Chapter 1
OPERATIONS
MANAGEMENT: Creating Value
Along the Supply Chain,
Canadian Edition
Robert S. Russell, Bernard W. Taylor III, Ignacio Castillo, Navneet Vidyarthi
CHAPTER 1
Introduction to Operations and Supply
Chain Management
11
What is Operations Management
Operations management concerned with designing
and controlling the process of production and
redesigning business operations in the production
of goods and services.
It involves responsibilities of ensuring that
business operations are efficient in terms of using
as few resources as needed and effective in terms
of customer requirements.
12
What is Operations Management
Operations Management programs typically
include:
Instruction in principle of general management
Manufacturing and production system
Factory management
Equipment maintenance management
Production planning and control
System analysis
Productivity analysis and cost control
Materials planning
13
Operations as a Transformation
Process
• What is Operations Management?
Design, operation, and improvement of productive systems
• What is Operations?
a function or system that transforms inputs into outputs of greater
value
• What is a Transformation Process?
a series of activities along a value chain extending from supplier to
customer
activities that do not add value are superfluous and should be
eliminated
14
Operations as a Transformation
Process
15
Operations Management Decision
Furniture manufacturer:
purchasing wood and fabric,
hiring and training workers,
location and layout of the furniture factory,
purchase cutting tools and other fabrication equipment.
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The Operations Functions
Organizing work
Selecting processes
Arranging layout and location facilities
Designing job
Measuring performance
Controlling quality
Scheduling work
Managing inventory
Planning production
17
Operations Function
18
Evolution of Operations and Supply
Chain Management
Craft Production: before 1700 this method was used 1 person
used to produce 1 product, skilled workers, before the
industrial revolution
Division of labor: assign workers specific set of work,
repetitive work
Interchangeable parts
Scientific management: Freddric Taylor introduced Scientific
management
Mass production
Lean Production
19
Globalization
Why “go global”?
favorable cost
access to international markets
response to changes in demand
reliable sources of supply
latest trends and technologies
Increased globalization
results from the Internet and falling trade barriers
110
Hourly Compensation
111
Productivity and Competitiveness
Competitiveness
ability to provide products and services as or more
effectively and efficiently than the relevant
competitors.
Productivity
ratio of output to input
Output
sales made, products produced, customers served,
meals delivered, or calls answered
Input
labor hours, investment in equipment, material usage,
or square footage
112
Productivity Challenge
Productivity is the ratio of outputs (goods and
services) and 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
113
Improving Productivity at Starbucks
A team of 10 analysts
continually look for ways to
save time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
114
Improving Productivity at Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:
Operations improvements have helped
Starbucks increase yearly revenue per outlet
Stop requiring signatures Saved 8 seconds
by $200,000 to $940,000 in six years.
on credit card purchases per transaction
under $25 Productivity has improved by 27%, or about
4.5% per year.
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
115
Measures of Productivity
116
Single Factor Productivity
Data is readily available
Easier to relate to specific processes
Terms applied to single factor productivity
measures are
Capital productivity (using machine hours or dollar
invested)
Energy productivity (using kilowatt hours)
Materials productivity (using inventory dollars)
117
Multi Factor Productivity
A multifactor productivity measure utilizes more
than a single factor, for example, both labor and
capital.
Hence, multifactor productivity is the ratio of total
output to a subset of inputs
A subset of inputs might consist of only labor and
materials or it could include capital.
118
Total Factor Productivity
Total factor productivity is measured by combining the effects of all the
resources used in the production of goods and services (labor, capital,
raw material, energy, etc.).
Total output must be expressed in the same unit of measure and total
input must be expressed in the same unit of measure.
However, total output and total input need not be expressed in the
same unit of measure.
For example, total output could be expressed as the number of units
produced, and total input could be expressed in dollars, such as tons of
steel produced per dollar input.
119
Example 1
Osborne Industries is compiling the monthly productivity report for its
Board of Directors. From the following data, calculate (a) labor
productivity, (b) machine productivity, and (c) the multifactor productivity
of dollars spent on labor, machine, materials, and energy. The average
labor rate is $15 an hour, and the average machine usage rate is $10
an hour.
Units produced 100,000
Labor hours 10,000
Machine hours 5,000
Cost of materials $35,000
Cost of energy $15,000
120
Solution:
(a)
(b)
(c)
121
Example 2
A specialty laboratory performs lab tests for the area hospitals.
During its first two years of operation the following measurements
were gathered:
Measurement Year 1 Year 2
.
Price per test ($) 50 50
Annual tests 10,000 10,700
Total labor costs($) 150,000 158,000
Material costs ($) 8,000 8,400
Overhead ($) 12,000 12,200
Determine and compare the multifactor productivity for historical
benchmarking.
122
Solution:
10,000 * 50
Multifacto r Pr oductivityYear 1 2.9
150 ,000 8,000 12,000
10,700 * 50
Multifactor Pr oductivityYear 2 3.0
158,000 8,400 12,200
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USE OF PRODUCTIVITY MEASURES
Productivity is a required tool in evaluating and monitoring the
performance of an organization, especially a business organization.
Proper use of productivity measures can give the manager an
indication of how to improve productivity: either increase the numerator
of the measure, decrease the denominator, or both.
Managers are also concerned with how productivity measures relate to
competitiveness.
Productivity measures can also be used to evaluate the performance of
an entire industry or the productivity of a country as a whole.
124
Productivity Growth
125
Percent Change in Input and Output
126