Production and Operations Management Systems

Production and Operations Management Systems Chapter 2: Strategy, Productivity and History Sushil K. Gupta Martin K. Starr 2014

After reading this chapter, you should be able to: • Understand the strategic importance of productivity to an organization. • Evaluate the applicability of various measures of productivity. • Explain what contributes to good productivity. • Discuss how to improve productivity. • Explain why productivity is a systems issue. • Relate productivity and price. • Explain demand elasticity as a systems link between P/OM and marketing. • Describe the effects of quality on elasticity. • Explain why quality elasticity is critical to P/OM.

After reading this chapter, you should be able to (continued): • Apply the concepts of economies of scale and division of labor to the management of operations. • Relate productivity and CAD/CAM. • Relate productivity and FPS/FMS. • Explain mass customization and relate that capability to productivity. • Explain how the history of P/OM shows continual improvement in the P/OM input–output transformation model with resultant increases in productivity.

Productivity—A Major P/OM Issue • Productivity must be measurable to be useful. • Different measures of productivity serve various needs (e.g., labor, capital, and multifactor (total) productivity). • Productivity is measured by company (enterprise, plant, division, etc.) or by country (national, or regions, etc.) • Productivity is measured within specific sectors of industry using ISIC (International Standard Industrial Classification) by countries all over the world.

Strategic Thinking • High productivity is necessary but not sufficient to assure competitiveness. • Productivity excellence is useless without market acceptance (a highly productive buggy whip company is whistling in the dark). • Adaptability is critical when product design technology (or style) changes. • Flexibility is a strategic goal in a turbulent environment. Market acceptance, right quality, right quantity, right time and place, lowest cost, flexibility, adaptability, and maximum productivity levels are important endeavors to pursue by P/OM.

Productivity Measurement • Measurement of productivity creates quandaries because it can be defined in many different ways. • For adequate information a firm may need to measure productivity in several ways. • One thing is common to all definitions of productivity - productivity is always a measure of outputs over inputs. • It is, therefore, a measure of the efficiency with which resources are utilized to create revenue and profit.* • Three important measure of productivity include: • Labor productivity • Capital Productivity • Multifactor Productivity *Assuming market acceptance

Three Productivity Measures • Labor Productivity = Output/Labor Input • Labor Input is dollars paid for labor. • Capital Productivity = Output/Capital Input • Capital Input is dollars for capital resources. • Multifactor Productivity = Output/Total Inputs • Multifactor Input is dollars for all resources. Multifactor productivity is also known as total productivity.

Total Productivity Is a Systems Measure • Total productivity impacts the bottom line when output is measured in sales dollars. • Total productivity is a function of the entire interacting system, i.e., product design, hiring, training, marketing plans, processes used, organizational design, nature of competition, and state of the economy. • In sports, winning teams are considered highly productive; losing teams are cash-drains and have low productivity. The system must include paid attendance at games which increases when teams win.

Trends in Multifactor (MFP) Productivity Average Annual percent Changes in USA Multifactor Productivity • 1948 to 1973: Healthy though not robust growth. • 1973 to 1995: The shrinking era – tough years for U.S. manufacturing firms. • Then began a long learning process on the part of U.S. auto manufacturers to increase their productivity. Source: Table A, Bureau of Labor Statistics, June 28, 2013 entitled: Preliminary Multifactor Productivity Trends - 2012.

Useful Operational Measures of Productivity • Productivity measures should reflect strategic goals. • It takes insight and creativity to measure what matters in performance and what truly can be controlled and corrected. • Productivity measures can be common-sense ratios. Examples include the following. • Dollar value of pieces made in a factory divided by the cost of making them, • The number of documents produced by the typing pool divided by the number of people doing word processing. • A productivity measure used by restaurants is the daily dollars generated per table or per square foot.

Useful Operational Measures of Productivity (continued) • Airlines measure plane occupancy per flight and average occupancy per route, as well as for all routes flown. • Department stores use sales dollars per square foot of space. • Mail-order companies measure sales dollars for categories (i.e., fashion, toys, and luggage) by type of illustration (i.e., color and size) on a percent of page basis. • Many companies measure the productivity of their complaint departments by the ratio of the number of complaints dealt with per day divided by the number of complaint handlers. Such operational measures of productivity are valuable benchmarks to companies that are focused on continuous improvement. Relative productivity is such a benchmark.

System Wide Issues Impacting Productivity • The productivity of the company is the composite of the individual productivity functions. • Volume of output sold is a measure of the productivity of the sales department. • Cost of goods sold is a measure of the productivity of the process designers, the R&D department, purchasing department and the operations managers. • Deliveries per day to customers is a measure of the distribution system’s productivity.

System Wide Issues Impacting Productivity (continuing) • Warranties, if exercised, represent productivity decreases. • Productivity issues are woven into all parts of the supplier-producer-customer value chain and the input–output transformation process. The system-wide issues that influence the role of productivity and its measurementinclude: • Global issues • Bureaucracy • Size of firm • Price-demand elasticity • Elasticity of quality • Economy of scale and division of labor.

Global Issues • Increasingly, companies buy from suppliers located around the world and sell in markets that are equally dispersed. • Production facilities, including fabrication, assembly, chemical and drug processes, and service facilities (e.g., call centers), are located globally. • The outsourcing of services has become familiar; outsourced call centers is an obvious example of a global phenomenon. • Product life is becoming shorter and shorter. • Quality deterioration global distances away impairs speed to recovery. • Exchange rate imbalances can cause both gains and losses that relate to the productivity of investments.

Global Issues (continued) • There is scarcity of capital to invest in new technology, technical knowledge, and training in many developing countries. • Productivity improvements can be registered by companies that reduce the number of direct employees, increase the use of part-time help, rely more on outsourcing and subcontracting of parts, and employ outside maintenance companies, among other things. • Better methods improve output values—rather than soley reducing input costs (like TPS) The Toyota Production System (called TPS) is referenced continually by businesses all over the world. TPS is P/OM-hub-centric, connecting all other business functions. In the big picture, productivity performance is the result of international interactions.

Bureaucracy, Flexibility and Productivity • Bureaucracy—the great inhibitor of flexibility, is a major factor that accounts for poor productivity. • Bureaucracy is institutionalized officialism which has layers of red tape to cut through in order to conclude activities and operations. • Bureaucracy uses organizational controls in the quest for low risk- all systems have an inherent risk aversion to protect the status quo. • Bureaucracy, however, plays an important stabilizing role in organizations that are undisciplined and prone to accidents. • Routines known to be safe (low risk) are insurance against risk of catastrophic damage. The status quo often impedes progress and supports rigidity.

Bureaucracy, Flexibility and Productivity (continued) • Flexibility, the ability to adapt to new situations, is related to productivity in a number of ways. New situations, among many others, include: • New technology • The need to be global. • Shorter product life cycles • Mass customization replacing mass production • Design variations among different countries and even regions of the same country. When bureaucratic constraints are removed the afflicted organizations tend to regain some ability to rebound.

Size of Firms and Flexibility • Organizational awareness of the need for flexibility has been recognized by many large organizations but solutions for big bureaucratic companies have been elusive. • Small- and medium-sized firms consist of about 300 people. • The upper limit should be no more than 500. • Given the usual proportions of other functions, a sensible limit for the size of an efficient production system is in the neighborhood of 100 to 200 people. • By using divisional structures, it is reasonable to assume that a number of relatively autonomous divisions of sensible size can be related within the firm.

Price–Demand Elasticity and Productivity • Elasticity is a rate-of-change measure that expresses the degree to which demand grows or shrinks in response to a price change. • Low elasticity, called inelasticity, means that demand levels are relatively insensitive to price changes. • Products with no substitutable alternatives have low elasticity. • Product designers who strive for exceptional qualities and production managers who demand the highest feasible process qualities are creating barriers to substitutability. • Perfect inelasticity is experienced when an industrial customer is dependent on one supplier for special materials. • Most customers try to get out of such a constraining situation.

Elasticity of Quality and Productivity • Quality of the product affects demand volume at a given price. • Customers take both price and quality into account. • Customers’ quality expectations often override price considerations. • The quality–demand elasticity needs to be determined. • Essentially, it is necessary to establish how much extra money customers would be willing to pay for superior quality or for an added quality feature. • By noting the distribution of the additional amounts of money that people would pay for superior quality or an added feature, it is possible to quantify the effects of quality and price on demand elasticity.

Economies of Scale and the Division of Labor • Economies of scale are reductions in variable costs directly related to increasing volumes of production output. • Materials and labor are an important component of the variable per unit cost. • The design of the product or service determines what materials are needed. • Greater purchase volumes of materials generally are rewarded with discounts. • The machines that can be used for high-volume outputs are significantly faster than machines that are economic for low-volume outputs.

Economies of Scale and the Division of Labor (continued) • High volumes can pay for pre-engineering and improvement studies of the interactions between the design of jobs and the processes used, while low volumes cannot. • High volumes generate learning about how to do the job better; low volumes do not. • The design of jobs determines the amount of labor and the skill levels required. • Division of labor, proposed by Adam Smith (1776), leads to specialization which in turn improves productivity. To make division of labor worthwhile, the volume of production must be sufficient.

History of Improvements of P/OM Transformations • The stages of history have moved production and operations capabilities from low-volume custom work through high-volume, rapid, and continuous output systems, using modular production and allowing mass customization. • The capability of P/OM processes to deliver goods and services has ramped up in steps or stages over time. • The study of the history of P/OM production transformation processes allows us to determine which events triggered these stages of production theory.

The 7 Steps in the Development of Production Theory—plus the Beginning • The Beginning: Artisans, Apprentices, and Trainees. • The First Step: Interchangeable Parts (IP) • The Second Step: Scientific Management (SM) • The Third Step: Sequenced Assembly (SA). • The Fourth Step: Statistical Quality Control (SQC) • The Fifth Step: Lean Production Systems (LPS) • The Sixth Step: Mass Customization with CAD, CAM and FPS; including nano-times for changeovers. • The Seventh Step: Global Competition: Year 2010 Plus These stages are described next. Dates mentioned are approximate (but satisfactory). It is not possible to pinpoint exactly when each contribution was made.

Artisans, Apprentices, and Trainees—The Beginning • The Renaissance period (1300s–1600s) signaled a surge of intellectual and productive vitality in Europe. • Accomplishments centered on artisans, apprentices, and craft guilds. • Production transformations were by hand. • Output volumes were very small. • Before the Industrial Revolution began (around 1770), Process techniques were manual skills handed down from generation to generation.

Artisans, Apprentices, and Trainees—The Beginning (continued) • Apprenticeship still has significance for many service functions. Great chefs almost always are the pupils of great chefs. • The art element, both in manufacturing and service, is now disappearing. Computer know-how is replacing people know-how When the important knowledge resides in the minds and hands of skilled workers, then the percent of art is high and the percent of science is low. Over time, this percentage has shifted in manufacturing so that engineering, technology, and computer programming play an increasing role.

First Step: Interchangeable Parts (IP) • The concept of interchangeable parts (IP) is: It allows batches of parts to be made, any one of which will fit into the assembled product. • IP was the catalyst around which new methods for production transformation began to develop. • The parts are interchangeable because each one falls within the allowable design tolerances. • Machines that could produce parts to conform to the designer’s tolerances were the keystone. Hand labor, better suited to custom work, began to be replaced by machinery.

First Step: Interchangeable Parts (continued) • Eli Whitney invented the concept of interchangeable parts for the fabrication of rifles around 1780. • In 1776, Adam Smith proposed using division of labor (based on job specialization) as a means of increasing productivity. The production transformation process was revolutionized—combining worker specialization with interchangeable parts transformed all of the productivity standards. Expectations were raised to new levels.

Second Step:Scientific Management (SM) • Frederick Winslow Taylor (1856–1915) introduced scientific management (SM). • SM required rationalizing the job, the workplace, and the workers. • The design of the workplace and the job were enhanced to improve the productivity of the transformation process. • Other important contributors in this era include: Henry L. Gantt, Frank and Lillian Gilbreth and Henri Fayol. Taylor and other contributors to scientific management have been accused of dehumanizing the worker in pursuit of efficiency.

Third Step:Sequenced Assembly (SA) • In 1912, Henry Ford developed the sequenced assembly process as a continuous flow production line for automobiles, changing the pace from batch to continuous sequenced assembly. • The moving assembly line required a high level of component interchangeability (IP). • By means of the principles of interchangeability, division of labor, and flow synchronization, Ford altered the production transformation process. Ford’s contributions had a major impact on the Japanese automobile industry.

Fourth Step:Statistical Quality Control (SQC) • Interchangeable parts required manufacturing methods that made batches of parts conforming to tolerance limits. • Shewhart developed the theory of statistical quality control (SQC) that enabled manufacturing to design and control processes that could achieve these objectives. • SQC was focused on the producer’s ability to control the variability of the process. • Deming (1986) and Juran (1980) also participated in the development of SQC theory. • Organizations like Motorola, Toyota, and GE are considered to be pioneers who led the development of TQM and Six Sigma within the framework of the systems approach.

Fifth Step:Lean Production Systems (LPS) • During the 1970s–1990s, Japanese organizations spearheaded by Toyota developed the methodology called lean production systems (also called the Toyota Production System). • LPS combine a deep understanding of quality with a desire to be fast and a fanatical distaste for all kinds of waste. • Advocates of ‘‘lean’’ focus on high-output targets, minimum cycle times, and rapid new product development. • Six Sigma (Motorola’s initiative) when properly conceived and executed is a means to lean production systems. The next two steps are in formative stages, and their impact on productivity cannot be fully evaluated at this time.

Sixth Step:Mass Customization with CAD, CAM, & FPS • Computer-aided design represents powerful new technology. • Computers can instruct and control machines instead of needing hands-on command by human operators. • The purpose of using such equipment is different from the goal of ‘‘mass production’’ where one item is made in extremely high volume. • The purpose is mass customization, where high-levels of variety can be produced in great volume. Mass customization is discussed in more detail in Chapter 11, Innovation and New Product Development.

Seventh Step:Global Competition: Year 2010 Plus • It is conjectured that in the future the transformation process will continue increasing in complexity and productivity. • There will be global competition at every link in the supply chain. • Internationality of sourcing, fabrication, assembly, distribution, and marketing will prevail. • The costs of the inputs and the values of the outputs will be affected by dozens, if not hundreds, of different currencies. • Managing disparate currencies (and cultures) will be part of the transformation process.

Seventh Step:Global Competition: Year 2010 Plus (continued) • Information systems will be based on international networks of computers. • Global telecommunication systems will transmit conversations that are spoken and auto-translated into 80 different languages. • Translation will be accomplished by language-capable computers with voice–language recognition. Voice response in the appropriate language will be expected. • The systems approach will extend to all functions within the organization and all partners along the supply chain, including suppliers and customers.

Seventh Step:Global Competition: Year 2010 Plus (continued) • Production and operations will develop transformation processes that require great management skills while decreasing burdensome labor components. Substantial productivity increases will be obtained. • We do expect that mass customization (MC) will become more economically feasible as a result of P/OM learning how to do MC effectively. • There can be no doubt that Global Competition will become increasingly pervasive. Technology is going to be the drum-major.

Thank you

Production and Operations Management Systems