Chapter 1: Operations and Productivity

What is Operations Management?

• Operations management (OM): Activities that relate to the creation
of goods and services through the transformation of inputs to outputs.
• Production: the creation of goods and services
Organizing to Produce Goods and Services
• To create goods and services, all organizations perform three
functions.
1. Marketing, which generates the demand
2. Production/operations, which creates the product
3. Finance/accounting, which tracks how well the organization is
doing, pays the bills, and collects the money.
THE SUPPLY CHAIN
• Through the 3 functions, value for the customer is created.
• Firms don’t create this value by themselves, they rely on a variety of
suppliers who provide everything from raw materials to accounting
services.
• Supply chain: a global network of organizations and activities that
supplies a firm with goods and services.
• The expertise that comes with specialization exists up and down the
supply chain, adding value at each step.
• When members of the supply chain collaborate to achieve high levels
of customer satisfaction, we have a tremendous force for efficiency
and competitive advantage.
 • Competition is no longer between companies, it is between supply
chain.
Why Study Operations Management?
• We study OM for four reasons:
1. OM is one of the three major functions of any organization, and
it is integrally related to all the other business functions.
How people organize themselves for productive enterprise
2. We want to know how goods and services are produced.
3. To understand what operations managers do
4. It is such a costly part of an organization
What Operations Managers Do?
• Management process: the application of planning, organization,
staffing, lending and controlling to the achievement of objectives.
• Operation managers apply this management process to the decisions
they make in the OM function.
• The 10 major decisions of OM
1. Design of goods and services
2. Managing quality
3. Process and capacity design
4. Location strategy
5. Layout strategy
6. Human resources and job design
7. Supply-chain management
8. Inventory, material requirements planning, and JIT
9. Intermediate and short-term scheduling
10. Maintenance

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The Heritage of Operations Management
Significant Events in Operations Management

• Frederick W. Taylor (1881), Known as the father of scientific

management, contributed to personnel selection, planning and
scheduling, motion study, and the now popular field of ergonomics
o Major contribution: his belief that management should be much
more resourceful and aggressive in the improvement of work
methods.
o Another of Taylor’s contributions was the belief that
management should assume more responsibility for:
1. Matching employees to the right job
2. Providing the proper training
3. Providing proper work methods and tools
4. Establishment legitimate incentives for work to accomplished
• Quality control is another historically significant contribution the the
field of OM:
o Walter Shewart combined his knowledge of statistics with the
need for quality control.

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Operations in the Service Sector
• Services: economic activities that typically produce an intangible
product (such as education, entertainment, lodging, government,
financial, and health services)
DIFFERENCES BETWEEN GOODS AND SERVICES
• Services are intangible as opposed to a tangible good
• Services are often produced and consumed simultaneously; there is
no stored inventory
• Services are often unique
• Services have high customer interaction. Services are often difficult to
standardize, automate, and make as efficient as we would like
because customer interaction demands uniqueness
• Services have inconsistent product definition
• Services are often knowledge based and therefore hard to automate
• Services are frequently dispersed
GROWTH OF SERVICES
• Service constitute the largest economic sector in postindustrial
societies
• The huge productivity increases in agricultural and manufacturing
have allowed more of our economic resources to be devoted to
services.
• Service sector: the segment of the economy that includes trade,
financial, lodging, education, legal, medical, and other professional
occupations

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New Challenges in Operations Management
• Global focus
• Supply-chain partnering
• Sustainability
• Rapid product development
• Mass customization
• Just-in-time performance
• Empowered employees
The Productivity Challenge
• The creation of goods and services requires changing resources into
goods and services.
• The more efficiently we make this change, the more productive we
are, and the more value is added to the good or service provided.
• Productivity: the ratio of outputs (goods and services) divided by one
or more inputs (such as labour, capital, or management)
• The operations manager’s job is to enhance this ratio of outputs to
outputs.
• Improving productivity means improving efficiency. Efficiency means
doing the job well – with a minimum of resources and waste.
• Use of productivity measures aids managers in determining how well
they are doing
• If labour productivity growth is entirely the result of capital spending,
measuring just labour distorts the results.
• The multifactor-productivity measures provide better information
about the tradeoffs among factors, but substantial measurement
problems remain. Some of these measurement problems are:
1. Quality may change while the quantity of inputs and outputs
remains constant.

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 2. External elements may cause an increase or a decrease in
productivity for which the system under study may not be
directly responsible.
3. Precise units of measure may be lacking
• Productivity measurement is particularly difficult in the service sector,
where the end product can be hard to define.
• Productivity measurement require specific inputs and outputs, but a
free economy is producing worth – what people want – which
includes convenience, speed and safety.
PRODUCTIVITY VARIABLES
• Productivity increases are dependent on three productivity variables:
1. Labour, which contributes about 10% of annual increase
2. Capital, which contributes about 38% of the annual increase
3. Management, which contributes about 52% of the annual
increase
• These three factors are critical to improve productivity.
Labour
• Improvement in the contribution of labour to productivity is the result
of a healthier, better-educated and better-nourished labour force.
• About 10% of the annual improvement in productivity is attributed to
improvement in the quality of labour.
• Three key variables for improved labour productivity are:
• Basic education appropriate for an effective labour force
• Diet of the labour force
• Social overhead that makes labour available, such as
transportation and sanitation.

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 • In developed nations, the challenge becomes maintaining and
enhancing the skills of labour in the midst of rapidly expanding
technology and knowledge
• Improvements in labour productivity are possible; however, they can
be expected to be increasingly difficult and expensive
Capital
• Accumulated capital investment has increased in Canada at a
compound annual growth rate of 4.5%
• Inflation and taxes increase the cost of capital, making capital
investment increasingly expensive
• When the capital invested per employee drops, we can expect a drop-
in productivity
• Using labour rather than capital may reduce unemployment in the
short-run, but it also makes economies less productive and lowers
wages
Management
• Management is responsible for ensuring that labour and capital are
effectively used to increase productively
• Management accounts for over half of the annual increase in
productivity
• Using knowledge and technology is critical in postindustrial societies.
o Postindustrial societies are known as knowledge society
▪ Knowledge society: one in which much of the labour force
has migrated from manual work to technical and
information-processing tasks requiring ongoing education
• The expanding knowledge base of contemporary society requires that
managers use technology and knowledge effectively

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 • More effective use of capital also contributes to productivity

Productivity and the Service Sector

• The traditional analytical framework of economic theory is based
primarily on goods-producing activities
• Productivity of the service sector has proven difficult to improve
because service-sector work is:
1. Typically, labour intensive (ex. Counselling, teaching)
2. Frequently focused on unique individual attributes or desires
(ex. Investment advice)
3. Often an intellectual task performed by professional (ex.
Medical diagnosis)
4. Often difficult to mechanize and automate (ex. A haircut)
5. Often difficult to evaluate for quality (ex. Performance of a law
firm)
• Look at Chapter 1: Rapid review on page 23