Lecture 1 - Operations and Productivity(s)

Learning outcomes
Define operations management

Explain the difference between goods and services
Explain the difference between production and productivity
Operations Compute single-factor productivity
Compute multifactor productivity
and Identify the critical variables in enhancing productivity
Productivity
OPMG210B Semester 2 (Jan – Apr 2011) OPMG210B Semester 2 (Jan – Apr 2011)
What is operations management? Organising to produce goods and

services
Production is the creation of goods and services
Operations management (OM) is the set of activities that creates value in the
form of goods and services by transforming inputs into outputs To create goods and services all organisations perform 3
essential functions:
Managers who successfully design and deliver goods and services Marketing – generates demand
through the world understand operations – Takes order for product or service
OM applies to service industry such as restaurants as well as factories – Nothing happens until there is a sale
Applies to office, hospital, restaurant, department store or factory – Production/operations – creates the product
production of goods and services requires OM Finance/accounting – tracks how well the organisation is
Efficient production of goods and services requires effective doing, pays bills, collects the money
applications of the concepts, tools and techniques of OM that we will
study in this course
Production activities may be more obvious in manufacturing firms and
less obvious in organisation that does not create a tangible good or
product (e.g. transplant of liver, transfer of funds from savings to
chequing account)
OPMG 210B Semester 2 (Jan – Apr 2011) OPMG210B Semester 2 (Jan – Apr 2011)
1
Organisational charts Organisational charts
Shows how an airline organises itself to perform these functions
Shows how a bank organises itself to perform these functions
Commercial Bank Airline
Operations Finance/ accounting Marketing

Operations Finance Marketing
Ground support Accounting Traffic administration
Teller scheduling Investments Loans equipment Payables Reservations
Cheque clearing Security Commercial Maintenance Receivables Schedules
Collection Real estate Industrial Ground Operations General Ledger Tariffs (pricing)
Transaction Financial Facility Finance Sales
processing Personal maintenance Cash control Advertising
Facilities Accounting Catering International
design/layout Mortgage exchange
Flight Operations
Vault operations Crew scheduling
Maintenance Auditing Flying
Communications
Security Trust Department Dispatching
Management science
Organisational charts Why study OM?

Shows how a manufacturing firm organises itself to perform these functions
Manufacturing Study OM for 4 reasons

OM is one of three major functions (marketing, finance, and
operations) of any organisation
Operations Finance/ Marketing – All organisations market (sell), finance (account) and produce (operate)
Facilities accounting Sales – OM is integrally related to all other business functions
Construction; maintenance Disbursements/ promotion – Study how people organise themselves for productive enterprise
Production and inventory control credits Advertising
Scheduling; materials control
We want (and need) to know how goods and services are produced
Receivables Sales
Payables – Production function is the segment of society that creates the products
Quality assurance and control Market
General ledger and services we use
Supply chain management research
Funds Management We want to understand what operations managers do
Manufacturing – By understanding, you can develop skills necessary to become such a
Tooling; fabrication; assembly Money market
International manager
Design exchange
Product development and design OM is such a costly part of an organisation
Detailed product specifications Capital requirements – Large % of revenue of most companies spent on OM function
Industrial engineering Stock issue – OM provides opportunity to improve profitability and enhance service
Efficient use of machines, space, Bond issue
and personnel and recall
Process analysis
Development and installation of
production tools and equipment
2
What operations managers do Ten critical decisions of OM
All good managers perform the basic functions of the
management process: Ten decision areas
Planning Design of goods and services
Organising Managing quality
Staffing Process and capacity design
Leading Location strategy
Controlling Layout strategy
Human resources and job design
Operations managers apply these functions to 10 major OM Supply chain management
decisions Inventory management
Job opportunities include plant manager, operations analyst, Scheduling
quality manager, supply chain manager Maintenance
OPMG 210B Semester 2 (Jan – Apr 2011) OPMG210B Semester 2 (Jan – Apr 2011)
The critical decisions The critical decisions

Design of goods and services
– What good or service should we offer?
– How should we design these products and services? Supply chain management
– Should we make or buy this component?
Managing quality
– Who are our suppliers and who can integrate into our e-commerce
– How do we define quality?
program?
– Who is responsible for quality?
Process and capacity design Inventory, material requirements planning, and JIT
– How much inventory of each item should we have?
– What process and what capacity will these products require?
– When do we re-order?
– What equipment and technology is necessary for these processes?
Location strategy
– Where should we put the facility?
– On what criteria should we base the location decision?
Layout strategy
– How should we arrange the facility?
– How large must the facility be to meet our plan?
Human resources and job design
– How do we provide a reasonable work environment?
– How much can we expect our employees to produce?
3
The heritage of OM
Division of labor (Adam Smith 1776; Charles Babbage 1852)

Standardised parts (Whitney 1800)
Significant events in Scientific Management (Taylor 1881)

Coordinated assembly line (Ford/ Sorenson 1913)
Operations Management Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922)
Quality control (Shewhart 1924; Deming 1950)
The heritage of OM Eli Whitney
Born 1765; died 1825

Computer (Atanasoff 1938) French revolution saw new conflicts between Great Britain, France and
CPM/PERT (DuPont 1957) the US so US government needed to prepare for war and started to
Material requirements planning (Orlicky 1960) rearm
Computer aided design (CAD 1970) Issue contact for 10,000 muskets
In 1798, received government contract to make 10,000 muskets
Flexible manufacturing system (FMS 1975)
Credited for early popularisation of interchangeable parts
Baldrige Quality Awards (1980) – Achieved through quality control and standardisation
Computer integrated manufacturing (1990) – Interchangeable parts – identical - made to specifications that ensure
Globalization (1992) they are so nearly identical that they will fit any device of the same type
– Allows for ease of assembly and repair
Internet (1995) Showed that machine tools could make standardised parts to exact
specifications
– Musket parts could be used in any musket
4
Frederick W. Taylor Frank & Lillian Gilbreth
Known as ‘father of scientific management’ Frank (1868-1924); Lillian (1878-1972)
In 1881, as chief engineer for Midvale Steel, studied how tasks were Husband-and-wife engineering team
done ‘Father of motion study’ – Frank
Contributed to personnel selection, planning and scheduling, motion
– Principle that there is one best method to perform task
study and ergonomics
Further developed work measurement methods
Began first motion and time studies
Applied efficiency methods to their home and 12 children!
One major contribution – belief that management should be more
Book & Movie: “Cheaper by the Dozen,” book: “Bells on Their
resourceful and aggressive in the improvement of work methods
– One of the first to systematically seek best way to produce
Toes”
Created efficiency principles
Also believed 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
Two famous experiments
– Shoveling – different sized shovel for different materials
– Pig iron – one best method
Henry Ford W. Edwards Deming

Engineer and physicist
In 1903, created Ford Motor Company
Credited with teaching Japan quality control methods in post-WW2
In 1913, first used moving assembly line to make Model T
– Unfinished product moved by conveyor past work station
Used statistics to analyse process
– Men stood still and material moved His methods involve workers in decisions
Paid workers very well for 1911 ($5/day!) Taught that by adopting appropriate principles of management,
organizations can increase quality and simultaneously reduce costs
(by reducing waste, rework, staff attrition and litigation while
increasing customer loyalty)
Key is to practice continual improvement and think of manufacturing
as a system, not as bits and pieces
5
Contributions from other disciplines
Other disciplines contributing to progress of OM:

– Human factors
– Industrial engineering
– Management science
– Biological science
–
–
Physical sciences
Information technology
Goods and Services
Combined with statistics, management and
economics – contribute to improved models and
decision making
Goods and services Characteristics of goods
Tangible product
Manufacturers produce a tangible product, service
products are often intangible Consistent product definition
Some products – combination of a good and a service Production usually separate from consumption
Several differences between goods and services: Can be inventoried
– Services include repair and maintenance, government, Low customer interaction
food, lodging, transportation, insurance, trade, financial,
real estate, education, legal, medical, entertainment and Some aspects of quality are measurable
other professional occupations Product is transportable
– Services – economic activities that typically produce an Often easy to automate
intangible product
6
Characteristics of services Goods versus services
Intangible product
– E.g. purchase of ride in an empty airline seat Attributes of goods Attributes of services
Produced and consumed simultaneously (Tangible product) (Intangible product)
– No stored inventory Can be resold Reselling unusual
– E.g. haircut – produced and ‘consumed’ at same time Can be inventoried Difficult to inventory
Often unique Some aspects of quality Quality difficult to measure
measurable
– E.g. haircut produced for you is not exactly like anyone
else’s Selling is distinct from Selling is part of service
production
High customer interaction Product is transportable Provider, not product, is
– Often difficult to standardise, automate and make as often transportable
efficient as we would like because customer interaction Site of facility important for cost Site of facility important for
demands uniqueness customer contact
Inconsistent product definition Often easy to automate Often difficult to automate
Often knowledge-based Revenue generated primarily Revenue generated primarily
from tangible product from the intangible service
Frequently dispersed
– Brought to client via local office or retail outlet
Goods and services Industry and services as % of GDP

Distinction not clear cut - most goods contain a service, and most services
contain a good
Automobile Pure service – does not include a
Computer tangible product
Installed carpeting 90 −
Services Manufacturing
80 −
Fast-food meal
70 −
Restaurant meal/auto repair
60 −
Hospital care
50 −
Advertising agency/ 40 −
investment management
30 −
Consulting service/ 20 −
teaching
10 −
Counseling
Australia
Canada
China
France
Germany
South Africa
Czech Rep
Hong Kong
Japan
Mexico
Russian Fed
Spain
US
UK
0−
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |
% of product that is a good % of product that is a service
7
Growth of services Manufacturing and service
employment
US manufacturing and service employment No of people employed in
manufacturing decreased
modestly in recent years
Services constitute largest economic But production increases
120 – sector in postindustrial societies – 150 – Each person is
Manufacturing employment – Industrial producing about 20
decreased in last 25 years production times more than in 1950
Employment (millions)
100 – (right scale) – 125
Services now dominant
Employment (millions)
Index: 1997 = 100

Service – 100 employer (since early 1920s)
80 –
60 – – 75
40 – Manufacturing – 50
40 – employment
30 – (left scale)
Manufacturing 20 – – 25
20 –
10 –
0 – | | | | | | – 0|
0– | | | | | | | 1950 1970 1990 2010 ((est
est))
1950 1970 1990 2010 (est) 1960 1980 2000
1960 1980 2000
New challenges in OM
From To
Local or national focus
Global focus
Batch (large) shipments
Trends in Operations Low bid purchasing
Just-in-time
Supply chain partnering
Management Lengthy product
development
Rapid product
development, alliances
Standard products Mass customisation
Empowered employees,
Job specialisation
teams
8
New trends in OM New trends in OM
Past Causes Future Past Causes Future

Local or Reliable worldwide Global focus, Lengthy Shorter life cycles, Internet, Rapid product
national focus communication and moving product rapid international development,
transportation networks production development communication, computer- alliances,
offshore aided design, and collaborative
Batch (large) Short product life cycles and Just-in-time international collaboration designs
shipments cost of capital put pressure performance Standardized Affluence and worldwide Mass
on reducing inventory products markets; increasingly flexible customization
production processes with added
Low-bid Supply chain competition Supply chain emphasis on
purchasing requires that suppliers be partners, quality
engaged in a focus on the collaboration, Job Changing socioculture Empowered
end customer alliances, specialization milieu; increasingly a employees,
outsourcing knowledge and information teams, and lean
society production
New trends in OM New trends in OM

Global focus
– Rapid decline in communication and transportation costs – made markets
Past Causes Future global
– Resources (capital, markets, talent, labour) – also global
Low-cost Environmental issues, ISO Environmentally
– Op managers responding with innovations that generate ideas, production and
focus 14000, increasing disposal sensitive
finished goods rapidly
costs production, green
manufacturing, Just-in-time performance
recycled materials, – Vast financial resources committed to inventory – making it costly
remanufacturing – Inventory also impedes rapid response to changes in marketplace
– Op managers cutting inventories at all levels – raw materials to finished goods
Ethics not Businesses operate more High ethical
Supply chain partnering
at forefront openly; public and global standards and
review of ethics; opposition to social responsibility – Shorter product life cycle driven by demanding customers – also rapid
changes in materials and processes – suppliers must be in tune with needs of
child labor, bribery, pollution expected
customers
– Op managers are outsourcing and building long term partnerships with critical
players in supply chain
Figure 1.6
9
New challenges in OM
Rapid product development
– Rapid international communication of news, entertainment, lifestyles –
dramatically reducing life span pf products
– Op managers response – management structures and technology that are
faster and partners that are more effective
Mass customisation Productivity
– Cultural and individual differences place pressure on firms to respond
– Op managers response – flexible prod process – goal is to produce
customised products whenever and wherever needed
Empowered employees
– Explosion of knowledge and more technical workforce - more competence
required at work
– Op managers response – move decision making to individual worker level
Environmentally sensitive production
– Op managers – designing products that are biodegradable, reuse, recycle,
more efficient packaging
Ethics
– Op managers – enhance ethical behaviour
Productivity challenge Productivity challenge

Creation of goods and services requires changing resources into Only through increase in productivity can standard of living improve
goods and services Only through increases in productivity can labour, capital etc receive
– More efficiently we make change more productive we are additional payment
– More value added to the good or service provided – If returns to labour, capital etc increase without increased productivity,
Productivity is the ratio of outputs (goods and services) divided by prices rise
the inputs (resources such as labour and capital) – Alternatively, increase in productivity = lower prices as more is
produced with same resources
Op manager’s job is to improve productivity – can be done in 2 ways:
– Reducing inputs while keeping output constant
– Increasing output while keeping input constant
Production – the making of goods and services
– High production does not imply high productivity
Measuring productivity – excellent way to evaluate country’s ability to
provide improve standard of living for its people
Production is a measure of output only and not a measure

of efficiency
10
Improving productivity at Starbucks Improving productivity at Starbucks
A team of 10 analysts continually look A team of 10 analysts continually look
for ways to shave time. Some for ways to shave time. Some
improvements: improvements:
Operations improvements have helped

Stop requiring signatures on Saved 8 seconds per Starbucks
Stop requiring signatures on increaseSaved
yearly8revenue
seconds per
per
credit card purchases under $25 transaction outlet
credit card purchases underby$25
$200,000 to $940,000 in six years.
transaction
Productivity has improved by 27%, or
about 4.5% per year.
Change the size of the ice scoop Saved 14 seconds per Change the size of the ice scoop Saved 14 seconds per
drink drink
New espresso machines Saved 12 seconds per New espresso machines Saved 12 seconds per
shot shot
Productivity measurement Single- and multi-factor productivity

Units produced Single factor productivity = one resource input
Productivity =
Input used Multi-factor productivity – multiple resource inputs
Output
Input measures – labour-hours, capital ($ invested), materials
Productivity =
(tons), or energy (kW of electricity used) ∑ Inputs
Example: if units produced = 1000 and labour-hrs used = 250,
then
Output
Units produced Productivity =
Productivity = Labor-hours used Labor + Material + Energy + Capital
+ Miscellaneous
1,000
= 250 = 4 units/labor-hour Multifactor productivity – also known as total factor productivity
To aid computation individual inputs are often expressed in dollars
and summed
11
Example: Multifactor productivity Solution: Multifactor productivity
Company A has a staff of 4, each working 8 hr per day (payroll cost = Labour productivity (old) = 8 tiles per day/32 labour-hr = 0.25tiles per labour-hr
$640/day) with expenses of $400 per day. A total of 8 tiles are processed each Labour productivity (new) = 14 tiles per day/32 labour-hr = 0.4375 tiles per
day. The company recently purchased a computerised system that will allow labour-hr
14 tiles to be processed each day. Although the staff, their work hours and pay
Labour prod increased by 75% (0.4375-0.25)/0.25 = 75%
will be the same, overhead expenses are now $800 per day.
How will labour productivity change?
Multifactor productivity (old) = 8 tiles per day/640+400 = .0077tiles per $
What will be new multifactor productivity? By what percentage will it increase
or decrease? Labour productivity (new) = 14 tiles per day/640+ 800 = .0097tiles per $
Multifactor prod increased by 26%
If overhead now goes to $960 rather than $800, what is the multifactor
productivity? (0.00875)
Measurement problems Productivity variables

Productivity measures aid managers in determining how well they are
doing Productivity increases – dependent on 3 variables
Multifactor usually better but more complicated These represent the broad areas in which managers can take
– Better info about trade-offs among factors, but many measurement problems action to improve productivity
including the following:
Productivity variables – the 3 factors critical to productivity
Quality may change while the quantity of inputs and outputs remains improvement – labour, capital and the art and science of management
constant – Labour - contributes about 10% of the annual increase
– New colour TV and old black and white – quality improved but unit of measure – Capital - contributes about 38% of the annual increase
– TV- still the same
– Management - contributes about 52% of the annual increase
External elements may cause an increase or decrease in productivity
– More reliable electricity system may greatly improve production – improving
firm’s productivity rather than because of any internal decision
Precise units of measure may be lacking
– E.g. not all cars require same inputs
Measurement particularly difficult in service sector – end product hard to
define
– E.g. statistics ignore quality of a haircut
12
1. Labour 2. Capital
Improvement in contribution of labour to productivity is the result of healthier,
Capital investments provide equipment and tools used in production
better-educated and better-nourished labour force
About 10% of increase in prod attributed to improvement in labour Inflation and taxes increase cost of capital
3 key variables for improved labour productivity When capital invested per employee drops – productivity drops
Basic education appropriate for the labour force Using labour rather than capital – reduces unemployment in the short
– Illiteracy – major impediment to productivity run, but makes economies less productive and therefore lower wages
Diet of the labour force in long run
– Poor diet (obesity, malnutrition and chronic diseases) – also major Capital investment – necessary but seldom sufficient for increased
impediment productivity
Social overhead that makes labour available such as transportation – Constant trade-off between capital and labour
Challenge for developed countries - maintaining and enhancing skills in the
midst of rapidly changing technology and knowledge
– Recent data – average 17yr-old American knows significantly less maths
than average Japanese at same age
Training, motivation and team building, improved HR strategies as well as
improved education – techniques that will contribute to increased labour
productivity
3. Management Productivity and service sector

Responsible for ensuring that labour and capital are effectively used
Productivity of service sector difficult to improve because work in the
to increase productivity
service sector is:
Accounts for > ½ of the annual increase in productivity
Typically labor intensive e.g. counseling, teaching
– Includes improvements made thru use of knowledge and application of
technology Frequently focused on unique individual attributes or desires e.g.
Post-industrial societies – knowledge societies investment advice
Knowledge society – a society in which much of the labour force has Often an intellectual task performed by professionals e.g. medical
migrated from manual work to work based on knowledge diagnosis
– i.e. technical and info-processing tasks requiring ongoing education Often difficult to mechanize e.g. a haircut
– Required education and training – important high-cost items – Often difficult to evaluate for quality e.g. performance of a law firm
responsibility of Op managers More intellectual and personal the task, more difficult to achieve
More effective use of capital – contributes to productivity increases in productivity
– Op manager must select best new capital investments as well as
improving productivity of existing ones
Poorly educated labour, inadequate capital and dated technology -
country cannot be a world-class competitor with these
13
Example: Productivity at Taco Bell Productivity at Taco Bell
Case of how Taco Bell increased productivity to lower

costs Improvements:
Improvements made include;
Results:
Revised the menu
Revised the menu
Designed meals for easy preparation Designed meals for easy preparation
Preparation time cut to 8 seconds
Shifted some preparation to suppliers Shifted some
Management span preparation to suppliers
of control increased from 5 to 30
Efficient layout and automation Efficient layout
In-store labor cut and
by 15automation
hours/day
Training and employee empowerment Training and twice
Stores handle employee empowerment
the volume with half the labor
Fast-food low-cost leader
Ethics and social responsibility Exercise 1: Productivity

Kleen Karpet cleaned 65 rugs in October, consuming the following
Op managers face many challenges and constant changes resources:
– Physical, social environment, laws and values
Labour 520 hr at $13/hr
Challenges from conflicting perspectives of stakeholders such Solvent 100 gallons at $5/gal
as customers, distributors, suppliers, owners, lenders, Machine rental 20 days at $50/day
employees
Ethical challenges facing Op managers include: a. What is the labour productivity per dollar?
b. What is the multifactor productivity?
Developing and producing safe, quality products
Maintaining a clean environment
Providing a safe workplace
Honoring community commitments
OPMG 210B Semester 2 (Jan – Apr 2011) OPMG 210B Semester 2 (Jan – Apr 2011)
14
Exercise 2 Exercise 3
Student tuition at Boehring University is $150 per semester credit Productivity can be measured in a variety of ways, such as by labour,
hour. The state supplements school revenue by $100 per semester capital, energy, material usage and so on. At Modern Lumber Inc. , Art
credit hour. Average class size for a typical 3-credit course is 50 Binley, president and producer of apple crates sold to growers, has
students. Labor costs are $4,000 per class, material costs are $20 per been able, with his current equipment, to produce 240 crates per 100
student per class, and overhead costs are $25,000 per class. logs. He currently purchases 100 logs per day, and each log requires
a. What is the multifactor productivity ratio for this course process? 3 labour-hrs to process.
b. If instructors work an average of 14 hours per week for 16 weeks He believes that he can hire a professional buyer who can buy a
for each 3-credit class of 50 students, what is the labor productivity better-quality log at the same cost. If this is the case, he can increase
ratio? his production to 260 crates per 100 logs. His labour-hrs will increase
by 8 hrs- per day.
What will be the impact on productivity (measured in crates per labour-
hr) if the buyer is hired?
OPMG 210B Semester 2 (Jan – Apr 2011) OPMG 210B Semester 2 (Jan – Apr 2011)
Exercise 4
Art Binley has decide to look at his productivity from a multifactor

productivity perspective. To do so, he has determined his labour,
capital, energy, and material usage and has decided to use dollars as
the common denominator.
His total labour-hrs are now 300 per day and will increase to 308 per
day. His capital and energy costs will remain constant at $350 and
$150 per day, respectively. Material costs for the 100logs per day are
$1,000 and will remain the same.
If he pays an average of $10 per hr, determine Binley’s productivity
increase
OPMG 210B Semester 2 (Jan – Apr 2011)
15

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Learning outcomes

Define operations management

What is operations management? Organising to produce goods and

Commercial Bank Airline

Operations Finance/ accounting Marketing

Organisational charts Why study OM?

Manufacturing Study OM for 4 reasons

The critical decisions The critical decisions

Division of labor (Adam Smith 1776; Charles Babbage 1852)

Significant events in Scientific Management (Taylor 1881)

The heritage of OM Eli Whitney

Born 1765; died 1825

Henry Ford W. Edwards Deming

Born 1900; died 1993

Other disciplines contributing to progress of OM:

Goods and services Characteristics of goods

Goods and services Industry and services as % of GDP

% of product that is a good % of product that is a service

Index: 1997 = 100

Past Causes Future Past Causes Future

New trends in OM New trends in OM

Productivity challenge Productivity challenge

Production is a measure of output only and not a measure

Operations improvements have helped

Productivity measurement Single- and multi-factor productivity

Measurement problems Productivity variables

3. Management Productivity and service sector

Case of how Taco Bell increased productivity to lower

Ethics and social responsibility Exercise 1: Productivity

Art Binley has decide to look at his productivity from a multifactor

OPMG 210B Semester 2 (Jan – Apr 2011)

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