statistics, information systems, and
mathematics, the more job opportunities will be
available.
▶ About 40% of all jobs are in OM.
▶ Figure 1.3 shows some recent job opportunities.

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

Opportunities
Figure 1.3

Certifications
▶ APICS, the Association for Operations
Management
▶ American Society for Quality (ASQ)
▶ Institute for Supply Management (ISM)
▶ Project Management Institute (PMI)
▶ Council of Supply Chain Management
Professionals
▶ Charter Institute of Purchasing and Supply
(CIPS)

Significant Events in OM
Figure 1.4

The Heritage of OM
Contributions p10:
▶Division of labor (Adam Smith 1776; Charles Babbage 1852)
▶Standardized (interchangeable) parts (Whitney 1800)
▶Scientific Management (Taylor 1881)
▶Coordinated assembly line (Ford/ Sorenson 1913)
▶Gantt charts (Gantt 1916)
▶Motion study (Frank and Lillian Gilbreth 1922)
▶Quality control (Shewhart 1924; Deming 1950)
Operations management will continue to progress as
contributions from other disciplines, including industrial
engineering, statistics, management, and economics,
improve decision making.

The Heritage of OM
▶ Computer (Atanasoff 1938)
▶ CPM/PERT (DuPont 1957, Navy 1958)
▶ 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)

Eli 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

Frederick 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 and time studies
▶ Created efficiency principles

Taylor’s Principles
Management Should Take More
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

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

▶ 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 Ford

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

Contributions From
▶ Human factors
▶ Industrial engineering
▶ Management science
▶ Biological science
▶ Physical sciences
▶ Information technology

Operations for
Goods and Services
▶ Manufacturers produce tangible product, services often
intangible But many products are a combination of a good and
a service, which complicates the definition of a service.
However, we define services as including repair and
maintenance, government, food and lodging, transportation,
insurance, trade, financial, real estate, education, legal,
medical, entertainment, and other professional occupations.
▶ Operations activities for both goods and services often very
similar. Both have quality standards, are designed and
produced on a schedule that meets customer demand, and
are made in a facility where people are employed
▶ Distinction not always clear
▶ Few pure services meaning they have no tangible component

Differences Between Goods and
Services
TABLE 1.3
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty
salon produces a haircut that is consumed as it is
produced
Product can usually be kept in inventory (beauty care
products)
Unique: Your investments and medical care are
unique
Similar products produced (iPods)
High customer interaction: Often what the customer
is paying for (consulting, education)
Limited customer involvement in production
Inconsistent product definition: Auto Insurance
changes with age and type of car
Product standardized (iPhone)
Often knowledge based: Legal, education, and
medical services are hard to automate
Standard tangible product tends to make automation
feasible
Services dispersed: Service may occur at retail store,
local office, house call, or via internet.
Product typically produced at a fixed facility
Quality may be hard to evaluate: Consulting,
education, and medical services
Many aspects of quality for tangible products are easy
to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value

U.S. Agriculture, Manufacturing,
and Service Employment
Figure 1.5
100 –
80 –
60 –
40 –
20 –
0 –
PercentofWorkforce
1800
1825
1850
1875
1900
1925
1950
1975
2000
2025 (est.)
| | | | | | | | |
Agriculture Services Manufacturing

Organizations in Each Sector
TABLE 1.4
SECTOR EXAMPLE
PERCENT OF
ALL JOBS
Service Sector
Education, Legal, Medical, Other
Trade (retail, wholesale)
Utilities, Transportation
Professional and Business Services
Finance, Information, Real Estate
Food, Lodging, Entertainment
Public Administration
San Diego Zoo, Arnold Palmer Hospital
Walgreen's, Walmart, Nordstrom
Pacific Gas & Electric, American Airlines
Snelling and Snelling, Waste Management, Inc.
Citicorp, American Express, Prudential, Aetna
Olive Garden, Motel 6, Walt Disney
U.S., State of Alabama, Cook County
13.2
13.8
3.3
10.1
21.0
9.0
15.5
85.9
Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 8.2
Construction Sector Bechtel, McDermott 4.1
Agriculture King Ranch 1.4
Mining Sector Homestake Mining .4
Grand Total 100.0

Service Pay
▶ Perception that services are low-paying
▶ 42% of service workers receive above average
wages
▶ 14 of 33 service industries pay below average
▶ Retail trade pays only 61% of national average
▶ Overall average wage is 96% of the average

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

Feedback loop
Outputs
Goods
and
services
Transformation
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 System
Inputs
Labor,
capital,
management
Figure 1.6

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

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
Operations improvements have
helped Starbucks increase yearly
revenue per outlet by $250,000 to
$1,000,000 in seven years.
Productivity has improved by 27%, or
about 4.5% per year.

▶ Measure of process improvement
▶ Represents output relative to input
▶ Only through productivity increases
can our standard of living improve
Productivity
Productivity =
Units produced
Input used

Productivity Calculations
Productivity =
Units produced
Labor-hours used
= = 4 units/labor-hour
1,000
250
Labor Productivity
For example, if units produced = 1,000 and labor-hours used is 250, then:
One resource input  single-factor productivity

Multi-Factor Productivity
Output
Labor + Material + Energy +
Capital + Miscellaneous
Productivity =
► Also known as total factor productivity
► Output and inputs are often expressed in dollars
Multiple resource inputs  multi-factor productivity

Collins Title Ltd. Productivity
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:
=
Old labor
productivity
8 titles/day
32 labor-hrs

Collins Title Ltd. Productivity
Collins Title Insurance Ltd. wants to evaluate its labor and
multifactor productivity with a new computerized title-
search system. The company has a staff of four, each
working 8 hours per day (for a payroll cost of $640/day)
and overhead expenses of $400 per day. Collins
processes and closes on 8 titles each day. The new
computerized title-search system will allow the processing
of 14 titles per day. Although the staff, their work hours,
and pay are the same, the overhead expenses are now
$800 per day.

Collins Title Productivity
Old System:
8 titles/day
32 labor-hrs
=
Old labor
productivity = 0.25 titles/labor-hr

Old System:
14 titles/day Overhead = $800/day
New System:
8 titles/day
32 labor-hrs
=
Old labor
productivity
=
New labor
productivity
= 0.25 titles/labor-hr
14 titles/day
32 labor-hrs

Old System:
New System:
8 titles/day
32 labor-hrs
=
Old labor
productivity = 0.25 titles/labor-hr
14 titles/day
32 labor-hrs
=
New labor
productivity
= 0.4375 titles/labor-hr

Old System:
New System:
=
Old multifactor
productivity
8 titles/day
$640 + 400

Old System:
New System:
8 titles/day
$640 + 400
=
Old multifactor
productivity
= .0077 titles/dollar

Old System:
New System:
8 titles/day
$640 + 400
=
Old multifactor
productivity
=
New multifactor
productivity
14 titles/day
$640 + 800

Old System:
New System:
8 titles/day
$640 + 400
14 titles/day
$640 + 800
=
Old multifactor
productivity
=
New multifactor
productivity

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
3. Precise units of measure may be
lacking

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

Key Variables for Improved
Labor Productivity
1. Basic education appropriate for the labor force
2. Diet ‫ةةةةةةة‬ of the labor force:
3. Social overhead that makes labor available
▶ ‫ةةةةة‬ ‫ةةةةة‬ ‫ةةةةةةة‬ ‫ةة‬ ‫ةةةةةة‬ ‫ةةةةةة‬ ‫ةةةة‬ Illiteracy and poor diets
are a major impediment to productivity
▶ Challenge is in maintaining and enhancing skills in the
midst of rapidly changing technology and knowledge
▶ Overcoming shortcomings in the quality of labor is a major challenge.
Perhaps improvements can be found not only through increasing
competence of labor but also via better utilized labor with a stronger
commitment . Training,motivation, team building, and the human
resource strategies discussed in Chapter 10

Labor Skills
About half of the 17-year-olds in the U.S. cannot
correctly answer questions of this type
Figure 1.7

2. Capital
10
8
6
4
2
0
Percentincreaseinproductivity
Percentage investment
10 15 20 25 30 35

2. Capital
▶ Human beings are tool-using animals. Capital investment provides
those tools.
▶ Capital investment has increased every year
▶ Inflation and taxes increase the cost of capital, making capital
investment increasingly expensive.
▶ When the capital invested per employee drops, we can expect a drop
in productivity.
▶ Using labor rather than capital may reduce unemployment in the short
run, but it also makes economies less productive and therefore lowers
wages in the long run. Capital investment is often a necessary, but
seldom a sufficient, ingredient in the battle for increased productivity.
▶ The trade-off between capital and labor is continually in flux. The
higher the cost of capital or perceived risk, the more projects requiring
capital are “squeezed out”: they are not pursued because the
potential return on investment for a given risk has been reduced.
Managers adjust their investment plans to changes in capital cost and
risk.

3. Management
▶ Ensures labor and capital are effectively used to
increase productivity, This increase includes
improvements made
▶ Through the Use of knowledge and the
▶ Application of technologies
▶ Using knowledge and technology is critical in postindustrial
societies. Consequently, postindustrial societies are also
known as knowledge societies . Knowledge societies are
those in which much of the labor force has migrated from
manual work to technical and information-processing tasks
requiring ongoing education which is costly. The expanding
knowledge base of contemporary society requires that
managers use technology and knowledge effectively

3. Management
▶ The productivity challenge is difficult. A country
cannot be a world-class competitor with second-
class inputs. Poorly educated labor, inadequate
capital, and dated technology are second-class
inputs. High productivity and high-quality outputs
require high-quality inputs, including good
operations managers.

Productivity and the
Service Sector
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 and automate
5. Often difficult to evaluate for quality

Productivity at Taco Bell
Improvements:
▶ Revised the menu
▶ Designed meals for easy preparation
▶ Shifted some preparation to suppliers
▶ Efficient layout and automation
▶ Training and employee empowerment
▶ New water and energy saving grills

Productivity at Taco Bell
Improvements::
Results::
▶ Preparation time cut to 8 seconds
▶ Management span of control increased from 5
to 30
▶ In-store labor cut by 15 hours/day
▶ Floor space reduced by more than 50%
▶ Stores average 164 seconds/customer from
drive-up to pull-out
▶ Water- and energy-savings grills conserve 300
million gallons of water and 200 million KwH of
electricity each year
▶ Green-inspired cooking method saves 5,800
restaurants $17 million per year

New Challenges in OM
▶ Global focus
▶ Supply-chain partnering
▶ Sustainability: Operations managers’ continuing
battle to improve productivity is concerned with designing
products and processes that are ecologically sustainable.
▶ Rapid product development
▶ Mass customization: as consumers are
increasingly aware of innovation and options, substantial
pressure is placed on firms to respond in a creative way.
And OM must rapidly respond with product designs and
flexible production processes. The goal is to produce
customized products, whenever and wherever needed.
▶ Lean operations:
▶ Empowered employees

Ethics, Social Responsibility,
and Sustainability
Challenges facing
operations managers:
▶ Develop and produce safe, high-quality green
products
▶ Train, retrain, and motivate employees in a safe
workplace
▶ Honor stakeholder commitments
▶ If operations managers have a moral awareness and focus
on increasing productivity in a system where all
stakeholders have a voice, and many ethical challenges will
be successfully addressed.

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