COMMERCE 4OB3 Chapter Notes - Chapter 1-4: Walter A. Shewhart, North American Free Trade Agreement, World Trade Organization

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3 Feb 2015
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CHAPTER ONE: OPERATIONS AND PRODUCTIVITY
What is Operations Management?
Production: creation of goods/services
Operations management (OM): set of activities that creates value in the form of
goods/services by transforming inputs into outputs
Organizing to Produce Goods and Services
All organizations must perform three functions:
1. Marketing: generates demand for product/service
2. Production/operations: creates the product
3. Finance/accounting: tracks how well organization is doing, pays bills, collects
the money
Why Study OM?
OM is one of three major functions of any organization
Integrally related to all other business functions
Want to know how goods/services are produced
Want to understand what operations managers do
Large percentage of revenues are spent on OM function
What Operations Managers Do
Management process: planning, organizing, staffing, leading, controlling
Design goods/services, manage quality, location strategy, layout strategy, supply-
chain management, maintenance
About 40% of all jobs are in OM
The Heritage of Operations Management
Cost focus:
oWhitney: standardization and quality control
oFredrick Taylor: scientific management
1. Matching employees to right job
2. Providing proper training
3. Providing proper work methods/tools
4. Establishing incentives for work to be accomplished
oFord/Sorenson: assembly line
Quality focus:
oShewhart: statistical sampling in quality control
oJust-in-time
oTotal quality management
Customization focus:
oGlobalization
oInternet/e-commerce
oInternational Quality Standards (ISO)
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oSupply-chain management
oMass customization
Operations in the Service Sector
Differences Between Goods and Services
Services usually intangible
Services are produced and consumed simultaneously (no stored inventory)
Services are unique
Services have high customer interaction (difficult to standardize, automate
because of this)
Services have inconsistent product definition
Services are often knowledge based (educational, medical, legal services)
Services are frequently dispersed (brought to client at local office, house call, etc.)
Growth of Services
Services make up largest economic sector in postindustrial societies
Productivity increases in agriculture and manufacturing have allowed more of
economic resources to be devoted to services
Employment in service sector is larger now than before
Service Pay
42% of service workers receive wages above the national average
Service sector average is driven down by industries that pay below industrial
average (ex. retail sector)
Exciting New Trends in Operations Management
Ethics
Global focus
Rapid product development
Environmentally sensitive production
Mass customization
Empowered employees
Supply-chain partnering
Just-in-time performance
The Productivity Challenge
Productivity: ratio of outputs (goods, services) divided by one or more inputs
(labour, capital, management)
Managers job is to improve ratio of outputs to inputs
Improving productivity means improving efficiency
Improvement can be achieved in two ways:
1) Reducing inputs while keeping outputs constant
2) Increasing output while keeping inputs constant
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Only through increased productivity can the standard of living improve
Productivity Measurement
Single-factor productivity:
oRatio of one resource (input) to the goods/services produced (outputs)
oProductivity = Units produced/Input used
Example:
oUnits produced = 1,000
oLabour-hours used = 250
oProductivity = 1000/250 = 4 units per labour-hour
Multifactor productivity:
oRatio of many or all resources (inptus) to the goods/services produced
(outputs)
oProductivity = Output/(Labour + Material + Energy + Capital +
Miscellaneous)
Problems with using multifactor productivity:
oQuality may change while quantity of inputs and outputs remains constant
oExternal elements may cause increase or decrease in productivity that
system under study may not be responsible for
oPrecise units of measure may be lacking
Productivity Variables
Labour:
oAccount for 10% of annual increase in productivity
oHealthier, better-educated, better-nourished labour force
oIlliteracy and poor diets are major impediment to productivity
oTraining, team building, motivation, improved education can improve
productivity
Capital:
oContributes to 38% of annual increase in productivity
oInflation and taxes increase cost of capital, making capital investment
increasingly expensive
oWhen capital invested per employee drops there will be a drop in
productivity
Management:
oContributes to 52% of annual increase in productivity
oManagement is a factor of production and an economic resource
oResponsible for ensuring capital and labour are used effectively to
increase productivity
oKnowledge society: society in which much of labour force has migrated
from manual work to work based on knowledge
Productivity and the Service Sector
As economy has increased in size there has been a slower growth in productivity
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