Processes and operations 2 3 1 4 5 Processes and Operations Internal and external customers • Inputs • Workers • Managers • Equipment • Facilities • Materials • Services • Land • Energy • Outputs • Services • Goods Information on performance
Describe Input-Process-Output • An airline • Inputs: passengers • Components: planes, crews, equipment, terminals • Primary functions: transportation • Output: satisfied, safe customers • A state penitentiary • Inputs: criminals • Components: legal system, physical plant (prison), guards and support staff • Primary functions: segregation of prisoners from society, punishment, rehabilitation • Output: reformed society members • A branch office of a bank • Inputs: customers • Components: tellers, bank officers, teller windows, systems • Primary functions: deposit and withdrawal handling, loan initiation, storing money and valuables • Output: satisfied customers, positive return on loan ratios • The home office of a major banking firm • Inputs: paperwork from customers and other institutions • Components: loan underwriters, clerks, computer systems • Primary function: record-keeping, loan processing, coordinating cash flows • Output: satisfied customers, sound investment portfolios
BANK Operations Retail Products Wholesale Trading Loan administration Leasing Others Cash Management Loan operations Trading operations Others Auto Finance Cards Mortgages Others Distribution Compliance Finance Human resources Fund management Market making spot Dealer support Others ATM support Customer transactions Service quality Others Teller line transactions Track branch sales ATM hotline Others Credit applications Manage retail products Originate lease portfolio Others Maintain cards Research problems Site analysis Others Prepare reports Attend meetings Input funds deals Others Process deposits Cash checks Safe deposit boxes Others Loan documentation Review credit standing Obtain manager approval Others Nested Processes at Chase Manhattan Bank
Operations Management • Operations management (OM)is defined as the design, operation, and improvement of the systemsthat create and deliver the firm’s primary products and services • Each part of the organization, not just operations, must design and operate processes and deal with quality, technology and staffing issues.
Types of OM Decisions • Strategic choices – how to best design processes for competitive priorities. • Process – improvement, one-time projects, technologies • Quality – SPC, improvement • Capacity, Location,Layout - global • Operating Decisions – SCM, forecasting, staffing levels, scheduling, resource planning
Operations Management as a Function Functions Types of Organizations • Accounting • Distribution • Engineering • Operations • Finance • Human resources • Marketing Types of Organizations Manufacturing Construction Transportation Health care Wholesale Retailing Bank Government • ----------------- • ----------------- • ----------------- • ----------------- • ----------------- • ----------------- • ----------------- • -----------------
Goods vs. Services • “If you drop it on your foot, it won’t hurt you.” (Good or service?) • “Services never include goods and goods never include services.” (True or false?) • Value-added servicesdifferentiate the organization from competitors and build relationships that bind customers to the firm in a positive way.
Continuum of Characteristics More like a manufacturing organization More like a service organization • Physical, durable product • Output that can be inventoried • Low customer contact • Long response time • Regional, national, or international markets • Large facilities • Capital intensive • Quality easily measured • Intangible, perishable product • Output that cannot be inventoried • High customer contact • Short response time • Local markets • Small facilities • Labor intensive • Quality not easily measured
Manufacturing, mining, and construction Other services 40 – 30 – 20 – 10 – 0 Wholesale and retail sales Percentage of workforce Government | | | | | 1959 1969 1979 1989 1999 Service Sector Jobs
Output Input Productivity = Productivity Productivity is the value of outputs (goods and services) produced divided by the values of input resources.
Policies processed Employee hours Output Number of Machines Labor productivity = Machine productivity = Productivity An index of the output per person or hour worked.
600 policies (3 employees)(40 hours/employee) Labor productivity = Productivity Labor productivity = 5 policies/hour
Productivity Multifactor productivity is an index of the output provided by more than one of the resources used in production. We have to convert the measure into a common unit of measure, usually dollars. Multifactor productivity = Quantity at standard cost Labor cost + Materials cost + Overhead cost
(400 units)($10/unit) $4000 $400 + $1000 + $300 $1700 = = 2.35 Productivity A team of workers make 400 units of a product which is valued by its standard cost of $10 each. The reported costs for this product are $400 for labor, $1000 materials, and $300 overhead Multifactor productivity =
Productivity • The productivity measures are compared with measures from prior periods. If the ratios are not improved, the processes should be investigated. • Our challenge is to increase the value of the output relative to the cost of the input. If processes can generate more output or output of better quality using the same amount if input, productivity increases. If they can maintain the same level of output while reducing the use of resources, productivity also increases.
Productivity Measures • OM Explorer • Tutor 1.1—Productivity Measures • The state ferry service charges $18 per ticket plus a $3 surcharge to fund planned equipment upgrades. It expects to sell 4,700 tickets during the eight-week summer season. During that period, the ferry service will experience $110,000 in labor costs. Materials required for each passage sold (tickets, a tourist-information sheet, and the like) cost $1.30. Overhead during the period comes to $79,000. • What is the multifactor productivity ratio? • If ferry-support staff work an average of 310 person-hours per week for the 8 weeks of the summer season, what is the labor productivity ratio? Calculate labor productivity on an hourly basis.
Productivity Measures • Tutor 1.1—Productivity Measures • Enter data in yellow areas. Use Tab to advance from one input cell to the next. a. Multifactor productivity is the ratio of the value of output to the value of input. Step 1. Enter the number of tickets sold during a season, the price per ticket, and the surcharge per ticket. To compute value of output, multiply tickets sold by the sum of price and surcharge. Tickets sold: 4,700 Value of output: Price: $18 Surcharge: $3 Step 2. Enter labor costs, materials costs per passenger, and overhead cost. For value of input, add together labor costs, materials costs times number of passengers, and overhead costs. Labor costs: $110,000 Materials costs: $1.30 Overhead: $79,000 Value of input: Step 3. To calculate multifactor productivity, divide value of output by value of input. Multifactor productivity:
Productivity Measures • Tutor 1.1—Productivity Measures • Enter data in yellow areas. Use Tab to advance from one input cell to the next. b. Labor productivity is the ratio of the value of output to labor hours The value of output is computed in part a, step 1. Step 1. Enter person-hours per week and the number of weeks in the season; multiply the two together to calculate labor hours of input. Hours per week: 310 Weeks: 8 Labor hours of input: Step 2. To calculate labor productivity, divide value of output by labor hours of input. Labor productivity: Figure 1.6b
Productivity Measures • Tutor 1.1—Productivity Measures • Place cell pointer on green shaded areas to examine formulas. a. Multifactor productivity is the ratio of the value of output to the value of input. Step 1. Enter the number of tickets sold during a season, the price per ticket, and the surcharge per ticket. To compute value of output, multiply tickets sold by the sum of price and surcharge. Tickets sold: 4,700 Value of output: $98,700 Price: $18 Surcharge: $3 Step 2. Enter labor costs, materials costs per passenger, and overhead cost. For value of input, add together labor costs, materials costs times number of passengers, and overhead costs. Labor costs: $110,000 Materials costs: $1.30 Overhead: $79,000 Value of input: $195,110 Step 3. To calculate multifactor productivity, divide value of output by value of input. Multifactor productivity: 0.51
Productivity Measures • Tutor 1.1—Productivity Measures • Place cell pointer on green shaded areas to examine formulas. b. Labor productivity is the ratio of the value of output to labor hours The value of output is computed in part a, step 1. Step 1. Enter person-hours per week and the number of weeks in the season; multiply the two together to calculate labor hours of input. Hours per week: 310 Weeks: 8 Labor hours of input: 2,480 Step 2. To calculate labor productivity, divide value of output by labor hours of input. Labor productivity: $39.80
Productivity Measures • Management believes that sales will grow next season to 5500 tickets. If labor costs grow to $140,000 and everything else remains unchanged, what will be the new multifactor productivity ratio? Labor productivity ratio?
Productivity Measures • At the national level, productivity is measured as the dollar value of output per unit of labor. Productivity is a prime determinant of the nation’s standard of living. If the value of output per hour goes up, the nation benefits from higher overall income levels, because the productivity of human resources determines employee wages. Wage or price increases not accompanied by productivity increases lead to inflationary pressures rather than real increases in the standard of living.
Productivity Growth Average annual growth in productivity 3 – 2 – 1 – 0 2.8 2.8 2.0 1.9 1.4 Percent 1950s 1960s 1970s 1980s 1990s Figure 1.7(a)
Productivity Growth Value added per hour worked Whole economy Manufacturing 100 – 80 – 60 – 40 – 20 – 0 Percent United States Japan Britain France Germany
Productivity Growth • The biggest problem associated with the measurement of service productivity is the definition of output. There is a lack of agreement among economists on the best definition of output. Another difficulty in measuring services outputs is the role of the consumer. One of the basic distinctions between manufacturing and services is that the consumer in services often supplies an essential input. For example how do you define the output of a music performance? Is it the same regardless of the number of people in the audience? Does it matter whether the audience enjoyed the performance or not? There is no widely accepted model for including the consumer in the measurement of service outputs.
Productivity Growth • Compare the productivity trends in manufacturing with the unit labor costs of manufacturing. • While the productivity of the manufacturing sector based on output per hour is showing a positive growth, the unit labor costs have generally trended downwards. This implies that manufacturing is able to get an increase in output while reducing the number of people employed to deliver that output. The manufacturing sector has become more capital intensive, which implies more use of automation and less people. Also the quality of the output has improved considerably in the 90's, so there is less cost of poor quality.
Competing Today • Globalization • Quality, time, and technology • Ethical, workforce diversity, environmental issues • What choices and decisions should be made to gain and sustain a competitive advantage? • How do we manage cross-functional responsibilities?
Current Trends in OM • Effectively consolidating the operations resulting from mergers. • Developing flexible supply chains to enable mass customization of products and services. • Managing global supplier, production and distribution networks. • Achieving the “Service Factory”. • Achieving good service from service firms.
Current Trends in OM • JIT and TQC. • Manufacturing Strategy Paradigm. • Service Quality and Productivity. • Total Quality Management and Quality Certification. • Business Process Reengineering. • Supply Chain Management. • Electronic Commerce