BA 339, OM – Class Notes

1. BA 339, OM – Class Notes • Chapter 1 – Operations & Productivity • What is OM? • Production & productivity • Organizing to produce goods/services • Why study OM? • What OM does • OM history/heritage • OM & services

2. BA 339, OM – Class Notes • What is OM? • Managing activities that create value in the form of goods & services • Done by transforming inputs into outputs • Activities that create goods/services take place in all organizations • Examples: • Transport Co. – maintenance, scheduling, dispatching activities to move products from suppliers to customers • Utility – engineering, quality, SCM, inventory, maintenance, construction, scheduling activities to move electricity from generators to customers • Steel Manufacturer – production scheduling, material control, fabrication, quality, design, process layout and design activities to provide steel to customers • Banking – collections, transaction processing, teller scheduling activities to help customers manage finance

3. BA 339, OM – Class Notes • Production & productivity • Production – creation of goods and services • Obvious for manufacturing firms • Less apparent for services > often no tangible goods produced • Ex. – Transferring funds from savings to checking; suing a credit card to pay for purchases • Productivity – ratio of outputs (goods & services) divided by inputs (labor, capital, management, etc.) • Annual increase of approx. 2.5%/Yr. > Mgmt. = 52%; Capital = 38%; Labor = 10% >>OM leading source of increases • Standard of living improves only through increases in productivity > Results in the creation of wealth! • Measurement = Units produced/Input (single vs. multi-factor)

4. BA 339, OM – Class Notes • Productivity Variables • Labor • 4 variables affect labor productivity • Basic education • Diet/health • Social O/H (infrastructure) – transportation, sanitation, etc. • Maintaining/enhancing the skills of labor • Statistics • Avg. American 17 year old knows significantly less math. than the average Japanese at the same age • About half cannot answer the following questions correctly • Rectangle, 6x4 yards – what is area of the rectangle • If 9y+3=6y+15, then y = 1, 2, 4, or 6 • Which of the following is true about 84% of 100 > Greater than, less than or equal to 100

5. BA 339, OM – Class Notes • Productivity Variables • Capital • Annual capital investment in the U.S. has increased at an annual rate of 1.5%, after depreciation and taxes • Inflation, taxes, and interest rates affect cost of capital > negatively affect return on capital investment • Low interest rates and inflation have helped fuel recent increases in productivity • Using Labor vs. Capital • Reduces unemployment in short run • Results in decreased productivity • Lowers wages in the long run

6. BA 339, OM – Class Notes • Productivity Variables • Management • Factor of production, economic resource • Accounts for over half of annual increases in productivity • Driven by technology and utilization of knowledge & information > process improvements • Education is critical in knowledge societies (post industrial societies are technologically based • Ops. Managers build workforces that recognize the need for education and knowledge • Ensures that technology, education & knowledge are used effectively and efficiently • Ensures that capital is utilized more effectively vs. investment in additional capital

7. BA 339, OM – Class Notes • Production & productivity • Ex. – LA Motor Pool (mid-90s) • Problem: 30% of trash trucks & 11% of police vehicles were in the repair shop • Solutions: • Individual drivers > teams to complete routes • Assigned parking spaces > Improved labor efficiency • Tire pressure checked every evening > reduced flats • Trucks emptied nightly > reduced fire danger • Standardized customer pickups • Computerized fleet management systems > reduced $ & improved cost control • Maintenance performed on night shifts > improved util. • Results: Fleet reduced by 500 vehicles; parts inventory dropped by 20%; Out-of-service vehicles dropped from 30% to 18%

8. BA 339, OM – Class Notes • Organizing to produce goods/services • Major organizational functions (all) • Marketing/Sales – generates demand, orders, etc. > Demand • Production/Operations – creates product/service > Supply • Finance/Accounting – tracks/manages $$ > ValueExchange Processing • See attached Org. chart

9. BA 339, OM – Class Notes

10. BA 339, OM – Class Notes • Why Study OM? • To determine how people organize themselves for productive enterprises • To determine how goods/services are produced • To understand what Operations Managers do • To understand how to control and manage costs (since OM is such a costly part of an organization) • See attached Example – Fishers Technologies • Double $$ contribution to fixed cost/profit to purchase next generation production equipment • Without doubling, no bank loan & end of business • Using simple profit & loss statement, evaluate 3 options

11. Marketing Option Fin./Acct. 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 @ 25% -$3,500 -$6,000 -$4,250 -$7,500 Contribution $10,500 $18,000 $12,750 $22,500 BA 339, OM – Class Notes

12. BA 339, OM – Class Notes • What Ops. Mgrs. Do • Plan – Organize – Staff – Lead – Control • Key components of project/quality mgmt. • 10 Key Decision Areas of OM • Service/product design – what to offer & design • Quality management – who is responsible & how is it defined • Process/capacity design – what process/order & equipment/technology • Location – placement & rationale • Layout design – arrangement & size • Human resources & job design – work environment & production level • Supply chain management – make vs. buy & re-order points • Inventory management – how much & when to re-order • Scheduling – subK vs. in-house & short/mid/project • Maintenance – who & when

13. BA 339, OM – Class Notes • Jobs in OM • Plant/production mgr. • Purchasing/logistics/supply chain mgr. • Warehouse/inventory mgr. • Transportation mgr. • Process/project mgr. • Industrial/Mfg. engineer • IT mgr. • Maintenance/facility mgr. • Construction/project mgr. • Equipment mgr. • HR mgr. • Quality mgr. • Consultants – team development, strategic planning, customer relations, quality mgmt., risk management, process management

14. BA 339, OM – Class Notes • OM History/Heritage • Early Concepts (1776-1880) • Labor specialization (Smith, Babbage) • Standardized/interchangeable parts (Eli Whitney (1765-1825) > Govt. Kt of 10K muskets – machine tools to make standardized musket parts) • Scientific Management Era – 1880-1910 • Frederick W. Taylor – 1856-1915 (“Principles of Scientific Management) > father of scientific mgmt. • Process analysis, work methods & tools analysis, personnel selection & incentives, time & motion studies • Frank (1868-1924) & Lillian (1878-1972) Gilbreth • Further development of work methods, time & motion studies and efficiency methods

15. BA 339, OM – Class Notes • OM History/Heritage • Mass Production Era – 1910-1980 • Henry Ford (1863-1947) – along w/Charles Sorensen, combined standardized parts with knowledge of quasi-assembly lines of meatpacking and mail-order business and added movable assembly line (1913) • Walter Shewhart – combined knowledge of statistics & need for quality control to provide the foundations for statistical process control in quality • W. Edwards Deming (1900-1993) – engineer/physicist • Focus on management improving work environment and processes as a means to improve quality • Used statistics to analyze process • Methods to involve workers in decisions

16. BA 339, OM – Class Notes • OM History/Heritage • Lean Production Era – 1980-1995 • Just-in-time (JIT) • Computer-Aided Design (CAD) • Electronic Data Interchange (EDI) • Total Quality Management (TQM) • Mass Customization Era – 1995-2010 • Globalization • Internet • Enterprise Resource Planning (ERP) – MRP concept to all other facets of the organization (including services) • SCM • E-commerce

17. BA 339, OM – Class Notes • OM & Services • Service usually intangible (Ex. – e-purchase of airline ticket for empty seat) • Often produced and consumed simultaneously (Ex. – haircut, surgery, etc.) • Often unique (Ex. – investment portfolio, hospital care, interior design, etc.) • High degree of customer interaction • Inconsistent product definition (Ex. – car insurance > standardized policy but different cars) • Knowledge-based • Dispersed

18. Attributes – Goods Products resold Products inventoried Quality aspects measurable Selling separate from production Product transportable Site important to cost Easier to automate Revenue from tangible product Attributes – Services Reselling unusual Many can’t be inventoried Hard to measure “Q” Selling part of service Provider transportable Site important to customer contact More difficult to automate Revenue from intangibles BA 339, OM – Class Notes

19. Service Sector Prof. Services, ex., Legal, Medical Trade (retail/wholesale) Utilities, transportation Business/repair services Finance, Insurance, Real Estate Food, Lodging, Entertainment Public Administration Mfg. Sector Construction Sector Agriculture Mining % of All Jobs 24.3% 20.6% 7.2% 7.1% 6.5% 5.2% 4.5% 14.8% 7.0% 2.4% .4% BA 339, OM – Class Notes