Production and Operations Management Systems Chapter 1: Introduction

P/OM Input-Output Profit Model

• The inputs are materials, labor, and other direct costs associated with each unit of work made or services delivered.
• The basic equations are:
• Profit (P) = Revenue (R) minus Total Costs (TC)
• P = R - TC
• TC = Fixed Costs plus Total Variable Costs
• The next slide spells out all of the details

I/O Profit Model with Sales Volume (V) assume period t (e.g., one year)

Output Variables	Input Variables	Transformation
Revenue: R	Total Cost: TC	Volume: V Units sold at price/unit, p
R = pV	TC = FC + vc(V)	Net Profit: R - TC
p = price per unit	vc = variable costs per unit	Margin = p - vc
What volume V can be sold in period t at price p?	FC = fixed costs for time period, t	Productivity is the Output/Input = (R)/(vc)V Labor and materials productivity

Productivity – a Major Issue

• Productivity is a critical business variable that directly impacts the ‘‘bottom line’’.
• Productivity is defined as the ratio measure of output (O) divided by input (I).
• Improved productivity raises net profits.
• Productivity measures the performance of the organization’s processes for doing work.
• This is such a critical factor in a company’s overall success that excellence in productivity achievement is a major P/OM issue.
• P/OM is responsible for the productivity of the process.