Introduction to Business 3e 9 Part III: Management Copyright © 2004 South-Western. All rights reserved. Improving Productivity and Quality

Copyright © 2004 South-Western. All rights reserved.

Jeff MaduraIntroduction to

Business 3e

Introduction to Business 3e

99Part III: ManagementPart III: Management

Improving Productivity Improving Productivity and Qualityand Quality

Improving Productivity Improving Productivity and Qualityand Quality

Copyright © 2004 South-Western. All rights reserved. 9–2

Learning GoalsLearning Goals• Identify the key resources used for production.

• Identify the factors that affect the plant site decision.

• Describe how various factors affect the design and layout decision.

• Describe the key tasks that are involved in production control.

• Describe the key factors that affect production efficiency.


Improving Productivity and Improving Productivity and QualityQuality


Resources Used for Resources Used for ProductionProduction

• Production– A series of tasks in which resources are used

to produce a product or service.

• Production (or operations) management– Focuses on developing efficient and high-

quality production process by determining the proper amount and mix of production resources to use: Human resources , materials and other

assets (buildings, machinery, equipment)


Achieving Low-Cost Achieving Low-Cost ProductionProduction

• Managers try to combine resources in ways that are efficient and reduce costs.– Work stations are areas in which one or more

employees are assigned a specific task– Assembly line

A sequence of work stations individually designed to cover specific phases of the production process

Efficiency improves when specific employees are responsible for specific tasks that utilize their expertise.


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Resources Used in Resources Used in ProductionProduction

Exhibit 9.1


Selecting a SiteSelecting a Site

•Location of a factory or office– Impacts production costs and the firm’s

ability to compete effectively.

•Site location decision factors– Cost of workplace space– Cost and supply of labor– Tax incentives– Source of demand– Access to transportation


Evaluating Possible SitesEvaluating Possible Sites

•Using weighted criteria to compare the desirability of various sites:– Identify evaluation criteria and create a site

evaluation matrix.– Assign weights based on importance of each

criterion.– Rate each site on the individual criteria.– Determine the total rating for each site.– Select the most appropriate site based on

the site evaluation matrix.


Example of Site Evaluation Example of Site Evaluation MatrixMatrix

Exhibit 9.2

PossibleSites Rating

Weighted Rating(80% of Weight) Rating

Weighted Rating

(80% of Weight)Total Rating

Austin, TX 3 2.4 1 .2 2.6

Chicago, IL 4 3.2 2 .4 3.6

Los Angeles, CA 5 4.0 1 .2 4.2

Omaha, NE 1 .8 1 .2 1.0

Land Cost Supply of Labor


Design and LayoutDesign and Layout

•Design– Dictates the eventual size and structure of

the plant or office

•Layout– The arrangement of machinery and

equipment within the plant or office


Selecting Design and LayoutSelecting Design and Layout

•Design and layout decisions affect operating expenses– Determine cost of rent, machinery and

equipment– Influence the amount of money that must be

borrowed and interest expense.

•Desired production capacity– Allows the flexibility to increase production

capacity over time in the most efficient manner possible.


Factors Affecting Design and Factors Affecting Design and LayoutLayout

•Site characteristics– Cost of land

•Production process– Assembly line often uses a product layout.– Product layout positions tasks in sequence.– Fixed-position layout requires employees to

go to the product.– Flexible manufacturing is be easily adjusted

to accommodate future revisions. Requires employees to have flexible skills


Factors Affecting Design and Factors Affecting Design and Layout (cont’d)Layout (cont’d)

•Product line– A narrow product line focuses on the

production of one or a few products.– Firms with a broad product line offer a wide

range of products.– The layout must change in response to

changes in customer preferences and demand for products.


Production ControlProduction Control

•Purchasing materials• Inventory control•Routing•Scheduling•Quality control


Purchasing MaterialsPurchasing Materials

•Selecting suppliers– Buyers consider price, speed of delivery,

quality, servicing and credit availability.– Some firms use the Internet for e-

procurement.

•Obtaining volume discounts•Delegating production to suppliers

– Outsourcing the production of parts Deintegration: delegating production tasks

to suppliers


Small Business SurveySmall Business Survey

Exhibit 9.10u

Why Do Firms Outsource Rather Than Produce Some Products Themselves?


Effects of DisintegrationEffects of Disintegration

Exhibit 9.3


Inventory ControlInventory Control

•The process of managing inventory at a level that minimizes costs by:– Using inventory control systems to reduce

carrying and ordering costs. Just-in-Time (JIT) inventory Materials requirements planning (MRP)

– Controlling work-in-process and finished goods inventories. Use expected demand to determine how

much product should be held in inventory


Illustration of IBM’s Efforts Illustration of IBM’s Efforts to Minimize Inventoryto Minimize Inventory

Exhibit 9.4


Routing and SchedulingRouting and Scheduling

•Routing– The sequence (or route) of tasks necessary

to complete the production of a product Should be evaluated periodically to improve

speed or reduce costs

•Scheduling– The act of setting time periods for each task

in the production process Production schedule: a plan for the timing

and volume of production tasks.


Scheduling Special ProjectsScheduling Special Projects

•Gantt chart – Illustrates the expected timing for each task

in the production process.

•Program evaluation and review technique (PERT)– Schedules tasks to minimize delays.

Critical path: the time required to complete all tasks in precedence order; allows managers to estimate slack time on other paths and reduce inefficiencies.


Example of a Gantt ChartExample of a Gantt Chart

Exhibit 9.5


Determining the Critical Path Based Determining the Critical Path Based

on a Sequence of of Production on a Sequence of of Production TasksTasks

Exhibit 9.6


Quality ControlQuality Control

•Quality– The degree to which a product or service

satisfies a customer’s requirements or expectations.

•Quality control– A process of determining whether product

quality meets the desired quality level.

•Total quality management (TQM)– The act of monitoring and improving the

quality of products and services.


Interaction between Management and Interaction between Management and Marketing Functions When Implementing Total Marketing Functions When Implementing Total

Quality ManagementQuality Management

Exhibit 9.7


Total Quality ManagementTotal Quality Management

•Key guidelines for improving quality– Provide managers and other employees with

the education and training they need to excel in their jobs.

– Encourage employees to take responsibility for quality and to provide leadership.

– Encourage all employees to search for ways to improve the production process.


Assessing QualityAssessing Quality

•Control by technology– Computers can determine whether each

component of a product meets specific quality standards

•Control by employees– Assign an employee to assess quality at

each stage of the assembly line– Use quality control circles to assess quality

and make suggestions for improvement


Assessing Quality (cont’d)Assessing Quality (cont’d)

•Control by sampling– Randomly selecting some of the products

produced and testing them to see if they satisfy quality standards.

•Control by monitoring complaints– Some quality deficiencies may not be

apparent until after the product is sold.

•Correcting deficiencies– Determining what caused the quality defects.


Improving Production Improving Production EfficiencyEfficiency

•Production Efficiency– Having the ability to produce products at a

low cost while maintaining quality.

•Benchmarking– A method of evaluating performance by

comparison to some specified level Many firms use benchmarking to improve

efficiency. Firms use stretch targets to improve

efficiency.


Improving Production Improving Production Efficiency (cont’d)Efficiency (cont’d)

•Adopting new technology– Automated tasks are completed by machines

without the use of employees: Using computers to track inventory and

sales volume on a daily basis. Programming computers to automatically

reorder some products once inventory is reduced to a pre-specified level.


Guidelines for Effective Guidelines for Effective AutomationAutomation

•Plan to decide what type of automation is most appropriate.

•Use automation where the benefits are greatest.

•Train to make sure automation is implemented effectively.

•Evaluate costs and benefits over time.

Exhibit 9.8


Measuring Production Measuring Production EfficiencyEfficiency

•Economies of scale– The effect of cost per product unit declines

as production volume increases Fixed costs do not decrease as the number

of units produced increases. Variable costs vary directly with the

number of products produced.

– Break-even point Reflects the total quantity of units sold at

which total revenue equals total costs (fixed and variable) and profitability begins.


Relationship between Production Relationship between Production Volume and CostsVolume and Costs

Quantityof Books

ProducedFixedCosts

VariableCost

($2 per unit)

TotalCost

AverageCost

Per Unit

1,000 $40,000 $2,000 $42,000 $42.00

3,000 40,000 6,000 46,000 15.33

5,000 40,000 10,000 50,000 10.00

10,000 40,000 20,000 60,000 6.00

15,000 40,000 30,000 70,000 4.67

20,000 40,000 40,000 80,000 4.00

25,000 40,000 50,000 90,000 3.60

Exhibit 9.9a


Relationship Relationship between between

Production Production Volume and Volume and

CostsCosts

Exhibit 9.9b


Relationship between Volume Relationship between Volume and Profitabilityand Profitability

Quantityof Books

Produced PriceTotal

RevenueTotalCost Profits

1,000 $10.00 $10,000 $42,000 -$32,000

3,000 10.00 30,000 46,000 -$16,000

5,000 10.00 50,000 50,000 $0

10,000 10.00 100,000 60,000 $40,000

15,000 10.00 150,000 70,000 $80,000

20,000 10.00 200,000 80,000 $120,000

25,000 10.00 250,000 90,000 $160,000


Relationship between Volume Relationship between Volume and Profitabilityand Profitability

Exhibit 9.10a



•Restructuring– Revision of the production process in an

attempt to improve efficiency.

•Reengineering– Redesign of a firm’s organizational structure

and operations to improve efficiency.



•Downsizing– A reduction in the number of employees

without affecting the volume or quality of products produced

– Firms must be careful not to downsize too much (corporate anorexia).


Integrating Production TasksIntegrating Production Tasks

• If any integrated production task breaks down, the entire production schedule is affected– Consequently, firms must monitor its supply

chain and its processes from the beginning of the production process until the product reaches the customer

•Service firms must also manage the supply chain effectively.


Chapter SummaryChapter Summary•Key production resources

– Human resources, materials, and other resources (buildings, equipment, and machinery)

•Plant site decision depends on:– Costs of workplace space and labor– Tax incentives– Source of demand– Access to transportation– Supply of labor


Chapter Summary (cont’d)Chapter Summary (cont’d)

•Design and layout of a plant– Dependent on site characteristics– Production process used– Product line offered– Desired production capacity


Chapter Summary (cont’d)Chapter Summary (cont’d)

•Production control involves purchasing materials, inventory control, routing, scheduling, and quality control

•Key methods for improving production efficiency are technology, economies of scale, and restructuring


Summary of ManagementSummary of Management

Exhibit 9.2u

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Introduction to Business 3e 9 Part III: Management Copyright © 2004 South-Western. All rights reserved. Improving Productivity and Quality