PRODUCTION AND

OPERATIONS
MANAGEMENT
BSBA

Learning Objectives

Definition of Operations Management (OM)

Organizational Functions
Why Study OM?
A brief history of operations management
The future of the discipline
Goods Versus Services
Measuring productivity
Career opportunities in operations
management

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

Organizing to Produce
Goods and Services

Essential functions:
1.
2.
3.

4.

Marketing generates demand

Production/operations creates the
product
Finance/accounting tracks how
well the organization is doing, pays
bills, collects the money
Human Resources provides labor,
wage and salary administration
and job evaluation

Organizational Charts
Commercial Bank

Operations
Teller Scheduling
Check Clearing
Collection
Transaction processing
Facilities design/layout
Vault operations
Maintenance
Security

Finance
Investments
Security
Real estate
Accounting
Auditing

Marketing
Loans
Commercial
Industrial
Financial
Personal
Mortgage
Trust Department

Human Resources
Recruitment
Job evaluation
Performance evaluation
Wage and Salary Adm.
Personnel records

Organizational Charts
Manufacturing

Operations
Facilities
Construction; maintenance
Production and inventory control
Scheduling; materials control
Quality assurance and control
Supply-chain management
Manufacturing
Tooling; fabrication; assembly
Design
Product development and design
Detailed product specifications
Industrial engineering
Efficient use of machines, space,
and personnel
Process analysis
Development and installation of
production tools and equipment

Finance/ accounting
Disbursements/
credits
Receivables
Payables
General ledger
Funds Management
Money market
International
exchange
Capital requirements
Stock issue
Bond issue
and recall

Human Resources
Recruitment

Marketing
Sales
promotion
Advertising
Sales
Market research

Job evaluation
Performance evaluation
Wage and Salary Adm.
Personnel records

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

Options for Increasing

Contribution
Marketing
Option

Current
Sales
Cost of Goods
Gross Margin
Finance Costs
Subtotal
Taxes at 25%
Contribution

$100,000
80,000
20,000
6,000
14,000
3,500
$ 10,500

Finance/
Accounting
Option

Increase
Reduce
Sales
Finance
Revenue 50% Costs 50%
$150,000
120,000
30,000
6,000
24,000
6,000
$ 18,000

$100,000
80,000
20,000
3,000
17,000
4,250
$ 12,750

OM
Option
Reduce
Production
Costs 20%
$100,000
64,000
36,000
6,000
30,000
7,500
$ 22,500

WHAT OPERATIONS
MANAGERS DO
Basic Management Functions

Planning
Organizing
Staffing
Leading
Controlling

Ten Critical Decisions

Ten Decision Areas

1.
2.
3.

Design of goods and services

Managing quality
Process and capacity
design
4.
Location strategy
5.
Layout strategy
6.
Human resources and
job design
7.
Supply-chain
management
8.
Inventory, MRP, JIT
9.
Scheduling
10. Maintenance

The Critical Decisions

1.

Design of goods and services

2.

What good or service should we offer?

How should we design these products
and services?

Managing quality

How do we define quality?

Who is responsible for quality?

The Critical Decisions

3.

Process and capacity design

4.

What process and what capacity will

these products require?
What equipment and technology is
necessary for these processes?

Location strategy

Where should we put the facility?

On what criteria should we base the
location decision?

The Critical Decisions

5.

Layout strategy

6.

How should we arrange the facility?

How large must the facility be to meet
our plan?

Human resources and job design

How do we provide a reasonable work

environment?
How much can we expect our
employees to produce?

The Critical Decisions

7.

Supply-chain management

8.

Should we make or buy this component?

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

Inventory, material requirements

planning, and JIT

How much inventory of each item should

we have?
When do we re-order?

The Critical Decisions

9.

Intermediate and shortterm

scheduling

10.

Are we better off keeping people on

the payroll during slowdowns?
Which jobs do we perform next?

Maintenance

How do we build reliability into our

processes?
Who is responsible for maintenance?

Significant Events in OM

The Heritage of OM
Division of labor (Adam Smith 1776; Charles Babbage
1852)
Standardized parts (Whitney 1800)
Scientific Management (Taylor 1881)
Assembly line (Ford/ Sorenson 1913)
Gantt charts (Gantt 1916)
Motion study (Frank and Lillian Gilbreth 1922)
Quality control (Shewhart 1924; Deming 1950)

The Heritage of OM
First Digital Computer (Atanasoff 1938)
CPM/PERT (DuPont 1957, Navy 1958)
Material requirements planning (Orlicky 1960)
Computer aided design (CAD 1970)
Flexible manufacturing system (FMS 1975)
Baldrige Quality Awards (1980)
Computer integrated manufacturing (1990)
Globalization (1992)
Internet (1995)
Mass Customization (2000s)

New Challenges in OM
From

To

Local or national focus

Batch shipments

Global focus
Just-in-time

Low bid purchasing

Supply-chain partnering
Rapid product
development, alliances
Mass customization

Lengthy product development

Standard products
Job specialization

Empowered employees,
teams

Characteristics of Goods
Tangible product
Consistent product
definition
Production usually
separate from
consumption
Can be inventoried
Low customer
interaction

Characteristics of Service
Intangible product
Produced and
consumed at same time
Often unique
High customer
interaction
Inconsistent product
definition
Often knowledge-based
Frequently dispersed

Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100%
|

75
|

50
|

25
|

Percent of Product that is a Good

0
|

25
|

50
|

75
|

100%
|

Percent of Product that is a Service

Changing Challenges
Traditional
Approach

Reasons for
Change

Current
Challenge

Ethics and
regulations
not at the
forefront

Public concern over

pollution, corruption,
child labor, etc.

High ethical and

social
responsibility;
increased legal
and professional
standards

Local or
national
focus

Growth of reliable, low

cost communication
and transportation

Global focus,
international
collaboration

Lengthy
product
development

Shorter life cycles;

growth of global
communication; CAD,
Internet

Rapid product
development;
design
collaboration

Changing Challenges
Traditional
Approach

Reasons for
Change

Current
Challenge

Low cost
production,
with little
concern for
environment;
free
resources
(air, water)
ignored

Public sensitivity to
environment; ISO 14000
standard; increasing
disposal costs

Environmentally
sensitive
production; green
manufacturing;
sustainability

Low-cost
standardized
products

Rise of consumerism;
increased affluence;
individualism

Mass
customization

Changing Challenges
Traditional
Approach

Reasons for
Change

Current
Challenge

Emphasis on
specialized,
often manual
tasks

Recognition of the
employee's total
contribution; knowledge
society

Empowered
employees;
enriched jobs

In-house
production;
low-bid
purchasing

Rapid technological
change; increasing
competitive forces

Supply-chain
partnering; joint
ventures, alliances

Large lot
production

Shorter product life

cycles; increasing need
to reduce inventory

Just-In-Time
performance;
lean; continuous
improvement

New Trends in OM

Ethics
Global focus
Environmentally sensitive production
Rapid product development
Mass customization
Empowered employees
Supply-chain partnering
Just-in-time performance

Productivity Challenge
Productivity is the ratio of outputs (goods
and services) divided by the inputs
(resources such as labor and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output only and not a
measure of efficiency

Efficiency Versus
Effectiveness

The difference between efficient and effective is that

efficiency refers to how well you do something, whereas
effectiveness refers to how useful it is.
Efficiency is doing things right; effectiveness is
doing the right things.

Doing the Right Things is More Important

than Doing Things Right

Efficiency Versus
Effectivenes

For example, if a company is not doing well and

they decide to train their workforce on a new
technology. The training goes really well - they
train all their employees in avery short time and
tests show they have absorbed the training well.
But overall productivity doesn't improve. In this
case the company's strategy was efficient but not
effective.

The Economic System

Inputs

Transformation

Outputs

Labor,
capital,
management

Economic system transforms

inputs to outputs
/CONVERSITION PROCESS

Goods
and
services

Feedback loop

Productivity
Units produced
Productivity =
Input used
Measure of process improvement
Represents output relative to input
Only through productivity increases
can our standard of living improve

Productivity Calculations
Labor Productivity
Productivity =

Units produced
Labor-hours used

1,000
= 250 = 4 units/labor-hour
One resource input single-factor productivity

Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous
Also known as total factor productivity
Output and inputs are often expressed
in dollars
Multiple resource inputs multi-factor productivity

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

Old labor
productivity

8 titles/day
32 labor-hrs

8 titles/day
Overhead = $400/day

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

Old labor
productivity

8 titles/day
32 labor-hrs

8 titles/day
Overhead = $400/day

= .25 titles/labor-hr

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Overhead = $800/day

Old labor
productivity

New labor
productivity

8 titles/day
32 labor-hrs
14 titles/day
32 labor-hrs

= .25 titles/labor-hr

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Overhead = $800/day

Old labor
productivity

New labor
productivity

8 titles/day
32 labor-hrs
14 titles/day
32 labor-hrs

= .25 titles/labor-hr

= .4375 titles/labor-hr

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

Overhead = $800/day

8 titles/day
$640 + 400

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

Overhead = $800/day

8 titles/day
$640 + 400

= .0077 titles/dollar

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

New multifactor
productivity

Overhead = $800/day

8 titles/day
$640 + 400

14 titles/day
$640 + 800

= .0077 titles/dollar

Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day

8 titles/day
Overhead = $400/day

New System:
14 titles/day

Old multifactor
productivity

New multifactor
productivity

Overhead = $800/day

8 titles/day
$640 + 400

= .0077 titles/dollar

14 titles/day
$640 + 800

= .0097 titles/dollar

Measurement Problems
1. Quality may change while the quantity
of inputs and outputs remains constant
(HDTV, iphones)
2. External elements may cause an
increase or decrease in productivity
(using more reliable electric power
system)
3. Precise units of measure may be lacking

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

3.

Social overhead that makes labor available such as

transportation and sanitation

Challenge is in maintaining and

enhancing skills in the midst of rapidly
changing technology and knowledge

Investment and
Productivity
Percent increase in productivity

10
8
6
4
2
0

10

15

20

25

Percentage investment

30

35

Service Productivity
1.

Typically labor intensive (teaching, counseling)

2.

Frequently focused on unique individual desires (customer

representatives in banks)

3.

Often an intellectual task performed by professionals

4.

Often difficult to mechanize

5.

Often difficult to evaluate for quality

ETHICS AND
SOCIAL RESPONSIBILITY
Challenges facing
operations managers:
Developing and producing safe,
quality products
Maintaining a clean environment
Providing a safe workplace
Honoring stakeholder commitments

FINALLY