Chapter Nine
Producing Quality
Goods and
Services
Learning Objectives
1. Explain the nature of production.
2. Outline how the conversion process
transforms raw materials, labor, and
other resources into finished products
or services.
3. Describe how research and
development lead to new products and
services.
4. Discuss the components involved in
planning the production process.
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Learning Objectives
5. Explain the four major areas of
operations control: purchasing,
inventory control, scheduling, and
quality control.
6. Discuss the increasing role of
computers, robotics, and flexible
manufacturing in the production
process.
7. Outline the reasons for recent trends
in productivity.
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What Is Production?
• Operations Management
– All of the activities that managers engage in to
produce goods and services
• Operations Manager
– A person who manages systems that convert
resources into goods and services
– Managers concern themselves with the control of
operations to ensure that the organization’s goals
are achieved
• Planning
– Planning takes place before anything is produced
and during the production process
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Competition in the Global Marketplace
• The U.S. was the most productive country after World
War II
• Competitors in European and Asian countries
eventually recovered and began to compete with the
U.S. firms
• U.S. firms have had to refocus on quality and
customer needs
• The most successful U.S. firms have focused on:
–
–
–
–
–
Reducing production costs by carefully selecting suppliers
Revamping their facilities with state-of-the-art equipment
Using computer-aided and flexible manufacturing systems
Improving control procedures to lower manufacturing costs
Building foreign manufacturing facilities where labor costs
are lower
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Careers in Operations Management
• Operations managers must appreciate the
manufacturing process
– Analytic process: a process that breaks raw materials into
different component parts
– Synthetic process: a process that combines raw materials or
components to create a finished product
• Successful operations managers must:
– Be able to motivate and lead people
– Understand how technology can make a manufacturer more
productive and efficient
– Appreciate the control processes that lower production costs
and improve product quality
– Understand the relationship between the customer, the
marketing of a product, and the production of a product
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The Conversion Process
• The purpose of the resources conversion
process is to provide utility to customers
– Utility: the ability of a good or service to satisfy a
human need
– Four types of utility: form, place, time, and
possession
– Form utility: utility created by the converting raw
materials, people, finances, and information into
finished products
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The Conversion
Process
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The Nature of Conversion
• Focus
– The focus of the conversion process is the
resource or resources that comprise the
major or most important input
• Magnitude of Change
– The degree to which the resources are
physically changed
• Number of Production Processes
– The number of production processes
employed varies from one or a few for
small firms to many for larger firms
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The Increasing Importance of Services
• Service Economy
– An economy in which more effort is devoted to
services than to the production of goods
– The production of services varies from the
production of goods
1. Services are consumed immediately and cannot be
stored
2. Services are provided when and where the customer
desires
3. Services are usually labor intensive
4. Services are intangible, making it difficult to
evaluate customer satisfaction
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Service Industries
Source: U.S. Bureau of Labor Statistics, Monthly Labor Review, August 2002, p. 72.
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Where Do New Products and Services
Come From?
• Research and Development
– A set of activities intended to identify new ideas
that have the potential to result in new goods and
services
– Basic research
• Uncovering new knowledge; scientific advancement
without regard for its potential use
– Applied research
• Discovering new knowledge with some potential use
– Development and implementation
• Activities undertaken to put new or existing knowledge to
use in producing goods and services
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Where Do New Products and Services
Come From? (cont’d)
• Product Extension and Refinement
– Product life cycle
• The rise and fall pattern of sales associated with the introduction
and acceptance of a product in the market place
– Product refinement
• Improving a product’s performance characteristics to increase its
utility to consumers
– Product extension
• Improving and adding additional performance features that extend
the want-satisfying capability of the product and its life cycle in the
market
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Planning for Production
• Design Planning
– The development of a plan for converting a
product idea into an actual product
– Product line
• A group of similar products that differ only in relatively
minor characteristics
– Product design
• 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
• Required capacity must meet product demand
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Planning for Production (cont’d)
• Design Planning (cont’d)
– Use of technology
• The degree of automation must be determined
based on the tradeoff between high initial
investment costs with lower operating costs (for
automation) and low initial investment costs
with high operating costs (for human labor)
• Labor-intensive technology: a process in which
people must do most of the work
• Capital-intensive technology: a process in
which machines and equipment do most of the
work
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Planning for Production (cont’d)
• Facilities Planning and Site Selection
– The process of determining where
products or services are to be produced
– Factors influencing the decision either to
use an existing facility or to construct a
new facility
• Does the existing facility have the capacity to
handle the increased demand for production?
• Is the cost of refurbishing or expanding the
existing facility less than constructing a new
facility?
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Planning for Production (cont’d)
• Facilities Planning and Site Selection (cont’d)
– Factors influencing the location decision for a
production facility
•
•
•
•
•
•
•
•
•
Locations of major customers
Transportation costs to deliver finished products
Geographic location of suppliers and raw materials
Availability of skilled and unskilled labor
Quality of life for employees and management
Cost of land and construction
Taxes, environmental regulations, zoning laws
Financial incentives from local and state governments
Special requirements for resources
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Planning for Production (cont’d)
• Human Resources
– Human resources manager and operations
manager must work together
– The appropriate skills must be identified
– Employees with the right skills must be
recruited
– Or training programs must be developed
– The HR manager should provide
information such as the availability of
skilled workers and wage rates
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Planning for Production (cont’d)
• Plant Layout
– The process layout is used when small
batches of different products are created or
worked on in a different operating
sequence
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Planning for Production (cont’d)
• Plant Layout
– The product layout (assembly line) is used
when all products undergo the same
operations in the same sequence
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Planning for Production (cont’d)
• Plant Layout
– The fixed position layout is used in
producing a product that is too large to
move
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Operational Planning
• Four Steps in Operational Planning
– Step 1: Selecting a Planning Horizon
• The period during which a plan will be in effect;
commonly one year
– Step 2: Estimating Market Demand
• The quantity that customers will purchase at the going
price
• Demand is estimated for the planning horizon
– Step 3: Comparing Market Demand with Capacity
• If market demand and the facility’s capacity are not
equal, adjustments may be necessary
– Step 4: Adjusting Products or Services to Meet
Demand
• Increase capacity to meet demand
• Ignore excess demand
• Eliminate excess capacity
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Three Types of Control
Source: Robert Kreitner, Management, 9th ed. (Boston: Houghton Mifflin, 2004), p. 565.
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Class Exercise
• Assume you are in charge of product
development for a small manufacturing firm
that produces three different sizes of paper
clips.
– What types of purchasing decisions would you
need to make in order to manufacture these
products?
– How would you balance the problems of excessive
holding costs and potential stock-out costs?
– How would scheduling affect the production of
these products?
– What specific steps would be used to manufacture
a paper clip?
– Should you be concerned with quality control for
inexpensive products like paper clips?
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Chapter Quiz
1. A(n) __________ process combines raw materials or
components to create a finished product.
a)
b)
c)
d)
e)
analytic
synthetic
technological
productive
mechanical
2. In the manufacturing process, the degree to which
the resources are physically changed is referred to as
a)
b)
c)
d)
e)
focus of the conversion process.
number of technologies.
magnitude of change.
laissez faire economy.
mature economy.
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Chapter Quiz (cont’d)
3. Today, the American economy is referred to as a(n)
a)
b)
c)
d)
e)
stagnant economy.
service economy.
manufacturing economy.
laissez faire economy.
mature economy.
4. A __________ layout is sometimes referred to as an
assembly line.
a)
b)
c)
d)
e)
fixed
process
product
labor intensive
capital intensive
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Chapter Quiz (cont’d)
5. The process of ensuring that materials and other
resources are at the right place at the right time is
a)
b)
c)
d)
e)
scheduling.
quality control.
inspection.
labor-intensive technology.
plant layout process.
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Answers to Chapter Quiz
1. A(n) __________ process combines raw materials or
components to create a finished product.
a)
b)
c)
d)
e)
analytic
synthetic
technological
productive
mechanical
2. In the manufacturing process, the degree to which
the resources are physically changed is referred to as
a)
b)
c)
d)
e)
focus of the conversion process.
number of technologies.
magnitude of change.
laissez faire economy.
mature economy.
Copyright © Houghton Mifflin Company. All rights reserved.
9 - 28
Answers to Chapter Quiz (cont’d)
3. Today, the American economy is referred to as a(n)
a)
b)
c)
d)
e)
stagnant economy.
service economy.
manufacturing economy.
laissez faire economy.
mature economy.
4. A __________ layout is sometimes referred to as an
assembly line.
a)
b)
c)
d)
e)
fixed
process
product
labor intensive
capital intensive
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9 - 29
Answers to Chapter Quiz (cont’d)
5. The process of ensuring that materials and other
resources are at the right place at the right time is
a)
b)
c)
d)
e)
scheduling.
quality control.
inspection.
labor-intensive technology.
plant layout process.
Copyright © Houghton Mifflin Company. All rights reserved.
9 - 30