OPERATION MANAGEMENT AND PRODUCTIVITY

I. Activities of Businesses
1. Production/Operation
Definition: creation of goods and services
Activities:
 Facilities Construction
 Facilities Maintenance
 Production and inventory control
 Scheduling, material controls
 Quality Assurance and control
 Supply-chain management
 Manufacturing tooling fabrication; Assembly;
 Design products, product development
 Detailed product specification
 Industrial engineering, efficient use of machine, space, personnel.

2. Finance/Accounting
Definition: tracks how well the organization is doing, paying bills, and
collecting money.
Activities:
 Disbursement/credits, Accounts receivable, payable, General ledger
 Fund management, money market, International exchange
 Capital requirements, Stock issue, Bond issue and recall
 Finance, cash control
 Investment

3. Marketing
Definition: generates the demand, or at least takes the order for a product or
service
Activities:
 Sale promotion
 Advertising
 Market research
 Sales
II. Value-Added
- The difference between the cost of inputs and the value or price of outputs.

III. Operation Management

- Is the set of activities that creates value in the form of goods and services
through transformation of inputs to outputs.

IV. INPUT-PROCESS-OUTPUT
1. Food Processor 2. Hospital Process

V. Goods and Services

What’s the difference between Goods and Services?
Goods Services
Can be resold Reselling is unusual
Can be inventoried Cannot be inventoried
Some aspect of quality are measurable Many aspect are difficult to measure
Selling is distinct from production Selling is often part of the services
Product is transportable Provider is transportable
Site of facility is important for cost Site of facility is important for customer contact
Easy to automate Difficult to automate
Revenue generated from tangible product Revenue generated from intangible services

Manufacturing or Service?

Goods-service Continuum

Manufacturing vs Service

VI. PRODUCTIVITY

Lets Try This:

Fisher Technologies is a small firm that doubles its dollar contribution to a fixed
cost and profit in order to be profitable enough to purchase the next generation of
production equipment. Management has determined that if the firm fails to
increase contribution, its bank will not make the loan and the equipment cannot
be purchased. It the firm cannot purchase the equipment, the limitations of the
old equipment will force Fisher to go out of business and, in doing so, puts its
employees out of work and discontinue producing goods and services for its
customers.
Option No. 1: (Marketing Option) Good marketing management may
increase sales by 50%
Option No. 2: (Finance/Accounting Option) Good financial management cut
in half the finance costs.
Option No. 3: (OM Option) Reduce production cost by 20%

VII. The Productivity Challenge

 Productivity is the ratio of outputs (goods and services) divided by one or more
inputs (such as labor, capital, or management)
 Outputs/inputs
 O/I
 This requires Efficiency!
 Efficiency doing job well- minimum resources/waste
 Effective doing the right thing.
 How do we increase Productivity?
 Reduce inputs, constant outputs
 Increase outputs, constant inputs
 Resulting to High ROI, lower prices.
 High ROI, constant productivity = higher prices
VIII. Productivity Measurement
Single-factor productivity – indicates the ratio of one resource (input) to the
goods and services produced (outputs)
Multifactor productivity – indicates the ratio of many or all resources (inputs) to
the goods and services produced (outputs)

Example
Collins Title wants to evaluate its labor and multifactor productivity with a new
computerized search system. The company has a staff of four, each working 8
hours per day (for a payroll cost of $640/day) and overhead expenses of $400
per day. Collins processes and closes on 8 titles each day. The new
computerized title-search system will allow the processing of 14 titles per day.
Although the staff, their work hours, and pay are the same, the overhead
expenses are now $800 per day.

Use Single-factor productivity.

Use multifactor productivity.

Productivity Variables
 Labor, contributes about 10% of the annual increase
 Capital, contributes about 38% of the annual increase
 Management, which contributes about 52% of the annual increase.

Lets Try This.

 At Modern Lumber, Inc., Art Binley, president and producer of apple crates
sold to growers, has been able, with his current equipment, to produce
240 crates per 100 logs. He currently purchases 100 logs per day, and
each log requires 3 labor-hours to process. He believes that he can hire a
professional buyer who can buy a better-quality log at the same cost. If
this is the case, he can increase his production to 260 crates per 100 logs.
His labor-hours will increase by 8 hours per day.

 What will be the impact on productivity (measured in crates per labor-

hour) if the buyer is hired?
 Art Binley has decided to look at his productivity from a multifactor (total
factor productivity) perspective (refer to Solved Problem 1.1). To do so, he
has determined his labor, capital, energy, and material usage and decided
to use dollars as the common denominator. His total labor-hours 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 100 logs per day are $1,000 and will remain the same. Because he
pays an average of $10 per hour (with fringes), Binley determines his
productivity increase as follows:
Solution
Current System System with Professional Buyer

Labor: 300hrs. @ $10 = 308 hrs @ $10 =

$3,000 $3,080
Material: 100 logs/day
1,000 1,000
Capital:
350 350
Energy:
150 150
Total Cost:
$4,500 $4,580
Multifactor productivity of Multifactor productivity of
current system: = 240 proposed system: = 260
crates/4,500 = .0533 crates/4580 = .0568 crates/dollar
crates/dollar