Operations and Productivity PDF

PART ONE Introduction to Operations Management 1 C H A P T E...

PART ONE Introduction to Operations Management 1 C H A P T E R Operations and Productivity CHAPTER GLOBAL COMPANY PROFILE: Hard Rock Cafe OUTLINE ◆ ◆ What Is Operations Management? 4 Operations for Goods and Services 11 ◆ ◆ Organizing to Produce Goods The Productivity Challenge 13 and Services 4 ◆ Current Challenges in Operations ◆ The Supply Chain 6 Management 18 ◆ ◆ Why Study OM? 6 Ethics, Social Responsibility, and ◆ Sustainability 19 What Operations Managers Do 7 ◆ The Heritage of Operations Management 8 Alaska Airlines 10 Design of Goods and Services Managing Quality Human Resources Supply-Chain Management OM STRATEGY Process Strategy Location Strategies Inventory Management Scheduling DECISIONS Layout Strategies Maintenance 1 M01_HEIZ0422_12_SE_C01.indd 1 01/12/15 2:18 PM  C H A P T E R 1 GLOBAL COMPANY PROFILE Operations Management at Hard Rock Cafe Hard Rock Cafe O perations managers throughout the world are producing products every day to provide for the well-being of society. These products take on a multitude of forms. They may be washing machines at Whirlpool, motion pictures at DreamWorks, rides at Disney World, or food at Hard Rock Cafe. These firms produce thousands of complex products every day—to be delivered as the customer ordered them, when the customer wants them, and where the cus- tomer wants them. Hard Rock does this for over 35 million guests worldwide every year. This is a challenging task, and the operations manager’s job, whether at Whirlpool, DreamWorks, Disney, or Hard Rock, is demanding. Hard Rock Cafe in Orlando, Florida, prepares over 3,500 meals each day. Seating more than 1,500 people, it is one of the largest restaurants in the world. But Hard Rock’s operations managers serve the hot food hot and the cold food cold. Andre Jenny/Alamy Demetrio Carrasco/Rough Guides/Dorling Kindersley, Ltd. Operations managers are interested in the attractiveness of the layout, but they must be sure that the facility contributes to the efficient movement of people and material with the necessary controls to ensure that proper portions are served. 2 M01_HEIZ0422_12_SE_C01.indd 2 01/12/15 2:18 PM  Efficient kitchen layouts, motivated personnel, tight schedules, and the right Presselect/Alamy ingredients at the right place at the right time are required to delight the customer. Lots of work goes into designing designing, testing, testing and costing meals. Then suppliers deliver quality products on time, every time, for well-trained cooks to prepare quality meals. But none of that matters unless an enthusiastic waitstaff, such as the one shown here, holding guitars previously owned by members of U2, is doing its job. Jack Picone/Alamy Orlando-based Hard Rock Cafe opened its first restau- ingredients, labor requirements, and customer satisfaction. rant in London in 1971, making it over 45 years old and the On approval, menu items are put into production—and then granddaddy of theme restaurants. Although other theme only if the ingredients are available from qualified suppliers. restaurants have come and gone, Hard Rock is still going The production process, from receiving, to cold storage, strong, with 150 restaurants in more than 53 countries—and to grilling or baking or frying, and a dozen other steps, is new restaurants opening each year. Hard Rock made its designed and maintained to yield a quality meal. Operations name with rock music memorabilia, having started when Eric managers, using the best people they can recruit and train, Clapton, a regular customer, marked his favorite bar stool also prepare effective employee schedules and design by hanging his guitar on the wall in the London cafe. Now efficient layouts. Hard Rock has 70,000 items and millions of dollars invested Managers who successfully design and deliver goods in memorabilia. To keep customers coming back time and and services throughout the world understand operations. again, Hard Rock creates value in the form of good food and In this text, we look not only at how Hard Rock’s manag- entertainment. ers create value but also how operations managers in other The operations managers at Hard Rock Cafe at Uni- services, as well as in manufacturing, do so. Operations versal Studios in Orlando provide more than 3,500 custom management is demanding, challenging, and exciting. It products—in this case meals—every day. These products affects our lives every day. Ultimately, operations managers are designed, tested, and then analyzed for cost of determine how well we live. 3 M01_HEIZ0422_12_SE_C01.indd 3 01/12/15 2:19 PM  LO 1.1 Define operations management 4 L E A RNING LO 1.2 Explain the distinction between goods and services 11 OBJECTIVES LO 1.3 LO 1.4 Explain the difference between production and productivity 13 Compute single-factor productivity 14 LO 1.5 Compute multifactor productivity 15 LO 1.6 Identify the critical variables in enhancing productivity 16 STUDENT TIP Let’s begin by defining what this course is about. What Is Operations Management? Operations management (OM) is a discipline that applies to restaurants like Hard Rock Cafe as well as to factories like Ford and Whirlpool. The techniques of OM apply throughout the LO 1.1 Define world to virtually all productive enterprises. It doesn’t matter if the application is in an office, operations management a hospital, a restaurant, a department store, or a factory—the production of goods and ser- vices requires operations management. And the efficient production of goods and services requires effective applications of the concepts, tools, and techniques of OM that we introduce in this book. VIDEO 1.1 As we progress through this text, we will discover how to manage operations in an economy Operations Management in which both customers and suppliers are located throughout the world. An array of informa- at Hard Rock tive examples, charts, text discussions, and pictures illustrates concepts and provides informa- tion. We will see how operations managers create the goods and services that enrich our lives. VIDEO 1.2 In this chapter, we first define operations management, explaining its heritage and exploring Operations Management at the exciting role operations managers play in a huge variety of organizations. Then we discuss Frito-Lay production and productivity in both goods- and service-producing firms. This is followed by a discussion of operations in the service sector and the challenge of managing an effective and efficient production system. Production Production is the creation of goods and services. Operations management (OM) is the set of activi- The creation of goods and ties that creates value in the form of goods and services by transforming inputs into outputs. services. Activities creating goods and services take place in all organizations. In manufacturing firms, Operations management (OM) the production activities that create goods are usually quite obvious. In them, we can see the Activities that relate to the creation creation of a tangible product such as a Sony TV or a Harley-Davidson motorcycle. of goods and services through In an organization that does not create a tangible good or product, the production func- the transformation of inputs to tion may be less obvious. We often call these activities services. The services may be “hidden” outputs. from the public and even from the customer. The product may take such forms as the transfer of funds from a savings account to a checking account, the transplant of a liver, the filling of an empty seat on an airplane, or the education of a student. Regardless of whether the end product is a good or service, the production activities that go on in the organization are often referred to as operations, or operations management. STUDENT TIP Operations is one of the Organizing to Produce Goods and Services three functions that every organization performs. To create goods and services, all organizations perform three functions (see Figure 1.1). These functions are the necessary ingredients not only for production but also for an organization’s survival. They are: 1. Marketing, which generates the demand, or at least takes the order for a product or ser- vice (nothing happens until there is a sale). 2. Production/operations, which creates, produces, and delivers the product. 3. Finance/accounting, which tracks how well the organization is doing, pays the bills, and collects the money. Universities, churches or synagogues, and businesses all perform these functions. Even a vol- unteer group such as the Boy Scouts of America is organized to perform these three basic 4 M01_HEIZ0422_12_SE_C01.indd 4 01/12/15 2:19 PM  CHAP T ER 1 | OP ERATI ONS AND PR ODUCT IVIT Y 5 (A) ((A A Figure 1.1 Organization Charts for Two Commercial Com om mmmer errccia ia al B Bank a an ank Service Organizations and One Manufacturing Organization (A) a bank, (B) an airline, and Operations ns Finance Fiinanc Fin ance ance an Marketing Ma M Marar (C) a manufacturing organization. Teller scheduling heduling Investments Invest Inv nvves estmen est nts ts Loans Loa L Loo ns The blue areas are OM activities. Check clearing earing Securities Se Sec S ec curi uritie tiess Commercial Commerc Collectionn Real Re Rea R ea eal esta e estate sta tate te te Industrial stockshoppe/Shutterstock Transactionon processing Financial Personal STUDENT TIP Facilities design/layout Accounting Acccoun Ac Acc ou tin ingg Mortgage Vault operations erations The areas in blue indicate the Maintenancence significant role that OM plays in both Security Auditing A iting Au Audititi ting Trust department T st dep Tr Tru d depa manufacturing and service firms. (B) Airline Operations Finance/accounting Marketing ng Ground suppsupport portrtt equipment Accounting Traffic administration adm ad dministrat ration rat ra ion Maintenance M intenance Ma e Accounts payable pay yabl ab e Reservations Reserv Reserv Res vat ati t ons Accounts Accoun u ts receivable un re eiv rec va abl bl ble Schedules Schedu Sch chedu dulles less Ground Groround ro d operations und un opera oppeera ra atioons ns General Gen en e l ledger nera er led edg dger d er Tariffs Tar Tar iffss (pricing) arifififf (pri p cin cing) ing) Facility tyy maintenance maiinte ntenan nttena nance nan ance ce Catering Finance Fin nanc anc a nc ce Sales Sa Sale Sal ales es Cash Cas assh control cont ontrrol oll Advertising Adv A Ad d ert dv errttis isi s ng ng Flight Fllig Fli Fl h operations gh ght operatio op erra era er ations tio io ons ns International I ern Int ernati ationa ati onaal Sergiy Serdyuk/Fotolia Crew scheduling sche che hed he duliling du dul ing in exchange exchange exch exc Flying Communications Dispatching Management science (C) Manufacturing Operations Fin naanc anncee/a /a account Finance/accounting Marketing Facilities D Dis is sbur burrsem semenen s/c /c /c Disbursements/credits Sales promotion Construction; maintenance Acc A ccoun ounts rreceivable Accounts e eiv eivv Advertising Production and inventory ry co ry ccontrol ntrol Acc cccou oun un u Accountsnts s pa payab ab payable Sales Scheduling; materials co control onntr nt trol tr ol G Ge Gene eral ledg General ed ed dgger ledger Market research ea Quality assurance nd ccontrol and on nt ol ntr nt Fu F Fun u unds un nds man Funds m ma an nage age gement management Mon Mooney Money ym maarket ket ke market hain managem Supply-chain ment management ntt Int terrna rnationa Internationalona nall e na xch xc cchan exchange nge Manufacturing nuf ufacturing Cap C ap pita ittal rrequirements Capital eq equ q ire re emen m ntss Tooling; oolin oo lin ing; ing fabrication; as g; assem assembly sem embly embly y Stoock Stock k iss is ss ss ssue issue Design B Bon Boond on Bondnd iissue s e and ss ssu anndd rec rrecall re all all Product development velop ve lop opmen me t aand nd n dd de des design es esig iign gn gn Detailed productt spec sspecifications pec pecific cifi ific ficati fic atitions ations at ons Industrial engineering Efficient use of machines, sspace,pace, pac e Alexzel/Shutterstock and personnel Process analysis Development and installation of production tools and equipment M01_HEIZ0422_12_SE_C01.indd 5 01/12/15 2:19 PM  6 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT Figure 1.2 Soft Drink Supply Chain A supply chain for a bottle of Coke requires a beet or sugar cane farmer, a syrup producer, a bottler, a distributor, and a retailer, Farmer Syrup Bottler Distributor Retailer producer each adding value to satisfy a customer. Only with collaborations between all members of the supply functions. Figure 1.1 shows how a bank, an airline, and a manufacturing firm organize them- chain can efficiency and customer selves to perform these functions. The blue-shaded areas show the operations functions in satisfaction be maximized. The these firms. supply chain, in general, starts with the provider of basic raw materials and continues all the way to the final customer at the retail store. The Supply Chain Through the three functions—marketing, operations, and finance—value for the customer is created. However, firms seldom create this value by themselves. Instead, they rely on a variety of suppliers who provide everything from raw materials to accounting services. These suppli- Supply chain ers, when taken together, can be thought of as a supply chain. A supply chain (see Figure 1.2) is A global network of organizations a global network of organizations and activities that supply a firm with goods and services. and activities that supplies a firm As our society becomes more technologically oriented, we see increasing specialization. with goods and services. Specialized expert knowledge, instant communication, and cheaper transportation also foster specialization and worldwide supply chains. It just does not pay for a firm to try to do every- thing itself. 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 in the 21st century is not between companies; it is between supply chains. Why Study OM? STUDENT TIP Good OM managers are scarce and, as a result, career opportunities and We study OM for four reasons: pay are excellent. 1. OM is one of the three major functions of any organization, and it is integrally related to all the other business functions. All organizations market (sell), finance (account), and produce (operate), and it is important to know how the OM activity functions. Therefore, we study how people organize themselves for productive enterprise. 2. We study OM because we want to know how goods and services are produced. The produc- tion function is the segment of our society that creates the products and services we use. 3. We study OM to understand what operations managers do. Regardless of your job in an organization, you can perform better if you understand what operations managers do. In addition, understanding OM will help you explore the numerous and lucrative career opportunities in the field. 4. We study OM because it is such a costly part of an organization. A large percentage of the revenue of most firms is spent in the OM function. Indeed, OM provides a major oppor- tunity for an organization to improve its profitability and enhance its service to society. Example 1 considers how a firm might increase its profitability via the production function. Example 1 EXAMINING THE OPTIONS FOR INCREASING CONTRIBUTION Fisher Technologies is a small firm that must double its dollar contribution to 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. If the firm cannot purchase the equipment, the limitations of the old equipment will force Fisher to go out of business and, in doing so, put its employees out of work and discontinue producing goods and services for its customers. M01_HEIZ0422_12_SE_C01.indd 6 01/12/15 2:19 PM  CHAP T ER 1 | OP ERATI ONS AND PR ODUCT IVIT Y 7 APPROACH c Table 1.1 shows a simple profit-and-loss statement and three strategic options (mar- keting, finance/accounting, and operations) for the firm. The first option is a marketing option, where excellent marketing management may increase sales by 50%. By increasing sales by 50%, contribution will in turn increase 71%. But increasing sales 50% may be difficult; it may even be impossible. TABLE 1.1 Options for Increasing Contribution FINANCE/ MARKETING ACCOUNTING OM OPTIONa OPTIONb OPTIONc INCREASE SALES REDUCE FINANCE REDUCE PRODUCTION CURRENT REVENUE 50% COSTS 50% COSTS 20% Sales $100,000 $150,000 $100,000 $100,000 Costs of goods −80,000 −120,000 −80,000 −64,000 Gross margin 20,000 30,000 20,000 36,000 Finance costs −6,000 −6,000 −3,000 −6,000 Subtotal 14,000 24,000 17,000 30,000 Taxes at 25% −3,500 −6,000 −4,250 −7,500 Contributiond $ 10,500 $ 18,000 $ 12,750 $ 22,500 aIncreasing sales 50% increases contribution by $7,500, or 71% (7,500/10,500). bReducing finance costs 50% increases contribution by $2,250, or 21% (2,250/10,500). cReducing production costs 20% increases contribution by $12,000, or 114% (12,000/10,500). dContribution to fixed cost (excluding finance costs) and profit. The second option is a finance/accounting option, where finance costs are cut in half through good financial management. But even a reduction of 50% is still inadequate for generating the necessary increase in contribution. Contribution is increased by only 21%. The third option is an OM option, where management reduces production costs by 20% and increases contribution by 114%. SOLUTION c Given the conditions of our brief example, Fisher Technologies has increased contribu- tion from $10,500 to $22,500. It may now have a bank willing to lend it additional funds. INSIGHT c The OM option not only yields the greatest improvement in contribution but also may be the only feasible option. Increasing sales by 50% and decreasing finance cost by 50% may both be virtu- ally impossible. Reducing operations cost by 20% may be difficult but feasible. LEARNING EXERCISE c What is the impact of only a 15% decrease in costs in the OM option? [Answer: A $19,500 contribution; an 86% increase.] Example 1 underscores the importance of the effective operations activity of a firm. Devel- opment of increasingly effective operations is the approach taken by many companies as they face growing global competition. What Operations Managers Do 10 Strategic OM Decisions All good managers perform the basic functions of the management process. The management Design of goods and services process consists of planning, organizing, staffing, leading, and controlling. Operations manag- Managing quality ers apply this management process to the decisions they make in the OM function. The 10 Process strategy strategic OM decisions are introduced in Table 1.2. Successfully addressing each of these decisions Location strategies requires planning, organizing, staffing, leading, and controlling. Layout strategies Human resources Supply-chain management Where Are the OM Jobs? How does one get started on a career in operations? The 10 Inventory management strategic OM decisions identified in Table 1.2 are made by individuals who work in the dis- Scheduling ciplines shown in the blue areas of Figure 1.1. Business students who know their accounting, Maintenance M01_HEIZ0422_12_SE_C01.indd 7 01/12/15 2:19 PM  8 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT STUDENT TIP TABLE 1.2 Ten Strategic Operations Management Decisions An operations manager must successfully address the 10 DECISION CHAPTER(S) decisions around which this text is 1. Design of goods and services: Defines much of what is required of operations 5, Supplement 5 organized. in each of the other OM decisions. For instance, product design usually determines the lower limits of cost and the upper limits of quality, as well as major implications for sustainability and the human resources required. 2. Managing quality: Determines the customer’s quality expectations and 6, Supplement 6 establishes policies and procedures to identify and achieve that quality. 3. Process and capacity strategy: Determines how a good or service is produced 7, Supplement 7 (i.e., the process for production) and commits management to specific technology, quality, human resources, and capital investments that determine much of the firm’s basic cost structure. 4. Location strategy: Requires judgments regarding nearness to customers, 8 suppliers, and talent, while considering costs, infrastructure, logistics, and government. 5. Layout strategy: Requires integrating capacity needs, personnel levels, 9 technology, and inventory requirements to determine the efficient flow of materials, people, and information. 6. Human resources and job design: Determines how to recruit, motivate, and 10 retain personnel with the required talent and skills. People are an integral and expensive part of the total system design. 7. Supply chain management: Decides how to integrate the supply chain into the 11, Supplement 11 firm’s strategy, including decisions that determine what is to be purchased, from whom, and under what conditions. 8. Inventory management: Considers inventory ordering and holding decisions 12, 14, 16 and how to optimize them as customer satisfaction, supplier capability, and production schedules are considered. 9. Scheduling: Determines and implements intermediate- and short-term 13, 15 schedules that effectively and efficiently utilize both personnel and facilities while meeting customer demands. 10. Maintenance: Requires decisions that consider facility capacity, production 17 demands, and personnel necessary to maintain a reliable and stable process. statistics, finance, and OM have an opportunity to assume entry-level positions in all of these areas. As you read this text, identify disciplines that can assist you in making these decisions. Then take courses in those areas. The more background an OM student has in accounting, statistics, information systems, and mathematics, the more job opportunities will be available. About 40% of all jobs are in OM. The following professional organizations provide various certifications that may enhance your education and be of help in your career: ◆ APICS, the Association for Operations Management (www.apics.org) ◆ American Society for Quality (ASQ) (www.asq.org) ◆ Institute for Supply Management (ISM) (www.ism.ws) ◆ Project Management Institute (PMI) (www.pmi.org) ◆ Council of Supply Chain Management Professionals (www.cscmp.org) Figure 1.3 shows some recent job opportunities. The Heritage of Operations Management The field of OM is relatively young, but its history is rich and interesting. Our lives and the OM discipline have been enhanced by the innovations and contributions of numerous indi- viduals. We now introduce a few of these people, and we provide a summary of significant events in operations management in Figure 1.4. M01_HEIZ0422_12_SE_C01.indd 8 01/12/15 2:19 PM  CHAP T ER 1 | OP ERATI ONS AND PR ODUCT IVIT Y 9 1/15 Plant Manager Division of Fortune 1000 company seeks plant manager for plant located in the upper Hudson Valley area. This plant manufactures loading dock equipment for commercial markets. The candidate must be experienced in plant management including expertise in production planning, purchasing, and inventory management. Good written and oral communication skills are a must, along with excellent application of skills in managing people. 2/23 Operations Analyst Expanding national coffee shop: top 10 “Best Places to Work” wants junior level systems analyst to join our excellent store improvement team. Business or I.E. degree, work methods, labor standards, ergonomics, cost accounting knowledge a plus. This is a hands-on job and excellent opportunity for a team player with good people skills. West Coast location. Some travel required. 3/18 Quality Manager Several openings exist in our small package processing facilities in the Northeast, Florida, and Southern California for quality managers. These highly visible positions require extensive use of statistical tools to monitor all aspects of service, timeliness, and workload measurement. The work involves (1) a combination of hands-on applications and detailed analysis using databases and spreadsheets, (2) processing of audits to identify areas for improvement, and (3) management of implementation of changes. Positions involve night hours and weekends. 4/6 Supply-Chain Manager and Planner Responsibilities entail negotiating contracts and establishing long-term relationships with suppliers. We will rely on the selected candidate to maintain accuracy in the purchasing system, invoices, and product returns. A bachelor's degree and up to 2 years related experience are required. Working knowledge of MRP, ability to use feedback to master scheduling and suppliers and consolidate orders for best price and delivery are necessary. Proficiency in all PC Windows applications, particularly Excel and Word, is essential. Effective verbal and written communication skills are essential. 5/14 Process Improvement Consultants An expanding consulting firm is seeking consultants to design and implement lean production and cycle time reduction plans in both service and manufacturing processes. Our firm is currently working with an international bank to improve its back office operations, as well as with several manufacturing firms. A business degree required; APICS certification a plus. Figure 1.3 Many Opportunities Exist for Operations Managers Eli Whitney (1800) is credited for the early popularization of interchangeable parts, which was achieved through standardization and quality control. Through a contract he signed with the U.S. government for 10,000 muskets, he was able to command a premium price because of their interchangeable parts. 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 ergo- nomics. One of his major contributions was his belief that management should be much more resourceful and aggressive in the improvement of work methods. Taylor and his colleagues, Henry L. Gantt and Frank and Lillian Gilbreth, were among the first to systematically seek the best way to produce. 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. Establishing legitimate incentives for work to be accomplished. M01_HEIZ0422_12_SE_C01.indd 9 01/12/15 2:19 PM  10 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT Everett Collection/Newscom Cost Focus Quality Focus Customization Focus Globalization Focus Early Concepts Mass Production Era Lean Production Era Mass Customization Era Globalization Era 1776–1880 1910–1980 1980–1995 1995–2005 2005–2020 Labor Specialization Moving Assembly Line Just-in-Time (JIT) Internet/E-Commerce Global Supply Chains (Smith, Babbage) (Ford/Sorensen) Computer-Aided Design Enterprise Resource Planning Growth of Transnational Standardized Parts (Whitney) Statistical Sampling (CAD) International Quality Standards Organizations (Shewhart) Electronic Data Interchange (ISO) Instant Communications Scientific Management Era Economic Order (EDI) Finite Scheduling Sustainability 1880–1910 Quantity (Harris) Total Quality Management Supply Chain Management Ethics in a Global Workforce Gantt Charts (Gantt) Linear Programming (TQM) Mass Customization Logistics Motion & Time Studies PERT/CPM (DuPont) Baldrige Award Build-to-Order (Gilbreth) Material Requirements Empowerment Radio Frequency Identification Process Analysis (Taylor) Planning (MRP) Kanbans (RFID) Queuing Theory (Erlang) Figure 1.4 Significant Events in Operations Management By 1913, Henry Ford and Charles Sorensen combined what they knew about standardized parts with the quasi-assembly lines of the meatpacking and mail-order industries and added the revolutionary concept of the assembly line, where men stood still and material moved. Quality control is another historically significant contribution to the field of OM. Walter Shewhart (1924) combined his knowledge of statistics with the need for quality control and provided the foundations for statistical sampling in quality control. W. Edwards Deming (1950) believed, as did Frederick Taylor, that management must do more to improve the work environ- ment and processes so that quality can be improved. Operations management will continue to progress as contributions from other disciplines, including industrial engineering, statistics, management, and economics, improve decision making. Innovations from the physical sciences (biology, anatomy, chemistry, physics) have also contributed to advances in OM. These innovations include new adhesives, faster integrated circuits, gamma rays to sanitize food products, and specialized glass for iPhones and plasma TVs. Innovation in products and processes often depends on advances in the physical sciences. Especially important contributions to OM have come from information technology, which we define as the systematic processing of data to yield information. Information technology—with wireless links, Internet, and e-commerce—is reducing costs and accelerating communication. Decisions in operations management require individuals who are well versed in analyti- cal tools, in information technology, and often in one of the biological or physical sciences. In this textbook, we look at the diverse ways a student can prepare for a career in operations management. M01_HEIZ0422_12_SE_C01.indd 10 01/12/15 2:19 PM  CHAP T ER 1 | OP ERATI ONS AND PR ODUCT IVIT Y 11 Operations for Goods and Services STUDENT TIP Services are especially important because almost 80% Manufacturers produce a tangible product, while service products are often intangible. But of all jobs are in service firms. many products are a combination of a good and a service, which complicates the definition of a service. Even the U.S. government has trouble generating a consistent definition. Because definitions vary, much of the data and statistics generated about the service sector are incon- sistent. However, we define services as including repair and maintenance, government, food Services and lodging, transportation, insurance, trade, financial, real estate, education, legal, medical, Economic activities that typically entertainment, and other professional occupations. produce an intangible product (such as education, entertainment, The operation activities for both goods and services are often very similar. For instance, lodging, government, financial, both have quality standards, are designed and produced on a schedule that meets customer de- and health services). mand, and are made in a facility where people are employed. However, some major differences do exist between goods and services. These are presented in Table 1.3. We should point out that in many cases, the distinction between goods and services is not LO 1.2 Explain the clear-cut. In reality, almost all services and almost all goods are a mixture of a service and a distinction between tangible product. Even services such as consulting may require a tangible report. Similarly, the goods and services sale of most goods includes a service. For instance, many products have the service components of financing and delivery (e.g., automobile sales). Many also require after-sale training and maintenance (e.g., office copiers and machinery). “Service” activities may also be an integral part of production. Human resource activities, logistics, accounting, training, field service, and repair are all service activities, but they take place within a manufacturing organization. Very few services are “pure,” meaning they have no tangible component. Counseling may be one of the exceptions. Growth of Services Services constitute the largest economic sector in postindustrial societies. Until about 1900, most Americans were employed in agriculture. Increased agricultural productivity allowed people to leave the farm and seek employment in the city. Similarly, manufactur- ing employment has decreased for the past 60 years. The changes in agriculture, manufac- turing, and service employment as a percentage of the workforce are shown in Figure 1.5. Although the number of people employed in manufacturing has decreased since 1950, each person is now producing almost 20 times more than in 1950. Services became the dominant TABLE 1.3 Differences Between Goods and Services CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS Intangible: Ride in an airline seat Tangible: The seat itself Produced and consumed simultaneously: Beauty Product can usually be kept in inventory (beauty care salon produces a haircut that is consumed as it is products) produced Unique: Your investments and medical care are Similar products produced (iPods) unique High customer interactio