Operations Management Operations and Productivity Chapter 1 Operations Management 1-1 Outline Global company profile: Whirlpool What is Operations Management? The heritage of Operations Management Why study OM? What Operations Managers do How this book is organized Organizing to produce goods and services Where are the OM jobs? Exciting new trends in Operations Management Operations Management 1-2 Outline - Continued Operations in the service sector Differences between goods and services Growth of services Service pay The Productivity challenge Productivity measurement Productivity variables Productivity and the Service Sector The challenge of social responsibility Operations Management 1-3 Learning Objectives When you complete this chapter, you should be able to : Identify or Define: Production and productivity Operations Management (OM) What operations managers do Services Operations Management 1-4 Learning Objectives - continued When you complete this chapter, you should be able to : Describe or Explain: A brief history of operations management Career opportunities in operations management The future of the discipline Measuring productivity Operations Management 1-5 Whirlpool Change in attitude - employees “live quality” Training - “use your heads as well as your hands” Flexible work rules Gain-sharing Global procurement Role of information/information technology Adoption of a Worldwide strategy Operations Management 1-6 What Is Operations Management? Production is the creation of goods and services Operations management is the set of activities that creates goods and services by transforming inputs into outputs Operations Management 1-7 The Heritage of Operations Management Division of labor (Adam Smith 1776 and Charles Babbage 1852) Standardized parts (Whitney 1800) Scientific Management (Taylor 1881) Coordinated assembly line (Ford, Sorenson/Avery 1913) Gantt charts (Gantt 1916) Motion study (Frank and Lillian Gilbreth 1922 Quality control (Shewhart 1924; Deming 1950) Computer (Atanasoff 1938) CPM/PERT (DuPont 1957) Operations Management 1-8 The Heritage of Operations Management - continued 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) Operations Management 1-9 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 © 1995 Corel Corp. Operations Management 1-10 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 time & motion studies Created efficiency principles © 1995 Corel Corp. Operations Management 1-11 Taylor: 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 Operations Management 1-12 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 & 12 children! (Book & Movie: “Cheaper by the Dozen,” book: “Bells on Their Toes” Operations Management 1-13 © 1995 Corel Corp. Henry Ford Born 1863; died 1947 In 1903, created Ford Motor Company In 1913, first used moving assembly line to make Model T ‘Make them all alike!’ © 1995 Corel Corp. Unfinished product moved by conveyor past work station Paid workers very well for 1911 ($5/day!) Operations Management 1-14 W. Edwards Deming Born 1900; died 1993 Engineer & physicist Credited with teaching Japan quality control methods in post-WW2 Used statistics to analyze process His methods involve workers in decisions Operations Management 1-15 Contributions From Human factors Industrial engineering Management science Biological science Physical sciences Information science Operations Management 1-16 Figure 1.1 Operations Management 1-17 Significant Events in OM Division of labor (Smith, 1776) Standardized parts (Whitney, 1800) Scientific management (Taylor, 1881) Coordinated assembly line (Ford 1913) Gantt charts (Gantt, 1916) Motion study (the Gilbreths, 1922) Quality control (Shewhart, 1924) Operations Management 1-18 Significant Events - Continued CPM/PERT (Dupont, 1957) MRP (Orlicky, 1960) CAD Flexible manufacturing systems (FMS) Manufacturing automation protocol (MAP) Computer integrated manufacturing (CIM) Operations Management 1-19 Why Study OM? OM is one of three major functions (marketing, finance, and operations) of any organization We want (and need) to know how goods and services are produced We want to know what operations managers do OM is such a costly part of an organization Operations Management 1-20 Options for Increasing Contribution Marketing Option Current Sales Cost of Goods Sold Gross Margin Finance Costs Taxes @ 25% Contribution Operations Management $100,000 Sales Revenue : +50% $150,000 -80,000 Finance & OM Option Accounting Option Finance Production Costs: -50% Costs: -20% $100,000 $100,000 -120,000 -80,000 -64,000 20,000 30,000 20,000 36,000 -6,000 -6,000 -3,000 -6,000 14,000 -3,500 24,000 -6,000 17,000 -4,250 30,000 -7,500 10,500 18,000 12,750 22,500 1-21 What Operations Managers Do Plan Organize Staff Lead Control Operations Management 1-22 Ten Critical Decisions Service, product design……… Quality management………….. Process, capacity design……. Location …………….………….. Layout design …………………. Human resources, job design. Supply-chain management….. Inventory management ………. Scheduling …………………….. Maintenance …………………... Operations Management 1-23 Ch. 5 Ch. 6, 6S Ch. 7, 7S Ch. 8 Ch. 9 Ch. 10, 10S Ch. 11 Ch. 12, 12S, 14 Ch. 13, 15, 16 Ch. 17 The Critical Decisions Quality management Who is responsible for quality? How do we define quality? Service and product design What product or service should we offer? How should we design these products and services? Operations Management 1-24 The Critical Decisions - Continued Process and capacity design What processes will these products require and in what order? What equipment and technology is necessary for these processes? Location Where should we put the facility On what criteria should we base this location decision? Operations Management 1-25 The Critical Decisions - Continued Layout design How should we arrange the facility? How large a facility is required? Human resources and job design How do we provide a reasonable work environment? How much can we expect our employees to produce? Operations Management 1-26 The Critical Decisions - Continued Supply chain management Should we make or buy this item? Who are our good suppliers and how many should we have? Inventory, material requirements planning, JIT “just-in-time” inventory, How much inventory of each item should we have? When do we re-order? Operations Management 1-27 The Critical Decisions - Continued Intermediate, short term, and project scheduling Is subcontracting production a good idea? Are we better off keeping people on the payroll during slowdowns? Maintenance Who is responsible for maintenance? Operations Management 1-28 Organizational Functions Marketing Gets customers Operations creates product or service Finance/Accounting Obtains funds Tracks money © 1995 Corel Corp. Operations Management 1-29 Functions - Bank Commercial Bank © 1984-1994 T/Maker Co. Marketing Teller Scheduling Operations Management Operations Transactions Check Clearing Processing 1-30 Finance/ Accounting Security Functions - Airline Airline Marketing Flight Operations Operations Management Operations Ground Support Facility Maintenance 1-31 © 1984-1994 T/Maker Co. Finance/ Accounting Catering Functions - Manufacturer Manufacturing Marketing Manufacturing Operations Management Finance/ Accounting Operations Production Control Quality Control 1-32 Purchasing Organizational Charts Commercial Bank Operations Teller Scheduling Check Clearing Transactions processing Facilities design/layout Vault operations Maintenance Security Operations Management Finance Investments Security Real Estate Accounting Auditing 1-33 Marketing Loans Commercial Industrial Financial Personal Mortgage Trust Department Organizational Charts Airline Operations Ground support equipment Maintenance Ground Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications Dispatching Management science Operations Management Finance & Accounting Accounting Payables Receivables General Ledger Finance Cash control International exchange 1-34 Marketing Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising Organizational Charts Manufacturing Operations Facilities: Construction:maintenance Production & inventory control Scheduling: materials control Supply-chain management Manufacturing Tooling, fabrication,assembly Design Product development and design Detailed product specifications Industrial engineering Efficient use of machines, space, and personnel Process analysis Development and installation of production tools and equipment Operations Management 1-35 Finance & Accounting Disbursements/credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issues and recall Marketing Sales promotions Advertising Sales Market research 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 Operations Management 1-36 New Challenges in OM From Local or national focus Batch shipments Low bid purchasing To Global focus Just-in-time Supply chain partnering Lengthy product development Rapid product development, alliances Standard products Job specialization Mass customization Empowered employees, teams Operations Management 1-37 Changing Challenges for the Operations Manager Past Local or national focus Batch (large) shipments Low-bid purchasing Operations Management Causes Low-cost, reliable worldwide communication and transportation networks Cost of capital puts pressure on reducing investment in inventory Quality emphasis requires that suppliers be engaged in product improvement 1-38 Future Global Focus Just-in-time shipments Supply-chain partners Changing Challenges for the Operations Manager Past Causes Lengthy product development Shorter life cycles, rapid international communications, computeraided design, and international collaboration Affluence and worldwide markets; increasingly flexible production processes Changing sociocultural milieu. Increasingly a knowledge and information society. Standardized products Job specialization Operations Management 1-39 Future Rapid product development Mass customization Empowered employees, teams, and lean production Characteristics of Goods Tangible product Consistent product definition Production usually separate from consumption Can be inventoried Low customer interaction Operations Management © 1995 Corel Corp. 1-40 Characteristics of Service © 1995 Corel Corp. Operations Management Intangible product Produced & consumed at same time Often unique High customer interaction Inconsistent product definition Often knowledge-based Frequently dispersed 1-41 Goods Versus Services Goods Can be resold Can be inventoried Service Reselling unusual Difficult to inventory Quality difficult to measure Selling is part of service Some aspects of quality measurable Selling is distinct from production Operations Management 1-42 Goods Versus Services Continued Goods Service Product is transportable Site of facility important for cost Provider, not product is transportable Site of facility important for customer contact Often difficult to automate Revenue generated primarily from intangible service. Often easy to automate Revenue generated primarily from tangible product Operations Management 1-43 Goods Contain Services & Services Contain Goods Automobile Computer Installed Carpeting Fast-food Meal Restaurant Meal Auto Repair Hospital Care Advertising Agency Investment Management Consulting Service Counseling 100 75 50 25 Percent of Product that is a Good Operations Management 0 1-44 25 50 75 100 Percent of Product that is a Service Development of the Service Economy U.S. Employment, % Share 80 United States %70 60 Services 50 40 Canada 250 France 200 Italy 150 Industry 30 Britain 20 Japan 10 U.S. Exports of Services In Billions of Dollars Services as a Percent of GDP Farming 0 1850 75 1900 25 50 75 2000 100 50 W Germany 1970 1991 40 50 60 70 Percent Year 2000 data is estimated Operations Management 1-45 0 1970 75 80 85 90 95 2000 The Economic System Transforms Inputs to Outputs Inputs Land, Labor, Capital, Management Process The economic system transforms inputs to outputs at about an annual 1.7% increase in productivity (capital 38% of 1.7%), labor (10% of 1.7%), management (52% of 1.7%) Feedback loop Operations Management 1-46 Outputs Goods and Services Whirlpool Productivity improved increased Costs were pared Cost per unit of a spin pinion Parts per man hour Wages Average worker's annual cash compensation $2.25 115 110 27000 $2.00 105 26000 $1.75 100 95 25000 24000 $1.50 1989 1990 Operations Management 1991 1989 1990 1-47 1991 1989 1990 1991 Productivity Measure of process improvement Represents output relative to input Productivity Units produced = Input used Productivity increases improve standard of living From 1889 to 1973, U.S. productivity increased at a 2.5% annual rate Operations Management 1-48 Productivity Variables Productivity = Output Labor + material + energy + capital + miscellaneous Operations Management 1-49 Measurement Problems Quality may change while the quantity of inputs and outputs remains constant External elements may cause an increase or decrease in productivity Precise units of measure may be lacking Operations Management 1-50 Productivity Variables Labor - contributes about 10% of the annual increase Capital - contributes about 32% of the annual increase Management - contributes about 52% of the annual increase Operations Management 1-51 Key Variables for Improved Labor Productivity Basic education appropriate for the labor force Diet of the labor force Social overhead that makes labor available Maintaining and enhancing skills in the midst of rapidly changing technology and knowledge Operations Management 1-52 Jobs in the U.S 6% 5% Education, Health, etc. 5% Manufacturing 3% 1% 6% Retail Trade State & Local Gov't 14% Finance, Insurance 26% Wholesale Trade Transport, Public Util. 16% Construction Federal Government 18% Mining Operations Management 1-53 Productivity Growth 1971- 1992 Labor 5 4.5 % per year 4 3.5 3 United States West Germany Japan 2.5 2 1.5 1 0.5 0 Whole Economy Operations Management Manufacturing 1-54 Growth Rate of Labor Productivity 6 Growth Rate of Labor Productivity (%) U.S. U.K. W Germany France Japan 1964-84 1979-84 4 2 0 0 2 4 6 8 10 12 Growth Rate of Gross Capital Per Worker (%) Operations Management 1-55 Comparison of Productivity United States, Japan, Germany The Gap is Closing, But U.S. Maintains the Lead Labor Productivity Growth 100 France* Japan* Italy Britain* U.S. 100 80 80 60 60 40 40 20 20 1960 - 1973 Germany† 1973 - 1995 1973 - 1994 †1973 - 1995 * Canada U.S. 0 2 4 6 0 1960 65 70 75 80 85 90 95 2000 8 Labor Productivity Labor Productivity Growth (percent) Operations Management 1-56 0 Investment and Productivity in Selected Nations Percent increase in productivity (Mfg) 10 U.S. U.K. 8 Canada Italy 6 Belgium France 4 Netherlands 2 Japan Best fit 0 10 15 20 25 30 Nonresidential fixed investment to GNP (%) Operations Management 1-57 35 Service Productivity Typically labor intensive Frequently individually processed Often an intellectual task performed by professionals Often difficult to mechanize Often difficult to evaluate for quality Operations Management 1-58
