Read Chapter 8 - Producing Quality Goods and Services

WHAT IS PRODUCTION? In Chapter 6, we described an “operations manager” as a person who manages the systems that convert resources into goods and services. This area of management is usually referred to as operations management; it consists of all the activities managers engage in to produce goods and services. To produce a product or service successfully, a business must perform a number of specific activities. We discuss each of these activities later in this chapter.

How American Manufacturers Compete in the Global Marketplace. After World War II, the United States became the most productive country in the world. For almost 30 years, until the late 1970s, U.S. manufacturing leadership was never threatened. By then, however, manufacturers in Japan, Germany, Great Britain, Italy, Korea, Sweden, and other industrialized nations were increasingly competing with U.S. firms. Now the Chinese are manufacturing everything from sophisticated electronic equipment and automobiles to less-expensive everyday items.

The Bad News for Manufacturers. Today, fewer than one in ten work in manufacturing. Overall, just over 12 million U.S. workers are employed in manufacturing jobs—down from just over 17 million back in 2000. Many of the manufacturing jobs that were lost were outsourced to low-wage workers in nations where there are few labor and environmental regulations.

The Good News for Manufacturers. The United States remains one of the largest manufacturing countries in the world—producing approximately 18.6 percent of total global manufacturing output. While the number of manufacturing jobs has declined, productivity has increased. Two factors account for this increased productivity.

Innovation—finding a better way to produce products—is the key factor that has enabled American manufacturers to compete in the global marketplace.

Workers in the manufacturing sector are highly skilled and are making more goods with fewer employees.

Many American manufacturers that previously outsourced work are beginning to manufacture goods in the United States. This is known as reshoring. While the global marketplace has never been more competitive, the most successful U.S. firms focus on the following:

Meeting the needs of customers and improving product quality.

Motivating employees to cooperate with management and improve productivity.

Reducing costs by selecting suppliers that offer higher-quality raw materials and components at reasonable prices.

Using computer-aided and flexible manufacturing systems that allow a higher degree of customization.

Improving control procedures to help ensure lower manufacturing costs.

Using green manufacturing to conserve natural resources and sustain the planet.

Careers in Operations Management. Although it is hard to provide information about specific career opportunities in operations management, some generalizations do apply to this management area.

Understanding the following processes is essential.

Mass production is a manufacturing process that lowers the cost required to produce a large number of identical or similar products over a long period of time.

An analytical process breaks raw materials into different component parts.

A synthetic process is just the opposite of the analytic one; it combines raw materials or components to create a finished product.

Today’s successful operations managers must do the following:

Be able to motivate and lead people.

Understand how technology can make a manufacturer more productive and

Appreciate the control processes that help lower production costs and improve product quality.

Understand the relationship between the customer, the marketing of a product, and the production of a product.

THE CONVERSION PROCESS. The purpose of manufacturing is to provide utility to customers. Utility is the ability of a good or service to satisfy a human need. There are four types of utility—form, place, time, and possession. Operations management focuses primarily on form utility, which is created by converting raw materials, people, finances, and information into finished products.

Manufacturing Using a Conversion Process. The conversion of resources into products and services can be described in at least three ways. (See Figure 8-1.)

Focus or Major Resource. The focus of a conversion process refers to the resource or resources that comprise the major or most important input. The resources are financial, material, information, and people.

Magnitude of Change. The magnitude of a conversion process is the degree to which the resources are physically changed.

Number of Production Processes. A single firm may employ one production process or many. In general, larger firms that make a variety of products use multiple production processes.

THE INCREASING IMPORTANCE OF SERVICES. The application of the basic principles of operations management to the production of services has coincided with a dramatic growth in the number and diversity of service businesses. In 1900, only 28 percent of American workers were employed in service firms. By 1950, this figure had grown to 40 percent, and by the beginning of 2017, it had risen to 86 percent. The American economy is now characterized as a service economy—one in which more effort is devoted to the production of services than to the production of goods. (See Figure 8-2.)

Planning Quality Services. While service firms are different from manufacturing firms, both types of businesses must complete many of the same activities in order to be successful. Service businesses must plan, design, execute, evaluate, improve, and redesign their services in order to provide goods and services that their customers want.

Evaluating the Quality of a Firm’s Services. The production of services is very different from the production of manufactured goods in the following five ways:

Customers are more involved in obtaining the service they want or need.

Services are consumed immediately and, unlike manufactured goods, cannot be stored.

Services are provided when and where the customer desires the service.

Services are usually labor-intensive because the human resource is often the most important resource used in the production of services.

Services are intangible, and it is therefore more difficult to evaluate customer satisfaction.

Service firms listen more carefully to customers and respond more quickly to the market’s changing needs. Many service firms also use social media to build relationships with their customers.

WHERE DO NEW PRODUCTS AND SERVICES COME FROM?

Research and Development. Research and development (R&D) involves a set of activities intended to identify new ideas that have the potential to result in goods and services. Today, business firms use three general types of R&D activities.

Basic research consists of activities aimed at uncovering new knowledge, without regard for its potential use.

Applied research consists of activities geared to discovering new knowledge with some potential use.

Development and implementation are research activities undertaken specifically to put new or existing knowledge to use in producing goods and services.

Product Extension and Refinement

If a firm sells only one product, when customers no longer need the product or service the firm will die. To stay in business, the firm must at least find ways to extend or refine the want-satisfying capability of its product or service.

For most firms, extension and refinement are expected results of their research, development, and implementation activities and result in an essentially “new” product whose sales make up for the declining sales of a product that was introduced earlier.

HOW DO MANAGERS PLAN PRODUCTION? Only a few of the many ideas for new products ever reach the production stage. Planning for production involves three different phases: design planning, facilities planning, and operational planning. (See Figure 8-3.)

Design Planning. Design planning is the development of a plan for converting a product idea into an actual product or service. The major decisions deal with product line, required production capacity, and use of technology.

Product Line. A product line is a group of similar products that differ only in relatively minor characteristics.

An important issue in deciding on the product line is to balance customer preferences and production requirements.

Each distinct product within the product line must be designed. Product design is the process of creating a set of specifications from which the product can be produced.

Required Production Capacity. Capacity is the amount of products or services that an organization can produce in a given period of time.

Operations managers, working with the firm’s marketing managers, must determine the required capacity. This determines the size of the production facility.

If the facility is built with too much capacity, valuable resources will lie idle.

If the facility offers insufficient capacity, additional capacity may have to be added later, when it is much more expensive than in the initial building stage.

The capacity of a service business is the number of customers it can serve at one time.

Use of Technology. Management must determine the degree to which automation will be used to produce a product or service. There is a tradeoff between high initial costs and low operating costs (for automation) and low initial costs and high operating costs (for human labor).

A labor-intensive technology is a process in which people do most of the work.

A capital-intensive technology is a process in which machines and equipment do most of the work.

Site Selection and Facilities Planning. Generally, a business will choose to produce a new product in an existing factory as long as (1) the existing factory has enough capacity to handle customer demand for both the new product and established products, and (2) the cost of refurbishing an existing factory is less than the cost of building a new one. In determining where to locate production facilities, management must consider a number of variables, including the following:

Locations of major customers and suppliers.
Availability and cost of skilled and unskilled labor.
Quality of life for employees and management in the proposed location.
Cost of land and building(s).
Local and state taxes, environmental regulations, and zoning laws.
Amount of financial support and subsidies offered by local and state governments.
Special requirements, such as great amounts of energy or water used in the production process.

Human Resources. The human resources manager must staff the facility by recruiting managers and employees with the appropriate skills or developing training programs.

Plant Layout. Plant layout is the arrangement of machinery, equipment, and personnel within the production facility. Three general types of plant layout are used. (See Figure 8-4.)

The process layout is used when different operations are required for creating small batches of different products or working on different parts of a product.

The product layout (or assembly line) is used when all products undergo the same operations in the same sequence.

A fixed-position layout is used when a very large product is produced. The product remains stationary while people and machines are moved as needed to assemble the product.

Operational Planning. The objective of operational planning is to decide on the amount of products or services each facility will produce during a specific period of time. Four steps are required.

Step 1: Selecting a Planning Horizon. A planning horizon is the time period during which an operational plan will be in effect. A common planning horizon for production plans is one year.

Step 2: Estimating Market Demand. The market demand for a product is the
quantity that customers will purchase at the going price.

Step 3: Comparing Market Demand with Capacity. To satisfy market demand, the estimated market demand is compared with the facility’s capacity to satisfy that demand. One of three outcomes may result:

Demand may exceed capacity.

Capacity may exceed demand.

Capacity and demand may be equal.

If market demand and capacity are equal, the facility should be operated at full capacity. If they are not equal, adjustments may be necessary.

Step 4: Adjusting Products or Services to Meet Demand. The biggest reason for changes to a firm’s production schedule is changes in the amount of products or services that a company sells to its customers.

When market demand exceeds capacity, several options are available.

Production of products or services may be increased by operating the
facility overtime with existing personnel or by starting a second or third work shift.

A portion of the work can be subcontracted.

If the excess demand is likely to be permanent, the firm may expand the facility.

When capacity exceeds market demand, there are several options.

(1) To reduce output temporarily, workers may be laid off.

(2) The facility may be operated on a shorter-than-normal workweek.

(3) To adjust to a permanently decreased demand, management may shift the excess capacity to the production of other goods or services.

(4) The most radical adjustment is to eliminate the excess capacity by selling unused facilities.

OPERATIONS CONTROL. There are four important areas of operations control. (See Figure 8-5.)

Purchasing. Purchasing consists of all the activities involved in obtaining required materials, supplies, and parts from other firms. The objective of purchasing is to ensure that required materials are available when they are needed, in the proper amounts, and at minimum cost.

Purchasing personnel should constantly be on the lookout for new or backup suppliers, even when their needs are being met by their present suppliers.

The choice of suppliers should result from careful analysis of the following critical factors:

Price—Comparing prices is essential to selecting a supplier.

Quality—The minimum acceptable quality is usually specified by product

Reliability—Potential suppliers must meet delivery schedules.

Credit terms—Determine if the supplier demands immediate payment, extends credit, or offers a cash discount or reduction in price for prompt payment.

Shipping costs—The question of who pays the shipping costs should be answered before any supplier is chosen.

Inventory Control

Operations managers are concerned with three types of inventories.

The raw-materials inventory consists of materials that will become part of the product during the production process

The work-in-process inventory consists of partially completed products

The finished-goods inventory consists of completed goods awaiting shipment to customers.

Inventory control is the process of managing inventories to minimize inventory costs, including both holding costs (storage cost) and potential stock-out costs (the cost of running out of inventory).

One of the most sophisticated methods of inventory control used today is materials requirements planning. Materials requirements planning (MRP) is a computerized system that integrates production planning and inventory control. A manager using an MRP system can arrange both order and delivery schedules so that materials, parts, and supplies arrive when they are needed.

A just-in-time inventory system is designed to ensure that materials or supplies arrive at a facility just when they are needed so that storage and holding costs are minimized.

Scheduling is the process of ensuring that materials and other resources are at the right place at the right time. Place and time are important to scheduling for two reasons. First, the routing of materials is the sequence of workstations that the materials will follow. Second, the timing function specifies when the materials will arrive at each station and how long they will remain there.

Quality Control. Quality control is the process of ensuring that goods and services are produced in accordance with design specifications. The major objective of quality control is to see that the organization lives up to the standards it has set for itself on quality. The Malcolm Baldrige National Quality Award is given to organizations that apply and are judged to be outstanding in specific managerial tasks that lead to improved quality in products and services. U.S. firms use several techniques to gather statistical information which is used to improve the quality of their products. (See Table 8-1.)

Improving Quality Through Employee Participation. One of the first steps needed to improve quality is employee participation. Successful firms encourage employees to accept full responsibility for the quality of their work.

The use of a quality circle, a group of employees who meet on company time to solve problems of product quality.

Increased effort is also being devoted to inspection, which is the examination of the quality of work-in-process. Employees perform inspections at various times during production.

As mentioned in Chapter 6, a total quality management (TQM) program coordinates the efforts directed at improving customer satisfaction, increasing employee participation, strengthening supplier partnerships, and facilitating an organizational atmosphere of continuous quality improvement.

Six Sigma improves quality and overall performance through a disciplined approach that relies on statistical data and improved methods to eliminate defects for a firm’s products and services.

World Quality Standards: ISO 9000 and ISO 14000. Without a common standard of quality, customers may be at the mercy of manufacturers and vendors. As the number of companies competing in the world marketplace has increased, so has the seriousness of this problem. The International Organization for Standardization (ISO) is a nonprofit organization in Geneva, Switzerland, with a membership of 160 countries. It has brought together a panel of quality experts to define what methods a company must use to produce a quality product.

This certification, issued by independent auditors and laboratory testing services, serves as evidence that a company meets the standards for quality control procedures in manufacturing design, production processes, product testing, training of employees, recordkeeping, and correction of defects.

Although certification is not a legal requirement to do business globally, the organization’s member countries have approved the ISO standards.

ISO is so prevalent around the globe that many customers refuse to do business with noncertified companies.

The International Organization for Standardization has developed many different standards for businesses that provide goods and services to customers around the globe.

ISO 9000 sets guidelines for quality management procedures that manufacturers and service providers must use to receive certification.

ISO 14000 is a family of international standards for incorporating environmental concerns into operations and product standards.

Production Planning: A Summary. Many activities are involved in producing products and services. Table 8-2 shows how all of these activities fit together. The goal of all the planning activities in the top section and operations control activities in the middle section is to create and produce a successful product or service. Of course, these activities should always be evaluated to determine if the firm’s processes can be improved.

IMPROVING PRODUCTIVITY WITH TECHNOLOGY. Productivity is defined as the average level of output per worker per hour.

Productivity Trends. Overall productivity growth for the U.S. business sector averaged 2.3 percent for the period 2006–2016. The U.S. Bureau of Labor Statistics tracks productivity growth rates each year. While the 0.6 percent increase in productivity for 2016 was lower when compared with average productivity growth over the 2006–2016 period, economists, business leaders, politicians, and government officials are quick to point out that as a nation, our manufacturers must find ways to be more productivity. Fortunately, as the economy began to improve, so did U.S. productivity rates. (See Figure 8-6.)

Improving Productivity Growth. Lean manufacturing is a concept built on the idea of eliminating waste from all of the activities required to produce a product or service. Benefits of lean manufacturing include a reduction in the amount of resources required to produce a product or service, more efficient use of employee time, improved quality, and increased profits. Several additional factors have been suggested for U.S. firms to compete globally:

A stable economy in the United States and examining all government regulations to identify rules that hinder productivity growth.

Increased cooperation between management and labor could be fostered to increase employee motivation and participation resulting in improved productivity.

Satisfying customers’ needs with quality goods and services.

Use of automation, robotics, and technology to lower production costs.

The Impact of Automation, Robotics, and Computers on Productivity. Automation is the total or near-total use of machines to do work.

Robotics is the use of programmable machines to perform a variety of tasks by manipulating materials and tools.

Robots work quickly, accurately, and steadily.

They are especially effective in tedious repetitive assembly-line jobs as well as in handling hazardous materials.

Computer Manufacturing Systems. People are quick to point out how computers have changed their everyday life, but most individuals do not realize the impact that computers have had on manufacturing.

The factory of the future has already arrived.

For most manufacturers, the changeover began with the following:

Computer-aided design (CAD) is the use of computers to aid in the development of products.

Computer-aided manufacturing (CAM) is the use of computers to plan and control manufacturing processes.

Computer-integrated manufacturing (CIM) is a computer system that not only helps to design products but also controls the machinery needed to produce the finished product.

Flexible Manufacturing Systems. The flexible manufacturing system (FMS) combines electronic machines and computer-integrated manufacturing in a single production system.

Assembly lines turn out large numbers of identical products economically, but they require expensive, time-consuming retooling of equipment when new products are manufactured. Such manufacturing is referred to as a continuous process, in which the same products are produced over a long period of time.

In contrast, FMSs are rearranged by reprogramming electronic machines, so that smaller batches of a variety of products can be made without raising the production cost.

Flexible manufacturing, also referred to as an intermittent process, is a manufacturing process in which a firm’s manufacturing machines and equipment are changed to produce different products.

Customer-driven production describes a manufacturing system that is driven by customer needs and wants.

Sustainability and Technological Displacement. In Chapter 1, sustainability was defined as creating and maintaining the conditions under which humans and nature can exist in productive harmony while fulfilling the social, economic, and other requirements of present and future generations. While sustainability affects all aspects of a nation, its people, and the economy, the concept is especially important for manufacturers and service providers.

Most experts agree that because U.S. manufacturers will continue to innovate, workers who have manufacturing jobs will be highly skilled and can work with the automated and computer-assisted manufacturing systems.

Those that don’t possess high-tech skills will be dispensable and unemployed.