Operations Management

Operations and Productivity

Dr. Vaidy Jayaraman Univ of Miami, FL, USA

What Is Operations Management?

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

A Competitive Framework for Operations

Inputs

S U P

MY COMPANY

Demand Share

Outputs Preferences

P
L I E R

Service Cost Quality

Performance

Market Response
Market Size

Flexibility
Outputs

Inputs

C U S T O M E R S

Competitors
Demand Share

Why Study Operations Management?

Systematic Approach to Org. Processes

Business Education

Operations Management

Career Opportunities

Cross-Functional Applications

Organizing to Produce Goods and Services

Essential functions:
Marketing generates demand

Production/operations creates the product

Finance/accounting tracks how well the organization is doing, pays bills, collects the money

Westsides competitive strategy?

Staples: The worlds largest office products company ($23 billion in sales).
Video from the Staples Channel at www.youtube.com/stapleschannel Staples competitive strategy?

Toyota timeline 2008: #1 carmaker in the world. 2009-2010: 8.5 million vehicles recalled
Graphs from nytimes.com

Toyotas competitive strategy?

Aligning operations with strategic objectives

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Quick response @Westside
Capacity (Service level) vs Cost Managerial choices: Capacity planning? Demand planning?

Low price @Staples

Inventory costs vs customer satisfaction Managerial choices: Inventory planning? Product variety?

High quality @Toyota

Quality vs cost, Quality vs growth Internal re-work costs vs External recall costs Managerial choices: Process control, speed, quality

Strategic fit
Operations structure CORPORATE Make it easy for customers to buy a wide range of office suppliers at low cost

Operations strategy

Corporate strategy

OPERATIONS STRUCTURE Smart sourcing Efficient transportation Local warehouses Inter-store communication

OPERATIONS STRATEGY Low inventory levels Large variety Convenient delivery

When you can measure what you are speaking about, and express it in numbers, you know something about it. Lord Kelvin (18241907)

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Best-in-class emergency room

High

Responsiv eness

Operations frontier

Best-in-class nonemergency hospital

Low Low High

Cost efficiency
Operations frontier in healthcare

Trade-offs in competitive strategy

Balancing trade-offs

How to model and optimally resolve trade-offs?

Build mathematical models Analyze and solve model Recover solution Supplement with managerial judgement

Organizational Charts
Airline 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

Marketing
Traffic administration Reservations Schedules Tariffs (pricing) Sales Advertising

Organizational Charts Manufacturing

Operations
Facilities
Construction; maintenance

Finance/ accounting
Disbursements/ credits Receivables Payables General ledger Funds Management Money market International exchange Capital requirements Stock issue Bond issue and recall

Marketing
Sales promotion Advertising Sales Market research

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

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 understand what operations managers do OM is such a costly part of an organization

Winning versus Qualifying Criteria

COST

{ { {
{

Initial Cost: Lifecycle Cost:

the cost of acquiring the product which is directly related to the price the customer pays (usually relevant in everyday use consumer products) the cost of acquiring, maintaining and disposing the product (relevant in industrial equipment markets)

Design Quality: Conformance Quality:

QUALITY

features, styling and other product attributes that enhance fitness for use (typically important in luxury products) the product conforms to set standards during the production process (important for almost all product markets)

Delivery Speed: Delivery Reliability:

SERVICE

ability to produce and deliver the product in a short notice(characteristic environments of time based competition) ability to produce and deliver consistently products according to contractually prespecified time intervals

New Product Flexibility: ability to introduce in an effective and timely manner new products (again
characteristic of time based competition)

FLEXIBILITY

Customization: Product Mix Flexibility:

ability to produce a large variety of products that match the needs of a highly segmented market (mass customization) ability to efficiently and effectively adjust the production mix in response to demand fluctuations of various products (cyclical demand markets)

RESOURCES ORIENTED OPERATIONS

Geographic

Rationalization of Resources Economies of Scale

Supply Chain Coordination

Financial Flexibility (e.g., Tax Incentives)

Functional

INFORMATION ORIENTED OPERATIONS

Geographic

Rationalization of Resources Economies of Scope Network Optimization

Sectorial

Operational Flexibility

USER ORIENTED OPERATIONS

Rationalization of Resources Technology Development and R&D Customer Service (Winning, Maintain) Responsiveness Flexibility

Sectorial

Functional

GLOBAL OPERATIONS FRAMEWORK

Geographic
Information Oriented Operations Resource Oriented Operations

Sectorial
User Oriented Operations

Functional

OPERATIONAL ORIENTATION FOR COMPANIES

Resources Oriented
Cost Utilization Efficiency

Information Oriented
Speed of
Exchange Extent of Communication

User Oriented
Customer Service Bargaining Power

Core Services Defined

Core services are basic things that customers want from products they purchase

Core Services Performance Objectives

Quality

Flexibility

Operations Management

Speed

Price (or cost Reduction)

Value-Added Services Defined

Value-added services differentiate the organization from competitors and build relationships that bind customers to the firm in a positive way

Value-Added Service Categories

Problem Solving

Information

Operations Management

Sales Support

Field Support

What Operations Managers Do

Basic Management Functions
Planning

Organizing
Staffing

Leading
Controlling

Ten Critical Decisions

Ten Decision Areas Design of goods and services Managing quality Process and capacity design Location strategy Layout strategy Human resources and job design Supply chain management Inventory management Scheduling Maintenance

Where are the OM Jobs?

Significant Events in OM

Goods vs Service
Characteristic Customer contact Uniformity of input Labor content Uniformity of output Output Measurement of productivity Opportunity to correct problems Inventory Evaluation Patentable Goods Low High Low High Tangible Easy High Much Easier Usually Service High Low High Low Intangible Difficult Low Little Difficult Not usual

Goods Versus Services

Attributes of Goods (Tangible Product) Attributes of Services (Intangible Product)

Can be resold Can be inventoried Some aspects of quality measurable Selling is distinct from production Product is transportable
Site of facility important for cost Often easy to automate Revenue generated primarily from tangible product

Reselling unusual Difficult to inventory Quality difficult to measure

Selling is part of service Provider, not product, is often transportable Site of facility important for customer contact Often difficult to automate Revenue generated primarily from the intangible service

New Trends in OM
Past
Local or national focus
Batch (large) shipments

Causes
Reliable worldwide communication and transportation networks
Short product life cycles and cost of capital put pressure on reducing inventory Supply chain competition requires that suppliers be engaged in a focus on the end customer

Future
Global focus, moving production offshore
Just-in-time performance

Low-bid purchasing

Supply chain partners, collaboration, alliances, outsourcing

New Trends in OM
Past
Lengthy product development
Standardized products

Causes
Shorter life cycles, Internet, rapid international communication, computeraided design, and international collaboration Affluence and worldwide markets; increasingly flexible production processes
Changing socioculture milieu; increasingly a knowledge and information society

Future
Rapid product development, alliances, collaborative designs Mass customization with added emphasis on quality Empowered employees, teams, and lean production

Job specialization

New Trends in OM
Past
Low-cost focus

Causes
Environmental issues, ISO 14000, increasing disposal costs

Future
Environmentally sensitive production, green manufacturing, recycled materials, remanufacturing High ethical standards and social responsibility expected

Ethics not at forefront

Businesses operate more openly; public and global review of ethics; opposition to child labor, bribery, pollution

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

Strategy
Mission
The

reason for existence for an organization

Mission Statement
States

the purpose of an organization

Goals
Provide

detail and scope of mission

Strategies
Plans for achieving organizational goals

Tactics
The

methods and actions taken to accomplish strategies

Examples of Operations Strategies

Price Quality Time Flexibility Service Location
Low Cost U.S. first-class postage Motel-6, Red Roof Inns

High-performance design Sony TV or high quality Consistent Lexus, Cadillac quality Pepsi, Kodak, Motorola Rapid delivery On-time delivery Variety Volume Superior customer service Convenience Express Mail, Fedex, One-hour photo, UPS Burger King Supermarkets Disneyland Nordstroms Banks, ATMs

Global Strategy
Strategic decisions must be made with respect to globalization
What works in one country may not work in another Strategies must be changed to account for these differences Other issues
Political, social, cultural, and economic differences

Strategy Formulation
Distinctive competencies Environmental scanning SWOT Order qualifiers Order winners

Strategy Formulation
Order qualifiers
Characteristics that customers perceive as minimum standards of acceptability to be considered as a potential purchase

Order winners
Characteristics of an organizations goods or services that cause it to be perceived as better than the competition

Productivity 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!
Important Note! Production is a measure of output only and not a measure of efficiency

Improving Productivity at Starbucks

A team of 10 analysts continually look for ways to shave time. Some improvements:
Stop requiring signatures on credit card purchases under $25 Change the size of the ice scoop Saved 8 seconds per transaction Saved 14 seconds per drink

New espresso machines

Saved 12 seconds per shot

Improving Productivity at Starbucks

A team of 10 analysts continually look for ways to shave time. Some improvements:

Operations improvements have helped Starbucks increase yearly Stop requiring signatures Saved 8 seconds revenue per outlet $200,000 to on credit card purchases perby transaction $940,000 in six years. under $25

Productivity improved by 27%, Change the size of the ice has Saved 14 seconds or about 4.5% per year. scoop per drink New espresso machines Saved 12 seconds per shot

Productivity
Units produced Productivity = Input used

Measure of process improvement

Represents output relative to input Only through productivity increases can our standard of living improve

Productivity Calculations
Labor Productivity
Productivity = Units produced Labor-hours used 1,000 250 = 4 units/labor-hour

One resource input single-factor productivity

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

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day

8 titles/day Overhead = $400/day

8 titles/day Old labor = productivity 32 labor-hrs

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day

8 titles/day Overhead = $400/day

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

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

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

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

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

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

8 titles/day Old multifactor = productivity $640 + 400

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

8 titles/day Old multifactor = = .0077 titles/dollar productivity $640 + 400

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

8 titles/day Old multifactor = = .0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = productivity $640 + 800

Collins Title Productivity

Old System:

Staff of 4 works 8 hrs/day Payroll cost = $640/day New System:

14 titles/day

8 titles/day Overhead = $400/day

Overhead = $800/day

8 titles/day Old multifactor = = .0077 titles/dollar productivity $640 + 400 14 titles/day New multifactor = = .0097 titles/dollar productivity $640 + 800