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© 2011 Pearson
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1 Operations and
Productivity
PowerPoint presentation to accompanyPowerPoint presentation to accompany
Heizer and RenderHeizer and Render
Operations Management, 10eOperations Management, 10e
Principles of Operations Management, 8ePrinciples of Operations Management, 8e
PowerPoint slides by Jeff Heyl

© 2011 Pearson
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OutlineOutline
 Global Company Profile: Hard Rock
Cafe
 What Is Operations Management?
 Organizing to Produce Goods and
Services
 Why Study OM?
 What Operations Managers Do

© 2011 Pearson
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Outline - ContinuedOutline - Continued
 The Heritage of Operations
Management
 Operations in the Service Sector
 Differences between Goods and
Services
 Growth of Services
 Service Pay
 Exciting New Trends in Operations
Management

© 2011 Pearson
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Outline - ContinuedOutline - Continued
 The Productivity Challenge
 Productivity Measurement
 Productivity Variables
 Productivity and the Service Sector
 Ethics and Social Responsibility

© 2011 Pearson
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Learning ObjectivesLearning Objectives
When you complete this chapterWhen you complete this chapter
you should be able to:you should be able to:
1. Define operations management
2. Explain the distinction between
goods and services
3. Explain the difference between
production and productivity

© 2011 Pearson
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Learning ObjectivesLearning Objectives
When you complete this chapterWhen you complete this chapter
you should be able to:you should be able to:
4. Compute single-factor
productivity
5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity

© 2011 Pearson
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The Hard Rock CafeThe Hard Rock Cafe
 First opened in 1971
 Now – 129 restaurants in over 40 countries
 Rock music memorabilia
 Creates value in the form of good food
and entertainment
 3,500+
custom meals per day in Orlando
 How does an item get on the menu?
 Role of the Operations Manager

© 2011 Pearson
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What Is OperationsWhat Is Operations
Management?Management?
ProductionProduction is the creation of
goods and services
Operations management (OM)Operations management (OM)
is the set of activities that
create value in the form of
goods and services by
transforming inputs into
outputs

© 2011 Pearson
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Organizing to ProduceOrganizing to Produce
Goods and ServicesGoods and Services
 Essential functions:
1.1. MarketingMarketing – generates demand
2.2. Production/operationsProduction/operations – creates
the product
3.3. Finance/accountingFinance/accounting – tracks how
well the organization is doing,
pays bills, collects the money

© 2011 Pearson
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Organizational ChartsOrganizational Charts
Operations
Teller
Scheduling
Check Clearing
Collection
Transaction
processing
Facilities
design/layout
Vault operations
Maintenance
Security
Finance
Investments
Security
Real estate
Accounting
Auditing
Marketing
Loans
Commercial
Industrial
Financial
Personal
Mortgage
Trust Department
Commercial Bank
Figure 1.1(A)

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Operations
Ground support
equipment
Maintenance
Ground Operations
Facility
maintenance
Catering
Flight Operations
Crew scheduling
Flying
Communications
Dispatching
Management science
Finance/
accounting
Accounting
Payables
Receivables
General Ledger
Finance
Cash control
International
exchange
Airline
Figure 1.1(B)
Marketing
Traffic
administration
Reservations
Schedules
Tariffs (pricing)
Sales
Advertising

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Marketing
Sales
promotion
Advertising
Sales
Market
research
Operations
Facilities
Construction; maintenance
Production and inventory control
Scheduling; materials control
Quality assurance and 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
Finance/
accounting
Disbursements/
credits
Receivables
Payables
General ledger
Funds Management
Money market
International
exchange
Capital requirements
Stock issue
Bond issue
and recall
Manufacturing
Figure 1.1(C)

© 2011 Pearson
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Why Study OM?Why Study OM?
1. OM is one of three major functions of
any organization, we want to study
how people organize themselves for
productive enterprise
2. We want (and need) to know how
goods and services are produced
3. We want to understand what
operations managers do
4. OM is such a costly part of an
organization

© 2011 Pearson
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Options for IncreasingOptions for Increasing
ContributionContribution
Table 1.1
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 at 25% – 3,500 – 6,000 – 4,250 – 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
Finance/
Marketing Accounting OM
Option Option Option
Increase Reduce Reduce
Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%

© 2011 Pearson
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What OperationsWhat Operations
Managers DoManagers Do
 Planning
 Organizing
 Staffing
 Leading
 Controlling
Basic Management FunctionsBasic Management Functions

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Ten Critical DecisionsTen Critical Decisions
Ten Decision Areas Chapter(s)
1. Design of goods and services 5
2. Managing quality 6, Supplement 6
3. Process and capacity 7, Supplement 7
design
4. Location strategy 8
5. Layout strategy 9
6. Human resources and 10
job design
7. Supply-chain 11, Supplement 11
management
8. Inventory, MRP, JIT 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17 Table 1.2

© 2011 Pearson
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The Critical DecisionsThe Critical Decisions
1. Design of goods and services
 What good or service should we
offer?
 How should we design these
products and services?
2. Managing quality
 How do we define quality?
 Who is responsible for quality?
Table 1.2 (cont.)

© 2011 Pearson
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3. Process and capacity design
 What process and what capacity will
these products require?
 What equipment and technology is
necessary for these processes?
4. Location strategy
 Where should we put the facility?
 On what criteria should we base the
location decision?
Table 1.2 (cont.)

© 2011 Pearson
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5. Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet
our plan?
6. Human resources and job design
 How do we provide a reasonable
work environment?
 How much can we expect our
employees to produce?
Table 1.2 (cont.)

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7. Supply-chain management
 Should we make or buy this
component?
 Who should be our suppliers and how
can we integrate them into our strategy?
8. Inventory, material requirements
planning, and JIT
 How much inventory of each item
should we have?
 When do we re-order?
Table 1.2 (cont.)

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9. Intermediate and short–term
scheduling
 Are we better off keeping people on
the payroll during slowdowns?
 Which jobs do we perform next?
10.Maintenance
 How do we build reliability into our
processes?
 Who is responsible for maintenance?
Table 1.2 (cont.)

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Where are the OM Jobs?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

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OpportunitiesOpportunities
Figure 1.2

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CertificationsCertifications
 APICS, the American Production and
Inventory Control Society
 American Society of Quality (ASQ)
 Institute for Supply Management (ISM)
 Project Management Institute (PMI)
 Council of Supply Chain Management
Professionals
 Charter Institute of Purchasing and
Supply (CIPS)

© 2011 Pearson
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Significant Events in OMSignificant Events in OM
Figure 1.3

© 2011 Pearson
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The Heritage of OMThe Heritage of OM
 Division of labor (Adam Smith 1776;
Charles Babbage 1852)
 Standardized parts (Whitney 1800)
 Scientific Management (Taylor 1881)
 Coordinated assembly line (Ford/
Sorenson 1913)
 Gantt charts (Gantt 1916)
 Motion study (Frank and Lillian Gilbreth
1922)
 Quality control (Shewhart 1924; Deming
1950)

© 2011 Pearson
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The Heritage of OMThe Heritage of OM
 Computer (Atanasoff 1938)
 CPM/PERT (DuPont 1957, Navy 1958)
 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)

© 2011 Pearson
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Eli WhitneyEli 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

© 2011 Pearson
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Frederick W. TaylorFrederick 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 motion and time studies
 Created efficiency principles

© 2011 Pearson
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Taylor’s PrinciplesTaylor’s Principles
 Matching employees to right job
 Providing the proper training
 Providing proper work methods and
tools
 Establishing legitimate incentives for
work to be accomplished
Management Should TakeManagement Should Take
More Responsibility for:More Responsibility for:

© 2011 Pearson
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Frank & Lillian GilbrethFrank & Lillian Gilbreth
 Frank (1868-1924); Lillian (1878-1972)
 Husband-and-wife engineering team
 Further developed work
measurement methods
 Applied efficiency methods to their
home and 12 children!
 Book & Movie: “Cheaper by the
Dozen,” “Bells on Their Toes”

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 Born 1863; died 1947
 In 1903, created Ford Motor
Company
 In 1913, first used moving assembly
line to make Model T
Unfinished product moved by
conveyor past work station
 Paid workers very well for 1911
($5/day!)
Henry FordHenry Ford

© 2011 Pearson
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W. Edwards DemingW. Edwards Deming
 Born 1900; died 1993
 Engineer and physicist
 Credited with teaching Japan quality
control methods in post-WW2
 Used statistics to analyze process
 His methods involve workers in
decisions

© 2011 Pearson
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Contributions FromContributions From
 Human factors
 Industrial engineering
 Management science
 Biological science
 Physical sciences
 Information technology

© 2011 Pearson
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New Challenges in OMNew Challenges in OM
 Global focus
 Just-in-time
 Supply-chain
partnering
 Rapid product
development,
alliances
 Mass
customization
 Empowered
employees, teams
ToToFromFrom
 Local or national focus
 Batch shipments
 Low bid purchasing
 Lengthy product
development
 Standard products
 Job specialization

© 2011 Pearson
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Characteristics of GoodsCharacteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction

© 2011 Pearson
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Characteristics of ServiceCharacteristics of Service
 Intangible product
 Produced and
consumed at same time
 Often unique
 High customer
interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed

© 2011 Pearson
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Industry and Services asIndustry and Services as
Percentage of GDPPercentage of GDP
Services Manufacturing
Australia
Canada
China
CzechRep
France
Germany
HongKong
Japan
Mexico
RussianFed
SouthAfrica
Spain
UK
US
90 −
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0 −

© 2011 Pearson
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Goods and ServicesGoods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
Percent of Product that is a Good Percent of Product that is a Service
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |

© 2011 Pearson
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120 –
100 –
80 –
60 –
40 –
20 –
0 –
| | | | | | |
1950 1970 1990 2010 (est)
1960 1980 2000
Employment(millions)
Manufacturing and ServiceManufacturing and Service
EmploymentEmployment
Figure 1.4 (A)
Manufacturing
ServiceService

© 2011 Pearson
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Manufacturing EmploymentManufacturing Employment
and Productionand Production
Figure 1.4 (B)
40 –
30 –
20 –
10 –
0 – | | | | | | |
1950 1970 1990 2010 (est)
1960 1980 2000
– 150150
– 125125
– 100100
– 7575
– 5050
– 2525
– 00
Employment(millions)
Index:1997=100Index:1997=100
Manufacturing
employment
(left scale)
IndustrialIndustrial
productionproduction
(right scale)(right scale)

© 2011 Pearson
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Development of theDevelopment of the
Service EconomyService Economy
Figure 1.4 (C)
United States
Canada
France
Italy
Britain
Japan
W. Germany
1970 2010 (est)
| | | | |
40 50 60 70 80
Percent

© 2011 Pearson
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Organizations in Each SectorOrganizations in Each Sector
Service SectorService Sector ExampleExample
% of all% of all
JobsJobs
Education,
Legal, Medical,
other
San Diego Zoo, Arnold
Palmer Hospital
25.8
Trade (retail,
wholesale)
Walgreen’s, Wal-Mart,
Nordstrom’s
14.9
Utilities,
Transportation
Pacific Gas & Electric,
American Airlines
5.2
Professional and
Business
Services
Snelling and Snelling, Waste
Management, Inc.
10.7
Table 1.3

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Service SectorService Sector ExampleExample
% of all% of all
JobsJobs
Finance,
Information,
Real Estate
Citicorp, American Express,
Prudential, Aetna
9.6
Food, Lodging,
Entertainment
Olive Garden, Motel 6, Walt
Disney
8.5
Public
Administration
U.S., State of Alabama, Cook
County
4.6
Total 78.8
Table 1.3

© 2011 Pearson
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Other SectorsOther Sectors ExampleExample
% of all% of all
JobsJobs
Manufacturing
Sector
General Electric, Ford,
U.S. Steel, Intel
11.2
Construction
Sector
Bechtel, McDermott 8.1
Agriculture
Sector
King Ranch 1.4
Mining Sector Homestake Mining 0.5
Total 21.2
Table 1.3

© 2011 Pearson
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Changing ChallengesChanging Challenges
Traditional
Approach
Reasons for
Change
Current
Challenge
Ethics and
regulations
not at the
forefront
Public concern over
pollution, corruption,
child labor, etc.
High ethical and
social
responsibility;
increased legal
and professional
standards
Local or
national
focus
Growth of reliable, low
cost communication
and transportation
Global focus,
international
collaboration
Lengthy
product
development
Shorter life cycles;
growth of global
communication; CAD,
Internet
Rapid product
development;
design
collaboration
Figure 1.5

© 2011 Pearson
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Traditional
Approach
Reasons for
Change
Current
Challenge
Low cost
production,
with little
concern for
environment;
free
resources
(air, water)
ignored
Public sensitivity to
environment; ISO 14000
standard; increasing
disposal costs
Environmentally
sensitive
production; green
manufacturing;
sustainability
Low-cost
standardized
products
Rise of consumerism;
increased affluence;
individualism
Mass
customization
Figure 1.5

© 2011 Pearson
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Traditional
Approach
Reasons for
Change
Current
Challenge
Emphasis on
specialized,
often manual
tasks
Recognition of the
employee's total
contribution; knowledge
society
Empowered
employees;
enriched jobs
“In-house”
production;
low-bid
purchasing
Rapid technological
change; increasing
competitive forces
Supply-chain
partnering; joint
ventures, alliances
Large lot
production
Shorter product life
cycles; increasing need
to reduce inventory
Just-In-Time
performance;
lean; continuous
improvement
Figure 1.5

© 2011 Pearson
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New Trends in OMNew Trends in OM
 Ethics
 Global focus
 Environmentally sensitive production
 Rapid product development
 Environmentally sensitive production
 Mass customization
 Empowered employees
 Supply-chain partnering
 Just-in-time performance

© 2011 Pearson
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Productivity ChallengeProductivity Challenge
Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)
The objective is to improve productivity!The objective is to improve productivity!
Important Note!
Production is a measure of output
only and not a measure of efficiency

© 2011 Pearson
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Feedback loop
Outputs
Goods
and
services
Transformation
The U.S. economic system
transforms inputs to outputs
at about an annual 2.5%
increase in productivity per
year. The productivity
increase is the result of a
mix of capital (38% of 2.5%),
labor (10% of 2.5%), and
management (52% of 2.5%).
The Economic SystemThe Economic System
Inputs
Labor,
capital,
management
Figure 1.6

© 2011 Pearson
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Improving Productivity atImproving Productivity at
StarbucksStarbucks
A team of 10 analystsA team of 10 analysts
continually look for wayscontinually look for ways
to shave time. Someto shave time. Some
improvements:improvements:
Stop requiring signatures
on credit card purchases
under $25
Saved 8 seconds
per transaction
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines Saved 12 seconds
per shot

© 2011 Pearson
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Improving Productivity atImproving Productivity at
StarbucksStarbucks
A team of 10 analystsA team of 10 analysts
continually look for wayscontinually look for ways
to shave time. Someto shave time. Some
improvements:improvements:
Stop requiring signatures
on credit card purchases
under $25
Saved 8 seconds
per transaction
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines Saved 12 seconds
per shot
Operations improvements have
helped Starbucks increase yearly
revenue per outlet by $200,000 to
$940,000 in six years.
Productivity has improved by 27%,
or about 4.5% per year.

© 2011 Pearson
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 Measure of process improvement
 Represents output relative to input
 Only through productivity increases
can our standard of living improve
ProductivityProductivity
Productivity =
Units produced
Input used

© 2011 Pearson
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Productivity CalculationsProductivity Calculations
Productivity =
Units produced
Labor-hours used
= = 4 units/labor-hour
1,000
250
Labor ProductivityLabor Productivity
One resource input  single-factor productivity

© 2011 Pearson
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Multi-Factor ProductivityMulti-Factor Productivity
Output
Labor + Material + Energy
+ Capital + Miscellaneous
Productivity =
 Also known as total factor productivity
 Output and inputs are often expressed
in dollars
Multiple resource inputs  multi-factor productivity

© 2011 Pearson
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old System:Old System:
=
Old labor
productivity
8 titles/day
32 labor-hrs

© 2011 Pearson
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14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs
=
Old labor
productivity
=
New labor
productivity
= .25 titles/labor-hr
14 titles/day14 titles/day
32 labor-hrs32 labor-hrs

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8 titles/day
32 labor-hrs
=
Old labor
productivity = .25 titles/labor-hr
14 titles/day
32 labor-hrs
=
New labor
productivity
= .4375 titles/labor-hr

© 2011 Pearson
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8 titles/day
$640 + 400
=
Old multifactor
productivity
=
New multifactor
productivity
14 titles/day14 titles/day
$640 + 800$640 + 800

© 2011 Pearson
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8 titles/day
$640 + 400
14 titles/day
$640 + 800
=
Old multifactor
productivity
=
New multifactor
productivity

© 2011 Pearson
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Measurement ProblemsMeasurement Problems
1.1. QualityQuality may change while the
quantity of inputs and outputs
remains constant
2.2. External elementsExternal elements may cause an
increase or decrease in
productivity
 Precise unitsPrecise units of measure may be
lacking

© 2011 Pearson
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Productivity VariablesProductivity Variables
1.1. LaborLabor - contributes
about 10% of the
annual increase
2.2. CapitalCapital - contributes
about 38% of the
annual increase
3.3. ManagementManagement -
contributes about
52% of the annual
increase

© 2011 Pearson
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Key Variables for ImprovedKey Variables for Improved
Labor ProductivityLabor Productivity
1. Basic education appropriate for the
labor force
2. Diet of the labor force
3. Social overhead that makes labor
available
 Challenge is in maintaining and
enhancing skills in the midst of rapidly
changing technology and knowledge

© 2011 Pearson
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Labor SkillsLabor Skills
About half of the 17-year-olds in the U.S. cannotAbout half of the 17-year-olds in the U.S. cannot
correctly answer questions of this typecorrectly answer questions of this type
Figure 1.7

© 2011 Pearson
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Investment and ProductivityInvestment and Productivity
10
8
6
4
2
0
Percentincreaseinproductivity
Percentage investment
10 15 20 25 30 35

© 2011 Pearson
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Service ProductivityService Productivity
1. Typically labor intensive
2. Frequently focused on unique
individual attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality

© 2011 Pearson
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Productivity at Taco BellProductivity at Taco Bell
Improvements:
 Revised the menu
 Designed meals for easy preparation
 Shifted some preparation to suppliers
 Efficient layout and automation
 Training and employee empowerment
 New water and energy saving grills

© 2011 Pearson
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Productivity at Taco BellProductivity at Taco Bell
Improvements:
 Revised the menu
 Designed meals for easy preparation
 Shifted some preparation to suppliers
 Efficient layout and automation
 Training and employee empowerment
 New water and energy saving grills
Results:
 Preparation time cut to 8 seconds
 Management span of control increased
from 5 to 30
 In-store labor cut by 15 hours/day
 Stores handle twice the volume with half
the labor
 Conserve 300 million gallons of water andConserve 300 million gallons of water and
200 million KwH of electricity each year200 million KwH of electricity each year
saving $17 million annuallysaving $17 million annually

© 2011 Pearson
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Ethics andEthics and
Social ResponsibilitySocial Responsibility
Challenges facingChallenges facing
operations managers:operations managers:
 Developing and producing safe,
quality products
 Maintaining a clean environment
 Providing a safe workplace
 Honoring stakeholder commitments

© 2011 Pearson
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

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