Copyright 2006 John Wiley & Sons, Inc. Chapter 1 Introduction to Operations and Competitiveness To...

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.

Chapter 1Chapter 1

Introduction to Introduction to Operations and Operations and CompetitivenessCompetitiveness

To Accompany Russell and Taylor, Operations Management, 4th Edition, 2003 Prentice-Hall, Inc. All rights reserved.

Copyright 2010 John Wiley & Sons, Inc.Copyright 2010 John Wiley & Sons, Inc.

Welcome to ISQS 5343Welcome to ISQS 5343

Instructor: Dr. BurnsInstructor: Dr. Burns

Summer II 2013 SEMESTERSummer II 2013 SEMESTER

Telephone: 834-1547Telephone: 834-1547

Email: Email: [email protected]

Off hrs: 9:30-10:00 Tues., Th.Off hrs: 9:30-10:00 Tues., Th.

And by appointment And by appointment

Website: burns.ba.ttu.eduWebsite: burns.ba.ttu.edu

Copyright 2011 John Wiley & Sons, Inc.Copyright 2011 John Wiley & Sons, Inc. 1-1-33

My web siteMy web site

http://burns.ba.ttu.edu


PrerequisitesPrerequisites

STATISTICSSTATISTICS ISQS 5345: Basic Statistical ConceptsISQS 5345: Basic Statistical Concepts

COMPUTER LITERACYCOMPUTER LITERACY MS ExcelMS Excel MS WordMS Word


SeatingSeating

The seat you sit in on the second The seat you sit in on the second session of class will be your seat for the session of class will be your seat for the duration of the classduration of the class

A seating chart will be ‘made-up’ thenA seating chart will be ‘made-up’ then


SurveySurvey

I will hand it out…I will hand it out…


Requirements/PedagogyRequirements/Pedagogy

4 homework sets4 homework sets Collected the day before we do our reviewCollected the day before we do our review TO GET US READY TO TAKE THE EXAMSTO GET US READY TO TAKE THE EXAMS

3 EXAMS and a FINAL3 EXAMS and a FINAL Term ProjectTerm Project

1-1-99

Term Project--Consists of six partsTerm Project--Consists of six parts

Part 1 is due 7-15-2013Part 1 is due 7-15-2013 Part 2 is due 7-17-2013Part 2 is due 7-17-2013 Part 3 is due 7-19-2013Part 3 is due 7-19-2013 Part 4 is due 7-30-2013Part 4 is due 7-30-2013 Part 5 is due 8-5-2013Part 5 is due 8-5-2013 Part 6 is due 8-9-2013Part 6 is due 8-9-2013 PROJECT IN TOTAL IS due 8-9-2013PROJECT IN TOTAL IS due 8-9-2013


Term ProjectTerm Project

Part 1—design the firm & its products/ servicesPart 1—design the firm & its products/ services Part 2—design of the quality systemPart 2—design of the quality system Part 3—design of the internal processesPart 3—design of the internal processes Part 4—design of the external processesPart 4—design of the external processes Part 5—design of the inventory system/design Part 5—design of the inventory system/design

for leannessfor leanness Part 6—design of the startup projectPart 6—design of the startup project TEAM SIZES: 3-4 TEAM SIZES: 3-4


GradingGrading

The homework is worth a total of 16%The homework is worth a total of 16% Each EXAM is worth 13%Each EXAM is worth 13%

{There are three EXAMS}{There are three EXAMS}

The FINAL is worth 15%The FINAL is worth 15% The PROJECT is worth 30%The PROJECT is worth 30%

Each project part (there are six) is worth 4%Each project part (there are six) is worth 4% The final project report is worth 6%The final project report is worth 6%


GradesGrades

90-100---A90-100---A 80-89.999---B80-89.999---B 70-79.999---C70-79.999---C

97.5-on up---A+97.5-on up---A+ 92.5-97.4999---A92.5-97.4999---A 90-92.4999—A-90-92.4999—A-


Class PedagogyClass Pedagogy

Won’t show any moviesWon’t show any movies Video clips are OK, howeverVideo clips are OK, however PowerPointPowerPoint Simulations, where possibleSimulations, where possible Lectures--more informalLectures--more informal Interactive DiscussionsInteractive Discussions


How Long does it take you to How Long does it take you to do stuff?do stuff?

Do you know?Do you know? Suppose your employer assigns a task to Suppose your employer assigns a task to

you and asks you how long it will take you you and asks you how long it will take you to do it? Could you tell him/her?to do it? Could you tell him/her?

For your benefit, I want you to estimate For your benefit, I want you to estimate how long its going to take you to do each how long its going to take you to do each project step and then record how long it project step and then record how long it actually took youactually took you


Five ‘hot’ jobs right now—Five ‘hot’ jobs right now—according to Yahoo.according to Yahoo.

http://hotjobs.yahoo.com/career-articles-five_hot_business_careers_no_mba_needed-276

Event Planning--$20--$40/hrEvent Planning--$20--$40/hr Public Relations--$43,830/yr (median)Public Relations--$43,830/yr (median) Advertising--$40,300/yr (median)Advertising--$40,300/yr (median) Web Designer--$60,000/yr (median)Web Designer--$60,000/yr (median) Search Engine Optimization--$40,000 (med.)Search Engine Optimization--$40,000 (med.) Project manager--$50,000 to $80,000 to startProject manager--$50,000 to $80,000 to start


QuestionsQuestions

How big is the U.S. economy in terms of How big is the U.S. economy in terms of GDP? What is the world-wide GDP?GDP? What is the world-wide GDP?

How big is the U.S. population in relation How big is the U.S. population in relation to the rest of the world?to the rest of the world?

What percentage of worldwide What percentage of worldwide nonrenewable resources are consumed nonrenewable resources are consumed just in the U.S. alone?just in the U.S. alone?


More questionsMore questions

Is the U.S. leadership in terms of material Is the U.S. leadership in terms of material standard of living sustainable?standard of living sustainable? What does it take to make it sustainable?What does it take to make it sustainable?

What is causing the devaluation of the What is causing the devaluation of the dollar? Will that devaluation continue?dollar? Will that devaluation continue?

Is there anything good that comes from Is there anything good that comes from devaluation of the dollar?devaluation of the dollar?

What’s bad about the $ devaluation?What’s bad about the $ devaluation?


What are some of the biggest What are some of the biggest problems our country (U.S.A.) problems our country (U.S.A.) faces?faces?

The war on terrorThe war on terror Mexican border out of controlMexican border out of control The national debt; the budget and trade deficitsThe national debt; the budget and trade deficits Contributions to global warmingContributions to global warming High energy costsHigh energy costs Health care is too expensiveHealth care is too expensive Major employers like banks tankingMajor employers like banks tanking


What solutions do you foresee to What solutions do you foresee to America’s problems?America’s problems?

Massive Jobs growth (particularly high-value jobs) and Massive Jobs growth (particularly high-value jobs) and Immigration of tax-paying, foreign professionals Immigration of tax-paying, foreign professionals

Strong productivity growthStrong productivity growth Sell Resources owned by the Federal Gov.Sell Resources owned by the Federal Gov.

Oil on Federally-owned landsOil on Federally-owned lands Gas Gas on Federally-owned landson Federally-owned lands Coal Coal on Federally-owned landson Federally-owned lands Uranium Uranium on Federally-owned landson Federally-owned lands Electricity (solar and wind farms on federally-owned land)Electricity (solar and wind farms on federally-owned land)

BUY AMERICANBUY AMERICAN


The National DebtThe National Debt

Officially, $ 16,455,325,678,402.07 as of today Officially, $ 16,455,325,678,402.07 as of today accumulating at the rate of $3.5 billion per day--accumulating at the rate of $3.5 billion per day--$139,250 per taxpayer$139,250 per taxpayer

According to Kotlikoff, the fiscal gap is a stunning According to Kotlikoff, the fiscal gap is a stunning $65.9 trillion—that is more than twice the total net $65.9 trillion—that is more than twice the total net worth of the entire countryworth of the entire country

Social Security and Medicare liabilities are Social Security and Medicare liabilities are estimated at $40 trillionestimated at $40 trillion

No plans for accommodation of the retirements in No plans for accommodation of the retirements in 77 million baby boomers beginning now, but 77 million baby boomers beginning now, but becoming substantial after 2014becoming substantial after 2014


Can we increase tax rates, really?Can we increase tax rates, really?

Tax RevenuesGov expenditures

Tax Rate

GDP

SS & Medicare

debt service

Interest rate

NationalDebt

Deficit

<Other FederalRevenues>

Tax base


The Federal Government must The Federal Government must become an entrepreneurbecome an entrepreneur

Other FederalRevenues

Sale of oil and gas offof Federal lands

Sale of uranium off ofFederal lands

Sale of solar and windpower off of federal lands


Solutions--KotlikoffSolutions--Kotlikoff


CompetitivenessCompetitiveness

The opportunities are hugeThe opportunities are huge There will be massive changeThere will be massive change You can exploit that change to create You can exploit that change to create

wealthwealth


Competitiveness

Standard of Living

Jobs

ProductivityCycle Time

Quality

Operations

Creativity Innovation Improvement Design

Cost


What are some OM entry-level What are some OM entry-level titles?titles?

PROJECT MANAGERPROJECT MANAGER BUSINESS PROCESS ANALYSTBUSINESS PROCESS ANALYST INVENTORY ANALYSTINVENTORY ANALYST PROJECT COORDINATORPROJECT COORDINATOR UNIT SUPERVISORUNIT SUPERVISOR SUPPLY CHAIN ANALYSTSUPPLY CHAIN ANALYST MATERIALS MANAGERMATERIALS MANAGER QUALITY ASSURANCE SPECIALISTQUALITY ASSURANCE SPECIALIST PRODUCTION SCHEDULERPRODUCTION SCHEDULER LOGISTICS PLANNERLOGISTICS PLANNER


Competitiveness, Productivity, Competitiveness, Productivity, Leanness, Agility and MaturityLeanness, Agility and Maturity

That’s what this course is aboutThat’s what this course is about Creating wealth through production of Creating wealth through production of

goods and servicesgoods and services


Potential Project TopicsPotential Project Topics

Products/services that help us conserve Products/services that help us conserve energy/waterenergy/water ResidentialResidential CommercialCommercial

Products that help the retiring baby boom Products that help the retiring baby boom generation—77 million of them in the U.S. alonegeneration—77 million of them in the U.S. alone

Products/processes that reduce the cost of Products/processes that reduce the cost of health care?health care?

Products/services that help us become Products/services that help us become GREEN GREEN ANDAND


Lecture OutlineLecture Outline

What Operations and Supply Chain What Operations and Supply Chain Managers DoManagers Do

Operations FunctionOperations Function Evolution of Operations and Supply Chain Evolution of Operations and Supply Chain

ManagementManagement Globalization and CompetitivenessGlobalization and Competitiveness OperationsOperations Learning Objectives for This CourseLearning Objectives for This Course


What Operations and What Operations and Supply Chain Managers DoSupply Chain Managers Do

What is Operations Management?What is Operations Management? design, operation, and improvement of productive design, operation, and improvement of productive

systemssystems What is Operations?What is Operations?

a function or system that transforms inputs into outputs of a function or system that transforms inputs into outputs of greater valuegreater value

What is a Transformation Process?What is a Transformation Process? a series of activities along a a series of activities along a value chain value chain extending from extending from

supplier to customersupplier to customer activities that do not add value are superfluous and activities that do not add value are superfluous and

should be eliminatedshould be eliminated


Physical: Physical: as in manufacturing operationsas in manufacturing operations Locational: Locational: as in transportation or as in transportation or

warehouse operationswarehouse operations Exchange: Exchange: as in retail operationsas in retail operations Physiological: Physiological: as in health careas in health care Psychological: Psychological: as in entertainmentas in entertainment Informational: Informational: as in communicationas in communication

Transformation ProcessTransformation Process


INPUT •Material•Machines•Labor•Management•Capital

TRANSFORMATIONPROCESS

OUTPUT •Goods•Services

Feedback & RequirementsFeedback & Requirements

Operations as a Operations as a Transformation ProcessTransformation Process

From Paradigms to ProductsFrom Paradigms to Products

ParadigmsParadigms PrinciplesPrinciples

PracticesPractices ProcessesProcesses

Products and ServicesProducts and Services



Operations FunctionOperations Function

OperationsOperations MarketingMarketing Finance and Finance and

AccountingAccounting Human Human

ResourcesResources Outside Outside

SuppliersSuppliers


How is Operations Relevant to my How is Operations Relevant to my Major?Major?

AccountingAccounting

Information Information TechnologyTechnology

ManagementManagement

““As an auditor you must As an auditor you must understand the fundamentals of understand the fundamentals of operations management.”operations management.”

““IT is a tool, and there’s no better IT is a tool, and there’s no better place to apply it than in operations.” place to apply it than in operations.”

““We use so many things you learn We use so many things you learn in an operations class—scheduling, in an operations class—scheduling, lean production, theory of lean production, theory of constraints, and tons of quality constraints, and tons of quality tools.”tools.”


How is Operations Relevant to my How is Operations Relevant to my Major? (cont.)Major? (cont.)

EconomicsEconomics

MarketingMarketing

FinanceFinance

““It’s all about processes. I live It’s all about processes. I live by flowcharts and Pareto by flowcharts and Pareto analysis.”analysis.”

““How can you do a good job How can you do a good job marketing a product if you’re marketing a product if you’re unsure of its quality or delivery unsure of its quality or delivery status?”status?”

““Most of our capital budgeting Most of our capital budgeting requests are from operations, requests are from operations, and most of our cost savings, and most of our cost savings, too.”too.”


Evolution of Operations and Evolution of Operations and Supply Chain ManagementSupply Chain Management

Craft productionCraft production process of handcrafting products or services for process of handcrafting products or services for

individual customers in the craftsman’s shopindividual customers in the craftsman’s shop The Industrial Revolution brought:The Industrial Revolution brought:

Division of labor -- Adam SmithDivision of labor -- Adam Smith dividing a job into a series of small tasks each performed dividing a job into a series of small tasks each performed

by a different workerby a different worker Interchangeable parts – Eli WhitneyInterchangeable parts – Eli Whitney

standardization of parts initially as replacement parts; standardization of parts initially as replacement parts; enabled mass productionenabled mass production

Steam Engine – James WattSteam Engine – James Watt


Scientific managementScientific management systematic analysis of work methodssystematic analysis of work methods Mass productionMass production

high-volume production of a standardized product high-volume production of a standardized product for a mass marketfor a mass market

Lean productionLean production adaptation of mass production that prizes quality, adaptation of mass production that prizes quality,

flexibility and low costsflexibility and low costs

Evolution of Operations and Evolution of Operations and Supply Chain Management (cont.)Supply Chain Management (cont.)


Historical Events in Historical Events in Operations ManagementOperations Management

Era Events/Concepts Dates Originator

Industrial

Revolution

Steam engine 1769 James Watt

Division of labor 1776 Adam Smith

Interchangeable parts 1790 Eli Whitney

Scientific Management

Principles of scientific

management1911 Frederick W. Taylor

Time and motion studies 1911Frank and Lillian Gilbreth

Activity scheduling chart 1912 Henry Gantt

Moving assembly line 1913 Henry Ford


Historical Events in Historical Events in Operations Management Operations Management (cont.)(cont.)


Human Relations

Hawthorne studies 1930 Elton Mayo

Motivation theories1940s Abraham Maslow1950s Frederick Herzberg1960s Douglas McGregor

Operations Research

Linear programming 1947 George DantzigDigital computer 1951 Remington RandSimulation, waiting

line theory, decision

theory, PERT/CPM

1950sOperations research groups

MRP, EDI, EFT, CIM1960s, 1970s

Joseph Orlicky, IBM

and others




Quality

Revolution

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)TQM (total quality

management)1980s

W. Edwards Deming,

Joseph JuranStrategy and

operations1980s

Wickham Skinner,

Robert HayesBusiness process reengineering

1990sMichael Hammer,

James Champy

Six Sigma 1990s GE, Motorola



Era Events/Concepts Dates OriginatorInternet Revolution

Internet, WWW, ERP, supply chain management

1990s ARPANET, Tim

Berners-Lee SAP,

i2 Technologies,

ORACLEE-commerce 2000s Amazon, Yahoo,

eBay, Google, and others

Globalization WTO, European Union, and other trade agreements, global supply chains, outsourcing, BPO, Services Science

1990s

2000s

Numerous countries

and companies


Evolution of Operations and Evolution of Operations and Supply Chain Management (cont.)Supply Chain Management (cont.)

Supply chain managementSupply chain management management of the flow of information, products, and services across management of the flow of information, products, and services across

a network of customers, enterprises, and supply chain partnersa network of customers, enterprises, and supply chain partners


Globalization and Globalization and CompetitivenessCompetitiveness

Why “go global”?Why “go global”? favorable costfavorable cost access to international marketsaccess to international markets response to changes in demandresponse to changes in demand reliable sources of supplyreliable sources of supply latest trends and technologieslatest trends and technologies

Increased globalizationIncreased globalization results from the Internet and falling trade results from the Internet and falling trade

barriersbarriers


Globalization and Globalization and Competitiveness (cont.)Competitiveness (cont.)

Hourly Compensation Costs for Production WorkersHourly Compensation Costs for Production WorkersSource:Source: U.S. Bureau of Labor Statistics, 2005. U.S. Bureau of Labor Statistics, 2005.



World Population DistributionWorld Population DistributionSource:Source: U.S. Census Bureau, 2006. U.S. Census Bureau, 2006.



Trade in Goods as % of GDPTrade in Goods as % of GDP

(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)


Productivity and Productivity and CompetitivenessCompetitiveness

CompetitivenessCompetitiveness degree to which a nation can produce goods and services that degree to which a nation can produce goods and services that

meet the test of international marketsmeet the test of international markets Productivity – THE MEASURE OF Productivity – THE MEASURE OF

COMPETITIVENESSCOMPETITIVENESS ratio of output to inputratio of output to input

OutputOutput sales made, products produced, customers served, meals sales made, products produced, customers served, meals

delivered, or calls answereddelivered, or calls answered InputInput

labor hours, investment in equipment, material usage, or labor hours, investment in equipment, material usage, or square footagesquare footage


Measures of Productivity

Productivity and Productivity and Competitiveness (cont.)Competitiveness (cont.)



Average Annual Growth Rates in Productivity, 1995-2005.Average Annual Growth Rates in Productivity, 1995-2005.Source: Source: Bureau of Labor Statistics. A Chartbook of Bureau of Labor Statistics. A Chartbook of

International Labor Comparisons. January 2007, p. 28.International Labor Comparisons. January 2007, p. 28.



Average Annual Growth Rates in Output and Input, 1995-2005Average Annual Growth Rates in Output and Input, 1995-2005

Source:Source: Bureau of Labor Statistics. A Chartbook of International Bureau of Labor Statistics. A Chartbook of International Labor Comparisons, January 2007, p. 26.Labor Comparisons, January 2007, p. 26.

Dramatic Increase in Output w/ Decrease in

Labor Hours

Dramatic Increase in Output w/ Decrease in

Labor Hours


RetrenchingRetrenching productivity is increasing, but both output and input productivity is increasing, but both output and input

decrease with input decreasing at a faster ratedecrease with input decreasing at a faster rate

Assumption that more input would cause Assumption that more input would cause output to increase at the same rateoutput to increase at the same rate certain limits to the amount of output may not be certain limits to the amount of output may not be

consideredconsidered output producedoutput produced is emphasized, not is emphasized, not output soldoutput sold; ;

increased inventoriesincreased inventories



StrategyStrategy Provides direction for achieving a missionProvides direction for achieving a mission

Five Steps for Strategy FormulationFive Steps for Strategy Formulation Defining a primary taskDefining a primary task

What is the firm in the business of doing?What is the firm in the business of doing? Assessing core competenciesAssessing core competencies

What does the firm do better than anyone else?What does the firm do better than anyone else? Determining order winners and order qualifiersDetermining order winners and order qualifiers

What qualifies an item to be considered for purchase?What qualifies an item to be considered for purchase? What wins the order? What wins the order?

Positioning the firmPositioning the firm How will the firm compete?How will the firm compete?

Deploying the strategyDeploying the strategy

Strategy and OperationsStrategy and Operations


Strategic PlanningStrategic Planning

Missionand VisionMission

and Vision

CorporateStrategy

CorporateStrategy

OperationsStrategy

OperationsStrategy

MarketingStrategy

MarketingStrategy

FinancialStrategyFinancialStrategy

Voice of theBusiness

Voice of theBusinessVoice of the

CustomerVoice of the

Customer


Order WinnersOrder Winnersand Order Qualifiersand Order Qualifiers

Source:Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan Betts, Betts, Operations and Process ManagementOperations and Process Management, Prentice Hall, 2006, p. 47, Prentice Hall, 2006, p. 47


Positioning the FirmPositioning the Firm

CostCost SpeedSpeed QualityQuality FlexibilityFlexibility


Positioning the Firm: Positioning the Firm: CostCost

Waste eliminationWaste elimination relentlessly pursuing the removal of all wasterelentlessly pursuing the removal of all waste

Examination of cost structureExamination of cost structure looking at the entire cost structure for looking at the entire cost structure for

reduction potentialreduction potential Lean productionLean production

providing low costs through disciplined providing low costs through disciplined operationsoperations


Positioning the Firm:Positioning the Firm:SpeedSpeed

fast moves, fast adaptations, tight linkagesfast moves, fast adaptations, tight linkages InternetInternet

conditioned customers to expect immediate responsesconditioned customers to expect immediate responses Service organizationsService organizations

always competed on speed (McDonald’s, LensCrafters, and always competed on speed (McDonald’s, LensCrafters, and Federal Express)Federal Express)

ManufacturersManufacturers time-based competition: build-to-order production and time-based competition: build-to-order production and

efficient supply chainsefficient supply chains Fashion industryFashion industry

two-week design-to-rack lead time of Spanish retailer, Zaratwo-week design-to-rack lead time of Spanish retailer, Zara


Positioning the Firm: Positioning the Firm: QualityQuality

Minimizing defect rates or conforming to design Minimizing defect rates or conforming to design specifications; please the customerspecifications; please the customer

Ritz-Carlton - one customer at a timeRitz-Carlton - one customer at a time Service system is designed to “move heaven and Service system is designed to “move heaven and

earth” to satisfy customerearth” to satisfy customer Every employee is empowered to satisfy a guest’s Every employee is empowered to satisfy a guest’s

wish wish Teams at all levels set objectives and devise quality Teams at all levels set objectives and devise quality

action plansaction plans Each hotel has a quality leader Each hotel has a quality leader


Positioning the Firm:Positioning the Firm:FlexibilityFlexibility

ability to adjust to changes in product mix, ability to adjust to changes in product mix, production volume, or designproduction volume, or design

National Bicycle Industrial CompanyNational Bicycle Industrial Company offers 11,231,862 variationsoffers 11,231,862 variations delivers within two weeks at costs only 10% delivers within two weeks at costs only 10%

above standard modelsabove standard models mass customizationmass customization: the mass production of : the mass production of

customized partscustomized parts


Policy DeploymentPolicy Deployment

Policy deploymentPolicy deployment translates corporate strategy into measurable translates corporate strategy into measurable

objectivesobjectives

HoshinsHoshins action plans (small projects) generated from the action plans (small projects) generated from the

policy deployment processpolicy deployment process


Policy DeploymentPolicy Deployment

Derivation of an Action Plan Using Policy DeploymentDerivation of an Action Plan Using Policy Deployment


Balanced ScorecardBalanced Scorecard

Balanced scorecardBalanced scorecard measuring more than financial performancemeasuring more than financial performance

financesfinances customerscustomers processesprocesses learning and growinglearning and growing

Key performance indicatorsKey performance indicators a set of measures that help managers evaluate a set of measures that help managers evaluate

performance in critical areasperformance in critical areas


Balanced ScorecardBalanced ScorecardBalancedBalanced Scorecard WorksheetScorecard Worksheet


Balanced ScorecardBalanced Scorecard

Radar ChartRadar Chart DashboardDashboard


Operations StrategyOperations Strategy

ProductsProducts

ServicesServices ProcessProcess

andand

TechnologyTechnology

CapacityCapacity

HumanHuman

ResourcesResources QualityQuality

FacilitiesFacilities SourcingSourcing OperatingOperating

SystemsSystems


Organization of This Text:Organization of This Text:Part I – Operations ManagementPart I – Operations Management

Intro. to Operations andIntro. to Operations andSupply Chain Management:Supply Chain Management: Chapter 1Chapter 1

Quality Management:Quality Management: Chapter 2Chapter 2 Statistical Quality Control:Statistical Quality Control: Chapter 3Chapter 3 Product Design:Product Design: Chapter 4Chapter 4 Service Design:Service Design: Chapter 5Chapter 5 Processes and Technology:Processes and Technology: Chapter 6Chapter 6 Facilities:Facilities: Chapter 7Chapter 7 Human Resources:Human Resources: Chapter 8Chapter 8 Project Management:Project Management: Chapter 9Chapter 9


Supply ChainSupply ChainStrategy and Design:Strategy and Design: Chapter 10Chapter 10

Global Supply ChainGlobal Supply ChainProcurement and Distribution:Procurement and Distribution: Chapter 11Chapter 11

Forecasting:Forecasting: Chapter 12Chapter 12 Inventory Management:Inventory Management: Chapter 13Chapter 13 Sales andSales and

Operations Planning:Operations Planning: Chapter 14Chapter 14 Resource Planning:Resource Planning: Chapter 15Chapter 15 Lean Systems:Lean Systems: Chapter 16Chapter 16 Scheduling:Scheduling: Chapter 17Chapter 17

Organization of This Text:Organization of This Text:Part II – Supply Chain ManagementPart II – Supply Chain Management


Learning Objectives of Learning Objectives of this Coursethis Course

Gain an appreciation of strategic importance of Gain an appreciation of strategic importance of operations and supply chain management in a operations and supply chain management in a global business environmentglobal business environment

Understand how operations relates to other Understand how operations relates to other business functionsbusiness functions

Develop a working knowledge of concepts and Develop a working knowledge of concepts and methods related to designing and managing methods related to designing and managing operations and supply chainsoperations and supply chains

Develop a skill set for quality and process Develop a skill set for quality and process improvementimprovement


Copyright 2009 John Wiley & Sons, Inc.Copyright 2009 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without of the 1976 United States Copyright Act without express permission of the copyright owner is express permission of the copyright owner is unlawful. Request for further information should unlawful. Request for further information should be addressed to the Permission Department, be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only make back-up copies for his/her own use only and not for distribution or resale. The Publisher and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, assumes no responsibility for errors, omissions, or damages caused by the use of these or damages caused by the use of these programs or from the use of the information programs or from the use of the information herein. herein.


THIS IS AS FAR AS YOU NEED THIS IS AS FAR AS YOU NEED TO GO!!TO GO!!


Lecture OutlineLecture Outline

What Do Operations Managers Do?What Do Operations Managers Do? Operations FunctionOperations Function Evolution of Operations ManagementEvolution of Operations Management Operations Management and E–BusinessOperations Management and E–Business Globalization and CompetitivenessGlobalization and Competitiveness Primary Topics in Operations ManagementPrimary Topics in Operations Management Learning Objectives for this CourseLearning Objectives for this Course


What Do Operations What Do Operations Managers Do?Managers Do?

What are Operations?What are Operations? a function, a function, processprocess or system that transforms inputs into or system that transforms inputs into

outputs of greater valueoutputs of greater value What is a Transformation Process?What is a Transformation Process?

a series of activities along a a series of activities along a value chain value chain extending from extending from supplier to customersupplier to customer

activities that do not add value are superfluous and activities that do not add value are superfluous and should be eliminatedshould be eliminated

What is Operations Management?What is Operations Management? design, operation, and improvement of productive design, operation, and improvement of productive

systemssystems


Physical: Physical: as in manufacturing operationsas in manufacturing operations Locational: Locational: as in transportation operationsas in transportation operations Exchange: Exchange: as in retail operationsas in retail operations Physiological: Physiological: as in health careas in health care Psychological: Psychological: as in entertainmentas in entertainment Informational: Informational: as in communicationas in communication

Transformation ProcessTransformation Process


INPUT •Material•Machines•Labor•Management•Capital

TRANSFORMATIONPROCESS

OUTPUT •Goods•Services

FeedbackFeedback

Operations as a Operations as a Transformation ProcessTransformation Process


Operations FunctionOperations Function

OperationsOperations MarketingMarketing Finance and Finance and

AccountingAccounting Human Human

ResourcesResources Outside Outside

SuppliersSuppliers



AccountingAccounting

Information Information TechnologyTechnology

ManagementManagement

““As an auditor you must As an auditor you must understand the fundamentals of understand the fundamentals of operations management.”operations management.”

““IT is a tool, and there’s no better IT is a tool, and there’s no better place to apply it than in operations.” place to apply it than in operations.”

““We use so many things you learn We use so many things you learn in an operations class—scheduling, in an operations class—scheduling, lean production, theory of lean production, theory of constraints, and tons of quality constraints, and tons of quality tools.”tools.”



EconomicsEconomics

MarketingMarketing

FinanceFinance

““It’s all about processes. I live It’s all about processes. I live by flowcharts and Pareto by flowcharts and Pareto analysis.”analysis.”

““How can you do a good job How can you do a good job marketing a product if you’re marketing a product if you’re unsure of its quality or delivery unsure of its quality or delivery status?”status?”

““Most of our capital budgeting Most of our capital budgeting requests are from operations, requests are from operations, and most of our cost savings, and most of our cost savings, too.”too.”


Typical entry-level Positions for Typical entry-level Positions for Operations Management MajorsOperations Management Majors

Business process Business process analystanalyst

Inventory analystInventory analyst Project coordinatorProject coordinator Project ManagerProject Manager Unit supervisorUnit supervisor Supply chain analystSupply chain analyst

Materials ManagerMaterials Manager Quality assurance Quality assurance

specialistspecialist Production schedulerProduction scheduler Logistics plannerLogistics planner


Evolution of Operations Evolution of Operations ManagementManagement

Craft productionCraft production process of handcrafting products or process of handcrafting products or

services for individual customersservices for individual customers Division of laborDivision of labor

dividing a job into a series of small tasks dividing a job into a series of small tasks each performed by a different workereach performed by a different worker

Interchangeable partsInterchangeable parts standardization of parts initially as standardization of parts initially as

replacement parts; enabled mass replacement parts; enabled mass productionproduction


Scientific managementScientific management systematic analysis of work methodssystematic analysis of work methods

Mass productionMass production high-volume production of a standardized high-volume production of a standardized

product for a mass marketproduct for a mass market

Lean productionLean production adaptation of mass production that prizes adaptation of mass production that prizes

quality and flexibilityquality and flexibility

Evolution of Operations Evolution of Operations Management (cont.)Management (cont.)


Historical Events in Historical Events in Operations ManagementOperations Management


Industrial

Revolution

Steam engine 1769 James Watt

Division of labor 1776 Adam Smith

Interchangeable parts 1790 Eli Whitney

Scientific Management

Principles of scientific

management1911 Frederick W. Taylor

Time and motion studies 1911Frank and Lillian Gilbreth

Activity scheduling chart 1912 Henry Gantt

Moving assembly line 1913 Henry Ford




Human Relations

Hawthorne studies 1930 Elton Mayo

Motivation theories1940s Abraham Maslow1950s Frederick Herzberg1960s Douglas McGregor

Operations Research

Linear programming 1947 George DantzigDigital computer 1951 Remington RandSimulation, waiting

line theory, decision

theory, PERT/CPM

1950sOperations research groups

MRP, EDI, EFT, CIM1960s, 1970s

Joseph Orlicky, IBM

and others




Quality

Revolution

JIT (just-in-time) 1970s Taiichi Ohno (Toyota)TQM (total quality

management)1980s

W. Edwards Deming,

Joseph JuranStrategy and

operations1990s

Wickham Skinner,

Robert HayesBusiness process

reengineering1990s

Michael Hammer,

James Champy



Era Events/Concepts Dates OriginatorGlobalization WTO, European Union,

and other trade agreements

1990s

2000s

Numerous countries

and companies

Internet Revolution

Internet, WWW, ERP, supply chain management

1990s ARPANET, Tim

Berners-Lee SAP,

i2 Technologies,

ORACLE,

PeopleSoftE-commerce 2000s Amazon, Yahoo,

eBay, and others


Continuum from Goods Continuum from Goods to Servicesto Services

Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.


Operations Management Operations Management and E-Businessand E-Business

Categories of E-Commerce

Bu

sin

ess

Bu

sin

ess

Co

nsu

mer

Co

nsu

mer

BusinessBusiness ConsumerConsumer

B2BCommerceone.com

B2CAmazon.com

C2BPriceline.com

C2CeBay.com


An Integrated Value ChainAn Integrated Value Chain

Value chain: Value chain: set of processes that create and set of processes that create and deliver products to customerdeliver products to customer

Manufacturer SupplierCustomer

Flow of information (customer order)Flow of information (customer order)

Manufacturer SupplierCustomer

Flow of information (customer order)Flow of information (customer order)

Flow of product (order fulfillment)Flow of product (order fulfillment)


Impact of E-Business on Impact of E-Business on Operations ManagementOperations Management

Comparison shopping by customers

Direct contact with customers

Business processes conducted online

Customer expectations escalate; quality must be maintained and costs lowered

No more guessing about demand is necessary; inventory costs go down; product and service design improves; build to-order products and services is made possible

Transaction costs are lower; customer support costs decrease; e-procurement saves big bucks

Benefits of E-Business Impact on Operations


Impact of E-Business on Impact of E-Business on Operations Management (cont.)Operations Management (cont.)

Access to customers worldwide

Middlemen are eliminated

Access to suppliers worldwide

Demand increases; order fulfillment and logistics become major issues; production moves overseas

Logistics change from delivering to a store or distribution center to delivering to individual homes; consumer demand is more erratic and unpredictable than business demand

Outsourcing increases; more alliances and partnerships among firms are formed; supply is less certain; global supply chain issues arise




Online auctions and e-marketplaces

Better and faster decision making

Competitive bidding lowers cost of materials; supply needs can be found in one location

More timely information is available with immediate access by all stakeholders in decision-making process; customer orders and product designs can be clarified electronically; electronic meetings can be held; collaborative planning is facilitated




IT synergy

Expanded supply chains

Productivity increases as information can be shared more efficiently internally and between trading partners

Order fulfillment, logistics, warehousing, transportation and delivery become focus of operations management; risk is spread out; trade barriers fall



Globalization and Globalization and CompetitivenessCompetitiveness

Favorable costFavorable cost Access to international Access to international

marketsmarkets Response to changes in Response to changes in

demanddemand Reliable sources of Reliable sources of

supplysupply 14 major trade 14 major trade

agreements in 1990sagreements in 1990s Peak: 26% in 2000Peak: 26% in 2000

World Trade Compared to World GDPSource: “Real GDP and Trade Growth of OECD Countries, 2001–03,” International Trade Statistics 2003, World Trade Organization, www.wto.org



Hourly Wage Rates for Selected CountriesSource: “International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003.

Germany: $26.18Germany: $26.18

USA: $21.33USA: $21.33

Taiwan: $5.41Taiwan: $5.41

Mexico: $2.38Mexico: $2.38

China: $0.50China: $0.50



Trade with China: Percent of each country‘s trade Trade with China: Percent of each country‘s trade Source: Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,” “Share of China in Exports and Imports of Major Traders, 2000 and 2002,”

International Trade Statistics 2003, World Trade Organization, www.wto.orgInternational Trade Statistics 2003, World Trade Organization, www.wto.org


Risks of GlobalizationRisks of Globalization

Cultural differencesCultural differences Supply chain logisticsSupply chain logistics Safety, security, and Safety, security, and

stabilitystability Quality problemsQuality problems Corporate image Corporate image Loss of capabilitiesLoss of capabilities


Competitiveness and Competitiveness and ProductivityProductivity

CompetitivenessCompetitiveness degree to which a nation can produce goods and degree to which a nation can produce goods and

services that meet the test of international services that meet the test of international marketsmarkets

ProductivityProductivity ratio of output to inputratio of output to input

OutputOutput sales made, products produced, customers sales made, products produced, customers

served, meals delivered, or calls answeredserved, meals delivered, or calls answered InputInput

labor hours, investment in equipment, material labor hours, investment in equipment, material usage, or square footageusage, or square footage


Measures of Productivity

Competitiveness and Competitiveness and Productivity (cont.)Productivity (cont.)


Changes in Productivity Changes in Productivity for Select Countriesfor Select Countries

Internet-enabled productivityInternet-enabled productivity

- Dot com bust- 9/11 terrorist attacks- Dot com bust- 9/11 terrorist attacks

Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004


Become efficientBecome efficient output increases with little or no increase in inputoutput increases with little or no increase in input

ExpandExpand both output and input grow with output growing both output and input grow with output growing

more rapidlymore rapidly Achieve breakthroughsAchieve breakthroughs

output increases while input decreasesoutput increases while input decreases DownsizeDownsize

output remains the same and input is reducedoutput remains the same and input is reduced RetrenchRetrench

both output and input decrease, with input both output and input decrease, with input decreasing at a faster ratedecreasing at a faster rate

Productivity IncreaseProductivity Increase


Competitiveness and Competitiveness and ProductivityProductivity

Productivity as a Function of Inputs and Outputs, 2001–2002Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003

Breakthrough Performance

Breakthrough Performance

More EfficientMore Efficient

RetrenchRetrench


Global Competitiveness Global Competitiveness RankingRanking

1.1. FinlandFinland2.2. United StatesUnited States3.3. SwedenSweden4.4. DenmarkDenmark5.5. TaiwanTaiwan6.6. SingaporeSingapore7.7. SwitzerlandSwitzerland8.8. IcelandIceland9.9. NorwayNorway10.10. AustraliaAustralia

Source: Global Competitiveness Report 2003–2004, World Economic Forum, January 2004, www.weforum.org


Economies of ScaleEconomies of Scale Capital InvestmentCapital Investment Access to Supply and Distribution Access to Supply and Distribution

ChannelsChannels Learning CurveLearning Curve

Operations–Oriented Operations–Oriented Barriers to EntryBarriers to Entry


Primary Topics in Primary Topics in Operations ManagementOperations Management


Primary Topics in Operations Primary Topics in Operations Management (cont.)Management (cont.)


Learning Objectives of Learning Objectives of this Coursethis Course

Gain an appreciation of strategic importance of Gain an appreciation of strategic importance of operations in a global business environmentoperations in a global business environment

Understand how operations relates to other Understand how operations relates to other business functionsbusiness functions

Develop a working knowledge of concepts and Develop a working knowledge of concepts and methods related to designing and managing methods related to designing and managing operationsoperations

Develop a skill set for quality and process Develop a skill set for quality and process improvementimprovement


Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without of the 1976 United States Copyright Act without express permission of the copyright owner is express permission of the copyright owner is unlawful. Request for further information should unlawful. Request for further information should be addressed to the Permission Department, be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only make back-up copies for his/her own use only and not for distribution or resale. The Publisher and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, assumes no responsibility for errors, omissions, or damages caused by the use of these or damages caused by the use of these programs or from the use of the information programs or from the use of the information herein. herein.


Introduction: The Growing Introduction: The Growing Federal Deficit—is it a real Federal Deficit—is it a real Problem?Problem?

Current deficit stands at 8.25 trillion dollarsCurrent deficit stands at 8.25 trillion dollars This does not take into account the amount the This does not take into account the amount the

government owes to Social Security and government owes to Social Security and MedicareMedicare

Taking this into account the real federal debt is Taking this into account the real federal debt is nearly $30 trillion or $100,000 for every man nearly $30 trillion or $100,000 for every man woman and child in the country.woman and child in the country.

If you are head of a household of four, you If you are head of a household of four, you owe the government $400,000owe the government $400,000


An Assessment using a methodology An Assessment using a methodology that Assimilates Three World Viewsthat Assimilates Three World Views

Statistics/ForecastingStatistics/Forecasting Dynamic modeling/simulationDynamic modeling/simulation Systems ThinkingSystems Thinking


A System Dynamics Model: A System Dynamics Model: Purpose Purpose

To address the question “Is our debt To address the question “Is our debt serviceable over the long haul?”serviceable over the long haul?”

To discern that, we constructed a model To discern that, we constructed a model that was able to forecast debt service that was able to forecast debt service and annual revenues to come up with a and annual revenues to come up with a ratio of debt service to revenuesratio of debt service to revenues


Assumptions and Starting PointsAssumptions and Starting Points U.S. Population projections (‘mid-series’) by U.S. Population projections (‘mid-series’) by

Census Bureau Department of Commerce (2000) Census Bureau Department of Commerce (2000) are basis for population numbers.are basis for population numbers.

Only about 70% of population participates in Only about 70% of population participates in workforce (RAND, 2004)workforce (RAND, 2004)

Federal revenues are stabilizing at 19% of GDP Federal revenues are stabilizing at 19% of GDP over the past 50 years (Jones, 2003)over the past 50 years (Jones, 2003)

If present policies are continued federal deficit If present policies are continued federal deficit would rise from current 3% to 20% of GDP by the would rise from current 3% to 20% of GDP by the year 2075(Jones, 2003)year 2075(Jones, 2003)

Current avg interest rate on National Debt is 4.8% Current avg interest rate on National Debt is 4.8% p.a. (Bureau of Public Debt, 2006)p.a. (Bureau of Public Debt, 2006)

Avg GDP growth rate has been 3% for the period Avg GDP growth rate has been 3% for the period 1994-2003 (IMF, 2004)1994-2003 (IMF, 2004)

AAAS predicts a decline in the federal Deficit by AAAS predicts a decline in the federal Deficit by the year 2015 (AAAS, 2005)the year 2015 (AAAS, 2005)


Basic Simplified StructureBasic Simplified Structure

NationalFederal

Debt

annual federaldeficit

annual debt service

Assumed aggregateannual interest rate

GDP

GDP growth rate

federal revenues

ratio of debtservice to revenues

GDP growth norm

Fract of GDP that isfederal revenue

deficit as a fractionof GDP

budget deficitlookup

<Time>

normalizing factor

GDP look up <Time>

GDP Gr switch

budget deficitlookup2

turn around switch


About the Structure AboveAbout the Structure Above

Obviously, persistent Federal deficits are Obviously, persistent Federal deficits are accumulated within the National Debtaccumulated within the National Debt

The model starts on January 1, 2005 The model starts on January 1, 2005 with an assumed national debt of 7.596 with an assumed national debt of 7.596 trillions (Bureau of Public Debt, 2006)trillions (Bureau of Public Debt, 2006)


Debt Service to Federal RevenuesDebt Service to Federal Revenuesratio of debt service to revenues

0.8

0.6

0.4

0.2

0

2 2 2 2 2 2 2 22 2

22

2 22

22

2 22

22

22

2

2

2

2

1 1 1 1 1 1 1 1 1 1 1 1 11

1 11

11

1 11

11

11

11

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)

ratio of debt service to revenues : Debt1 Dmnl1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

ratio of debt service to revenues : Debt2 Dmnl2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2


What the Above Curves Don’t What the Above Curves Don’t ShowShow

The additional burdens to be brought to The additional burdens to be brought to bear upon the Federal governmentbear upon the Federal government

Retiring baby-boomers living longer, will Retiring baby-boomers living longer, will require more than the SSA can pay out require more than the SSA can pay out after the year 2025after the year 2025

Other entitlement programs coming into Other entitlement programs coming into full play—the military and civil service full play—the military and civil service pension programs, specificallypension programs, specifically


More concerns leading to lower More concerns leading to lower federal revenuesfederal revenues

The Bush tax cutsThe Bush tax cuts Offshoring of jobsOffshoring of jobs Devaluation of the dollar leading to Devaluation of the dollar leading to

higher inflation, higher interest rates, and higher inflation, higher interest rates, and a slowing economya slowing economy

Higher energy pricesHigher energy prices Instability of foreign sources of oilInstability of foreign sources of oil


Basic Demographic SectorBasic Demographic Sector

Pop: 0-15 yr Pop: 16-19 yr Pop: 20-39 yr Pop: 50-64 yr Pop: 65- andabovetr1 tr2 tr5

Immigration 1 Immigration 2 Immigration 3

dr1 dr2 dr3 dr5 dr6

fractional mortality 1 fractional mortality 2 fractional mortality 3 fractional mortality 4 fractional mortality 5 fractional mortality 6

transit fraction1 transit fraction2 transit fraction3 transit fraction4 transit fraction5

Pop: 40-49 yrtr3 tr4

Immigration 4

dr4

birth rate

BR NORMAL

IMMIGRATION NORMAL

TotalPopulation

pop tab

ratio of retirees toTotal Population

Immigration5


Population CohortsPopulation CohortsPopulations

200 M

150 M

100 M

50 M

0

66

6 6 6 6 6 6 6 6 6 6 6

5 5 5 5 5 5 5 5 5 5 5 5 5

4 4 4 4 4 4 4 4 4 4 4 4 4 4

3 3 3 3 3 3 3 3 3 3 3 3 3 3

2 2 2 2 2 2 2 2 2 2 2 2 2 2

1 1 1 1 1 1 1 1 1 1 1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)

"Pop: 0-15 yr" : Debt1 People1 1 1 1 1 1 1 1 1 1 1





"Pop: 65- and above" : Debt1 People6 6 6 6 6 6 6 6 6 6 6


Ratio of Retirees to Total Ratio of Retirees to Total PopulationPopulation

ratio of retirees to Total Population

0.2

0.175

0.15

0.125

0.1

1

1

1

1

1

1

11

11

11 1

11 1 1 1 1 1 1 1 1 1 1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)

ratio of retirees to Total Population : Debt1 Dmnl1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1


Workforce StructureWorkforce Structure

<Pop: BeginnerEarners 16-19 yr>

<Pop: Dissavers 65-and above>

<Pop: Early earners20-39 yr>

<Pop: Early Savers40-49 yr>

<Pop: Peak Savers50-64 yr>

beginnerparticipation rate

early earnerparticipation rate

early saversparticipation rate

peak saversparticipation rate

dissaversparticipation rate

beginnerworkforce

early earnerworkforce

early saverworkforce

peak saversworkforce

dissaversworkforce

total civilianworkforce

<Pop: Dissavers 65-and above> workforce to

retirees ratio

<TOTALPOPULATION>

populationparticipation rate

<Pop: YouthfulDependent 0-15 yr>


Basic DemographicsBasic Demographics

What happens when we increase the What happens when we increase the average lifespan from 83 years to 90 average lifespan from 83 years to 90 years?years? This puts an even greater drain on Social This puts an even greater drain on Social

Security and MedicareSecurity and Medicare


Workforce to Retirees Ratio, assuming Workforce to Retirees Ratio, assuming retirement ages of 65 and 70retirement ages of 65 and 70

workforce to retirees ratio

8

6

4

2

0

2

22

22

22 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 21

11

11 1

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)

workforce to retirees ratio : Debt1 Dmnl1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

workforce to retirees ratio : Debt3 Dmnl2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2


Workforce to Retirees Ratio, assumingWorkforce to Retirees Ratio, assuming average lifetime of 90average lifetime of 90


6

5

4

3

2

6

66 6 6 6 6

5

55 5 5 5 5 5

4

44

4 4 4 4 4

3

33

3 3 3 3 3

2

2

22 2 2 2 2

1

1

11

1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)

workforce to retirees ratio : INTR9 Dmnl1 1 1 1 1workforce to retirees ratio : basecase Dmnl2 2 2 2 2workforce to retirees ratio : INTR8 Dmnl3 3 3 3 3workforce to retirees ratio : FDTRND Dmnl4 4 4 4 4workforce to retirees ratio : GDPDNG Dmnl5 5 5 5 5 5workforce to retirees ratio : Debt2 Dmnl6 6 6 6 6 6


Workforce to Retirees Ratio, assuming Workforce to Retirees Ratio, assuming avgavg lifetime of 90 lifetime of 90

Now the steady-state ratio of workers to Now the steady-state ratio of workers to retirees is 2.2, as opposed to 2.7retirees is 2.2, as opposed to 2.7


6

5

4

3

2

6

66 6 6 6 6

5

55 5 5 5 5 5

4

44

4 4 4 4 4

3

33

3 3 3 3 3

2

2

22 2 2 2 2

1

1

11

1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055Time (Year)

workforce to retirees ratio : INTR9 Dmnl1 1 1 1 1workforce to retirees ratio : basecase Dmnl2 2 2 2 2workforce to retirees ratio : INTR8 Dmnl3 3 3 3 3workforce to retirees ratio : FDTRND Dmnl4 4 4 4 4workforce to retirees ratio : GDPDNG Dmnl5 5 5 5 5 5workforce to retirees ratio : Debt2 Dmnl6 6 6 6 6 6


Cumulative RatiosCumulative Ratios

<National FederalDebt>

<TotalPopulation>

cumulativeAVG Debt per

capita

avg Debt percapita

ar

cumulative DebtService to

revenue ratio

ar2

<ratio of debt serviceto revenues>

avg Debt Service torevenue ratio

cumulativeWorkforce toretirres ratio

ar3

<workforce toretirees ratio>

avg Workforce toretirees ratio

<normalizingfactor>

<normalizingfactor>

<Time>


Table 1: Some ScenariosTable 1: Some ScenariosSettingsSettings Key metricsKey metrics

DatasetDataset InterestInterest

GDPGDPGrowthGrowthraterate

FederalFederalDeficit %Deficit %assumed assumed

RetirementRetirementage age

AverageAverageworkforceworkforceParticipationParticipationRateRate

DebtDebtServiceServiceToToRevenuesRevenuesratio inratio in20552055

NationalNationaldebtdebtper capitaper capita

WorkforceWorkforceTo retireesTo retireesratioratio

Base caseBase case 4.804.80 at 3.1%at 3.1% IncreasingIncreasing 6565 0.70.7 0.30450.3045 $94,320.00 $94,320.00 2.9932.993

GDPDNGGDPDNG 4.804.80

3.1% to 3.1% to 1%1%

by 2025by 2025 increasingincreasing 6565 0.70.7 0.38410.3841 $73,139.00 $73,139.00 2.9932.993

FDTRNDFDTRND 4.804.80 at 3.1%at 3.1%turned turned

aroundaround 6565 0.70.7 0.12390.1239 $31,053.00 $31,053.00 2.9932.993

HI INTRHI INTR 8.008.00 at 3.1%at 3.1% increasingincreasing 6565 .7.7 0.50760.5076 2.9932.993

GDPDNG= GDP does not continue to growGDPDNG= GDP does not continue to grow

FDTRND=Fed deficit turned aroundFDTRND=Fed deficit turned around


Avg. Debt Service-to-Revenue RatiosAvg. Debt Service-to-Revenue Ratios

Avg Debt Service to revenue ratio

0.4

0.3

0.2

0.1

0

3 3 3 3 3 33

3 33

33

33

3

2 2 22 2

22

22

22

2

22

2

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Time (Year)

avg Debt Service to revenue ratio : FDTRND Dmnl1 1 1 1 1 1

avg Debt Service to revenue ratio : GDPDNG Dmnl2 2 2 2 2 2

avg Debt Service to revenue ratio : basecase Dmnl3 3 3 3 3 3


Avg Debt Per-capitaAvg Debt Per-capitaAvg Debt per capita

100,000

75,000

50,000

25,000

0

33 3

33

33

33

33

3

3

3

2 22 2

22

22

22

2

22

2

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

Time (Year)

avg Debt per capita per year : FDTRND Dollars/People1 1 1 1 1

avg Debt per capita per year : GDPDNG Dollars/People2 2 2 2 2

avg Debt per capita per year : basecase Dollars/People3 3 3 3 3


THE PROBLEM RevisitedTHE PROBLEM Revisited

Reduce the outflow (federal Reduce the outflow (federal expenditures) to a minimumexpenditures) to a minimum

Increase the inflow (federal revenues) Increase the inflow (federal revenues) to a maximum, without raising taxesto a maximum, without raising taxes

As some optimists predict (AAAS,2005) As some optimists predict (AAAS,2005) federal deficits must register a turn federal deficits must register a turn around in the trend and start to decline around in the trend and start to decline from the current 3+% of GDP down to a from the current 3+% of GDP down to a healthy 1%healthy 1%


Possible Solutions to the Growing Possible Solutions to the Growing Deficit and National DebtDeficit and National Debt

Open up federal lands in Colorado, Open up federal lands in Colorado, Wyoming, Utah, Nevada and Alaska to Wyoming, Utah, Nevada and Alaska to oil exploration and productionoil exploration and production

Open up the outer continental shelf to Open up the outer continental shelf to aggressive oil explorationaggressive oil exploration

Export our hugely abundant uranium Export our hugely abundant uranium resources for energy usageresources for energy usage


Action itemsAction items

Write your Congressperson and SenatorWrite your Congressperson and Senator Inform your friends that reducing the Inform your friends that reducing the

deficit and the national debt should be deficit and the national debt should be our country’s highest priorityour country’s highest priority


SummarySummary

Debt service is growing; revenues aren’tDebt service is growing; revenues aren’t Our highest priority as a country should Our highest priority as a country should

be the reduction and pay-down of the be the reduction and pay-down of the national debtnational debt

To pay down the national debt, we must To pay down the national debt, we must stay focused on that national prioritystay focused on that national priority

The citizenry of a country are NOT The citizenry of a country are NOT FREE if that country is deeply in debtFREE if that country is deeply in debt

Ignore slides below this pointIgnore slides below this point



Coal

U.S. Oil

Foreign Oil

U.S. Natural Gas

Foreign Natural Gas

Uranium

Solar, including Wind

Electric Utilities

Transportation

Residential/commercial

Industrial

SOURCES CONSUMPTION SECTORS

biofuels

Copyright 2006 John Wiley & Sons, Inc. Chapter 1 Introduction to Operations and Competitiveness To...

Documents

Transcript of Copyright 2006 John Wiley & Sons, Inc. Chapter 1 Introduction to Operations and Competitiveness To...