Producing Quality Goods and Services Chapter 8 Producing Quality Goods and Services

Learning Objectives Explain the nature of production. Outline how the conversion process transforms raw materials, labor, and other resources into finished products and services. Describe how research and development lead to new products and services. Discuss the components involved in planning the production process. Explain how purchasing, inventory control, scheduling, and quality control affect production. Summarize how productivity and technology are related.

Operations Management …all activities managers engage in to produce goods and services.

Spotlight Production Salaries Source: Monster website, www.monster.com, accessed September 21, 2008.

Where U.S. Jobs Have Gone Source: Bronfenbrenner & Luce, “Offshoring: The Evolving Profile of Corporate Global Restructuring,” Multinational Monitor, Dec. 2004, http://www.multinationalmonitor.org/mm2004/122004/bronfenbrenner.html .

How Successful U.S. Firms Compete in the Global Marketplace Motivate employees to cooperate and improve productivity Select suppliers offering higher-quality raw materials at good prices Replace outdated equipment Use computerized manufacturing Improve control procedures Build new facilities in foreign countries

Output per Hour in Manufacturing Source: U.S. Department of Labor, Bureau of Labor Statistics, September 2008, “Output per Hour in Manufacturing: 15 Countries or Areas,1950–2007,” ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/prodsuppt01.txt.

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

Analytical Process …a process in operations management in which raw materials are broken into different component parts.

Synthetic Process …a process in operations management in which raw materials or components are combined to create a finished product.

Today’s Operations Managers Must Be able to motivate/lead Understand technology Appreciate control processes Understand customer

…the ability of a good or service to satisfy a human need. Utility …the ability of a good or service to satisfy a human need.

Types of Utility Form Place Time Possession

Form Utility …created by converting raw materials, people, finances, and information into finished goods or services.

Figure 8.1: The Conversion Process The conversion process enables business firms to convert ideas and resources such as materials, finances, and information into useful goods and services. The ability to produce products, services, and ideas is a crucial step in the economic development of any nation.

Conversion Process Focus ─ resource(s) that make up the major input Magnitude of change ─ degree to which physical resources are physically changed Number of production processes ─ varies by product/industry

Service Economy …an economy in which more effort is devoted to the production of services than to the production of goods.

Figure 8.2: Service Industries Source: U.S. Bureau of Labor Statistics website, www.bls.gov, accessed September 20, 2008.

Production of Services vs. Goods Services consumed immediately; goods can be stored Services provided when/where customer desires Services usually labor-intensive Services intangible

Major Activities in Operations Management New Product Development Planning for Production Operations Control

Research and Development (R&D) …a set of activities intended to identify new ideas that have potential to result in new goods and services.

Types of R&D Activities Basic Research Aimed at uncovering new knowledge Applied Research Geared toward discovering new knowledge with some potential use Development and Implementation Undertaken specifically to put new or existing knowledge to use in producing goods and services

Product Modification Product extension or refinement gives new life to a product whose sales make up for the declining sales of a product…introduced earlier.

Figure 8.3: Planning for Production

Design Planning …the development of a plan for converting a product idea into an actual product or service.

Requires balancing customer preferences and production requirements Product Line …a group of similar products that differ only in relatively minor characteristics. Requires balancing customer preferences and production requirements

Product Design …the process of creating a set of specifications from which a product can be produced.

Capacity …the amount of products or services that an organization can produce in a given time.

Use of Technology Automation Labor-intensive technology Process in which people do most of the work Capital-intensive technology Process in which machines and equipment do most of the work

Produce a New Product in Existing Factory If Existing has enough capacity Cost of refurbishing is less than cost of building new

Production Facility Location Variables Locations of major customers and suppliers Availability and cost of skilled and unskilled labor Quality of life for employees and management Cost of land and construction Local and state taxes, environmental regulations, zoning laws Financial support from local and state governments Special requirements such as great amounts of energy or water

Plant Layout …arrangement of machinery, equipment, personnel within a production facility.

Figure 8.4: Facilities Planning

Operational Planning Step 1: Selecting a Planning Horizon Step 2: Estimating Market Demand Step 3: Comparing Market Demand with Capacity Step 4: Adjusting Products/Services to Meet Demand

When Demand Exceeds Capacity Operate facility overtime Add 2nd, 3rd shift Outsource a portion Expand current facility or build another

When Capacity Exceeds Demand Reduce number of employees Shorten workweek Close part of facility Shift to production of other goods or services Sell unused facilities

Figure 8.5: Four Aspects of Operations

Purchasing …all activities involved in obtaining required materials, supplies, components, and parts from other firms.

Objective of Purchasing Ensure Required materials Available when needed In proper amounts At minimum cost

Factors in Choosing Supplier Price Quality Reliability Credit Terms Shipping Costs

Inventory Types: Raw Materials Work-in-Process Finished Goods Associated Costs: Holding/Storage Stock-Out

Inventory Control …the process of managing inventories in such a way as to minimize inventory costs, including …holding costs and potential stock-out costs.

Materials Requirements Planning (MRP) …a computerized system that integrates production planning and inventory control.

Extensions of MRP Manufacturing Resource Planning Less-sophisticated software; involves just production and inventory personnel Enterprise Resource Planning More-sophisticated software; can monitor not only inventory and production processes but also quality, sales, etc.

Just-in-Time Inventory System (JIT) …a system designed to ensure that materials or supplies arrive at a facility just when they are needed so storage and holding costs are minimized.

Debate: Should JIT Be Used to Reduce Inventory Costs? YES JIT ensures that materials or supplies arrive when they are needed. JIT reduces inventory storage costs because suppliers must deliver goods when they are needed. Former storage space can be diverted to more productive activities like manufacturing. NO Firm can encounter stock-out costs if supplier doesn’t deliver. Supplier storing goods passes on storage cost in the form of higher prices. If suppliers don’t deliver on time, manufacturer may have to shut down assembly line.

Scheduling …the process of ensuring that materials and other resources are at the right place at the right time.

Scheduling Concerns Place/time Routing of materials Timing Follow-up

Quality Control …the process of ensuring that goods and services are produced in accordance with design specifications.

Malcolm Baldrige National Quality Award Given by U.S. President Results in Better employee relations Higher productivity Greater customer satisfaction Increased market share Improved profitability

…the examination of the quality of work in process. Inspection …the examination of the quality of work in process.

Improving Quality Through Employee Participation Total Quality Management (TQM) program Six Sigma: Disciplined approach that relies on statistical data and improved methods to eliminate defects in products and services

Six Sigma Belts White ─ intensive, short-term training for small-scale or localized quality projects Green ─ extensive training for more-complex or department-wide projects Black ─ long-term training plus hands-on experience; for leading projects involving multiple areas

Production and Quality Management Websites There are several web-based sources of information and journals devoted to quality management and production issues. National Association of Manufacturers: www.nam.org Quality Digest: www.qualitydigest.com Industry Week: www.industryweek.com

…the average level of output per worker per hour. Productivity …the average level of output per worker per hour.

Average % Changes in Productivity 1999–2008 Source: U.S. Bureau of Labor Statistics.

Productivity Trends U.S 5th largest increase U.S. rate of productivity growth lagging Determines standard of living Increased cooperation between management and labor Changing reward system More money invested in facilities, equipment, and training

…the total or near-total use of machines to do work. Automation …the total or near-total use of machines to do work.

Robotics and Computerization Robotics Use of programmable machines to perform a variety of tasks by manipulating materials and tools Computer manufacturing systems Computer-aided design Computer-aided manufacturing Computer-integrated manufacturing

Flexible Manufacturing Systems Continuous process = a firm produces the same product over a long period of time Intermittent process = a firm’s machines and equipment are changed to produce different products Customer-driven production Technological displacement

Chapter Quiz A(n) __________ process breaks raw materials into different component parts. mechanical analytic synthetic technological productive

Chapter Quiz In the manufacturing process, the resource that comprises the major or most important input is referred to as the number of technologies. magnitude of change. focus of the conversion process. resource utilization process. resource manufacturing process.

Chapter Quiz Today, approximately __________ percent of American workers are employed by service industries. 92 83 76 40 28

Chapter Quiz A __________ layout is used when different operations are required for creating small batches of different products or working on different parts of a product. labor intensive capital intensive process product fixed

Chapter Quiz The average level of output per worker per hour is the definition of productivity. is the focus of the production process. applies only to a synthetic manufacturing process. applies only to an analytic manufacturing process. can be improved if the magnitude of the change is eliminated.