Handout dls csb-produma_24_may2012

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Introduction to Operations Management

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Prof. Ramon H. Enriquez

The Hard Rock Cafe

First opened in 1971

Now – 129 restaurants in over 40 countries

Rock music memorabilia

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Creates value in the form of good food and entertainment

3,500+ custom meals per day in Orlando

How does an item get on the menu?

Role of the Operations Manager

What Is Operations Management?

Production is the creation of goods and services

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Operations management (OM) is the set of activities that create value in the form of goods and

services by transforming inputs into outputs

Organizing to Produce Goods and Services

Essential functions:

1. Marketing – generates demand

/

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2. Production/operations – creates the product

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

Organizational Charts

OperationsTeller Scheduling

FinanceInvestmentsSecurity

MarketingLoans

Commercial

Commercial Bank

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Check ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

Secu tyReal estate

Accounting

Auditing

Co e c aIndustrialFinancialPersonalMortgage

Trust Department

Figure 1.1(A)


OperationsGround support

equipmentMaintenance

Finance/ accountingAccounting

Payables

Airline

MarketingTraffic administration

Reservations

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MaintenanceGround Operations

Facilitymaintenance

CateringFlight OperationsCrew schedulingFlyingCommunicationsDispatching

Management science

PayablesReceivablesGeneral Ledger

FinanceCash controlInternational

exchange

Figure 1.1(B)

ReservationsSchedulesTariffs (pricing)

SalesAdvertising

DLS-COSB PRODUMA Handout LECTURE 1 - 24May2012 of 12

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MarketingSales

promotionAdvertisingSales


OperationsFacilities

Construction; maintenance

Production and inventory controlScheduling; materials control

Quality assurance and control

Finance/ accountingDisbursements/

creditsReceivablesPayables

Manufacturing

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Market research

Quality assurance and controlSupply-chain managementManufacturing

Tooling; fabrication; assembly

DesignProduct development and designDetailed product specifications

Industrial engineeringEfficient use of machines, space,

and personnel

Process analysisDevelopment and installation of

production tools and equipment

PayablesGeneral ledger

Funds ManagementMoney marketInternational

exchangeCapital requirements

Stock issueBond issue

and recall

Figure 1.1(C)

Why Study OM?1. OM is one of three major functions of

any organization, we want to study how people organize themselves for productive enterprise

2 W t ( d d) t k h

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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

Options for Increasing Contribution

Finance/Marketing Accounting OM

Option Option Option

Increase Reduce ReduceSales Finance Production

Current Revenue 50% Costs 50% Costs 20%

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Sales $100,000 $150,000 $100,000 $100,000Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000Gross Margin 20,000 30,000 20,000 36,000Finance Costs – 6,000 – 6,000 – 3,000 – 6,000Subtotal 14,000 24,000 17,000 30,000Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

Current Revenue 50% Costs 50% Costs 20%

What Operations Managers Do

Planning

Basic Management Functions

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Organizing

Staffing

Leading

Controlling

Ten Critical Decisions

1. Design of goods and services2. Managing quality3. Process and capacity

design 4. Location strategy5 Layout strategy

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5. Layout strategy6. Human resources and

job design 7. Supply-chain

management8. Inventory, MRP, JIT9. Scheduling

10. Maintenance

Table 1.2

The Critical Decisions

1. Design of goods and services

What good or service should we offer?

How should we design these

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How should we design these products and services?

2. Managing quality

How do we define quality?

Who is responsible for quality?

Table 1.2 (cont.)


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3. Process and capacity design What process and what capacity will

these products require?

What equipment and technology is

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q p gynecessary for these processes?

4. Location strategy Where should we put the facility?

On what criteria should we base the location decision?

Table 1.2 (cont.)

The Critical Decisions5. Layout strategy

How should we arrange the facility?

How large must the facility be to meet our plan?

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6. Human resources and job design How do we provide a reasonable

work environment?

How much can we expect our employees to produce?

Table 1.2 (cont.)

The Critical Decisions7. Supply-chain management

Should we make or buy this component?

Who should be our suppliers and how can we integrate them into our strategy?

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can we integrate them into our strategy?

8. Inventory, material requirements planning, and JIT How much inventory of each item

should we have?

When do we re-order?

Table 1.2 (cont.)


9. Intermediate and short–term scheduling Are we better off keeping people on

the payroll during slowdowns?

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Which jobs do we perform next?

10. Maintenance How do we build reliability into our

processes?

Who is responsible for maintenance?

Table 1.2 (cont.)

Significant Events in OM

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Figure 1.3

New Challenges in OM

Global focus

Just-in-time

Supply-chain t i

ToFrom

Local or national focus

Batch shipments

Low bid purchasing

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partnering

Rapid product development, alliances

Mass customization

Empowered employees, teams

Lengthy product development

Standard products

Job specialization


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Characteristics of Goods

Tangible product

Consistent product definition

Production usually

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Production usually separate from consumption

Can be inventoried

Low customer interaction

Characteristics of Service Intangible product

Produced and consumed at same time

Often unique

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High customer interaction

Inconsistent product definition

Often knowledge-based

Frequently dispersed

Industry and Services as Percentage of GDP

Services Manufacturing90 −

80 −

70 −

60 −

50 −

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Au

str

alia

Can

ad

a

Ch

ina

Cze

ch R

ep

Fra

nc

e

Ge

rma

ny

Ho

ng

Ko

ng

Ja

pa

n

Me

xic

o

Ru

ss

ian

Fe

d

So

uth

Afr

ica

Sp

ain

UK

US

50

40 −

30 −

20 −

10 −

0 −

Goods and ServicesAutomobile

Computer

Installed carpeting

Fast-food meal

Restaurant meal/auto repair

Hospital care

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Hospital care

Advertising agency/investment management

Consulting service/teaching

Counseling

Percent of Product that is a Good Percent of Product that is a Service

100% 75 50 25 0 25 50 75 100%| | | | | | | | |

120 –

100 –

80 –

mill

ion

s)

Manufacturing and Service Employment

Service

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60 –

40 –

20 –

0 – | | | | | | |1950 1970 1990 2010 (est)

1960 1980 2000

Em

plo

ymen

t (

Figure 1.4 (A)

Manufacturing

Productivity Challenge

Productivity is the ratio of outputs (goods and services) divided by the inputs

(resources such as labor and capital)

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The objective is to improve productivity!

Important Note!Production is a measure of output

only and not a measure of efficiency


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Outputs

Goods and

services

Transformation

Conversion Process

The Production System

Inputs

Labor,capital,

management

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Feedback loop

Figure 1.6

Improving Productivity at Starbucks

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

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improvements:

Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop

Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

Improving Productivity at Starbucks

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

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improvements:

Stop requiring signatures on credit card purchases under $25

Saved 8 seconds per transaction

Change the size of the ice scoop

Saved 14 seconds per drink

New espresso machines Saved 12 seconds per shot

Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years.

Productivity has improved by 27%, or about 4.5% per year.

Productivity

Productivity =Units produced

Input used

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Measure of process improvement

Represents output relative to input

Only through productivity increases can our standard of living improve

Productivity Calculations

Productivity =Units produced

Labor-hours used

Labor Productivity

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= = 4 units/labor-hour1,000

250

One resource input single-factor productivity

Multi-Factor Productivity

OutputLabor + Material + Energy + Capital + Miscellaneous

Productivity =

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Also known as total factor productivity

Output and inputs are often expressed in dollars

Multiple resource inputs multi-factor productivity


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Measurement Problems

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

2 E t l l t

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

Precise units of measure may be lacking

Productivity Variables

1. Labor - contributes about 10% of the annual increase

2 Capital - contributes

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2. Capital - contributes about 38% of the annual increase

3. Management -contributes about 52% of the annual increase

Key Variables for Improved Labor Productivity

1. Basic education appropriate for the labor force

2. Diet of the labor force

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3. Social overhead that makes labor available

Challenge is in maintaining and enhancing skills in the midst of rapidly changing technology and knowledge

Service Productivity

1. Typically labor intensive

2. Frequently focused on unique individual attributes or desires

3 Often an intellectual task performed by

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3. Often an intellectual task performed by professionals

4. Often difficult to mechanize

5. Often difficult to evaluate for quality

Ethics andSocial Responsibility

Challenges facing operations managers:

Developing and producing safe

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Developing and producing safe, quality products

Maintaining a clean environment

Providing a safe workplace

Honoring stakeholder commitments

The Global Environment and Operations Strategy

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Prof. Ramon H. Enriquez


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Some Boeing Suppliers (787)Firm Country Component

Latecoere France Passenger doors

Labinel France Wiring

Dassault France Design and PLM software

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Messier-Bugatti France Electric brakes

Thales France Electrical power conversion system and integrated standby flight display

Messier-Dowty France Landing gear structure

Diehl Germany Interior lighting


Cobham UK Fuel pumps and valves

Rolls-Royce UK Engines

Smiths Aerospace UK Central computer system

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y

BAE SYSTEMS UK Electronics

Alenia Aeronautics Italy Upper center fuselage & horizontal stabilizer

Toray Industries Japan Carbon fiber for wing and tail units


Fuji Heavy Japan Center wing boxIndustries

Kawasaki Heavy Japan Forward fuselage,Industries fixed section of wing,

l di ll

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landing gear well

Teijin Seiki Japan Hydraulic actuators

Mitsubishi Heavy Japan Wing boxIndustries

Chengdu Aircraft China RudderGroup

Hafei Aviation China Parts


Korean Aviation South WingtipsKorea

Saab Sweden Cargo access doors

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Global Strategies

Boeing – sales and production are worldwide

Benetton – moves inventory to stores around the world faster than its

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around the world faster than its competition by building flexibility into design, production, and distribution

Sony – purchases components from suppliers in Thailand, Malaysia, and around the world

35 –

30 –

25 –

20en

t

Growth of World Trade

Collapse of the Berlin Wall

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20 –

15 –

10 –

5 –

0 –| | | | | | | | | | |1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 (est*)

Year

Pe

rce

Figure 2.1


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Some Multinational Corporations

% Sales % AssetsOutside Outside

Home Home Home % ForeignCompany Country Country Country Workforce

Citicorp USA 34 46 NA

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p

Colgate- USA 72 63 NAPalmolive

Dow USA 60 50 NAChemical

Gillette USA 62 53 NA

Honda Japan 63 36 NA

IBM USA 57 47 51

Reasons to Globalize

Reasons to Globalize

1. Reduce costs (labor, taxes, tariffs, etc.)2. Improve supply chain3 P id b tt d d i

Tangible Reasons

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3. Provide better goods and services4. Understand markets5. Learn to improve operations6. Attract and retain global talent

Intangible Reasons

Cultural and Ethical Issues

Cultures can be quite different

Attitudes can be quite different towards

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Punctuality

Lunch breaks

Environment

Intellectual property

Thievery

Bribery

Child labor

Developing Missions and Strategies

Mission statements tell an organization where it is going

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organization where it is going

The Strategy tells the organization how to get there

Mission

Mission - where are you going?

Organization’s

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purpose for being

Answers ‘What do we provide society?’

Provides boundaries and focus

Arnold Palmer Hospital

Arnold Palmer Hospital for Children provides state-of-the-art,

family centered healthcare

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yfocused on restoring the joy of childhood in an environment of compassion, healing, and hope.

Figure 2.2


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Factors Affecting Mission

Philosophy and Values

Profitability and GrowthEnvironment

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Benefit to Society

Mission

Customers Public Image

Sample Missions

Sample Company Mission

To manufacture and service an innovative, growing, and profitable worldwide microwave communications business that exceeds our customers’ expectations.

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Sample Operations Management Mission

To produce products consistent with the company’s mission as the worldwide low-cost manufacturer.

Figure 2.3

Sample Missions

Sample OM Department Missions

Product design To design and produce products and services with outstanding quality and inherent customer value.

Quality management To attain the exceptional value that is consistent with our company mission and

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Figure 2.3

consistent with our company mission and marketing objectives by close attention to design, procurement, production, and field service operations

Process design To determine, design, and produce the production process and equipment that will be compatible with low-cost product, high quality, and good quality of work life at economical cost.

Sample Missions

Sample OM Department Missions

Location To locate, design, and build efficient and economical facilities that will yield high value to the company, its employees, and the community.

Layout design To achieve, through skill, imagination, and

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Figure 2.3

Layout design To achieve, through skill, imagination, and resourcefulness in layout and work methods, production effectiveness and efficiency while supporting a high quality of work life.

Human resources To provide a good quality of work life, with well-designed, safe, rewarding jobs, stable employment, and equitable pay, in exchange for outstanding individual contribution from employees at all levels.

Sample MissionsSample OM Department Missions

Supply-chainmanagement

To collaborate with suppliers to develop innovative products from stable, effective, and efficient sources of supply.

Inventory To achieve low investment in inventory consistent with high customer service levels

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Figure 2.3

gand high facility utilization.

Scheduling To achieve high levels of throughput and timely customer delivery through effective scheduling.

Maintenance To achieve high utilization of facilities and equipment by effective preventive maintenance and prompt repair of facilities and equipment.

Strategic Process

Functional

Organization’s Mission

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Marketing Operations Finance/ Accounting

Functional Area Missions


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Strategy

Action plan to achieve mission

Functional areas have strategies

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g

Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

Strategies for Competitive Advantage

Differentiation – better, or at least different

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Cost leadership – cheaper

Response – rapid response

Competing on Differentiation

Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception

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that impacts customer s perception of value

Safeskin gloves – leading edge products

Walt Disney Magic Kingdom –experience differentiation

Hard Rock Cafe – dining experience

Competing on Cost

Provide the maximum value as perceived by customer. Does not

imply low quality.

S th t Ai li d

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Southwest Airlines – secondary airports, no frills service, efficient utilization of equipment

Wal-Mart – small overhead, shrinkage, distribution costs

Franz Colruyt – no bags, low light, no music, doors on freezers

Competing on Response

Flexibility is matching market changes in design innovation and volumes

A way of life at Hewlett-Packard

Reliability is meeting schedules

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German machine industry

Timeliness is quickness in design, production, and delivery

Johnson Electric, Pizza Hut, Motorola

OM’s Contribution to Strategy

Product

Quality

Process

Location

DIFFERENTIATIONInnovative design … Safeskin’s innovative glovesBroad product line … Fidelity Security’s mutual fundsAfter-sales service … Caterpillar’s heavy equipment

serviceExperience … Hard Rock Café’s dining

experience

COST LEADERSHIPLow overhead … Franz-Colruyt’s warehouse-type

t

10 Operations CompetitiveDecisions Approach Example Advantage

Differentiation

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Layout

Humanresource

Supply chain

Inventory

Scheduling

Maintenance

storesEffective capacity

use … Southwest Airline’saircraft utilization

Inventory management … Wal Mart’s sophisticated

distribution system

RESPONSEFlexibility … Hewlett-Packard’s response to

volatile world marketReliability … FedEx’s “absolutely, positively,

on time”Quickness … Pizza Hut’s 5-minute guarantee

at lunchtimeFigure 2.4

Response(faster)

Cost leadership(cheaper)

Differentiation(better)


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Goods and Services and the 10 OM Decisions

OperationsDecisions Goods ServicesGoods and service design

Product is usually tangible

Product is not tangible

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design

Quality Many objective standards

Many subjective standards

Process and capacity design

Customers not involved

Customer may be directly involved

Capacity must match demand

Table 2.1


OperationsDecisions Goods ServicesLocation selection

Near raw materials and labor

Near customers

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labor

Layout design

Production efficiency

Enhances product and production

Human resources and job design

Technical skills, consistent labor standards, output based wages

Interact with customers, labor standards vary

Table 2.1


OperationsDecisions Goods ServicesSupply chain

Relationship critical to final product

Important, but may not be critical

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p oduct c t ca

Inventory Raw materials, work-in-process, and finished goods may be held

Cannot be stored

Scheduling Level schedules possible

Meet immediate customer demand

Table 2.1


OperationsDecisions Goods ServicesMaintenance Often preventive

and takes place at production site

Often “repair” and takes place at customer’s site

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at p oduct o s te custo e s s te

Table 2.1

Managing Global Service Operations

Requires a different perspective on:

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Capacity planning

Location planning

Facilities design and layout

Scheduling

Product Life Cycle

Best period to increase market share

R&D engineering is critical

Practical to change price or quality image

Strengthen niche

Poor time to change image, price, or quality

Competitive costs become criticalDefend market

Cost control critical

Introduction Growth Maturity Decline

egy/

Issu

es

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position

Co

mp

any

Str

ate

Figure 2.5

Internet search engines

Sales

Drive-through restaurants

CD-ROMs

Analog TVs

iPods

Boeing 787

LCD & plasma TVs

Twitter

Avatars

Xbox 360


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Product Life Cycle

Product design and development critical

Frequent product and process design

Introduction Growth Maturity Decline

y/Is

sues

Forecasting critical

Product and process reliability

Competitive d t

Standardization

Fewer product changes, more minor changes

Optimum capacity

Little product differentiation

Cost minimization

Overcapacity in the i d t

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process design changes

Short production runs

High production costs

Limited models

Attention to quality

OM

Str

ateg

y product improvements and options

Increase capacity

Shift toward product focus

Enhance distribution

Increasing stability of process

Long production runs

Product improvement and cost cutting

industry

Prune line to eliminate items not returning good margin

Reduce capacity

Figure 2.5

SWOT Analysis

Internal External

Mission

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Strategy

Analysis

Strengths

Internal Weaknesses

Opportunities

External Threats

Strategy Development Process

Determine the Corporate Mission

Analyze the EnvironmentIdentify the strengths, weaknesses, opportunities, and threats.

Understand the environment, customers, industry, and competitors.

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Determine the Corporate Mission

State the reason for the firm’s existence and identify the value it wishes to create.

Form a Strategy

Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, after-

sale service, broad product lines.

Figure 2.6

Strategy Development and Implementation

Identify key success factors

Build and staff the organization

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Integrate OM with other activities

The operations manager’s job is to implement an OM strategy, provide competitive advantage, and increase productivity

Four International Operations Strategies

Co

ns

ide

rati

on

s

High

Standardized productEconomies of scaleCross-cultural learning

Examples:Texas InstrumentsCaterpillarOtis Elevator

Global Strategy Transnational Strategy

Move material, people, ideas across national boundaries

Economies of scaleCross-cultural learning

ExamplesCoca-ColaNestlé

Figure 2.9

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Co

st

Re

du

cti

on

C

Low

HighLowLocal Responsiveness Considerations

(Quick Response and/or Differentiation)

International Strategy

Import/export or license existing product

ExamplesU.S. SteelHarley Davidson

Multidomestic StrategyUse existing

domestic model globallyFranchise, joint ventures,

subsidiaries

ExamplesHeinz The Body ShopMcDonald’s Hard Rock Cafe

End of Presentation

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