1. Producing Goods and Services
Chapter 10
Producing Goods
and Services

2. 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
Building Your Business Skills: p. 321.
Business Case 10:Marshalling the Arts of Quality, p

3. 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
Building Your Business Skills: p. 321.
Business Case 10:Marshalling the Arts of Quality, p

4. 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.

5. 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

6. 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.

7. The Transformation System
Production
Managers
Plan
Organize
Schedule
Control
Discussed on pages 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

8. 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.

9. 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
Activities:
Analysis Questions: #2,3.

10. 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
Activities:
Analysis Questions: #2,3.

11. 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.

12. 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
Activities:
Analysis Questions: #4.

13. 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
Activities:
Analysis Questions: #3,4,5

14. 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.

15. 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
Activities:
Have students explain how the following services are “intangible”:
Day care
Education
Legal Services
Auto Repair
Haircut
Analysis Questions: #3,4,5.

16. 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.

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

18. 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
Activities:
Application Exercises: #10.

19. 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
Activities:
Application Exercises: #10.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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
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.

25. 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.

26. 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.

27. 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.

28. 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
Activities:
Analysis Questions: #10.

29. 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

30. 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

31. 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.

32. 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

33. 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.

34. 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.

35. 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.

36. 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.

37. 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

38. 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.

39. 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.

40. 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.

41. 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.

42. 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
Activities:
Application Exercises: #5,6. 7 7

43. 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
Notes:
Industry productivity affects labour union negotiations, investors, employees, suppliers, and the community at large
Activities:
Application Exercises: #5,6.

44. 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.

45. 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

46. 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

47. 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.

48. 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

49. 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

50. 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

51. 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.

52. 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

53. 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

54. 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.

55. 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.

56. 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
Activities:
Review Questions: #4.
Application Exercises: #9, #10.

57. 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.

58. 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.

59. 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.

60. 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.

61. 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
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”.

62. 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.

63. 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.