Lecture1 strategy, productivity Operation Mnagement

Lecture 1
Operations Management:
Definition, Process, Productivity, Competitiveness, Strategy
Roberta S Russell and Bernard W. Taylor. Operations Management: Creating Value Along the
Supply Chain (7/e). John Wiley and Sons, Inc.,2011. (Chapter 1)
William Stevenson. Operations Management (11/e). McGraw-Hill/Irwin, 2012. (Chapter 1, 2)

Operations
• Operations is that part of a business organization that is responsible for
producing goods and/or services. Operations is defined as a transformation
process where inputs (such as material, machines, labour, management,
and capital) are transformed into outputs (goods and services).
– Goods Physical items produced by business organizations.
– Services Activities that provide some combination of time, location, form, and
psychological value.
• The role of operations is to create value. The transformation process itself
can be viewed as a series of activities along a value chain extending from
supplier to customer.
– Value chain: a series of activities from supplier to customer that add value to a
product or service.
January 9, 2017
EIB 523/518: Lecture 1 Operations Management (Spring
2017)
2

INPUT
•Material
•Machines
•Labor
•Management
•Capital
TRANSFORMATION
PROCESS
OUTPUT
•Goods
•Services
Feedback & Requirements
Operations as a Transformation Process
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Transformation Process
1.Physical: as in manufacturing operations
2.Locational: as in transportation or warehouse operations
3.Exchange: as in retail operations
4.Physiological: as in health care
5.Psychological: as in entertainment
6.Informational: as in communication
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Operations Management
• The management of systems or processes that create goods
and/or provide services. Operations management designs,
operates, and improves productive systems for getting work
done.
• Operations management tries to ensure that the
transformation process is performed efficiently and that the
output is of greater value than the sum of the inputs.
• Operations and supply chains are intrinsically linked and no
business organization could exist without both.
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Operations Management Decisions
• Most operations decisions involve many alternatives that can have
quite different impacts on costs or profits
• Typical operations decisions include:
1. What: What resources are needed, and in what amounts?
2. When: When will each resource be needed? When should the work be
scheduled? When should materials and other supplies be ordered?
3. Where: Where will the work be done?
4. How: How will he product or service be designed? How will the work be
done? How will resources be allocated?
5. Who: Who will do the work?
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Value Added
• The essence of the operations function is to add value during the transformation process.
• Value-added is the term used to describe the difference between the cost of inputs and the
value or price of outputs.
• In nonprofit organizations, the value of outputs (e.g., highway construction, police and fire
protection) is their value to society; the greater the value-added, the greater the
effectiveness of these operations.
• In for-profit organizations, the value of outputs is measured by the prices that customers
are willing to pay for those goods or services.
– Firms use the money generated by value-added for research and development, investment in
new facilities and equipment, worker salaries, and profits. Consequently, the greater the value-
added, the greater the amount of funds available for these purposes.
• Value can also be psychological, as in branding.
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The goods–service continuum
• The goods–service combination is a
continuum. It can range from primarily
goods, with little service, to primarily
service, with few goods.
• Because there are relatively few pure
goods or pure services, companies
usually sell product packages, which
are a combination of goods and
services.
• There are elements of both goods
production and service delivery in
these product packages. This makes
managing operations more interesting,
and also more challenging.
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Production of Goods versus Delivery of Services
• Manufacturing and service are often different in
terms of what is done but quite similar in terms of
how it is done.
1. Degree of customer contact. Many services involve a
high degree of customer contact, although services
such as Internet providers, utilities, and mail service
do not. When there is a high degree of contact, the
interaction between server and customer becomes a
“moment of truth” that will be judged by the
customer every time the service occurs.
2. Labor content of jobs. Services often have a higher
degree of labor content than manufacturing jobs do,
although automated services are an exception.
3. Uniformity of inputs. Service operations are often
subject to a higher degree of variability of inputs.
4. Measurement of productivity. Measurement of
productivity can be more difficult for service jobs due
largely to the high variations of inputs.
5. Quality assurance. Quality assurance is usually more
challenging for services due to the higher variation in
input, and because delivery and consumption occur at
the same time.
6. Inventory. Many services tend to involve less use of
inventory than manufacturing operations, so the costs
of having inventory on hand are lower than they are
for manufacturing. However, unlike manufactured
goods, services cannot be stored
7. Wages. Manufacturing jobs are often well paid, and
have less wage variation than service jobs, which can
range from highly paid professional services to
minimum-wage workers.
8. Ability to patent. Product designs are often easier to
patent than service designs, and some services cannot
be patented, making them easier for competitors to
copy.
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Process Management
• A key aspect of operations management is process management. A process consists of one or more
actions that transform inputs into outputs. In essence, the central role of all management is process
management.
• Generally speaking, there are three categories of business processes:
1. Upper-management processes. These govern the operation of the entire organization. Examples include
organizational governance and organizational strategy.
2. Operational processes. These are the core processes that make up the value stream. Examples include
purchasing, production and/or service, marketing, and sales.
3. Supporting processes. These support the core processes. Examples include accounting, human resources,
and IT (information technology).
• Business processes, large and small, are composed of a series of supplier–customer relationships,
where every business organization, every department, and every individual operation is both a
customer of the previous step in the process and a supplier to the next step in the process.
• Ideally, the capacity of a process will be such that its output just matches demand. Excess capacity is
wasteful and costly; too little capacity means dissatisfied customers and lost revenue. Having the
right capacity requires having accurate forecasts of demand, the ability to translate forecasts into
capacity requirements, and a process in place capable of meeting expected demand.
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Process Variation
• Variation occurs in all business processes. It can be due to variety or variability. There are four basic
sources of variation:
1. The variety of goods or services being offered. The greater the variety of goods and services, the greater the
variation in production or service requirements.
2. Structural variation in demand. These variations, which include trends and seasonal variations, are generally
predictable. They are particularly important for capacity planning.
3. Random variation. This natural variability is present to some extent in all processes, as well as in demand for
services and products, and it cannot generally be influenced by managers.
4. Assignable variation. These variations are caused by defective inputs, incorrect work methods, out-of-
adjustment equipment, and so on. This type of variation can be reduced or eliminated by analysis and
corrective action.
• Variations can be disruptive to operations and supply chain processes, interfering with optimal
functioning. Variations result in additional cost, delays and shortages, poor quality, and inefficient
work systems.
• Poor quality and product shortages or service delays can lead to dissatisfied customers and damage
an organization’s reputation and image. The ability to deal with variability is absolutely necessary for
managers.
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Globalization and Competitiveness
• Two thirds of today’s businesses operate globally
through global markets, global operations, global
financing, and global supply chains. Globalization can
take the form of selling in foreign markets, producing
in foreign lands, purchasing from foreign suppliers, or
partnering with foreign firms. Increased globalization
results from the Internet and falling trade barriers
• Companies “go global” to take advantage of
favourable costs, to gain access to international
markets, to be more responsive to changes in demand,
to build reliable sources of supply, and to keep abreast
of the latest trends and technologies.
• Companies must be competitive to sell their goods
and services in the marketplace. Competitiveness is
an important factor in determining whether a
company prospers, barely gets by, or fails. Business
organizations compete through some combination of
their marketing and operations functions.
1. Marketing influences competitiveness in several ways,
including identifying consumer wants and needs, pricing, and
advertising and promotion.
2. Operations has a major influence on competitiveness
through
1. product and service design
2. cost
3. location
4. quality
5. quick response time
6. flexibility
7. inventory management
8. supply chain management
9. service
10. people (managers and workers)
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Why Some Organizations Fail
• Organizations fail, or perform poorly, for a variety of reasons. Being aware of those reasons
can help managers avoid making similar mistakes. Among the chief reasons are the
following:
1. Neglecting operations strategy.
2. Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive
threats.
3. Putting too much emphasis on short-term financial performance at the expense of research and
development.
4. Placing too much emphasis on product and service design and not enough on process design and
improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communications and cooperation among different functional
areas.
7. Failing to consider customer wants and needs.
• Understanding competitive issues can help managers develop successful strategies.
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Competitiveness
• How effectively an organization meets the wants and needs of customers relative to others
that offer similar goods or services
• The OECD (Organization for Economic Cooperation and Development) defines
competitiveness as “the degree to which a nation can produce goods and services that
meet the test of international markets while simultaneously maintaining or expanding the
real incomes of its citizens.”
• The most common measure of competitiveness is productivity. Productivity is a measure of
the effective use of resources, usually expressed as the ratio of output to input.
1. Increases in productivity allow wages to grow without producing inflation, thus raising the
standard of living.
2. Productivity growth also represents how quickly an economy can expand its capacity to supply
goods and services.
3. Although productivity is important for all business organizations, it is particularly important for
organizations that use a strategy of low cost, because the higher the productivity, the lower the
cost of the output.
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Globalization, Competitiveness and International Trade
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Trade with China: Percent of each country‘s trade
Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,” International
Trade Statistics 2003, World Trade Organization, www.wto.org

Competitiveness and Productivity
• Competitiveness
– degree to which a nation can produce goods and services that meet the test of international
markets
• Productivity
– ratio of output to input [Productivity = O/I]
• Output
– sales made, products produced, customers served, meals delivered, or calls answered
• Input
– labor hours, investment in equipment, material usage, or square footage
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Productivity
• Productivity is an average measure of the efficiency of
production.
• Productivity is a ratio of production output to what is required
to produce it (inputs of capital, labor, land, energy, materials,
etc.).
• The measure of productivity is defined as a total output per
one unit of a total input. We see that as a measure of the
average productivity is often difficult to interpret correctly.
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Types of Productivity
• National Productivity: Productivity at the national level is
typically defined and measured in terms of Gross Domestic
Product (GDP) per capita, per employed person or per hour
worked. It is viewed by many as a key indicator of the
economic health of the country. Actions that improve
productivity typically enable wage gains to occur without
producing inflation.
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Measure of Productivity and Productivity Change
• Output can be expressed in units or
money in a variety of scenarios, such as
sales made, products produced, customers
served, meals delivered, or calls answered.
1. Single-factor productivity compares output to
individual inputs, such as labour hours,
investment in equipment, material usage, or
square footage.
2. Multifactor productivity relates output to a
combination of inputs, such as (labor + capital)
or (labour + capital + energy + materials).
• Capital can include the value of equipment,
facilities, inventory, and land.
3. Total factor productivity compares the total
quantity of goods and services produced with
all the inputs used to produce them.
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Measures of Productivity
• Single-factor measures =Output / (Single Input)
– Labor Productivity
–Quantity (or value) of output / labor hrs
–Quantity (or value) of output / shift
– Machine Productivity
–Quantity (or value) of output / machine hrs
– Energy Productivity
–Quantity (or value of output) / kwh
– Capital Productivity
–Quantity (or value) of output / value of input
• All-factors measure = Output / Total Inputs or All Inputs
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𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 =
𝑂𝑢𝑡𝑝𝑢𝑡
𝐼𝑛𝑝𝑢𝑡

Some Important Issues
• Single Factor
– If we produce only one product, the numerator can be either the total units of the
product or the total money value of the product. If we produce several products,
the numerator is the total money value of all products.
– The denominator can be the units of input or the total money value of input.
• All Factors
– If we produce only one product, the numerator can be either the total units of
product or total money value of the product.
– If we produce several products, the numerator is the total money value of all
products. Usually, the numerator is the total money value of all outputs.
The denominator is total money value of all inputs.
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Productivity in the Service Sector
• Service productivity is more problematic than manufacturing productivity. In many situations, it is
more difficult to measure, and thus to manage, because it involves intellectual activities and a high
degree of variability.
• Service is becoming an increasingly large portion of our economy, the issues related to service
productivity will have to be dealt with.
• A useful measure closely related to productivity is process yield. Where products are involved,
process yield is defined as the ratio of output of good product (i.e., defective product is not included)
to the quantity of raw material input. Where services are involved, process yield measurement is
often dependent on the particular process.
– In a car rental agency, a measure of yield is the ratio of cars rented to cars available for a given day.
– In education, a measure for college and university admission yield is the ratio of student acceptances to the
total number of students approved for admission.
• However, not all services lend themselves to a simple yield measurement. For example, services such
as automotive, appliance, and computer repair don’t readily lend themselves to such measures.
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Factors That Affect Productivity
• A commonly held misconception
is that workers are the main
determinant of productivity.
– According to that theory, the
route to productivity gains
involves getting employees to
work harder.
– However, the fact is that many
productivity gains in the past
have come from technological
improvements.
• Numerous factors affect
productivity. Generally, they are:
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Capital
Methods
Technology
Management
Quality

Other factors that affect productivity
1. Standardizing processes and procedures wherever
possible to reduce variability can have a significant
benefit for both productivity and quality.
2. Quality differences may distort productivity
measurements.
3. Use of the Internet can lower costs of a wide range of
transactions, thereby increasing productivity.
4. Searching for lost or misplaced items wastes time,
hence negatively affecting productivity.
5. Scrap rates have an adverse effect on productivity,
signaling inefficient use of resources.
6. New workers tend to have lower productivity than
seasoned workers.
7. Safety should be addressed. Accidents can take a toll
on productivity
8. A shortage of information technology workers and
other technical workers hampers the ability of
companies to update computing resources, generate
and sustain growth, and take advantage of new
opportunities.
9. Layoffs often affect productivity. The effect can be
positive and negative.
10. Labor turnover has a negative effect on productivity;
replacements need time to get up to speed.
11. Design of the workspace can impact productivity. For
example, having tools and other work items within
easy reach can positively impact productivity.
12. Incentive plans that reward productivity increases
can boost productivity.
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Improving Productivity
1. Develop productivity measures for all operations
2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements
4. Establish reasonable goals
5. Make it clear that management supports and encourages productivity
improvement
6. Measure and publicize improvements
7. Don’t confuse productivity with efficiency
– Efficiency is a narrower concept that pertains to getting the most out of a fixed set of
resources; productivity is a broader concept that pertains to effective use of overall
resources. For example, an efficiency perspective on mowing a lawn given a hand
mower would focus on the best way to use the hand mower; a productivity perspective
would include the possibility of using a power mower.
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Productivity Increase
• Productivity measures are useful for tracking an operating
unit’s performance over time and judging the performance of
an entire industry or country
1. Become efficient: output increases with little or no increase in input
2. Expand: both output and input grow with output growing more rapidly
3. Achieve breakthroughs: output increases while input decreases
4. Downsize: output remains the same and input is reduced
5. Retrench: both output and input decrease, with input decreasing at a faster rate
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Operations–oriented Barriers to Entry
• Economies of Scale
• Capital Investment
• Access to Supply and Distribution Channels
• Learning Curve
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Example
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INPUT
Units produced 100,000
Labor hours 10,000
Machine hours 5,000
Labor rate $15
Machine usage rate $10
Cost of materials $35,000
Cost of energy $15,000
Cost of labor $150,000
Cost of machines $50,000
Total cost $250,000
OUTPUT
Labor productivity 10 units / hour
Machine productivity 20 units / hour
Multifactor productivity 0.40 units / $

Units (in 000s) Cincinnati Frankfurt Guadalajara Beijing
Finished goods 10000 12000 5000 8000
Work-in-process 1000 2200 3000 6000
Total Output 10500 13100 6500 11000
Costs (in 000s)
Labor Costs 3500 4200 2500 800
Material Costs 3500 3000 2000 2500
Energy Costs 1000 1500 1200 800
Transportation Costs 250 2500 2000 5000
Overhead Costs 1200 3000 2500 500
Total 9450 14200 10200 9600
Labour Productivity 3.00 3.12 2.60 13.75
Multifactor Productivity 1.11 0.92 0.64 1.15
Assumption:
Work in process is half finished goods
Multifactor productivity is total productivity
January 9, 2017 EIB 523/518: Lecture 1 Operations Management (Spring 2017) 29

Example
• A property title search firm is contemplating using online
software to increase its search productivity. Currently an
average of 40 minutes is needed to do a title search. The
researcher cost is $2 per minute. Clients are charged a fee of
$400. Company A’s software would reduce the average search
time by 10 minutes, at a cost of $3.50 per search. Company B’s
software would reduce the average search time by 12 minutes
at a cost of $3.60 per search. Which option has highest
productivity in term of time? Which option would have the
highest productivity in terms of revenue per dollar of input?
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Analysis
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Current
Time Required 40 Minutes
Cost Per Minute 2 Dollars
Revenue Per Search 400 Dollars
Productivity Revenue Per Search / Time Required
400/40 = 10
Total Surplus Revenue Per Search - (Time Required X Cost Per Minute)
400 - (40 X 2)
Company A
Time Required 40 -10 = 30 Minutes
Cost Per Minute 3.5 Dollars
400/30 = 13.33
400 - (30 X 3.5)
Company B
Time Required 40 -12 = 28 Minutes
Cost Per Minute 3.6 Dollars
400/28 = 14.29
400 - (28 X 3.6)

Example
• A company offers ID theft protection using leads obtained from
client banks. Three employees work 40 hours a week on the
leads, at a pay rate of $25 per hour per employee. Each
employee identifies an average of 3,000 potential leads a week
from a list of 5,000. An average of 4 percent actually sign up for
the service, paying a one-time fee of $70. Material costs are
$1,000 per week, and overhead costs are $9,000 per week.
Calculate the multifactor productivity for this operation in fees
generated per dollar of input.
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Operations Strategy Formulation
Effective strategy formulation requires taking into account:
Core competencies: The special attributes or abilities that
give an organization a competitive edge. Core competency is
what a firm does better than anyone else, its distinctive
competence. A firm’s core competence can be exceptional
service, higher quality, faster delivery, or lower cost.
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Operations Strategy Formulation
1. Based on experience, knowledge, and know-how, core competencies represent
sustainable competitive advantages.
2. Core competencies are more likely to be processes, a company’s ability to do
certain things better than a competitor. Thus, while a particular product is not a
core competence, the process of developing new products is.
3. Core competencies are not static. They should be nurtured, enhanced, and
developed over time. Close contact with the customer is essential to ensuring
that a competence does not become obsolete. Core competencies that do not
evolve and are not aligned with customer needs can become core rigidities for
a firm.
 The most effective organizations use an approach that develops core competencies based on
customer needs as well as on what the competition is doing.
 To be effective core competencies and strategies need to be aligned
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Strategy Formulation
Successful strategy formulation also requires taking into
account:
 Order qualifiers: Order qualifiers are those characteristics that
potential customers perceive as minimum standards of acceptability
for a product to be considered for purchase.
 Order winners: Order winners are characteristics of an organization’s
goods or services that cause it to be perceived as better than the
competition.
• Order winners and order qualifiers can evolve over time, just as
competencies can be gained and lost.
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Order Winners and Order Qualifiers
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Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan
Betts, Operations and Process Management, Prentice Hall, 2006, p. 47

Positioning the Firm
1. Competing on Cost: Companies that compete on cost relentlessly pursue the elimination of all waste.
2. Competing on Speed: More than ever before, speed has become a source of competitive advantage.
– Speed: Fast moves, fast adaptations, tight linkages
3. Competing on Quality: Most companies approach quality in a defensive or reactive mode; quality is
confined to minimizing defect rates or conforming to design specifications. To compete on quality,
companies must view it as an opportunity to please the customer, not just a way to avoid problems
or reduce rework costs.
4. Competing on Flexibility: Marketing always wants more variety to offer its customers. Manufacturing
resists this trend because variety upsets the stability (and efficiency) of a production system and
increases costs. The ability of manufacturing to respond to variation has opened up a new level of
competition. Flexibility has become a competitive weapon. It includes the ability to produce a wide
variety of products, to introduce new products and modify existing ones quickly, and to respond to
customer needs.
– Flexibility: the ability to adjust to changes in product mix, production volume, or design.
– Mass customization: the mass production of customized products.
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Operations Strategy
• Operations strategy
– The approach, consistent with organization strategy, that is used to guide the operations function.
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Decision Area What the Decisions Affect
Product and service design Costs, quality, liability, and environmental issues
Capacity Cost, structure, flexibility
Process selection and
layout
Costs, flexibility, skill level needed, capacity
Work design Quality of work life, employee safety, productivity
Location Costs, visibility
Quality Ability to meet or exceed customer expectations
Inventory Costs, shortages
Maintenance Costs, equipment reliability, productivity
Scheduling Flexibility, efficiency
Supply chains Costs, quality, agility, shortages, vendor relations
Projects Costs, new products, services, or operating systems

Strategic Decisions in Operations
Products
EIB 523/518: Lecture 1 Operations Management (Spring 2017) 1-39
Services Process
and
Technology
Capacity
Human
Resources Quality
Facilities Sourcing Operating
Systems

Lecture1 strategy, productivity Operation Mnagement

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