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Chapter 8 Producing Quality Goods and Services

LEARNING OBJECTIVES

8-1 Explain the nature of production.

8-2 Outline how the conversion process transforms raw materials, labor, and other resources into finished goods or services.

8-3 Understand the importance of service businesses to consumers, other business firms, and the nation’s economy.

8-4 Describe how research and development leads to new products and services.

8-5 Discuss the components involved in planning the production process.

8-6 Explain how purchasing, inventory control, scheduling, and quality control affect production.

8-7 Summarize how technology can make American firms more productive and competitive in the global marketplace.

What Is Production?

Operations management – all the activities required to produce goods and services

To produce a product or service successfully, a business must perform a number of specific activities, such as:

Marketing research

Planning

Control of operations

Product quality

Performance standards

Inventory

Production costs

How American Manufacturers Compete in the Global Marketplace (slide 1 of 3)

The Bad News for Manufacturers

The number of Americans employed in the manufacturing sector has decreased.

Today, fewer than one in ten work in manufacturing.

Most of the U.S. manufacturing jobs that were lost were outsourced to low-wage workers in nations where there are few labor, safety, and environmental regulations.

Manufacturing accounts for only about 8 percent of the current U.S. workforce.

Experts predict that U.S. employment in the manufacturing sector will continue to decline.

As a result of the decline, China is now the largest manufacturing nation in the world.

How American Manufacturers Compete in the Global Marketplace (slide 2 of 3)

The Good News for Manufacturers

Although the number of manufacturing jobs has declined, productivity has increased.

Factors that account for the productivity increase:

Innovation

Highly skilled workers

Elected officials in Washington are taking a renewed interest in preserving existing manufacturing jobs and creating incentives for manufacturing firms to “do business in America.”

Reshoring – a situation in which U.S. manufacturers bring manufacturing jobs back to the United States

Examples: Ford, Apple, and Lenovo are involved in reshoring.

How American Manufacturers Compete in the Global Marketplace (slide 3 of 3)

The Good News for Manufacturers (continued)

The global marketplace has never been more competitive, and successful U.S. firms will 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 (slide 1 of 2)

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

Example: A barrel of crude oil refined by Marathon Oil Corporation can be broken down into gasoline, oil, lubricants, and many other petroleum by-products.

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

Example: Stanley Black & Decker uses a synthetic process when it combines plastic, steel, rechargeable batteries, and other components to produce a cordless drill.

Careers in Operations Management (slide 2 of 2)

Today’s successful operations managers must:

Be able to motivate and lead people.

Understand how technology can make a manufacturer more productive.

Appreciate the cost-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 or a service business is to provide utility to customers.

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

Although there are four types of utilities—form, place, time, and possession—operations management focuses primarily on form utility.

Form utility – utility created by people converting raw materials, finances, and information into finished products

FIGURE 8-1 The Conversion Process

Manufacturing Using a Conversion Process (slide 1 of 2)

Focus or Major Resource

Focus – the resource or resources (financial, material, information, and people) that make up the major or most important input

Example: For Citibank, financial resources are the major resource; for Chevron, material resources are the major resource.

Magnitude of Change

Magnitude of change – the degree to which the resources are physically changed

Example: Glad Products Company produces Glad® ClingWrap by combining various chemicals in liquid or powder form to produce the long, thin sheets of Glad ClingWrap. The original resources are totally unrecognizable in the finished product. At the other extreme, Southwest Airlines produces no physical change in its original resources; the airline provides a service and transports people from one location to another.

Manufacturing Using a Conversion Process (slide 2 of 2)

Number of Production Processes

A single firm may employ one production process or many, whereas larger firms that make a variety of products use multiple production processes.

Example: Advanced Cast Stone, Inc., manufactures one basic product: building materials made from concrete. On the other hand, General Electric manufactures some of its own products, buys other merchandise from suppliers, and operates multiple divisions including a finance division, a light division, an appliance division, and a healthcare division.

The Increasing Importance of Services

The application of the principles of operations management to the production of services has coincided with a dramatic growth in the number and diversity of service businesses.

The American economy is now characterized as a service economy.

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

Planning Quality Services

For a service firm, planning often begins with determining who the customer is and what needs the customer has.

After customer needs are identified, the next step is to develop a plan that will enable the firm to deliver the services that their customers want or need.

Once the firm provides a service to a customer, successful firms evaluate the way they operate and measure customer satisfaction.

If necessary, they redesign their services to improve the customer’s experience.

Evaluating the Quality of a Firm’s Services (slide 1 of 2)

The production of services is very different from the production of manufactured goods in the following five ways:

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

Services are consumed immediately and cannot be stored.

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

Services are usually labor-intensive.

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

Evaluating the Quality of a Firm’s Services (slide 2 of 2)

Compared with manufacturers, service firms often listen more carefully to customers and respond more quickly to the market’s changing needs.

Example: In order to continuously improve customer service, Maggiano’s Little Italy restaurant chain encourages diners to complete online surveys that prompt diners to evaluate the food, atmosphere, and service. The information is then used to fine-tune the way Maggiano’s meets its customers’ needs. Often, as a reward for completing the survey, diners are given free food the next time they visit a Maggiano’s restaurant.

Research and Development

Research and development (R&D) – a set of activities intended to identify new ideas that have the potential to result in new goods and services

Three general types of R&D:

Basic research – consists of activities aimed at uncovering new knowledge

Applied research – consists of activities geared toward discovering new knowledge with some potential use

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

Example: 3M, known for its development and implementation research activities, currently employs 8,300 researchers and has invested almost $8.5 billion over the last five years to develop new products.

Product Extension and Refinement

To stay in business, a firm must, at the very least, find ways to refine or extend the want-satisfying capability of its product or service.

Example: Since they were introduced in the late 1930s, television sets have been constantly refined so that they now provide clearer, sharper pictures with less dial adjusting. During the same time, television sets also were extended. There are basic flat-screen televisions without added features, and many others that include Blu-Ray players and Apps that can be used to access the Internet.

For most firms, extension and refinement are expected results of their research, development, and implementation activities.

Each refinement or extension results in an essentially “new” product whose sales make up for the declining sales of a product that was introduced earlier.

FIGURE 8-3 Planning for Production

Design Planning (slide 1 of 2)

Design planning – the development of a plan for converting an idea into an actual product or service

The major decisions involved in design planning deal with product line, required capacity, and use of technology.

Product Line

Product line – 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.

Once the product line has been determined, each distinct product within the product line must be designed.

Product design – the process of creating a set of specifications from which a product can be produced

Design Planning (slide 2 of 2)

Required Production Capacity

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

If a firm has too much capacity, valuable resources (plant, equipment, and money) will lie idle.

If a firm has too little capacity, additional capacity may have to be added later when it is much more expensive than in the initial building stage.

Use of Technology

Labor-intensive technology – a process in which people must do most of the work

Example: housecleaning services

Capital-intensive technology – a process in which machines and equipment do most of the work

Example: Sony’s automated assembly plant

Site Selection and Facilities Planning (slide 1 of 2)

In determining where to located 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

The cost of land and building costs

Local and state taxes, environmental regulations, and zoning laws

The amount of financial support and subsidies, if any, offered by local and state governments

Special requirements, such as great amounts of energy or water used in the production process

Before making a final decision about where a proposed plant will be located and how it will be organized, two other factors—human resources and plant layout—should be examined.

Site Selection and Facilities Planning (slide 2 of 2)

Plant layout – the arrangement of machinery, equipment, and personnel within a production facility

Three types of plant layout:

Process layout – used when different operations are required for creating small batches of different products or working on different parts of a product

Example: an auto repair facility at a local automobile dealership

Product layout – used when all products undergo the same operations in the same sequence

Example: an assembly line

Fixed-position layout – used when a very large product is produced

Example: used by commercial airlines and shipbuilders

FIGURE 8-4 Facilities Planning

Operational Planning (slide 1 of 2)

Four steps in operational planning:

Step 1: Selecting a Planning Horizon

Planning horizon – the 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

Market demand – the quantity of a product that customers will purchase at the going price

Step 3: Comparing Market Demand with Capacity

If market demand and capacity are equal, the facility should be operated at full capacity.

If market demand and capacity are not equal, adjustments may be necessary.

Operational Planning (slide 2 of 2)

Four steps in operational planning (continued):

Step 4: Adjusting Products or Services to Meet Demand

Options for when market demand exceeds capacity:

Start a second or third work shift

Expand the current facility or build another facility

Options for when capacity exceeds market demand:

Lay off workers

Operate on a shorter-than-normal workweek

Sell unused manufacturing facilities

FIGURE 8-5 Four Aspects of Operations Control

Purchasing

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

Example: Levi Strauss must purchase denim cloth, thread, and zippers before it can produce a single pair of jeans.

The objective of purchasing is to ensure that required materials are available when they are needed, in the proper amounts, and at minimum cost.

The choice of suppliers should result from careful analysis of a number of factors.

Price

Quality

Reliability

Credit terms

Shipping costs

Inventory Control

Operations managers are concerned with three types of inventories.

Raw-materials inventory – consists of materials that will become part of the product during the production process

Work-in-process inventory – consists of partially completed products

Finished-goods inventory – consists of completed goods

Each type of inventory has a holding cost, or storage cost, and a stock-out cost (the cost of running out of inventory).

Inventory control – the process of managing inventories in such a way as to minimize inventory costs, including both holding costs and potential stock-out costs

Materials requirements planning – a computerized system that integrates production planning and inventory control

Just-in-time inventory (JIT) system – a system 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

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

Routing – the sequence of workstations that the materials will follow

Timing – specifies when the materials will arrive at each station and how long they will remain there

Follow-up – monitoring schedules to ensure that the work flows according to the schedule

Quality Control (slide 1 of 3)

Over the years, more and more managers have realized that quality is an essential “ingredient” of the good or service being produced, and that this view of quality provides several benefits.

The number of defects decreases, which causes profits to increase.

Making products or completing services right the first time reduces many of the rejects and much of the rework.

Malcolm Baldrige National Quality Award – an award given by the President of the United States to organizations judged to be outstanding in specific managerial tasks that lead to improved quality for both products and services

Example: Nestle, Boeing, and Ritz-Carlton Hotels are all past winners.

Quality control – 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.

TABLE 8-1 Four Widely Used Techniques to Improve the Quality of a Firm’s Products

Technique	Description
Benchmarking	A process of comparing the way a firm produces products or services to the methods used by organizations known to be leaders in an industry in order to determine the “best practices” that can be used to improve quality
Continuous improvement	Continuous improvement is a never-ending effort to eliminate problems and improve quality. Often this method involves many small changes or steps designed to improve the production process on an ongoing basis
Statistical Process Control (SPC)	Sampling to obtain data that are plotted on control charts and graphs to see if the production process is operating as it should and to pinpoint problem areas
Statistical Quality Control (SQC)	A detailed set of specific statistical techniques used to monitor all aspects of the production process to ensure that both work-in-process and finished products meet the firm’s quality standards

Quality Control (slide 2 of 3)

Improving Quality through Employee Participation

Quality circle – a team of employees who meet on company time to solve problems of product quality

Example: Quality circles have been used successfully in companies such as Toyota, IBM, and Lockheed Martin.

Inspection – the examination of the quality of work-in-process

Total quality management (TQM)

Examples: American Express, AT&T, and Hewlett-Packard all have used TQM to improve product quality and customer satisfaction.

Six Sigma – a disciplined approach that relies on statistical data and improved methods to eliminate defects for a firm’s products and services

Example: General Electric, Ford, and Honeywell have used Six Sigma.

Quality Control (slide 3 of 3)

World Standards

International Organization for Standardization (ISO) – a network of national standards institutes and similar organizations from over 160 different countries that is charged with developing standards for quality products and services and environmental standards for global manufacturers and producers

The member organization for the United States is the American National Standards Institute located in Washington, D.C.

Standardization is achieved through consensus agreements between national delegations representing all the economic stakeholders—suppliers, customers, and often governments.

Although certification is not a legal requirement to conduct business globally, ISO standards are so prevalent around the globe that many customers refuse to do business with noncertified companies.

TABLE 8-2 Production Planning: A Summary (slide 1 of 2)

The Process Begins with Planning for Production

1. Research and Development identifies ideas for a product or service.

2. Design Planning develops a plan for producing a product or service.

3. Site Selection and Facilities Planning identifies a production site, a plant layout, and if human resources are available.

4. Operational Planning decides on the amount of products or services that will be produced.

TABLE 8-2 Production Planning: A Summary (slide 2 of 2)

Then Four Operations Control Steps Are Used to Produce a Product or Service

1. Purchasing obtains required materials, supplies, and parts from other firms.

2. Inventory Control ensures that materials, supplies, and parts are available when needed.

3. Scheduling ensures that materials and other resources are at the right place and at the right time in the production process.

4. Quality Control determines if the firm has lived up to the standards it has set for itself on the quality of its products or services.

The End Result: A Successful Product or Service

FIGURE 8-6 U.S. Productivity Growth Rates

Improving Productivity Growth

Lean manufacturing – a concept built on the idea of eliminating waste from all of the activities required to produce a product or service

Benefits:

A reduction in the amount of resources required to produce a product or service

More efficient use of employee time

Improved quality

Increased profits

Other factors that will increase productivity:

Increasing employee motivation and participation

Monitoring financial and customer satisfaction data

Increasing innovation and research and development efforts

The Impact of Automation, Robotics, and Computers on Productivity (slide 1 of 2)

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

Robotics

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

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

Computer Manufacturing Systems

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

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

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

The Impact of Automation, Robotics, and Computers on Productivity (slide 2 of 2)

Flexible Manufacturing Systems

Continuous process – a manufacturing process in which a firm produces the same product(s) over a long period of time

Example: traditional assembly lines at automobile manufacturers

Flexible manufacturing system (FMS) – a single production system that combines electronic machines and CIM

Flexible manufacturing is sometimes referred to as an intermittent process.

Intermittent process – a manufacturing process in which a firm’s manufacturing machines and equipment are changed to produce different products