Pride/Hughes/Kapoor Business, 10th Edition
Audio Review Transcript
Chapter 8 Producing Quality Goods and Services
1. Explain the nature of production
In order to have all the things we consider essential in today’s world, someone has
to produce them. But what exactly do we mean by production? We mean operations
management—all the activities that managers engage in to produce goods and services.
Recall that an operations manager is a person who creates and manages systems that
convert resources and raw materials into goods and services. Many activities fall into this
domain, and those organizations that do them the best tend to be more successful.
Competition in the global marketplace has kept the best companies striving for better
practices. This has been very important historically, because the last 50 years have
produced profound changes. Motivating employees to improve productivity, improving
quality, meeting customer needs as well as reducing costs, investing in new equipment,
using computer-aided and flexible manufacturing systems, improving control procedures,
and building new facilities in foreign countries have all contributed to new ways to
produce goods and services. To best appreciate the manufacturing process, you must first
understand the principle of mass production, which lowers the cost required to produce a
large number of identical or similar products over a long period of time. Most
manufacturing activities fall into one of two types: analytic or synthetic. An analytic
process in operations management is one in which raw materials are broken into different
component parts. A synthetic process is just the opposite. Raw materials or components
are combined to create a finished product. The people who work in operations
environments need to keep their skills on the cutting edge. Important skills include
motivating people, understanding technology, appreciating the control processes, and
understanding the relationship between the customer, marketing, and production. (LO 1
2. Outline how the conversion process transforms raw materials, labor, and other
resources into finished products or services
Let’s start by discussing how the conversion process transforms raw materials,
labor, and other resources into finished products or services. The purpose of the
conversion process is to provide utility, which is the ability of a good or service to satisfy
a human need. Though there are other types of utility, the one that is important for
operations management is form utility. Form utility is created by converting raw
materials, people, finances, and information into finished products. And the finished
product could be a good or a service. When we talk about the conversion process, we
need to consider three elements: the focus—the resource or resources that make up most
of the input; the magnitude—the degree to which the resources are physically changed,
and the number of processes required to make the change. The same operations principles
that apply to manufacturing also apply to services. In fact, because we live in an economy
in which more effort is devoted to the production of services than to the production of
goods, we are said to live in a service economy. Though many of the operations
techniques can be carried over from manufacturing to services, services are different in
four ways: (1) services are consumed immediately and cannot be stored, (2) services are
provided when and where the customer desires, (3) services are labor intensive, and (4)
services are intangible. Whether we are discussing products or services, we need to know
about three important concepts in operations management. They are product
development, planning for production, and operations control. Let’s look at each of these
individually. (LO 2 ends)
3. Describe how research and development lead to new products and services
Product development begins with an idea, either for a new product or for an
improvement to an existing one. Sometimes these ideas spring from a perceived need,
other times they are a product of research and development. R&D is a set of activities
intended to identify new ideas that have the potential to result in new goods and services.
R&D activities include basic research aimed at uncovering new knowledge; applied
research, which is geared to new knowledge with some potential use; and development
and implementation, which involves putting new or existing knowledge to use in
producing goods and services. Sometimes ideas are not necessarily for a brand-new
product or service, but a refinement or extension of an existing product. These refined or
extended products become new products, and help an organization produce new sales.
(LO 3 ends)
4. Discuss the components involved in planning the production process
After the product development stage, the second part of the process—planning for
production—comes into play. Only a few of the ideas that are conceived will actually
reach the production stage; but if they do, they must undergo three phases: design
planning, facilities planning and site selection, and operational planning. Design planning
is the development of a plan for converting a product idea into an actual product. At this
stage, management must determine how many different product variations there will be.
This is the beginning of a product line, which is a group of similar products that differ
only in relatively minor characteristics. Once the product line is set, the product must be
designed. This is the process of creating a set of specifications from which a product can
be produced. A third important consideration is the required capacity, or the amount of
products or services that an organization can produce in a given time. Finally, the use of
technology must be considered. Some products require labor-intensive technology, in
which people must do most of the work. In contrast, capital-intensive technology is a
process in which machines and equipment do most of the work.
Once product line, capacity, and technology decisions are made, it’s time to
determine where the products or services will be produced. Among the questions to be
answered in this phase are: whether to build a new plant or refurbish an existing one;
whether all of the product should be produced in one place or spread out among several
smaller facilities; whether the raw materials or customers are located in particular areas;
what the tax implications are for various regions; what the quality of life is like for
employees; and whether adequate skilled labor is available. Human resources and
operations managers work closely together to make certain decisions.
Once these
questions have been answered and a facility has been chosen, the next group of decisions
deal with plant layout, the arrangement of machinery, equipment, and personnel within a
production facility. Some products require a process layout, where each operation is
performed in its own area; some require a product layout, sometimes called an assembly
line; and others require a fixed-position layout, mainly when a very large product is
The product has now been designed and a facility and layout have been chosen.
Now is the time for operational planning, which has four steps. Step 1 is selecting a
planning horizon. The planning horizon is the period during which a plan will be in
effect. Often, this is one year. Step 2 is estimating market demand, or the quantity that
customers will purchase at a certain price. Step 3 is comparing market demand with
capacity to ensure that capacity and demand are kept in balance as much as possible. Step
4 is adjusting the products or services to meet demand. When demand and capacity are
not balanced, adjustments must be made. (LO 4 ends)
5. Explain how purchasing, inventory control, scheduling, and quality control affect
So now we have developed the product idea and done the planning to make it a
reality. We have finally arrived at operations control, which deals with purchasing,
inventory control, scheduling, and quality control. Purchasing consists of all the activities
involved in obtaining required materials, supplies, components, and parts from other
firms. The objective of purchasing is to ensure that required materials are available when
they are needed, in the proper amounts, and at the minimum cost. The choice of suppliers
is critical. The second part of operations control focuses on inventory. Inventory includes
raw materials that will become part of the finished product, work-in-process products
that are partially complete, and finished goods, which are complete. The costs of
inventory include holding or storage costs and stock-out costs, the cost of running out of
inventory. Inventory control is the process of managing inventories in such a way as to
minimize inventory costs, including both holding costs and potential stock-out costs. To
help track the status of inventory, successful companies today use a sophisticated method
called materials requirements planning, or MRP, a computerized system that integrates
production planning and inventory control. One of its strengths is the ability to juggle
delivery schedules and lead times effectively. One popular extension of MRP is
manufacturing resource planning, or MRP II. MRP II goes beyond MRP’s focus on
production and inventory personnel to involve the entire organization. Another extension
is known as enterprise resource planning, or ERP, which uses more sophisticated
software to monitor additional factors. Because the cost of inventory can be so high,
some firms have implemented a just-in-time inventory system, which is designed to
ensure that materials or supplies arrive at a facility just when they are needed so that
storage and holding costs are minimized.
The third part of inventory control is scheduling, the process of ensuring that
materials and other resources are at the right place at the right time. Scheduling involves
movement of raw materials into work-in-process, from work-in-process into finished
goods, and from finished goods to customers. Routing, timing, and follow-up are
necessary to ensure that the schedule is met. Some firms use Gantt charts to help with this
task. A Gantt chart is a graphic scheduling device that displays the tasks to be performed
on the vertical axis and the time required for each task on the horizontal axis. A Gantt
chart helps managers visualize steps and time requirements. Another scheduling
technique is PERT, the program evaluation and review technique, which identifies the
major activities necessary to complete a project and sequences them based on the time
required to perform each one. PERT vocabulary consists of activities and events. An
event is the completion of an activity. Arrows are used to connect events that must occur
in sequence along with an estimate of the time requirement. The sequence of activities
that takes the longest time to finish is called the critical path. A delay in the critical path
will delay the project.
The final part of operations control is quality control. You know that to compete
effectively, American firms have had to improve their quality. Today, the Malcolm
Baldrige National Quality Award is awarded by the President of the United States to
organizations that apply and are judged to be outstanding in specific managerial tasks that
lead to improved quality for both products and services. Quality control is the process of
ensuring that goods and services are produced in accordance with design specifications.
High quality is of utmost concern for some firms, and less so for others. To gather
information about product quality, many firms use statistical process control, or SPC, a
system that uses 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.
Firms may also use statistical quality control, or SQC, which is a set of specific statistical
techniques used to monitor all aspects of the production process to ensure that both workin-progress and finished products meet the firm’s quality standards. In addition,
companies are increasing their inspection efforts. Inspection is the examination of the
quality of work in process. An inspection may be done visually or with x-rays. You know
that a total quality management program coordinates the efforts directed at improving
customer satisfaction, increasing employee participation, strengthening supplier
partnerships, and facilitating an organizational atmosphere of continuous quality
improvement. Another quality improvement technique is called Six Sigma, which is a
disciplined approach that relies on statistical data and improved methods to eliminate
defects for a firm’s products and services. Finally, some companies use quality circles,
teams of employees who meet on company time to solve problems of product quality. Of
course, different companies throughout the world may have different perceptions of
quality. The International Organization for Standardization, a nonprofit organization in
Geneva, Switzerland with a membership of 156 countries develops standards for products
to facilitate trade across national borders. (LO 5 ends)
6. Summarize how productivity and technology are related
In addition to the other factors for which operations managers are responsible,
there is also the concept of productivity. Productivity is the average level of output per
worker per hour. Although American productivity is improving, our rate of productivity
growth lags behind many other countries. This may be due to an overall economic
slowdown, reductions in technology investment, lack of productivity growth in the
service sector, and increased government regulation. Solutions may involve
modifications to government policies, improved union-management relations, adjusted
employee incentives, and increased investment in facilities, new equipment, and
employee training.
One development that has helped improve productivity issues is automation, the
total or near-total use of machines to do work. Many firms use machines to complete all
or most of the work. An important part of automation is robotics. Robotics is the use of
programmable machines to perform a variety of tasks by manipulating materials and
tools. Robots work quickly, accurately, and steadily and are especially effective at
tedious repetitive tasks and in handling hazardous materials. Factories have used
computer-aided design (CAD) to aid in the development of products, along with
computer-aided manufacturing (CAM) to plan and control manufacturing processes for
some time. CAD and CAM have increased both the number of products available but also
the productivity of manufacturing plants. And when CAD and CAM are combined into
computer-integrated manufacturing, or CIM, what results is a computer system that not
only helps design products but also controls the machinery needed to produce the
finished product. The improved flexibility, scheduling, and quality have made companies
much more competitive today. Unlike old-style continuous process systems in which a
firm produces the same products over a long period of time, the new flexible
manufacturing systems, or FMS, combine robotics and computer-integrated
manufacturing in a single production system. When a manufacturer wants to produce a
new product, the machines are reprogrammed and rearranged to accommodate its needs.
FMS require less time and expense to reprogram, so companies can produce smaller
batches without incurring increased expense. Some companies use an intermittent
process, in which a firm’s manufacturing machines and equipment are changed to
produce different products. This usually results in shorter production runs than those that
use the continuous process system. (LO 6 ends)