Chapter 1

INTRODUCTION TO OPERATIONS
MANAGEMENT AND
PRODUCTIVITY

Reference (textbook): Operations Management: Sustainability

and Supply Chain Management
Heizer, Jay., Render, B. & Munson, C. (2017)

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Syllabus Content
1. Overview of Operation Management
2. Organizing to Produce Goods and Services
3. Operations for Goods and Services
4. Productivity Challenge
5. New Challenges in Operation Management

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 What is Operation Management
• Product/ Output
• Goods or services
• Consumer goods, industrial goods or producer goods

• Production is the creation of good and service

• Operation Management is the set of activities that

creates value in the form of goods and services by
transforming inputs into outputs.
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1. Overview of Operation Management (OM)
• OM is a discipline that applies to restaurant like Hard rock café
as well as to factories like Ford and Harley-Davidson
Motorcycle

• It doesn’t matter if the application is in an office, a hospital, a

restaurant, a department store, or a factory – the production of
goods and services require OM

• The efficient (doing the job well: with minimum of resources

and waste) production of goods and services requires effective
applications
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of the concepts, tools and techniques of OM
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2.0 Organizing to Produce Goods and Services
• To create goods and services, all organizations perform three
functions:-
1. Marketing : to generates demand/ gets customers
2. Production/Operation: Creates, produces and delivers
products
3. Finance/Accounting: Obtain funds, Tracks money, Track
how well the organization is doing, pays the bills, and
collects the money
• Operations is one of the three functions that every
organizations performs
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 2.1 Organization Charts for Service Organization
(A) Commercial Bank

Operations Finance Marketing

Teller scheduling Investments
Check Clearing Securities Loans (B) Airline
Real Estates Commercial
Collection
Industrial
Transaction processing
Financial
Facilities design/Layout
Accounting Personal
Vault Operations Finance
Maintenance
Mortgage Operations Marketing
Security Accounting
Auditing Trust Ground support Equipment
Accounts Payable Traffic administration
Department Maintenance Reservations
Accounts Receivable
Ground Operations Schedule
General Ledger
Facility maintenance Tariffs (Pricing)
Finance
Catering Sales
Cash Control
Flight Operation Advertising
International
Crew Scheduling
Exchange
Flying
Communications
Dispatching
Management Science

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2.2 Organization Charts for Manufacturing Organization

(C) Manufacturing

Operations
Finance/Accounting
Facilities
Construction, Maintenance Disbursements/credits Marketing
Production and inventory control Accounts receivable
Scheduling, materials control Accounts Payable
Quality assurance and control Sales promotion
General Ledger
Supply chain management Advertising
Funds Management
Manufacturing Sales
Money Market
Tooling, fabrication, assembly Market Research
International Exchange
Design Capital Requirements
Product development and design Stock Issue
Detailed product specifications Bond Issue and recall
Industrial engineering
Efficient use of machines, space, and personnel
Process Analysis
Development and installation of production tools
and requirement

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 2.3 Why Study OM?

We Study OM for four reasons:-

1. To learn how people organize themselves for productive

enterprise

2. To learn how goods and services are produced

3. To understand what operations managers do

4. Because
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 2.4 What OM Managers Do?
• All goods managers perform the basic functions of the management process (planning, organizing,
staffing, leading, controlling)

• The TEN OM Strategic Decision are required of operation managers:-

1. Design of good services
2. Managing quality
3. Process strategy
4. Location strategies
5. Layout Strategies
6. Human resources
7. Supply chain management
8. Inventory management
9. Scheduling
10. Maintenance
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 The 10 Strategic Decisions
1.Design of Goods and Services
- Defines what is required of operations
- Product design determines quality, sustainaibility and human
resources
2. Managing Quality
- Determine the customer's quality expectations
- Establish policies and procedures to identify and achieve that
quality
3. Process and Capacity Design
- How is a good or service produced?
- Commits management to specific technology, quality,human
resources,
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 The 10 Strategic Decisions
4. Location Strategy
- Nearness to customers, suppliers and talent
- Considering costs, infrastructure, logistics and government
5. Layout Strategy
- Integrate capacity needs, personnel levels, technology and
inventory
- Determine the efficient flow of materials, people and information
6. Human resources and Job Design
- Recruit, motivate and retain personnel with the required talent and
skills
- Integral and expensive part of the total system design
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 The 10 Strategic Decisions
7. Supply-chain Management
- Intergrate supply chain into the firm's strategy
- Determine what is to be purchased, from whom and under what
conditions

8. Inventory Management
- Inventory ordering and holding decisions
- Optimize considering customer satisfaction, supplier capability,
and production schedule.

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 The 10 Strategic Decisions
9. Scheduling
- Determine and implement intermidate and short-term schedules
- Utilize personnel and facilities while meeting customer demands

10. Maintenance
- Consider facility capacity, production demand, and personnel
- Maintain a reliable and stable process

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3.0 Operations for goods and services
• Manufacturers produce a tangible product, while service products are often intangible

• The definition of services: Economic activities that typically produce an intangible

product (e.g: education, entertainment, lodging, government, insurance, transportation
etc) – almost all services and almost all goods are a mixture of a service and a
tangible product

• Service Sector: The segment of the economy that includes trade, financial, lodging,
education, legal, medical, and other professional occupation
- Services now constitute the largest economic sector in
postindustrial societies
- The huge productivity increases in agriculture and manufacturing
allowed mire economic resources to be devoted to services
- Many service jobs pay very well
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 3.1 Differences Between Goods and Services
Characteristic of Services Characteristics of Goods
Intangible Tangible
Produced and consumed simultaneously Product can usually be kept in inventory
Unique Similar product produced
High customer interaction Limited customer interaction
Inconsistent product definition Product standardized
Often knowledge based Standard tangible product tends to make automation
feasible
Service dispersed Product typically produced at a fixed facility
Quality may be hard to evaluate Many aspects of quality for tangible products are
easy to evaluate
Reselling is unusual Product often has some residual value

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4.0 Productivity Challenge
• The creation of goods and services requires changing resources into goods and
services
• The more efficiently we make this change, the more productive we are
• Productivity : is the ratio of outputs (goods and services) divided by the inputs
(resources)
• The OM manager’s jobs is to improve this ratio of output to input (improving productivity
means improving efficiency)
• This improvement can be achieved in two ways:
1. reducing inputs while keeping output constant
2. increasing output while keeping inputs constant
Inputs Outputs
Labor, capital, management Transformation process Goods or services

Feedback loop

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4.1 Productivity Measurement
• Productivity – the ratio of outputs (goods and services) divided by one or more inputs
(such as labor, capital, or management)

Productivity = Unit Produced

Input used

• High production means producing many units, while high productivity means
producing unit efficiently

• Only through increase in productivity can the standard of living of a country improve

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4.1 Productivity Measurement
• Single-factor productivity (Labor Productivity)
- Indicates the ratio of goods and services produced (output) to one resource (input)

Productivity = Unit produced

Input used

For example, it units produced = 1,000 and labor-hours used is 250, then:

Single Factory Activity = Unit Produced = 1,000 = 4 units per labor-hours

Labor-hours used 250

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4.1 Productivity Measurement
• Multifactor productivity (Total Factor Productivity)
- Indicates the ratio of goods and services produced (output) to many or all
resources (input)

Multifactor Activity = Output

Labor + Material + Energy + Capital + Miscellaneous

 also known as total factor productivity

 outputs and inputs are often expressed in dollars

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4.1 Productivity Measurement
• Measurement problems are:

1. Quality may change while quantity of inputs and outputs remain constant

2. External elements may cause an increase or decrease in productivity

3. Precise units of measure may be lacking

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4.2 Productivity Variables
• Productivity increase are dependent on three productivity variables:

1. Labor – contribute about 10% of the annual increase

2. Capital – contributes about 38% of the annual increase
3. Management – contributes about 52% of the annual increase

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4.2 Productivity Variables
1. Labor
- Improvement in the contribution of labor to productivity is the result of a healthier,
better educated, and better-nourished labor force

- Key variables for improved labor productivity are

 Basic education appropriate for an effective labor force –
Diet for labor force
Social overhead that makes labor available, e.g. : transportation and sanitation
Maintaining and enhancing the skills of labor force

- Overcoming shortcoming in the quality of labor is a major challenge. Perhaps

improvement can be found not only through increasing competence labor but also via
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utilized labor with stronger commitment (training, team building, motivation etc.)
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4.2 Productivity Variables
2. Capital
- Inflation and taxes increase the cost of capital – making capital investment increasingly
expensive
- when the capital invested per employee are drops, we can expect a drop in
productivity
- Using labor rather than capital may reduce unemployment in the short run, but it also
makes economies less productive and therefore lower wages in the long run

3. Management
- Management is responsible for ensuring that labor and capital are effectively used to
increase productivity
- Knowledge society – a society in which much of the labor force has migrated from
manual work to work based on knowledge (ongoing education)
- Education and training are important high cost items – thus OM Managers must use
technology
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4.3 Productivity and the Service Sector
• The services sector provides a special challenge to the accurate measurement of
productivity and productivity improvement because:-

1. Typical labor intensive (e.g: counseling, teaching)

2. Frequently focused on unique individual attributes or desires (e.g.:
Investment advice)
3.Often an intellectual task performed by professional (e.g.: medical diagnosis)
4. Often difficult to mechanize and automate (e.g.: haircut)
5. Often difficult to evaluate for quality (e.g.: performance of a law firm)

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5.0 Current challenges in Operations Management
1. Globalization – international collaboration

2. Supply-chain partnering – joint ventures, alliances

3. Sustainability – green products, recycle, reuse

4. Rapid product development – design collaboration

5. Mass Customization – Customized product

6. Lean operations – continuous improvement and elimination of waste

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 Thank You

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