Operations Management

Learning Objectives When you complete this chapter, you should be able to: Identify or Define: • Production and productivity • Operations management (OM) • The future of the discipline • Measuring productivity

What Is Operations Management? Operations management (OM) is the set of activities and knowledge that help managers to find the most efficient and effective way of transforming inputs into outputs Production is the creation of goods and services

Organizing to Produce Goods and Services • Essential functions: • Generate Demand, e.g. Marketing and Sales [Manage the Market] • Produce Products & Services, e.g. Production/Operations [Manage the Operations] • Generate Support, e.g. Finance, Accounting, Customer Support[Manage the Money]

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 Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising Organizational Charts Airline Figure 1.1(B)

Finance/ Marketing Accounting OM Option Option Option Increase Reduce Reduce Sales Finance Production Current Revenue 50% Costs 50% 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 – 4,250 – 7,500 Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500 Options for Increasing Contribution

What Operations Managers Do Basic Management Functions Planning Organizing Staffing Leading Controlling

The Critical Decisions • Process and capacity design • What process and what capacity will these products require? • Location • Where should we put the facility? • Service and product design • What good or service should we offer? • Quality management • How do we define quality? Table 1.2 (cont.)

The Critical Decisions • Layout design • How should we arrange the facility and material flow? • Human resources and job design • How do we provide a reasonable work environment? • Supply-chain management • Should we make or buy this component? • Inventory, material requirements planning, and JIT • How much inventory of each item should we have? Table 1.2 (cont.)

Significant Events in OM Figure 1.3

Contributions to OM from other Disciplines • Human factors • Industrial engineering • Management science • Biological science • Physical sciences • Information science

90 − 80 − 70 − 60 − 50 − 40 − 30 − 20 − 10 − 0 − Australia Canada China Czech Rep France Germany Hong Kong Japan Mexico Russian Fed South Africa Spain UK US Manufacturing Services Industry and Services as Percentage of GDP

Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product) Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product Reselling unusual Difficult to inventory Quality difficult to measure Selling is part of service Provider, not product, isoften transportable Site of facility important forcustomer contact Often difficult to automate Revenue generated primarily from the intangible service Goods Versus Services Table 1.3

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 this measure of efficiency Effectiveness is doing the right thing. Efficiency is doing things right. Production is a measure of output only and not a measure of efficiency

Processes Outputs Inputs Processes Sub-processes Activities Goods andservices Raw Materials, Labor,Capital,Machines Feedbackloop The Economic System Figure 1.7

Processes Outputs Inputs Processes Sub-processes Activities Goods andservices(units, $) Raw Materials (units), Labor (number, hours, $),Capital ($),Machines (units, hours) Feedbackloop The System (with Quantitative Measures) Figure 1.7

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

Factor Productivity Types Output Labor + Material + Energy + Capital + Miscellaneous Total Factor Productivity = Output Labor Labor Productivity = Output Material Material Productivity = Output Capital Capital Productivity =

Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day Staff of 4 works 8 hrs/day Old labor productivity = = .25 titles/labor-hr 8 titles/day 32 labor-hrs 14 titles/day 32 labor-hrs New labor productivity = = .4375 titles/labor-hr Collins Title Productivity

Old System: Staff of 4 works 8 hrs/day 8 titles/day Payroll cost = $640/day Overhead = $400/day New System: 14 titles/day Overhead = $800/day 8 titles/day $640 + 400 Old multifactor productivity = 14 titles/day $640 + 800 New multifactor productivity = Collins Title Productivity = .0077 titles/dollar = .0097 titles/dollar

In-Class Example: Productivity Calculations

Actions Must Change Before The Productivity Measure Changes (Taco Bell) Improvements: • Revised the menu • Designed meals for easy preparation • Shifted some preparation to suppliers • Efficient layout and automation • Training and employee empowerment

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 • Stores handle twice the volume with half the labor • Fast-food low-cost leader Productivity at Taco Bell

Conclusion: • Demand matters • Products/Services matter • Operations matter • Operations management matters Summary

Operations Management