operations and productivity

1 – 1

Departament d’Economia de l’Empresa / Department of Business Economics & Administration

Operations ManagementOperations Management

Session 1 – Session 1 – Operations and Operations and ProductivityProductivity

1 – 2Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

OutlineOutline

Global Company Profile: Hard Rock Global Company Profile: Hard Rock CafeCafe

What Is Operations Management?What Is Operations Management?

Organizing to Produce Goods and Organizing to Produce Goods and Services Services

Why Study OM?Why Study OM?

What Operations Managers DoWhat Operations Managers Do How This Book Is OrganizedHow This Book Is Organized



Outline - ContinuedOutline - Continued

The Heritage of Operations The Heritage of Operations ManagementManagement

Operations in the Service SectorOperations in the Service Sector Differences between Goods and Differences between Goods and

ServicesServices

Growth of ServicesGrowth of Services

Service PayService Pay

Exciting New Trends in Operations Exciting New Trends in Operations ManagementManagement



Outline - ContinuedOutline - Continued

The Productivity ChallengeThe Productivity Challenge Productivity MeasurementProductivity Measurement

Productivity VariablesProductivity Variables

Productivity and the Service Sector Productivity and the Service Sector

Ethics and Social ResponsibilityEthics and Social Responsibility



Learning ObjectivesLearning Objectives

When you complete this chapter When you complete this chapter you should be able to:you should be able to:

1.1. Define operations managementDefine operations management

2.2. Explain the distinction between Explain the distinction between goods and servicesgoods and services

3.3. Explain the difference between Explain the difference between production and productivityproduction and productivity



Learning ObjectivesLearning Objectives

When you complete this chapter When you complete this chapter you should be able to:you should be able to:

4.4. Compute single-factor Compute single-factor productivityproductivity

5.5. Compute multifactor productivityCompute multifactor productivity

6.6. Identify the critical variables in Identify the critical variables in enhancing productivityenhancing productivity



The Hard Rock CafeThe Hard Rock Cafe

First opened in 1971First opened in 1971 Now – 121 restaurants in over 40 countriesNow – 121 restaurants in over 40 countries

Rock music memorabiliaRock music memorabilia

Creates value in the form of good food Creates value in the form of good food and entertainmentand entertainment

3,5003,500++ custom meals per day in Orlando custom meals per day in Orlando

How does an item get on the menu?How does an item get on the menu?

Role of the Operations ManagerRole of the Operations Manager

1 – 8

Departament d’Economia de l’Empresa / Department of Business Economics & AdministrationWhat Is Operations What Is Operations

Management?Management?

ProductionProduction is the creation of is the creation of goods and servicesgoods and services

Operations management (OM)Operations management (OM) is the set of activities that is the set of activities that

creates value in the form of creates value in the form of goods and services by goods and services by

transforming inputs into transforming inputs into outputsoutputs



Organizing to Produce Organizing to Produce Goods and ServicesGoods and Services

Essential functions:Essential functions: Marketing – generates demandMarketing – generates demand

Production/operations – creates Production/operations – creates the productthe product

Finance/accounting – tracks how Finance/accounting – tracks how well the organization is doing, pays well the organization is doing, pays bills, collects the moneybills, collects the money



Organizational ChartsOrganizational Charts

OperationsTeller SchedulingCheck ClearingCollectionTransaction processingFacilities design/layoutVault operationsMaintenanceSecurity

FinanceInvestmentsSecurityReal estate

Accounting

Auditing

MarketingLoans Commercial Industrial Financial Personal Mortgage

Trust Department

Commercial Bank

Figure 1.1(A)Figure 1.1(A)




OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science

Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange

Airline

Figure 1.1(B)Figure 1.1(B)

MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising



MarketingSales promotionAdvertisingSalesMarket research


OperationsFacilities Construction; maintenance

Production and inventory control Scheduling; materials control

Quality assurance and controlSupply chain managementManufacturing Tooling; fabrication; assembly

Design Product development and design Detailed product specifications

Industrial engineering Efficient use of machines, space, and personnel

Process analysis Development and installation of production tools and equipment

Finance/ accountingDisbursements/ credits Receivables Payables General ledgerFunds Management Money market International exchangeCapital requirements Stock issue Bond issue and recall

Manufacturing

Figure 1.1(C)Figure 1.1(C)



Why Study OM?Why Study OM?

OM is one of three major functions OM is one of three major functions (marketing, finance, and operations) (marketing, finance, and operations) of any organizationof any organization

We want (We want (and needand need) to know how ) to know how goods and services are producedgoods and services are produced

We want to understand what We want to understand what operations managers dooperations managers do

OM is such a costly part of an OM is such a costly part of an organizationorganization



Options for Increasing Options for Increasing ContributionContribution

SalesSales $100,000$100,000 $150,000$150,000 $100,000$100,000 $100,000$100,000

Cost of Goods Cost of Goods –– 80,000 80,000 –– 120,000 120,000 –– 80,000 80,000 –– 64,000 64,000

Gross MarginGross Margin 20,00020,000 30,00030,000 20,00020,000 36,00036,000

Finance CostsFinance Costs –– 6,000 6,000 –– 6,000 6,000 –– 3,000 3,000 –– 6,000 6,000

SubtotalSubtotal 14,00014,000 24,00024,000 17,00017,000 30,00030,000

Taxes at 25%Taxes at 25% –– 3,500 3,500 –– 6,000 6,000 –– 4,250 4,250 –– 7,500 7,500

ContributionContribution $ 10,500$ 10,500 $ 18,000$ 18,000 $ 12,750$ 12,750 $ 22,500$ 22,500

Finance/Finance/MarketingMarketing AccountingAccounting OMOM

OptionOption OptionOption OptionOption

IncreaseIncrease ReduceReduce ReduceReduceSalesSales FinanceFinance ProductionProduction

CurrentCurrent Revenue 50%Revenue 50% Costs 50%Costs 50% Costs 20%Costs 20%

1 – 15

Departament d’Economia de l’Empresa / Department of Business Economics & AdministrationWhat Operations What Operations

Managers DoManagers Do

PlanningPlanning

OrganizingOrganizing

StaffingStaffing

LeadingLeading

ControllingControlling

Basic Management FunctionsBasic Management Functions



Ten Critical DecisionsTen Critical DecisionsTen Decision AreasTen Decision Areas Chapter(s)Chapter(s)

Design of goods and servicesDesign of goods and services Session 1 & bookSession 1 & book Managing qualityManaging quality Session 4/5Session 4/5 Process and capacity Process and capacity Session 3Session 3

design design Location strategyLocation strategy Session 4Session 4 Layout strategyLayout strategy Session 3Session 3 Human resources and Human resources and See bookSee book

job design job design Supply chain Supply chain Session 2Session 2

management management Inventory managementInventory management Sessions 6 & 7Sessions 6 & 7 SchedulingScheduling Session 5 & bookSession 5 & book MaintenanceMaintenance See bookSee book

Table 1.2Table 1.2



The Critical DecisionsThe Critical Decisions

Design of goods and servicesDesign of goods and services What good or service should we What good or service should we

offer?offer? How should we design these products How should we design these products

and services? and services?

Managing qualityManaging quality How do we define quality?How do we define quality? Who is responsible for quality?Who is responsible for quality?

Table 1.2 (cont.)Table 1.2 (cont.)




Process and capacity designProcess and capacity design What process and what capacity will What process and what capacity will

these products require?these products require?

What equipment and technology is What equipment and technology is necessary for these processes?necessary for these processes?

Location strategyLocation strategy Where should we put the facility?Where should we put the facility?

On what criteria should we base the On what criteria should we base the location decision?location decision?




The Critical DecisionsThe Critical Decisions Layout strategyLayout strategy

How should we arrange the facility?How should we arrange the facility?

How large must the facility be to meet How large must the facility be to meet our plan?our plan?

Human resources and job designHuman resources and job design How do we provide a reasonable work How do we provide a reasonable work

environment?environment?

How much can we expect our How much can we expect our employees to produce?employees to produce?





Supply chain managementSupply chain management Should we make or buy this component?Should we make or buy this component?

Who are our suppliers and who can Who are our suppliers and who can integrate into our e-commerce program?integrate into our e-commerce program?

Inventory, material requirements Inventory, material requirements planning, and JITplanning, and JIT How much inventory of each item should How much inventory of each item should

we have?we have?

When do we re-order?When do we re-order?Table 1.2 (cont.)Table 1.2 (cont.)




Intermediate and shortIntermediate and short––term term schedulingscheduling Are we better off keeping people on Are we better off keeping people on

the payroll during slowdowns?the payroll during slowdowns?

Which jobs do we perform next?Which jobs do we perform next?

MaintenanceMaintenance Who is responsible for maintenance?Who is responsible for maintenance?

When do we do maintenance?When do we do maintenance?


1 – 22

Departament d’Economia de l’Empresa / Department of Business Economics & Administration

Where are the OM Jobs?Where are the OM Jobs?

Figure 1.2Figure 1.2



Where are the OM Jobs?Where are the OM Jobs?

Technology/methodsTechnology/methods Facilities/space utilizationFacilities/space utilization Strategic issuesStrategic issues Response timeResponse time People/team developmentPeople/team development Customer serviceCustomer service QualityQuality Cost reductionCost reduction Inventory reductionInventory reduction Productivity improvementProductivity improvement



Significant Events in OMSignificant Events in OM




The Heritage of OMThe Heritage of OM

Division of labor (Adam Smith 1776; Division of labor (Adam Smith 1776; Charles Babbage 1852)Charles Babbage 1852)

Standardized parts (Whitney 1800)Standardized parts (Whitney 1800)

Scientific Management (Taylor 1881)Scientific Management (Taylor 1881)

Coordinated assembly line (Ford/ Coordinated assembly line (Ford/ Sorenson 1913)Sorenson 1913)

Gantt charts (Gantt 1916)Gantt charts (Gantt 1916)

Motion study (Frank and Lillian Gilbreth Motion study (Frank and Lillian Gilbreth 1922)1922)

Quality control (Shewhart 1924; Deming Quality control (Shewhart 1924; Deming 1950)1950)



The Heritage of OMThe Heritage of OM

Computer (Atanasoff 1938)Computer (Atanasoff 1938)

CPM/PERT (DuPont 1957)CPM/PERT (DuPont 1957)

Material requirements planning (Orlicky Material requirements planning (Orlicky 1960)1960)

Computer aided design (CAD 1970)Computer aided design (CAD 1970)

Flexible manufacturing system (FMS 1975)Flexible manufacturing system (FMS 1975)

Baldrige Quality Awards (1980)Baldrige Quality Awards (1980)

Computer integrated manufacturing (1990)Computer integrated manufacturing (1990)

Globalization (1992)Globalization (1992)

Internet (1995)Internet (1995)



Eli WhitneyEli Whitney

Born 1765; died 1825Born 1765; died 1825

In 1798, received government In 1798, received government contract to make 10,000 musketscontract to make 10,000 muskets

Showed that machine tools could Showed that machine tools could make standardized parts to exact make standardized parts to exact specificationsspecificationsMusket parts could be used in any Musket parts could be used in any

musketmusket



Frederick W. TaylorFrederick W. Taylor


Known as ‘father of scientific Known as ‘father of scientific management’management’

In 1881, as chief engineer for In 1881, as chief engineer for Midvale Steel, studied how tasks Midvale Steel, studied how tasks were donewere doneBegan first motion and time studiesBegan first motion and time studies

Created efficiency principlesCreated efficiency principles



Taylor’s PrinciplesTaylor’s Principles

Matching employees to right jobMatching employees to right job

Providing the proper trainingProviding the proper training

Providing proper work methods and Providing proper work methods and toolstools

Establishing legitimate incentives for Establishing legitimate incentives for work to be accomplishedwork to be accomplished

Management Should Take More Management Should Take More Responsibility for:Responsibility for:



Frank & Lillian GilbrethFrank & Lillian Gilbreth

Frank (1868-1924); Lillian (1878-Frank (1868-1924); Lillian (1878-1972)1972)

Husband-and-wife engineering teamHusband-and-wife engineering team

Further developed work Further developed work measurement methodsmeasurement methods

Applied efficiency methods to their Applied efficiency methods to their home and 12 children! home and 12 children!

Book & Movie: “Cheaper by the Book & Movie: “Cheaper by the Dozen,” book: “Bells on Their Toes”Dozen,” book: “Bells on Their Toes”




In 1903, created Ford Motor In 1903, created Ford Motor CompanyCompany

In 1913, first used moving assembly In 1913, first used moving assembly line to make Model Tline to make Model TUnfinished product moved by Unfinished product moved by

conveyor past work stationconveyor past work station

Paid workers very well for 1911 Paid workers very well for 1911 ($5/day!)($5/day!)

Henry FordHenry Ford



W. Edwards DemingW. Edwards Deming


Engineer and physicistEngineer and physicist

Credited with teaching Japan Credited with teaching Japan quality control methods in post-quality control methods in post-WW2WW2

Used statistics to analyze processUsed statistics to analyze process

His methods involve workers in His methods involve workers in decisionsdecisions



Contributions FromContributions From

Human factorsHuman factors

Industrial engineeringIndustrial engineering

Management scienceManagement science

Biological scienceBiological science

Physical sciencesPhysical sciences

Information technology Information technology



New Challenges in OMNew Challenges in OM

Global focusGlobal focus

Just-in-timeJust-in-time

Supply chain Supply chain partneringpartnering

Rapid product Rapid product development, development, alliancesalliances

Mass Mass customizationcustomization

Empowered Empowered employees, teamsemployees, teams

ToToFromFrom Local or national focusLocal or national focus

Batch shipmentsBatch shipments

Low bid purchasingLow bid purchasing

Lengthy product Lengthy product developmentdevelopment

Standard productsStandard products

Job specializationJob specialization



Characteristics of GoodsCharacteristics of Goods

Tangible productTangible product

Consistent product Consistent product definitiondefinition

Production usually Production usually separate from separate from consumptionconsumption

Can be inventoriedCan be inventoried

Low customer Low customer interactioninteraction



Characteristics of ServiceCharacteristics of Service Intangible productIntangible product

Produced and Produced and consumed at same timeconsumed at same time

Often uniqueOften unique

High customer High customer interactioninteraction

Inconsistent product Inconsistent product definitiondefinition

Often knowledge-basedOften knowledge-based

Frequently dispersedFrequently dispersed



Industry and Services as Industry and Services as Percentage of GDPPercentage of GDP

ServicesServices ManufacturingManufacturing

Au

stra

liaA

ust

ralia

Can

ada

Can

ada

Ch

ina

Ch

ina

Cze

ch R

epC

zech

Rep

Fra

nce

Fra

nce

Ger

man

yG

erm

any

Ho

ng

Ko

ng

Ho

ng

Ko

ng

Jap

anJa

pan

Mex

ico

Mex

ico

Ru

ssia

n F

edR

uss

ian

Fed

So

uth

Afr

ica

So

uth

Afr

ica

Sp

ain

Sp

ain

UK

UK

US

US

90 90 −

80 80 −

70 70 −

60 60 −

50 50 −

40 40 −

30 30 −

20 20 −

10 10 −

00 −



Goods Versus ServicesGoods Versus Services

Table 1.3Table 1.3

Can be resoldCan be resold

Can be inventoriedCan be inventoried

Some aspects of quality Some aspects of quality measurablemeasurable

Selling is distinct from Selling is distinct from productionproduction

Product is transportableProduct is transportable

Site of facility important for costSite of facility important for cost

Often easy to automateOften easy to automate

Revenue generated primarily Revenue generated primarily from tangible productfrom tangible product

Attributes of GoodsAttributes of Goods(Tangible Product)(Tangible Product)

Attributes of ServicesAttributes of Services (Intangible Product) (Intangible Product)

Reselling unusualReselling unusual

Difficult to inventoryDifficult to inventory

Quality difficult to measureQuality difficult to measure

Selling is part of service Selling is part of service

Provider, not product, isProvider, not product, isoften transportableoften transportable

Site of facility important forSite of facility important forcustomer contactcustomer contact

Often difficult to automateOften difficult to automate

Revenue generated primarily Revenue generated primarily from the intangible servicefrom the intangible service



Goods and ServicesGoods and ServicesAutomobile

Computer

Installed carpeting

Fast-food meal

Restaurant meal/auto repair

Hospital care

Advertising agency/investment management

Consulting service/teaching

Counseling

Percent of Product that is a GoodPercent of Product that is a Good Percent of Product that is a ServicePercent of Product that is a Service

100%100% 7575 5050 2525 00 2525 5050 7575 100%100%|| || || || || || || || ||




120120 –

100 100 –

80 80 –

60 60 –

40 40 –

20 20 –

0 0 –| | | | | | |

19501950 19701970 19901990 2010 (est)2010 (est)19601960 19801980 20002000

Em

plo

ymen

t (m

illi

on

s)E

mp

loym

ent

(mil

lio

ns)

Manufacturing and Service Manufacturing and Service EmploymentEmployment

Figure 1.5 (A)Figure 1.5 (A)

ManufacturingManufacturing

ServiceService



Manufacturing Employment Manufacturing Employment and Productionand Production

Figure 1.5 (B)Figure 1.5 (B)

40 40 –

30 30 –

20 20 –

10 10 –

0 0 – | | | | | | |19501950 19701970 19901990 2010 (est)2010 (est)

19601960 19801980 20002000

– 150150

– 125125

– 100100

– 7575

– 5050

– 2525

– 00

Em

plo

ymen

t (m

illi

on

s)E

mp

loym

ent

(mil

lio

ns)

In

dex

: 19

97 =

100

Ind

ex:

1997

= 1

00

Manufacturingemployment

(left scale)

Industrial Industrial productionproduction

(right scale)(right scale)



Development of the Development of the Service EconomyService Economy

Figure 1.5 (C)Figure 1.5 (C)

United States

Canada

France

Italy

Britain

Japan

W. Germany

1970 2008 (est)

| | | | |

40 50 60 70 80Percent



Organizations in Each SectorOrganizations in Each Sector

Service SectorService Sector ExampleExample% of all % of all

JobsJobs

Education, Education, Legal, Medical, Legal, Medical, and otherand other

Notre Dame University, Notre Dame University, San Diego Zoo, Arnold San Diego Zoo, Arnold Palmer HospitalPalmer Hospital

25.525.5

Trade (retail, Trade (retail, wholesale)wholesale)

Walgreen’s, Wal-Mart, Walgreen’s, Wal-Mart, Nordstrom’sNordstrom’s

15.115.1

Utilities, Utilities, TransportationTransportation

Pacific Gas & Electric, Pacific Gas & Electric, American Airlines, Santa American Airlines, Santa Fe R.R., Roadway Fe R.R., Roadway ExpressExpress

5.25.2

Table 1.4Table 1.4



Organizations in Each SectorOrganizations in Each Sector

Service SectorService Sector ExampleExample% of all % of all

JobsJobs

Professional Professional and Business and Business ServicesServices

Snelling and Snelling, Waste Snelling and Snelling, Waste Management, Pitney-BowesManagement, Pitney-Bowes

10.110.1

Finance, Finance, Information, Information, Real EstateReal Estate

Citicorp, American Express, Citicorp, American Express, Prudential, Aetna, Trammel Prudential, Aetna, Trammel Crow, EDS, IBMCrow, EDS, IBM

9.69.6

Food, Lodging, Food, Lodging, EntertainmentEntertainment

Olive Garden, Hard Rock Cafe, Olive Garden, Hard Rock Cafe, Motel 6, Hilton Hotels, Walt Motel 6, Hilton Hotels, Walt Disney, Paramount PicturesDisney, Paramount Pictures

8.58.5

Public Public AdministrationAdministration

U.S., State of Alabama, Cook U.S., State of Alabama, Cook CountyCounty

4.64.6

Table 1.4Table 1.4



Organizations in Each SectorOrganizations in Each SectorManufacturing Manufacturing SectorSector ExampleExample

% of all % of all JobsJobs

ManufacturingManufacturing General Electric, Ford, General Electric, Ford, U.S. Steel, IntelU.S. Steel, Intel

11.511.5

ConstructionConstruction Bechtel, McDermottBechtel, McDermott 7.97.9

AgricultureAgriculture King RanchKing Ranch 1.61.6

MiningMining Homestake MiningHomestake Mining 0.40.4

SectorSector Percent of all jobsPercent of all jobs

ServiceService 78.6%78.6%

ManufacturingManufacturing 21.4%21.4%

Table 1.4Table 1.4



New Trends in OMNew Trends in OM

Local or Local or national national focusfocus

Reliable worldwide Reliable worldwide communication and communication and transportation networkstransportation networks

Global focus, Global focus, moving moving production production offshoreoffshore

Batch (large) Batch (large) shipmentsshipments

Short product life cycles Short product life cycles and cost of capital put and cost of capital put pressure on reducing pressure on reducing inventoryinventory

Just-in-time Just-in-time performanceperformance

Low-bid Low-bid purchasingpurchasing

Supply chain competition Supply chain competition requires that suppliers be requires that suppliers be engaged in a focus on the engaged in a focus on the end customerend customer

Supply chain Supply chain partners, partners, collaboration, collaboration, alliances, alliances, outsourcingoutsourcing


PastPast CausesCauses FutureFuture




Lengthy Lengthy product product developmentdevelopment

Shorter life cycles, Shorter life cycles, Internet, rapid international Internet, rapid international communication, computer-communication, computer-aided design, and aided design, and international collaborationinternational collaboration

Rapid product Rapid product development, development, alliances, alliances, collaborative collaborative designsdesigns

Standardized Standardized productsproducts

Affluence and worldwide Affluence and worldwide markets; increasingly markets; increasingly flexible production flexible production processesprocesses

Mass Mass customization customization with added with added emphasis on emphasis on qualityquality

Job Job specializationspecialization

Changing socioculture Changing socioculture milieu; increasingly a milieu; increasingly a knowledge and information knowledge and information societysociety

Empowered Empowered employees, employees, teams, and lean teams, and lean productionproduction






Low-cost Low-cost focusfocus

Environmental issues, ISO Environmental issues, ISO 14000, increasing disposal 14000, increasing disposal costscosts

Environmentally Environmentally sensitive sensitive production, green production, green manufacturing, manufacturing, recycled recycled materials, materials, remanufacturingremanufacturing

Ethics not Ethics not at forefrontat forefront

Businesses operate more Businesses operate more openly; public and global openly; public and global review of ethics; opposition review of ethics; opposition to child labor, bribery, to child labor, bribery, pollutionpollution

High ethical High ethical standards and standards and social social responsibility responsibility expectedexpected






Global focusGlobal focus Just-in-time performanceJust-in-time performance Supply chain partneringSupply chain partnering Rapid product developmentRapid product development Mass customizationMass customization Empowered employeesEmpowered employees Environmentally sensitive productionEnvironmentally sensitive production EthicsEthics



Productivity ChallengeProductivity Challenge

Productivity is the ratio of outputs (goods Productivity is the ratio of outputs (goods and services) divided by the inputs and services) divided by the inputs

(resources such as labor and capital)(resources such as labor and capital)

The objective is to improve productivity!The objective is to improve productivity!

Important Note!Production is a measure of output

only and not a measure of efficiency



FeedbackFeedback looploop

OutputsOutputs

Goods and

services

ProcessesProcesses

The U.S. economic system transforms inputs to outputs

at about an annual 2.5% increase in productivity per

year. The productivity increase is the result of a

mix of capital (38% of 2.5%), labor (10% of 2.5%), and

management (52% of 2.5%).

The Economic SystemThe Economic System

InputsInputs

Labor,capital,

management




Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:

Stop requiring signatures Stop requiring signatures on credit card purchases on credit card purchases under $25under $25

Saved 8 seconds Saved 8 seconds per transactionper transaction

Change the size of the ice Change the size of the ice scoopscoop

Saved 14 seconds Saved 14 seconds per drinkper drink

New espresso machinesNew espresso machines Saved 12 seconds Saved 12 seconds per shotper shot



Improving Productivity at Improving Productivity at StarbucksStarbucks

A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:

Stop requiring signatures Stop requiring signatures on credit card purchases on credit card purchases under $25under $25

Saved 8 seconds Saved 8 seconds per transactionper transaction

Change the size of the ice Change the size of the ice scoopscoop

Saved 14 seconds Saved 14 seconds per drinkper drink

New espresso machinesNew espresso machines Saved 12 seconds Saved 12 seconds per shotper shot

Operations improvements have Operations improvements have helped Starbucks increase yearly helped Starbucks increase yearly revenue per outlet by $200,000 to revenue per outlet by $200,000 to $940,000 in six years.$940,000 in six years.

Productivity has improved by 27%, Productivity has improved by 27%, or about 4.5% per year.or about 4.5% per year.



Measure of process improvementMeasure of process improvement

Represents output relative to inputRepresents output relative to input

Only through productivity increases Only through productivity increases can our standard of living improvecan our standard of living improve

ProductivityProductivity

Productivity =Productivity =Units producedUnits produced

Input usedInput used



Productivity CalculationsProductivity Calculations

Productivity =Productivity =Units producedUnits produced

Labor-hours usedLabor-hours used

= = = = 44 units/labor-hour units/labor-hour1,0001,000

250250

Labor ProductivityLabor Productivity

One resource input One resource input single-factor productivity single-factor productivity



Multi-Factor Productivity Multi-Factor Productivity

OutputOutput

Labor + Material + Energy Labor + Material + Energy + Capital + Miscellaneous+ Capital + Miscellaneous

Productivity =Productivity =

Also known as total factor productivityAlso known as total factor productivity

Output and inputs are often expressed Output and inputs are often expressed in dollarsin dollars

Multiple resource inputs Multiple resource inputs multi-factor productivity multi-factor productivity



Measurement ProblemsMeasurement Problems

QualityQuality may change while the may change while the quantity of inputs and outputs quantity of inputs and outputs remains constantremains constant

External elementsExternal elements may cause an may cause an increase or decrease in productivityincrease or decrease in productivity

Precise unitsPrecise units of measure may be of measure may be lackinglacking



Productivity VariablesProductivity Variables

LaborLabor - contributes - contributes about about 10%10% of the of the annual increaseannual increase

CapitalCapital - contributes - contributes about about 38%38% of the of the annual increaseannual increase

ManagementManagement - - contributes about contributes about 52%52% of the annual increaseof the annual increase



Key Variables for Improved Key Variables for Improved Labor ProductivityLabor Productivity

Basic education appropriate for the Basic education appropriate for the labor forcelabor force

Diet of the labor forceDiet of the labor force

Social overhead that makes labor Social overhead that makes labor availableavailable

Maintaining and enhancing skills in the Maintaining and enhancing skills in the midst of rapidly changing technology midst of rapidly changing technology and knowledgeand knowledge



Labor SkillsLabor Skills

About half of the 17-year-olds in the US cannot About half of the 17-year-olds in the US cannot correctly answer questions of this typecorrectly answer questions of this type




Investment and Productivity Investment and Productivity

1010

88

66

44

22

00

Per

cen

t in

crea

se in

pro

du

ctiv

ity

Per

cen

t in

crea

se in

pro

du

ctiv

ity

Percentage investmentPercentage investment

1010 1515 2020 2525 3030 3535



Service ProductivityService Productivity

Typically labor intensiveTypically labor intensive

Frequently focused on unique Frequently focused on unique individual attributes or desiresindividual attributes or desires

Often an intellectual task performed by Often an intellectual task performed by professionalsprofessionals

Often difficult to mechanizeOften difficult to mechanize

Often difficult to evaluate for qualityOften difficult to evaluate for quality



Productivity at Taco BellProductivity at Taco Bell

Improvements:Improvements: Revised the menu Revised the menu Designed meals for easy preparationDesigned meals for easy preparation Shifted some preparation to suppliersShifted some preparation to suppliers Efficient layout and automationEfficient layout and automation Training and employee empowermentTraining and employee empowerment



Productivity at Taco BellProductivity at Taco Bell

Improvements:Improvements: Revised the menu Revised the menu Designed meals for easy preparationDesigned meals for easy preparation Shifted some preparation to suppliersShifted some preparation to suppliers Efficient layout and automationEfficient layout and automation Training and employee empowermentTraining and employee empowerment

Results:

Preparation time cut to 8 seconds Management span of control

increased from 5 to 30 In-store labor cut by 15 hours/day Stores handle twice the volume with

half the labor Fast-food low-cost leader

1 – 65

Departament d’Economia de l’Empresa / Department of Business Economics & AdministrationEthics and Social ResponsibilityEthics and Social Responsibility

Challenges facing Challenges facing operations managers:operations managers:

Developing and producing safe, Developing and producing safe, quality productsquality products

Maintaining a clean environmentMaintaining a clean environment

Providing a safe workplaceProviding a safe workplace

Honoring community commitmentsHonoring community commitments