CH1: Introduction to Operations

Management
• Learning Objectives
• After this lecture, students will be able to
1. Define the terms operations management and supply
chain
2. Identify the three major functional areas of organizations
and describe how they interrelated
3. Identify similarities and differences between production
and service operations
4. Explain the key aspects of operations management
decision making
5. Explain the need to manage the supply chain
 What Is Operations Management?
• Production is the creation of goods and
services
• Operations management (OM) is the set of
activities that create value in the form of
goods and services by transforming inputs into
outputs
• Operations management:
• The business function responsible for
planning, coordinating, and controlling the
resources needed to produce a company’s
products and services
 Organizing to Produce Goods and
Services
• Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the product
3. Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money
4. Human Resources – provides labor, employs,
assigns and gives training.
 Why Study OM?
1. OM is one of four 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
 The Strategic Decisions
1. Design of goods and services
– Defines what is required of operations
– Product design determines quality,
sustainability and human resources
2. Managing quality
– Determine the customer’s quality expectations
– Establish policies and procedures to identify
and achieve that quality
 The Strategic Decisions
3. Process and capacity design
▶ How is a good or service produced?
▶ Commits management to specific technology,
quality, resources, and investment.
4. Location strategy
▶ Nearness to customers, suppliers, and talent.
▶ Considering costs, infrastructure, logistics, and
government.
 The Strategic Decisions
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.
 The Strategic Decisions
7. Supply-chain management
▶ Integrate 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 schedules.
 The Strategic Decisions
9. Scheduling
▶ Determine and implement intermediate- and
short-term schedules.
▶ Utilize personnel and facilities while meeting
customer demands.
10. Maintenance
▶ Consider facility capacity, production
demands, and personnel.
▶ Maintain a reliable and stable process.
 Operations for
Goods and Services
▶ Manufacturers produce tangible product,
services often intangible
▶ Operations activities often very similar
▶ Distinction not always clear
▶ Few pure services
 Differences Between Goods and Services

• Production of goods (goods oriented)

– Tangible products
• Automobile
• Refrigerator
• Services (TV and auto repair, lawn care)
• Government
• Regulatory bodies, FAA, FDA
• Wholesale/retail
• Financial services
• Education
 Goods vs. Service Operations (Cont)
• Differences
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
 Productivity Measurement

• What is productivity?
– Productivity is the ratio of outputs (goods and services) divided by the
inputs (resources such as labor and capital)
– The goal of productivity management is to make the ratio as large as
practical
– Productivity =
– Outputs and Inputs must be quantifiable measures to obtain
meaningful productivity ratio.
– Productivity is a common measure of how well a country, industry, or
business organizations using its resources.
 Productivity Measurement

• Output
– Desired result
– Sales made, products produced, customers served, meals delivered, or
calls answered
• Input
– Resources used
– labor hours, investment in equipment, material usage, space usage,
and/or energy usage
 Productivity Measurement

• Productivity represents output relative to input

• The most common factor which affect competitiveness of a
company as well as a nation
• Only through productivity increases can our standard of living
improve
 Productivity Measurement

• Measures of Productivity
Single-factor (Partial) productivity
Multi-factor productivity
Total factors productivity
 Productivity Measurement

• Single-factor (Partial) productivity

– Measures the productivity of a single
resource used in production
– The productivity of labor, materials,
energy, space, capital etc. will be
measured separately
– Labor Productivity
 Productivity Measurement

• Single-factor (Partial) productivity

– Material Productivity

– Machine Productivity

– Space Productivity
 Productivity Measurement

Some examples of partial productivity measures

• Labor productivity
– Units of output per labor hour
– Units of output per shift
– Value-added per labor hour
– Birr value of output per labor hour
• Machine productivity
– Units of output per machine hour
– Birr value of output per machine hour
 Productivity Measurement

Some examples of partial productivity measures

• Capital productivity
– Units of output per birr input
– Birr value of output per birr input
• Energy productivity
– Units of output per kilowatt hour
– Birr value of output per kilowatt hour
 Productivity Measurement

• Multi-factor productivity
– Relates output to a combination of inputs,
such as (labor + capital) or (labor +
capital + energy)
– Example: productivity of labor, materials,
an energy
 Productivity Measurement

• Total factors productivity

– Compares the total quantity of goods or
services produced with all the inputs used
to produce them
 Productivity Measurement

• Total factors productivity

– Compares the total quantity of goods or
services produced with all the inputs used
to produce them
Productivity Measurement
• Summary
 Productivity Measurement
• Example
– Units Produced: …….….100,000
– Labor hours used: ….…10,000
– Machine hours: ………..5,000
– Cost of materials: ….…..Birr 35,000
– Cost of energy: ………...Birr 15,000
– Cost of labor per hour: ..Birr 20
– Cost per machine hour: .Birr 10
– Selling price per unit: ….Birr 100
From the data above, calculate:
A. Single factor or partial productivity of Labor and Machine
B. The multifactor productivity of labor, machine, and materials
C. The total factor productivity
 Productivity Measurement

A. Single factor or partial productivity of

Labor and Machine

Hr

Hr
 Productivity Measurement
B. The multifactor productivity of labor, machine, and
materials
•

•
•

units/Birr spent on labor hr, machine hr, and material

Productivity Measurement (cont.)
OR
Value of Output
Productivity = Cost of labor,
machine, and
materials
100,000 X birr100
Productivity =
(10,000 X 20) + 35,000 + (5,000
X 10)

10,000,000
= = birr35.09/birr spent on labor-ho
285,000 machine-hour, and mat
Productivity Measurement (cont.)

C) The total factor productivity

Value of Output
Productivity =Cost of all factors of
production used

Value of Output
Productivity Cost
= of labor + cost of
machine + cost of
materials + cost of
energy
Productivity Measurement (cont.)

10,000,000
Productivity = 200,000 + 50,000 +
35,000 + 15,000
10,000,000
= = birr33.33/birr spent on total fac
300,000
 Productivity Measurement
(cont.)
• Exercise 1: Delux Wood and Metal Workshop is engaged in the production
of office furniture. The basic inputs used by the workshop are: Raw
materials, labor, supplies and capital (i.e., depreciation). The total out put
in the year 2007 was birr 100,000. The previous trend shows that out put
of the firm has been growing by 20% annually. The productivity of each
input, however, was assumed to remain constant over the years. Thus,
the
• The multi-factor productivity for materials, labor and supplies is
expected to be 2 for the year 2008
• Partial productivities of supplies and raw materials are 10 and 6 for
the year 2008 respectively
• Based on the above information compute
A. Total cost of labor, raw materials and supplies for the year 2008
B. Productivity of labor for the year 2008
C. Total factor productivity for the year 2008 if depreciation for the
2008 is estimated to be Birr 15,000
 Productivity Measurement
Solution for Exercise 1
(cont.)
• Given
• Total out put for 2007= Birr 100,000
• Total out put for 2008=20%
 Productivity Measurement
(cont.)
Based on the above information compute
• Total cost of labor, raw materials and supplies for the
year 2008 (ans. Birr 60,000)
• Productivity of labor for the year 2008 (ans. 4.29)
• Total factor productivity for the year 2008 if
depreciation for the 2008 is estimated to be birr
15,000 (ans. 1.6)
 Productivity Measurement
(cont.)
Exercise
2
 Based on the following data answer the questions that follow
 Output (selling price) Birr 400,000
 Inputs used for the given output
– Raw materials 8000 units
– Labor hours 2000 hours
– Machine hours 4000 hours
 Hourly cost of labor is Birr 2, which is twice that of machine.
The raw material cost incurred per single labor hour is Birr 20.
Calculate
A. Single factor productivity of raw material = 10
B. Multifactor productivity of labor and machine = 5
C. Total measure of productivity = 8.3
 Productivity Measurement
Heizer & Render
• Labor,
– which contributes about 17% of the annual increase.
• Capital,
– which contributes about 17% of the annual increase.
• Management,
– which contributes about 66 % of the annual increase.
 Productivity Measurement
• Labor
– Improvement in the contribution of labor to productivity is the result
of a healthier, better-educated, and better-nourished labor force.
– Three key variables for improved labor productivity are:
• Basic education appropriate for an effective labor force.
• Diet of the labor force.
• Social overhead that makes labor available, such as transportation and
sanitation.
– Improvements in labor productivity are possible; however, they can
be expected to be increasingly difficult and expensive.
 Productivity Measurement
• Labor
– Overcoming shortcomings in the quality of labor is a major
challenge,
– improvements can be found not only through increasing
competence of labor but also via better utilized labor with a
stronger commitment, Training, motivation, team building,
and other HR strategies.
– improved education, may be among the many techniques that
will contribute to increased labor productivity.
 Productivity Measurement
• Capital
– Capital investment provides those tools used
• Raw Materials, Building, Machinery
– Inflation & tax increase the cost of capital
– When the capital investment per employee drops, results drop
in productivity