OPERATION MANAGEMENT AND PRODUCTIVITY



OPERATION MANAGEMENT AND PRODUCTIVITY

I. Activities of Businesses

1. Production/Operation

Definition: creation of goods and services

Activities:

• Facilities Construction

• Facilities Maintenance

• Production and inventory control

• Scheduling, material controls

• Quality Assurance and control

• Supply-chain management

• Manufacturing tooling fabrication; Assembly;

• Design products, product development

• Detailed product specification

• Industrial engineering, efficient use of machine, space, personnel.

2. Finance/Accounting

Definition: tracks how well the organization is doing, paying bills, and collecting money.

Activities:

• Disbursement/credits, Accounts receivable, payable, General ledger

• Fund management, money market, International exchange

• Capital requirements, Stock issue, Bond issue and recall

• Finance, cash control

• Investment

3. Marketing

Definition: generates the demand, or at least takes the order for a product or service

Activities:

• Sale promotion

• Advertising

• Market research

• Sales

II. Value-Added

- The difference between the cost of inputs and the value or price of outputs.

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III. Operation Management

- Is the set of activities that creates value in the form of goods and services through transformation of inputs to outputs.

IV. INPUT-PROCESS-OUTPUT

1. Food Processor 2. Hospital Process

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V. Goods and Services

What’s the difference between Goods and Services?

|Goods |Services |

|Can be resold |Reselling is unusual |

|Can be inventoried |Cannot be inventoried |

|Some aspect of quality are measurable |Many aspect are difficult to measure |

|Selling is distinct from production |Selling is often part of the services |

|Product is transportable |Provider is transportable |

|Site of facility is important for cost |Site of facility is important for customer contact |

|Easy to automate |Difficult to automate |

|Revenue generated from tangible product |Revenue generated from intangible services |

Manufacturing or Service?

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Goods-service Continuum

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Manufacturing vs Service

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VI. PRODUCTIVITY

Lets Try This:

Fisher Technologies is a small firm that doubles its dollar contribution to a fixed cost and profit in order to be profitable enough to purchase the next generation of production equipment. Management has determined that if the firm fails to increase contribution, its bank will not make the loan and the equipment cannot be purchased. It the firm cannot purchase the equipment, the limitations of the old equipment will force Fisher to go out of business and, in doing so, puts its employees out of work and discontinue producing goods and services for its customers.

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Option No. 1: (Marketing Option) Good marketing management may increase sales by 50%

Option No. 2: (Finance/Accounting Option) Good financial management cut in half the finance costs.

Option No. 3: (OM Option) Reduce production cost by 20%

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VII. The Productivity Challenge

– Productivity is the ratio of outputs (goods and services) divided by one or more inputs (such as labor, capital, or management)

– Outputs/inputs

– O/I

– This requires Efficiency!

– Efficiency doing job well- minimum resources/waste

– Effective doing the right thing.

– How do we increase Productivity?

– Reduce inputs, constant outputs

– Increase outputs, constant inputs

– Resulting to High ROI, lower prices.

– High ROI, constant productivity = higher prices

VIII. Productivity Measurement

Single-factor productivity – indicates the ratio of one resource (input) to the goods and services produced (outputs)

Multifactor productivity – indicates the ratio of many or all resources (inputs) to the goods and services produced (outputs)

Example

Collins Title wants to evaluate its labor and multifactor productivity with a new computerized search system. The company has a staff of four, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400 per day. Collins processes and closes on 8 titles each day. The new computerized title-search system will allow the processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the overhead expenses are now $800 per day.

Use Single-factor productivity.

Use multifactor productivity.

Productivity Variables

← Labor, contributes about 10% of the annual increase

← Capital, contributes about 38% of the annual increase

← Management, which contributes about 52% of the annual increase.

Lets Try This.

← At Modern Lumber, Inc., Art Binley, president and producer of apple crates sold to growers, has been able, with his current equipment, to produce 240 crates per 100 logs. He currently purchases 100 logs per day, and each log requires 3 labor-hours to process. He believes that he can hire a professional buyer who can buy a better-quality log at the same cost. If this is the case, he can increase his production to 260 crates per 100 logs. His labor-hours will increase by 8 hours per day.

← What will be the impact on productivity (measured in crates per labor-hour) if the buyer is hired?

← Art Binley has decided to look at his productivity from a multifactor (total factor productivity) perspective (refer to Solved Problem 1.1). To do so, he has determined his labor, capital, energy, and material usage and decided to use dollars as the common denominator. His total labor-hours are now 300 per day and will increase to 308 per day. His capital and energy costs will remain constant at $350 and $150 per day, respectively. Material costs for the 100 logs per day are $1,000 and will remain the same. Because he pays an average of $10 per hour (with fringes), Binley determines his productivity increase as follows:

|Solution |  |

|Current System |System with Professional Buyer |

|Labor: 300hrs. @ $10 = $3,000 |308 hrs @ $10 = $3,080 |

|Material: 100 logs/day 1,000 | 1,000|

|Capital: 350 | 350|

|Energy: 150 | 150|

|Total Cost: $4,500 | $4,580 |

|Multifactor productivity of current system: = 240 |Multifactor productivity of proposed system: = 260 |

|crates/4,500 = .0533 crates/dollar |crates/4580 = .0568 crates/dollar |

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