copyright © 2006 pearson education canada inc. 10-1 chapter 10 producing goods and services
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10-2Copyright © 2006 Pearson Education Canada Inc.
Learning ObjectivesExplain the meaning of the term production (or operations) and describe the four kinds of utility it providesDescribe and explain the three classifications of operations processesIdentify the characteristics that distinguish service operations from goods production and explain the main differences in the service focus
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Learning ObjectivesDescribe the factors involved in operations planningExplain the activities involved in operations control, including materials management and the use of operation control toolsExplain the connection between productivity and qualityExplain the concept of total quality management and describe nine tools that companies can use to achieve it
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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
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Utility: Adding ValueTime 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
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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
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The Transformation System
Production Managers
PlanOrganizeSchedule
Control
Resources
Land
Capital Transformation Human Resources Activities Products and ServicesMaterials
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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
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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
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Transformation Technology
Assembly processes Put together various components Electronics, appliances, automotive
Transport processes Goods moved from one location to
anotherClerical processes Transform information
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Analytic Vs. Synthetic Processes
Analytic Resources are broken down in
production process Extracting minerals from ore
Synthetic Resources are combined in the
production process Paint production
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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
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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
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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
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Focus on Service Characteristics
Intangibility Services cannot be touched, tasted,
smelled, or seenCustomization Each service is performed to the
customer’s needsdental work, veterinary services
Unstorability Most services must be taken when
offered or the opportunity is gone Plane flight
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E-commerce: The Virtual Presence of the Customer
In a regular service environment, customers are physically presentIn an e-commerce environment, the customers are virtually present,with access 7 days weekly, 24 hours dailyUnique opportunity to build customer relationships
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Operations PlanningSuccessful operations are carefully planned and implementedKey issues include Forecasting Planning
Capacity Location Layout Quality Methods planning
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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
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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
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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
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Layout PlanningProductive 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
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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
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Cellular LayoutsA 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
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Product LayoutResources 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
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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
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Soft ManufacturingEmphasis 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)
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Layout Planning for Services
Differs for low and high contact systemsLow-contact systems should be designed to enhance service production High-contact systems should be arranged to meet customer’s needs and expectations
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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
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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
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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
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Operations Control
When long range plans are in place Operations control
Managers monitor production performance by comparing results with plans and schedules
Follow-up Checking to ensure that production
decisions are being implemented
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Materials ManagementMaterials management
Planning, organizing, and controlling the flow of materials from purchase through distribution of finished goods Transportation, warehousing, inventory control,
supplier selection, and purchasingStandardization
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
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Worker Training
Staff skills are essential to render high quality goods and servicesStaff manage both sales and service production human relations skills are vital in
high-contact services technical skills are vital in low-contact
services
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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
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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 processBill 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”
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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
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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
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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
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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
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Measuring Productivity
Productivity is measured as a ratio of outputs to inputsManagers must choose which inputs or outputs they desire to use in the ratioOutputs may include sales in units or dollarsInputs may include labour, capital, materials, and energy required to produce the output
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Labour Productivity
Labour Productivity = Gross Domestic Product (GDP)
Total Number of Workers
GDP is the value of all of the goods GDP is the value of all of the goods and servicesand services
produced by an economy.produced by an economy.
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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
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ProductivityIndustry 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
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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
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Quality Assurance and TQM
Activities necessary to get quality goods and services into the marketplace
Planning Organizing Leading Controlling
ManagingManagingQuality Quality EffortsEfforts
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Planning for Quality
Quality planning begins before goods are designed, or redesignedPerformance 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
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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
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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
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Controlling for Quality
Establish specific quality standards and measurementsCompare results to standards using quality assurance toolsDetect mistakes and make corrections
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Quality Assurance Tools
BenchmarkingISO 9000Re-engineeringCompetitive product analysisValue-added analysisStatistical process control
Quality/cost studies Quality improvement teamsControl chartsAdding value through supply chains
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Value-added AnalysisValue-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
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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
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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
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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
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Control Charts
A statistical process control method in which a sample is tested and the results are displayed graphicallyControl limits are critical values that are noted on the graph to depict the acceptable range of the specification limits
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Quality/Cost StudiesDetermining 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
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Quality/Cost Studies
Internal 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
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Quality Improvement Teams
Employees are grouped into small teams Quality circles
Each group chooses a team leader and determines rules for discussionEach team must define, analyze, and solve quality and other process-related problems within their areas of responsibilityMay involve brainstorming, discussion, and the use of quality/cost study
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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
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Getting Close to the Customer
Successful firms have an understanding of customer needs and wantsCustomers need and want good serviceCustomers are “economic assets”Firms need to stay close to their customers
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ISO 9000
A system developed by the international standards organization (ISO) to evaluate a firm’s qualityTo earn the rating firms are measured by qualified consultants Product testing Employee training Record-keeping Correcting defects
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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
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Supply Chain Strategy
Members of the chain work with each other rather than as adversariesAn 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
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