CHAPTER 1

1. CHAPTER 1 Introduction to Operations Management

2. What is Operations Management?

3. 3 Basic Functions of Business Organizations Produce goods or services Ensure and allocate financial resources Assess consumer needs, and sell / promote goods or services

4. Operations Management • Operations Management: Design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. • OM is the management of processes that produce and distribute products and/or services to customers. • OM’s objective is to make sure that the processes work effectively and efficiently.

5. Resources Output Inputs Operations and processes Operations: A Transformation Process Transformation process: System by which resources are used to convert inputs into desired output.

6. Different Types of Transformations • Physical -- manufacturing • Location -- transportation • Exchange -- retailing • Storage -- warehousing • Physiological -- health care • Informational -- telecommunications

7. Goods Services Input-Transformation-Output Relationships Exhibit 1.2

8. Differences between Services and Goods? • A service is an intangible process with direct customer involvement in the transformation process. The location of the service facility is important. • A good is the physical output of some process with little customer involvement in the transformation process. • Many overlaps between Service Processes and Good Processes: • Manufacturers provide services as part of their products. • Services manufacture the physical products they deliver to their customers or consume goods in creating the service (e.g., McDonald’s).

9. Operations Management (Cont.) • Operations Management: Design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. • OM is the management of processes that produce and distribute products and/or services to customers. • OM’s objective is to make sure that the processes work effectively and efficiently.

10. Effectiveness Efficiency Quality Price Efficiency and Effectiveness Effectiveness: Doing the right things to create the most value for the firm. • Efficiency: Doing something at the lowest possible cost. • Value: Ratio of quality to price paid. • Competitive “happiness” is being able to increase quality and reduce price while maintaining or improving profit margins. • This is a way that operations can directly increase customer retention and gain market share.

11. Strategic level Broad scope, long term Tactical level Moderate scope, medium term Operational level Narrow scope, short term Typical Operations Decisions and Their Hierarchy

12. An Example Rita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably • Strategy: Obtain a college education • Tactics: Select a college and a major • Operations: Register, buy books, take courses, study, graduate, get job

13. OM in the Organization Chart Exhibit 1.3

14. Operations as Services Every organization is in the service business, T or F? • An emerging model in industry • Core services + value-added services

15. Performance Objectives Quality Speed Flexibility Operations Management Price (or cost Reduction) Core Services • Basic things that customers (internal or external) want from products they purchase: • To be made correctly • Customized to customer needs • Delivered on time • Priced competitively • Somewhat easier to emulate or copy

16. Value-Added Service Categories Problem Solving Operations Management Sales Support Information Field Support Value-Added Services • Services that differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way • Information • Problem solving • Sales support • Field support • Significantly more difficult to copy and implement

17. Reasons to Study Operations Management • A business education is incomplete without an understanding of modern approaches to managing operations. • OM provides a systematic way of looking at organizational process. • OM presents interesting career opportunities: • Supply chain management • Quality assurance • Purchasing • And more • The concepts and tools of OM are widely used in managing other functions of a business.

18. CHAPTER 2 Productivity Measurement

19. Key Performance Indicators (KPI) • Key performance indicators (KPI): A set of measures that help managers evaluate a company’s economic performance and spot the need for changes in operations. • Financial measures: day’s cash on hand, operating income by units or division, etc. • Nonfinancial metrics: average time to respond to service calls, lead time to fill customer orders, percentage of sales from new products, etc. • A basic KPI -- Productivity

20. Outputs Productivity = Inputs Productivity • Productivity is a common measure on how well resources are being used. In the broadest sense, it can be defined as the following ratio: • One of the primary responsibilities of an operations manager is to achieve best use of an organization's resources. • Input: labor, capital, materials, energy, and others. • Output: goods and services.

21. PartialOutput Output Output Output measureLabor Capital Materials Energy Total Output Goods and services produced Measure Inputs All inputs used Examples of Productivity Measures Exhibit 2.6 Multifactor Output Output measure Labor + Capital + Energy Labor + Capital + Materials

22. = = 0.89 = = 4.28 = = 3.17 = 25 = = = 18.52 Example 1 Productivity measure examples Total measure: Total output 13,500 Total input 15,193 Multifactor measure: Total output 13,500 Human + Material 3,153 Finished units 10,000 Human + Material 3,153 Partial measure: Total output 13,500 Energy 540 Finished units 10,000 Energy 540 Input and output production data ($) Output: • Finished units $10,000 • Work in process $2,500 • Dividends $1,000 Total output $13,500 Input: • Human $3,000 • Material $153 • Capital $10,000 • Energy $540 • Other expenses $1,500 Total input $15,193

23. Productivity Measures (other than $) BusinessProductivity Measure Restaurant Customers (meals) per labor hour Retail store Sales per square foot Chicken farm Lb. of meat per lb. of feed Utility plant Kilowatts per ton of coal Paper mill Tons of paper per cord of wood Only partial measures of productivity can be used.

24. Example 2 • You have just determined that your service employees have used a total of 2400 hours of labor this week to process 560 insurance forms. Last week the same crew used only 2000 hours of labor to process 480 forms. a) Which productivity measure should be used? Answer: Could be classified as a Partial Measure. b) Is productivity increasing or decreasing? Answer: Last week’s productivity = 480/2000 = 0.24 forms/hr This week’s productivity = 560/2400 = 0.23 forms/hr So, productivity is decreasing slightly.

25. Quantity $/Unit Deluxe car 4,000 units sold $8,000/car Limited car 6,000 units sold $9,500/car Labor, Deluxe 20,000 hrs $12/hr Labor, Limited 30,000 hrs $14/hr Example 3 (Page 32, problem 4) Two types of cars (Deluxe and Limited) were produced by a car manufacturer in 2005. Quantities sold, price per unit, and labor hours follow. What is the labor productivity for each car? Explain the problem (s) associated with the labor productivity.

26. Solution to Example 3 Labor Productivity – units/hour • A conventional measure of productivity. • May not provide all of the necessary information that is needed. For example, increases in productivity could result from decreases in quality, and/or increases in material cost. Labor Productivity – dollars

27. Recap • Operations decisions hierarchy • Core services • Value-added services • KPI • Productivity • Partial / Multifactor / Total measure • Dollars / non-dollars • Operations management • Transformation process • Services vs. goods • Efficiency • Effectiveness • Value