Producing Goods and Services Chapter 10 Producing Goods and Services

Learning Objectives Explain the meaning of the term production (or operations) and describe the four kinds of utility it provides Describe and explain the three classifications of operations processes Identify the characteristics that distinguish service operations from goods production and explain the main differences in the service focus These learning objectives are based upon those at the beginning of the chapter. For a review of learning objectives, see the summary at the end of the chapter. Objectives: p. 284 Summary: p. 318-319 Building Your Business Skills: p. 321. Business Case 10:Marshalling the Arts of Quality, p. 323-324.

Learning Objectives Describe the factors involved in operations planning Explain the activities involved in operations control, including materials management and the use of operation control tools Explain the connection between productivity and quality Explain the concept of total quality management and describe nine tools that companies can use to achieve it These learning objectives are based upon those at the beginning of the chapter. For a review of learning objectives, see the summary at the end of the chapter. Objectives: p. 284 Summary: p. 318-319 Building Your Business Skills: p. 321. Business Case 10:Marshalling the Arts of Quality, p. 323-324.

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 Discussed on page 286. Notes: Goods are produced. Services are performed. Activities: Review Questions: #1,4.

Utility: Adding Value Time utility Place utility Form 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 Discussed on page 288. Note: utility refers to the power of a product to satisfy a human want; something of value

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 Discussed on page 288.

The Transformation System Production Managers Plan Organize Schedule Control Discussed on pages 288-289. This is similar to the diagram in Figure 10.1 on page 289. Activities: Have students use the diagram in Figure 10.1 to map the transformation system in a local manufacturing operation. They may present their findings orally. Resources Land Capital Transformation Human Resources Activities Products and Services Materials

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 Discussed on page 288. Activities: Analysis Questions: #2,3.

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 Discussed on page 288-289. Activities: Analysis Questions: #2,3.

Transformation Technology Assembly processes Put together various components Electronics, appliances, automotive Transport processes Goods moved from one location to another Clerical processes Transform information Discussed on page 288-289. Activities: Analysis Questions: #2,3.

Analytic Vs. Synthetic Processes Resources are broken down in production process Extracting minerals from ore Synthetic Resources are combined in the production process Paint production Discussed on pages 289. Activities: Analysis Questions: #2,3.

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 Discussed on pages 289-290. Activities: Analysis Questions: #4.

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 Discussed on pages 290-202 Activities: Analysis Questions: #3,4,5

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 Discussed on page 291. Activities: Analysis Questions: #3,4,5.

Focus on Service Characteristics Intangibility Services cannot be touched, tasted, smelled, or seen Customization Each service is performed to the customer’s needs dental work, veterinary services Unstorability Most services must be taken when offered or the opportunity is gone Plane flight Discussed on pages 291-292. Activities: Have students explain how the following services are “intangible”: Day care Education Legal Services Auto Repair Haircut Analysis Questions: #3,4,5.

E-commerce: The Virtual Presence of the Customer In a regular service environment, customers are physically present In an e-commerce environment, the customers are virtually present,with access 7 days weekly, 24 hours daily Unique opportunity to build customer relationships Discussed on page 292. Activities: Have students visit an e-commerce website. Ask them to record the things that the site does to build relationships with its online customers.

Operations Planning Successful operations are carefully planned and implemented Key issues include Forecasting Planning Capacity Location Layout Quality Methods planning Discussed on pages 292-299. Activities: Application Exercises: #10.

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 Discussed on pages 292-293. Activities: Application Exercises: #10.

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 Discussed on page 293-294. Activities: Application Exercises: #10.

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 Discussed on pages 294. Activities: Application Exercises: #8, 10.

Layout Planning Productive 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 Discussed on pages 295. Activities: Application Exercises: #10.

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 Discussed on pages 295. Activities: Application Exercises: #10.

Cellular Layouts A 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 Discussed on page 295 Activities: Application Exercises: #10.

Product Layout Resources 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 Discussed on pages 295-297 Notes: There are disadvantages to the assembly line system. Workers also become bored and less productive over time, affecting job satisfaction. Also, firms lack flexibility due to the capital required to create the layout, or change it. This makes it hard to bring about changes as they are required. Activities: Application Exercises: #10.

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 Discussed on pages 297. Activities: Application Exercises: #10.

Soft Manufacturing Emphasis 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) Discussed on pages 297. Activities: Application Exercises: #10.

Layout Planning for Services Differs for low and high contact systems Low-contact systems should be designed to enhance service production High-contact systems should be arranged to meet customer’s needs and expectations Discussed on page 297. Activities: Have students classify each of the following services as low or high contact, with regards to system design and facility layout: Veterinary clinic Autobody shop Bank Church Department of Motor Vehicles Analysis Questions: #10.

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 Discussed on pages 298-299. Activities: Analysis Questions: #10.

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 Discussed on page 299-300.

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 Discussed on page 300-301.

Operations Control When long range plans are in place Managers monitor production performance by comparing results with plans and schedules Follow-up Checking to ensure that production decisions are being implemented Discussed on page 301.

Materials Management Materials management Standardization Planning, organizing, and controlling the flow of materials from purchase through distribution of finished goods Transportation, warehousing, inventory control, supplier selection, and purchasing Standardization 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 Discussed on pages 301-302.

Worker Training Staff skills are essential to render high quality goods and services Staff manage both sales and service production human relations skills are vital in high-contact services technical skills are vital in low-contact services Discussed on pages 303.

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 Discussed on pages 304.

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 process Bill 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” Discussed on page 304.

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 Discussed on page 304.

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 Discussed on page 304-305.

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 Discussed on page 305. Activities: Application Exercises: #5,6.

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 Discussed on page 305.

Measuring Productivity Productivity is measured as a ratio of outputs to inputs Managers must choose which inputs or outputs they desire to use in the ratio Outputs may include sales in units or dollars Inputs may include labour, capital, materials, and energy required to produce the output Discussed on pages 305. Activities: Application Exercises: #5,6.

GDP is the value of all of the goods and services Labour Productivity GDP is the value of all of the goods and services produced by an economy. Discussed on page 305. Notes: When calculating Labour Productivity total number of hours worked may be used as the input instead of total number of workers. Labour productivity measures are used due to their simplicity to calculate and comprehend. Governments do comparative analyses using such ratios. Gross Domestic Product is measured annually and adjusted for inflation to allow constant-dollar comparisons across many years. As labour-intensive industries become less important to economic growth, measures relying more on other inputs such as materials, capital will become more important as indicators of national productivity. Activities: Application Exercises: #5,6.

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 Discussed on page 305-306. Activities: Application Exercises: #5,6. 7 7

Productivity Industry 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 Discussed on page 306-307. Notes: Industry productivity affects labour union negotiations, investors, employees, suppliers, and the community at large Activities: Application Exercises: #5,6.

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 Discussed on page 309.

Quality Assurance and TQM Activities necessary to get quality goods and services into the marketplace Planning Organizing Leading Controlling Managing Quality Efforts Discussed on page 309-312.

Planning for Quality Quality planning begins before goods are designed, or redesigned Performance 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 Discussed on page 310-311.

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 Discussed on pages 311.

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 Discussed on page 311

Controlling for Quality Establish specific quality standards and measurements Compare results to standards using quality assurance tools Detect mistakes and make corrections Discussed on page 311

Quality Assurance Tools Benchmarking ISO 9000 Re-engineering Competitive product analysis Value-added analysis Statistical process control Quality/cost studies Quality improvement teams Control charts Adding value through supply chains Discussed on pages 312-320.

Value-added Analysis Value-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 Discussed on page 312.

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 Discussed on page 312-313.

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 Discussed on page 312-313.

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 Discussed on page 312.

Control Charts A statistical process control method in which a sample is tested and the results are displayed graphically Control limits are critical values that are noted on the graph to depict the acceptable range of the specification limits Discussed on pages 313.

Quality/Cost Studies Determining 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 Discussed on pages 313-314. Activities: Review Questions: #4. Application Exercises: #9, #10.

Quality/Cost Studies Internal failures External 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 Discussed on page 314.

Quality Improvement Teams Employees are grouped into small teams Quality circles Each group chooses a team leader and determines rules for discussion Each team must define, analyze, and solve quality and other process-related problems within their areas of responsibility May involve brainstorming, discussion, and the use of quality/cost study Discussed on page 314. Notes: Quality circles greatly improve employee attitudes, imparting self-worth and a sense of ownership of quality.

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 Discussed on page 314.

Getting Close to the Customer Successful firms have an understanding of customer needs and wants Customers need and want good service Customers are “economic assets” Firms need to stay close to their customers Discussed on pages 315.

ISO 9000 A system developed by the international standards organization (ISO) to evaluate a firm’s quality To earn the rating firms are measured by qualified consultants Product testing Employee training Record-keeping Correcting defects Discussed on page 315-316. Notes: International Standards Organization is located in Geneva, Switzerland. The ISO 9000 system is becoming a prerequisite for selling to many firms internationally, particularly in the European Community. The system is pronounced as “ICE-O 9000”. For more information, consult the International Report box on page 405 entitled, “ISO 9000: Seeking the Standard in Quality”.

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 Discussed on page 316.

Supply Chain Strategy Members of the chain work with each other rather than as adversaries An 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 Discussed on page 317.