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Introduction to Operations Management

(Chapters 1 & 2)

Production & Operations Management

INFO 335-71

Week 1

2

Food for thought - POM

⚫ How can Southwest Airlines maintain low fare options?

⚫ How would Coca Cola assess the performance of its bottling machines?

⚫ What would be the impact on the next light rail project if the process of

acquiring land was delayed by 2 weeks?

⚫ How much inventory of shovels should be carried by your local Home

Depot store this Fall?

⚫ How do I increase the reliability of my operations by using backup

systems?

⚫ How should your friend organize tasks in her Pizza Hut to serve 60

customers per hour?

⚫ Where should I open my bakery? 6th Street or 13th Street?

3

Operations Management

The business function responsible for planning,

coordinating, and controlling the resources

needed to produce products and services for a

company

4

OM’s Transformation Role

⚫ To add value

• Increase product value at each stage

• Value added is the net increase between output

product value and input material value

⚫ Provide an efficient transformation

• Efficiency – means performing activities well for

least possible cost

5

Service vs. Manufacturing

Organizations

⚫ Is the product tangible or intangible?

⚫ Can the product be inventoried?

⚫ Is there high customer contact?

⚫ Is the response time long or short?

⚫ Is it labor or capital intensive?

6

Today’s OM Environment

⚫ Demands:

• Flexibility • Speed • Quality • Costs

Examples of companies and organizations facing pressures

such as above?

7

Developing a Business Strategy

⚫ Consider these three critical factors in developing a

business strategy:

• What is the business goal? (mission) • Does company understand the market?

(environmental scanning)

• What are the company strengths? (core competencies)

8

Developing an Operations Strategy

Operations Strategy:

⚫ Is a plan for the design and management of operations functions

⚫ Is developed after the business strategy

⚫ Focuses on specific capabilities which give it a competitive edge – competitive priorities

9

Competitive Priorities – The Edge

Four Key Operations Questions - Can a company

compete on:

1. Cost?

2. Quality?

3. Time?

4. Flexibility?

All of the above? Some? Tradeoffs?

10

1. Competing on Cost

Offer product at lower price than competition

• Typically high volume products

• Often limit product range with little customization

• May invest in automation to reduce unit costs

• Can use lower skill labor

• Probably use product focused layouts

• Low cost does not mean low quality

11

2. Competing on Quality

Quality is often subjective & is defined differently depending on who is defining it

⚫ Two major quality dimensions include 1. High performance design:

• Superior features, high durability, & excellent customer service 2. Product & service consistency:

• Meets design specifications • Close tolerances • Error free delivery

⚫ Quality must address • Product design quality – product/service meets

requirements

• Process quality – error free products

12

3. Competing on Time

⚫ Time/speed a top competitive priority

⚫ First to deliver often wins the race

⚫ Time-related issues involve:

• Rapid and/or on-time delivery • Focused on shorter time between order placement and

delivering product exactly when needed every time

13

4. Competing on Flexibility

⚫ Business environments can change rapidly;

company’s must accommodate change by

being flexible

• Product flexibility: • Offer a wide variety of goods/services, easily customized

to meet specific requirements of customer

• Easily drop or add product to meet customer demand • Volume flexibility:

• Ability to rapidly increase or decrease production to match market demands

14

The Need for Trade-offs

⚫ Decisions

• must emphasis priorities that support business strategy • often required trade-offs • must focus on order qualifiers and order winners

15

Order Qualifiers & Winners

Which priorities are “Order Qualifiers”? Hint: Must meet market’s competitive

priorities since market expects it

Which priorities are “Order Winners”? Hint:

Dell competes on all four priorities

Southwest Airlines competes on cost

FedEx competes on speed

Pizzerias compete on homemade taste (quality)

16

Food for Thought

The Nobel Prize winning economist, Paul Krugman, said that

while “productivity isn’t everything, in the long run, it is almost

everything”.

⚫ For business leaders, the concept of productivity (often

measured as output per hour, or per worker) can be difficult

to pin down within their company, with different levers, such

as hiring new staff or banning overtime, affecting the figures

in counterintuitive ways. Productivity doesn't always align

itself with profits. – The Telegraph

⚫ The blended workforce is on the rise.

17

Measuring Productivity ⚫ Productivity is a measure of how efficiently inputs are

converted to outputs

Productivity = Output/input

⚫ Total Productivity Measure Total Productivity = Output produced/All inputs used

⚫ Partial Productivity Measure Partial Productivity = Output/labor or Output/Capital

⚫ Multifactor Productivity Measure Multi-factor Productivity = Output/(labor + materials + others) or Output/(labor + capital)

Use all inputs when exact inputs are not identified for multifactor

Output = 1000 lbs of candy on a

weekly basis (equivalent $10,000)

Input = $500 of labor on a weekly

basis

Productivity = 1000 lbs / $500

= 2 lbs/$

Productivity = $10,000/$500 = 20

In-Class Practice Problem

Year1 Year2 Year3

Sales 110 129 124

Materials 62 73 71

Labor 28 33 28

Overhead 8 12 10

XYZ Manufacturing uses two measures of productivity: a) total/overall productivity, b) labor productivity. Given data for the last three years (Table 2), calculate the productivity ratios. How would you interpret the results. Table 2: XYZ Productivity Data (in millions of dollars)

In-Class Practice Problem

Suppose that a plant has a total

productivity measure of 0.85.

What can we conclude?

a) the plant is not earning profits

b) nothing

c) the plant should lay off

workers

d) the plant is highly automated

e) the daily productivity is

excellent

Answer: If there are no units associated with the

productivity measure, it implies that inputs and

outputs are measured in the same units.

Example: You buy a $100,000 house in the hopes

of flipping it for a profit, but the house sells for

$80,000. What is the productivity of your business

venture?

Output = $80,000 (note that units is $)

Input = $100,000 (note that units is $)

Productivity = Output/Input

= $ 80,000/$ 100,000 = 0.8

In this example the units cancel out as it is $

divided by $. So the productivity measure does not

have a unit. And the fact that 1 unit of input is

producing only 0.8 of the same unit of output

implies that the plant is not earning profits.

But if the output and input are measured in

different units the one cannot draw the same

conclusion if productivity <1. For instance, assume

output is 20 computer repairs and input is 100

hours of labor, then productivity will be 20

repairs/100 hours of labor = 0.2 repair per hour of

labor

In-Class Practice Problem

Vericol, Inc. manufactures drugs using workers and

automated machines. The firm has decided to

replace two workers with a new machine, while the

output per day is not expected to change. Which of

the following cannot be true?

a) labor productivity will increase

b) machine productivity will decrease

c) labor productivity will decrease

d) multifactor productivity will increase

e) multifactor productivity will decrease

Answer: Note the question asks

which one of the options cannot

be true. If you are automating, it

means that you are replacing

workers. A workers cost is part

of the input. So if you are

replacing workers with machines

then your input cost is going

down since you do not pay

machines healthcare, salaries

etc., and their maintenance cost

is a fraction of the overall labor

cost. If your input cost is going

down, then your labor

productivity = output/labor cost

will improve since labor cost

(the denominator) is reducing.

So option C cannot be true.

Labor productivity cannot go

down.

In-Class Practice Problem

If inputs increase by 30% and outputs decrease by

15%, what is the percentage change in productivity?

a) 100% decrease

b) 11.54% increase

c) 34.62% decrease

d) 15% increase

e) 15% decrease

Answer:

Assume output = 100

Input =100

So, current productivity = 1 (output/input = 100/100)

New output with 15% decrease = 85 (15% less)

New input with 30% increase = 130 (30% more)

New productivity = 85/130 = .6538

So % Change =

100 * (New Productivity – Old Productivity) divided by Old

Productivity

= 100 * (.6538 – 1)/1

= 100 * ( - .3462) ##note the negative sign)

= -34.62% (the negative indicates that the productivity decreases)

In-Class Practice Problem

If inputs increase by 30% and outputs decrease by

15%, what is the percentage change in productivity?

a) 100% decrease

b) 11.54% increase

c) 34.62% decrease

d) 15% increase

e) 15% decrease

23

Productivity Example - An automobile manufacturer has

presented the following data for the past three years in its

annual report. As a potential investor, you are interested in

calculating yearly productivity and year to year productivity

gains as one of several factors in your investment analysis.

2008 2007 2006

Partial Prod. Measure

Unit Car Sales/Employee 24.1 21.2 18.3

Year-to-year Improvement 13.7% 15.8%

Multifactor Prod. Measures

Total Cost Productivity 1.26 1.24 1.19

Year-to-year Improvement 1.6% 4.2%

Which is the best measurement?

2008 2007 2006

Unit car sales

2,700,000 2,400,000 2,100,000

Employees 112,000 113,000 115,000

$ Sales

(billions$)

$49,000 $41,000 $38,000

Cost of Sales

(billions)

$39,000 $33,000 $32,000

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Interpreting Productivity

Measures

⚫ Productivity measures must be compared to something, i.e., another year, a different company

⚫ Raw productivity calculations do not tell the complete story unless there are no major structure differences.

⚫ In the prior automobile business example, it is obvious that some major changes were taking place to yield 15.8% and 13.7% year-to-year cars/employee productivity improvements. What changes could improve car sales per employee? Automation? Outsourcing? Major re-design?