Copyright © 2006 Pearson Education Canada Inc. 10-1 Chapter 10 Producing Goods and Services

10-1

Copyright © 2006 Pearson Education Canada Inc.

Chapter 10

Producing Goods and Services

10-2Copyright © 2006 Pearson Education Canada Inc.

Learning ObjectivesExplain the meaning of the term production (or operations) and describe the four kinds of utility it providesDescribe and explain the three classifications of operations processesIdentify the characteristics that distinguish service operations from goods production and explain the main differences in the service focus


Learning ObjectivesDescribe the factors involved in operations planningExplain the activities involved in operations control, including materials management and the use of operation control toolsExplain the connection between productivity and qualityExplain the concept of total quality management and describe nine tools that companies can use to achieve it


Differences Between Goods and Services

Goods are produced Services are performed to meet the needs of customers Focus on the customers themselves

Haircut Focus on their possessions

Investments or auto repairs Services are more customized, intangible,

and perishable than goods Consumers evaluate services differently than goods The focus is on the service process and outcome


Utility: Adding ValueTime utility Satisfaction because the product is available

when it is wanted

Place utility Satisfaction because the product is available

where it is needed

Form utility Satisfaction because the product is available

when it is transformed into the needed final product

Ownership (possession) utility The product is consumed and satisfaction

occurs during the consumption process


Operations (Production) Management

Operation (production) management Systematic direction and control of the

processes that transform resources into finished goods

Production Managers Responsible for ensuring that

operations processes create value and provide benefits


The Transformation System

Production Managers

PlanOrganizeSchedule

Control

Resources

Land

Capital Transformation Human Resources Activities Products and ServicesMaterials


Goods-producing Processes

Operations classification Type of transformation technology Type of process (analytic or synthetic) Product flow pattern used during

transformation Extent of labour use during

transformation


Transformation Technology

Chemical processes Raw materials are chemically altered Aluminum, steel, petroleum

Fabrication processes Mechanically alter the basic shape or

form of a product Metal forming, woodworking


Transformation Technology

Assembly processes Put together various components Electronics, appliances, automotive

Transport processes Goods moved from one location to

anotherClerical processes Transform information


Analytic Vs. Synthetic Processes

Analytic Resources are broken down in

production process Extracting minerals from ore

Synthetic Resources are combined in the

production process Paint production


Service-producing Processes

Customer contact customer are involved in and can affect the

transformation process

Low-contact system Customers do not need to be physically

present to receive the service Electric power, automatic bank transfers

High-contact system Customers need to be physically present

Haircuts, medical examinations, bus transportation


Differences Between Service and Manufacturing Operations

Focus on performance Customer-oriented performance is the key in

measuring the effectiveness of a service firm

More complex than in a goods firm Link between production and consumption,

and between process and outcome Services are more intangible, more

customized and less storable than goods Quality must be well defined Managing a service firm is different than

managing a goods firm


Focus on Process and Outcome

Most services have some goods attached to them

The emphasis is on the process of transforming the resources into a service outcome

Service staff need to have interpersonal skills to deal with the process as well as the outcome, and the customer contact that is required


Focus on Service Characteristics

Intangibility Services cannot be touched, tasted,

smelled, or seenCustomization Each service is performed to the

customer’s needsdental work, veterinary services

Unstorability Most services must be taken when

offered or the opportunity is gone Plane flight


E-commerce: The Virtual Presence of the Customer

In a regular service environment, customers are physically presentIn an e-commerce environment, the customers are virtually present,with access 7 days weekly, 24 hours dailyUnique opportunity to build customer relationships


Operations PlanningSuccessful operations are carefully planned and implementedKey issues include Forecasting Planning

Capacity Location Layout Quality Methods planning


Forecasting

Forecasting Estimating future demand for new and

existing products May be short to long term (2 to 5 years) Production plan specifies the number of

plants or service facilities and the amount of labour, equipment, transportation, and storage that will be needed to meet demand


Capacity Planning

The amount of a good that a firm can produce under normal conditions Capacity should slightly exceed

normal demand Accommodate seasonal changes in

production Address ways to use excess capacity

Increase inventory levels


Location Planning

The decision of where to place a production facility is crucial and is based on: Availability of labour Proximity to raw materials and

markets Transportation and energy costs Local taxes Community attractiveness


Layout PlanningProductive facilities are used for transforming raw materials Workstations, equipment

Nonproductive facilities do not transform Storage & maintenance areas

Support facilities support the organization Cafeteria, parking lot, restrooms


Process Layout

Resources are grouped based on their function in the production process Tasks are performed in specialized

locations Suitable for “job shops” (custom work) In a bakery, areas are dedicated to

mixing, baking, decorating, and packaging


Cellular LayoutsA series of areas or “cells” are created Each cell is used to manufacture a product in a

“family” Each product in the family goes through a similar

process Requires less adjustment of equipment, smaller flow

distances, reduced materials handling and transit time Clothing pockets (product family) with individual

products requiring similar steps in production

Pants pockets, shirt pockets


Product LayoutResources are set up to produce only one type of good Product moved through a fixed sequence of

steps as they become finished goods Equipment and people are arranged in a

production line for each product being produced Often use assembly lines, where products are

moved along a conveyor belt or similar equipment

Can be efficient and cost-effective streamlined production simplified tasks therefore unskilled labour can be used automobile manufacturing, food processing


Flexible Manufacturing Systems (FMS)

Single factory to produce small batches of different goods on the same production line Linking company information systems

and production systems result in an increased ability to plan for changes in consumer tastes and seasonal demand changes

Automatic equipment produces small batches of different products on the same production line to meet demand


Soft ManufacturingEmphasis on computer software and networks rather than production equipment Does not rely on complete automation,

recognizing that human labour can excel in ways that machines cannot

Humans can do fine work and do not break down or wear out the way robots do

Allows firms to meet the needs of customized products for individual customers (not well met by automatic equipment)


Layout Planning for Services

Differs for low and high contact systemsLow-contact systems should be designed to enhance service production High-contact systems should be arranged to meet customer’s needs and expectations


Methods Planning

Identify all production steps in the process Each method must be specified Step-by-step examination of the production

process and individual tasks to reduce waste and inefficiency

May involve the use of a process flow chart, which identifies the sequence, procedures, wasteful activities, possible delays, and inefficiencies


Scheduling Goods Operations

Master production schedule (top level) Which products will be produced When will production occur What resources will be used Time periods for resource use Short-term detailed schedule:

Task assignments, order information, production specifics to meet incoming orders


Scheduling Service Operations

Differs for high and low-contact services Requires scheduling both work and

employees

Low-contact services Scheduled around desired completion dates

and/or arrival of orders (auto repair) Less direct customer involvement

High-contact services Scheduled to accommodate specific customer

needs (emergency medical care) Scheduling must revolve around the customer


Operations Control

When long range plans are in place Operations control

Managers monitor production performance by comparing results with plans and schedules

Follow-up Checking to ensure that production

decisions are being implemented


Materials ManagementMaterials management

Planning, organizing, and controlling the flow of materials from purchase through distribution of finished goods Transportation, warehousing, inventory control,

supplier selection, and purchasingStandardization

Using standard and uniform components in the production process May involve common parts or components across

product lines Saves production costs Simplifies the materials management process


Worker Training

Staff skills are essential to render high quality goods and servicesStaff manage both sales and service production human relations skills are vital in

high-contact services technical skills are vital in low-contact

services


Just-in-Time Inventory Systems (JIT)

Materials are acquired and put into production just as they are needed Minimizes trade-offs between holding time

and costs Parts and components are delivered

precisely when they are needed Does not require forward-buying, or carrying

of stock of parts and components Smoothes the production process, relieving

inefficiencies of stop and go systems


Materials Requirements Planning (MRP)

Inventory control method in which a computerized bill of materials is used to estimate production needs so that resources are acquired only as they are needed in the production processBill of materials A list of goods that are needed in the

production processes, and the method of combining the resources

A bill of materials gives requirements for a single production “batch”


Manufacturing Resource Planning (MRP II)

Advanced version of MRP that ties together all parts of the organization into the company’s production activities Production Inventory Human resources Marketing Finance


Quality Control

The management of the production process so as to manufacture the goods or supply services that meet specific quality standards Company oversees everything from

supplier selection to assembly to packaging


Productivity

A measure of efficiency that compares how much is produced with the resources used to produce it Productivity grows if an organization

can produce more of an item with less resources than it could in the past

All stakeholders (employees, business, economy) benefit from increased productivity


Quality

A product’s fitness for use in terms of offering the features that consumers want Firms may be efficient but still lack the quality

that consumers seek Quality and quantity are not the same

Quantity measures efficiency of production, not product quality

Canada’s competitive problems are largely linked to focusing on quantity issues


Measuring Productivity

Productivity is measured as a ratio of outputs to inputsManagers must choose which inputs or outputs they desire to use in the ratioOutputs may include sales in units or dollarsInputs may include labour, capital, materials, and energy required to produce the output


Labour Productivity

Labour Productivity = Gross Domestic Product (GDP)

Total Number of Workers

GDP is the value of all of the goods GDP is the value of all of the goods and servicesand services

produced by an economy.produced by an economy.


Productivity Among Global Competitors

Countries with greater domestic productivity Have greater wealth for all citizens

Countries with limited domestic productivity Can only allocate limited wealth to their citizens An individual’s wealth can only increase at the

expense of another individual Investors, employees, business, and individuals

are negatively affected


ProductivityIndustry productivity The services sector is showing slower growth Differences also exist within specific industries

Improved company productivity leads to Lower costs, competitive edge, improved

stock prices

Firms can offer employee profit-sharing plans based on productivity-improvement Can rely on productivity-planning to maintain

a long-term market advantage


Total Quality Management (TQM)

TQM requires attention to both efficiency (quantity produced) and quality (the ability of the product to deliver the consumers’ expectations) TQM recognizes that: No defects are tolerable All employees are responsible for

maintaining quality standards


Quality Assurance and TQM

Activities necessary to get quality goods and services into the marketplace

Planning Organizing Leading Controlling

ManagingManagingQuality Quality EffortsEfforts


Planning for Quality

Quality planning begins before goods are designed, or redesignedPerformance quality How well the features of the product meet

consumers’ needs How well the product performs

Quality reliability The consistency of quality from product unit

to product unit


Organizing for Quality

Producing quality products requires a commitment from every employee Quality control cannot be effective

as a as an isolated department Specific aspects of total quality

management can be assigned to different jobs and departments Quality improvement developments Quality control monitoring


Leading for Quality

Concept that quality belongs to each employee who creates or destroys it in producing a good or service

Managers must inspire and motivate employees Training employees Encouraging employee involvement Tying wages to quality of work


Controlling for Quality

Establish specific quality standards and measurementsCompare results to standards using quality assurance toolsDetect mistakes and make corrections


Quality Assurance Tools

BenchmarkingISO 9000Re-engineeringCompetitive product analysisValue-added analysisStatistical process control

Quality/cost studies Quality improvement teamsControl chartsAdding value through supply chains


Value-added AnalysisValue-added analysis is a process that evaluates All work activities Material flows Paperwork

Goal To determine the value they add for

customers Uncover and eliminate wasteful activities Improve quality


Statistical Process Control

SPC methods enable managers to Analyze variations in production data Detect when adjustments are needed

to create products with high quality reliability Process variation Process capability study Specification limits Control charts


Process Variation

Change in employees, materials, work methods, or equipment that affects output quality Some variation is acceptable Any variation outside of the

acceptable range must be detected and eliminated


Process Capability Study

Process variation is detected by analyzing a sample and measuring the conformity of output Specification limits provide the acceptable

range of variation around the required standard

Cereal boxes may be required to have about 400 grams More would be wasteful Less does not deliver customer satisfaction Acceptable range = 390 to 410 grams


Control Charts

A statistical process control method in which a sample is tested and the results are displayed graphicallyControl limits are critical values that are noted on the graph to depict the acceptable range of the specification limits


Quality/Cost StudiesDetermining quality-related costs and identifying areas with cost-saving potential Quality costs are associated with

making, finding, repairing or preventing product defects

Requires determining the costs of internal and external failures through objective analysis


Quality/Cost Studies

Internal failures Expenses incurred during production

and before bad product leaves the plant

External failures Allowing defective products to leave the

factory and get into consumers’ hands


Quality Improvement Teams

Employees are grouped into small teams Quality circles

Each group chooses a team leader and determines rules for discussionEach team must define, analyze, and solve quality and other process-related problems within their areas of responsibilityMay involve brainstorming, discussion, and the use of quality/cost study


Benchmarking

Compares the quality of a firm’s output with the quality of the output of the industry’s leaders, or the output of one division with another Internal benchmarking

A firm tracks its own performance over time to evaluate its progress

External benchmarking Critical review of competitors to determine which

goods or services perform the best


Getting Close to the Customer

Successful firms have an understanding of customer needs and wantsCustomers need and want good serviceCustomers are “economic assets”Firms need to stay close to their customers


ISO 9000

A system developed by the international standards organization (ISO) to evaluate a firm’s qualityTo earn the rating firms are measured by qualified consultants Product testing Employee training Record-keeping Correcting defects


Business Process Re-engineering

Redesigning of business processes to improve performance, quality, and productivity Identify the business activity that will be changed Evaluate information and human resources to see

if they can meet the requirements for change Diagnose the current process to identify its

strengths or weaknesses Create the new process design Implement the new design


Supply Chain Strategy

Members of the chain work with each other rather than as adversariesAn effective supply chain system offers the following benefits Improved coordination Enhanced communication Reduced inefficiencies Costs can be minimized

The members focus on the whole chain

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Copyright © 2006 Pearson Education Canada Inc. 10-1 Chapter 10 Producing Goods and Services