8
Producing Quality
Goods and
Services
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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 Understand the importance of service businesses to
consumers, other business firms, and the nation's economy.
④ Describe how research and development lead to new
products and services.
⑤ Discuss the components involved in planning the production
process.
⑥ Explain how purchasing, inventory control, scheduling, and
quality control affect production.
⑦ Summarize how productivity and technology are related.
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2
Operations Manager
The person who manages systems that convert
resources into goods and services
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© NEVENA RADONJA/SHUTTERSTOCK
 Marketing research
 Planning
 Control operations
• Quality
• Performance
• Inventory
• Cost
3
Manufacturing: U.S. Competition in the
Global Marketplace
 1940s -1970s U.S.
dominated global
manufacturing
 By late 1970s,
Japan, Germany,
Taiwan, Korea,
Singapore, Sweden
and others were
competing
© MYPIXXX/SHUTTERSTOCK
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4
Manufacturing: The Bad News
 Employment in the manufacturing sector has
decreased.
• Outsourcing to low-wage workers in
countries where regulations are lax
• Costs 20% more to manufacture in U.S.
© JUSTASC/SHUTTERSTOCK
• Decreased consumer demand
for manufactured goods
 9% of current workforce
 7 million jobs lost
since 1979
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5
Manufacturing: Output
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6
Manufacturing: Employment
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7
Manufacturing: The Good News
 U.S. produces
18% of global
manufacturing
output
 $2 trillion of
U.S. economy
© YURI ARCURS/SHUTTERSTOCK
 60% of U.S. exports
 2 million job openings by 2018
 3 related jobs for each manufacturing job
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8
Manufacturing: The Good News (cont'd)
 Americans make more goods with fewer
employees through innovation and elevated skill
 Reshoring (aka onshoring, insourcing): U.S.
manufacturers bringing jobs back to U.S.
• Increasing foreign labor costs
© FABIO BERTI/SHUTTERSTOCK
• High shipping costs
• Quality and safety issues
• Speed of product development
• Federal and state subsidies
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9
Manufacturing: Elements of Success
The most successful U.S. firms
have focused on:
• Customer needs and product quality
• Employee motivation
• Supplier quality and prices
• High-tech, customizable manufacturing
systems
• Lower costs through control procedures
• “Green” manufacturing
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10
Careers in Operations Management:
Types of Mass Production
Mass Production
© DVARG/SHUTTERSTOCK
Analytical Process
Synthetic Process
© RAINER PLENDL/SHUTTERSTOCK
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11
Careers in Operations Management:
Characteristics of Success
 Ability to motivate and lead
 Understanding of the potential of technology
 Appreciation of control processes that lower
costs and improve quality
 Understanding of the relationship among
customer, marketing, and production
© WAVEBREADMEDIA/SHUTTERSTOCK
© VIOLETKAIPA/SHUTTERSTOCK
© LEVENT KONUK/SHUTTERSTOCK
© BIKERIDERLONDON/SHUTTERSTOCK
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12
The Conversion Process: Utility
The purpose of manufacturing is to provide
utility to customers.
 Utility: the ability of a good or service to
satisfy a human need
• Form
© DONATAS1205/SHUTTERSTOCK
• Place
• Time
• Possession
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13
The Conversion Process: Form Utility
(cereal bowl) © ORIORI/SHUTTERSTOCK
Created by people converting raw materials,
finances, and information into finished products
© JIM BARBER/SHUTTERSTOCK
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14
The Conversion Process
The conversion process converts ideas and
goods into useful goods and services.
Conversion
Production
Inputs
1.
2.
3.
4.
5.
6.
Plan
Design
Execute
Evaluate
Improve
Redesign
Outputs
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15
The Conversion Process: Factors
 Focus: The resource(s) that make up the
major or most important input
• Financial
• Material
• Information
• People
 Magnitude of change: Degree to which the
resources are physically changed
 Number of production processes
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16
The Increasing Importance of Services:
Service Economy
A service economy is one in which more effort
is devoted to the production of services than the
production of goods.
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17
Characteristics of Services
The production of services varies from the
production of goods.
• Services are consumed immediately and
cannot be stored.
• Customers are much more involved in
obtaining the service they want or need.
• Services are provided when and where the
customer desires.
• Services are usually labor intensive.
• Services are intangible, making it difficult to
evaluate customer satisfaction.
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18
The Service Process
Determine identity
and needs of
customer
Redesign operating
systems and
services to improve
the customer's
experience
The
Service
Process
Measure customer
satisfaction
Develop a plan to
deliver services
Evaluate operating
systems
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19
The Service Process: Evaluating Quality
© PAKHNYUSHCHA/SHUTTERSTOCK
Service firms often listen more carefully to customers
and respond more quickly to changing needs.
What are some other examples of tools
service firms can use to evaluate
customer satisfaction and anticipate
customer needs?
Is customer satisfaction more important
in some industries than in others?
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20
New Products and Services:
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
© MICHAELJUNG/SHUTTERSTOCK
 Development and implementation Activities
undertaken to put new or existing knowledge to use
in producing goods and services
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21
New Products and Services:
Product Life Cycle
© S.JOHN/SHUTTERSTOCK
What would happen
to a firm that sells
only one product?
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22
New Products and Services:
Product Refinement and Extension
 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
© SHI YALI/SHUTTERSTOCK
© DJA65/SHUTTERSTOCK
© COBALT88/SHUTTERSTOCK
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23
Planning for Production
Once research and development identifies an idea that
meets customer needs, three additional steps are used
to convert the idea to an actual good or service.
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24
Planning for Production: Design Planning
Development of a plan for converting an idea
into an actual product or service
 What will it look like?
 Where and how will it
be produced?
 What options will
be included?
© KROMKRATHOG/SHUTTERSTOCK
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25
Design Planning
Product Line
Product Design
Capacity
© FANFO/SHUTTERSTOCK
© YAKOBCHUK VASYL/SHUTTERSTOCK
© BRANISLAVPUDAR/SHUTTERSTOCK
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26
Design Planning: Product Line
 Group of similar products
that differ only in relatively
minor characteristics
 Balance customer
preferences and
production requirements
What are the benefits and
drawbacks of “long” and
“short” product lines?
© FANFO/SHUTTERSTOCK
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27
Design Planning: Product Design
 Process of creating a set
of specifications from
which a product can be
produced.
 The product design must
be complete and detailed
© YAKOBCHUK VASYL/SHUTTERSTOCK
What is involved in the
product design of services?
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28
Design Planning: Capacity
 Amount of products or
services that an
organization can produce
in a given period of time
 Operations managers
determine capacity
What happens if a firm overestimates
capacity? Underestimates?
What can happen if a firm tries to
increase capacity without rethinking
their line and design?
© BRANISLAVPUDAR/SHUTTERSTOCK
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29
Design Planning:
Automation and Technology
Labor-intensive Technology
 People do most of the work
 Low initial cost
 High operating cost
© BARTLOMIEJMAGIEROWSKI/SHUTTERSTOCK
Capital-intensive Technology
 Machines do most of the work
 High initial cost
 Low operating cost
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© SFC/SHUTTERSTOCK
30
Site Selection and Facilities Planning:
Existing Factory
To build or not to build…
 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?
© JELLE VD WOLF/SHUTTERSTOCK
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31
Site Selection and Facilities Planning:
Build a New Facility
Considerations in choosing a location:
 Location of customers
and suppliers
 Availability and cost of labor
 Quality of life in the
proposed location
 Cost of land and construction
 Taxes, regulations, and laws
 Financial support and subsidies
 Special resource requirements
© KEKYALYAYNEN/SHUTTERSTOCK
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32
Build a New Facility: Human Resources
 Human resources manager and operations
manager must work together
© OZZON/SHUTTERSTOCK
• The appropriate skills must be identified
• Employees with the right skills must
be recruited
• Training programs must be developed
• Compliance with human rights policies and
wage laws must be ensured
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33
Process Layout
Process layout is used when small batches of
different products are created or worked on in a
different operating sequence.
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34
Product Layout
Product layout (assembly line) is used when
all products undergo the same operations in the
same sequence.
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35
Fixed-Position Layout
Fixed-position layout is used in producing a
product that is too large to move.
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36
Operational Planning
FOUR STEPS IN OPERATIONAL PLANNING
• Step 1: Select a planning horizon
- The period during which a plan will be in effect; commonly
one year
• Step 2: Estimate market demand
- The quantity that customers will purchase at the going price
- Demand is estimated for the planning horizon
• Step 3: Compare market demand with capacity
- If market demand and the facility’s capacity are not equal,
adjustments may be necessary
• Step 4: Adjust products or services to meet demand
- Increase capacity to meet demand
- Ignore excess demand
- Eliminate excess capacity
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37
Operations Control
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38
Operations Control: Purchasing
 Ensure that required materials are available when
they are needed, in the proper amounts, at a
minimum cost
 Choose suppliers based on:
• Price
• Reliability
• Shipping
costs
• Quality
• Credit terms
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39
Operations Control: Inventory Control
 Process of managing inventories in such a way as to
minimize inventory costs
• Holding cost: storage cost
• Stock-out cost: cost of running out of inventory
 Raw-materials inventory
 Work-in-progress inventory
 Finished-goods inventory
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40
Inventory Control:
Materials Requirement Planning (MRP)
 MRP is a
computerized system
that integrates
production planning
and inventory control
 ERP is an extension
of MRP
© HELDER ALMEIDA/SHUTTERSTOCK
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41
Inventory Control:
Just-in-Time Inventory System
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© BILAN 3D/SHUTTERSTOCK
Ensure materials and
supplies arrive at a facility
just when they are
needed so that storage
and holding costs are
minimized
42
Operations Control: Scheduling
 Process of ensuring that materials and other resources
are at the right place at the right time
 Routing: sequence of workstations
 Timing: specifies when materials arrive at each station
and how long they stay there
 Follow-up: monitoring schedules to ensure that the work
flows according to a timetable
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43
Operations Control: Quality Control
 Process of ensuring that goods and
services are produced in accordance
with design specifics
 Quality is an essential ingredient of
goods and services
 Defects decrease and profits increase
 Reduces rework
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44
Quality Control: Malcolm Baldrige
National Quality 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 products and services
 Using the Baldrige criteria
results in:
•
•
•
•
•
Better employee relations
Higher productivity
Greater customer satisfaction
Increased market share
Improved profitability
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45
Three Types of Control
Source: Robert Kreitner, Management, 10th ed. (Boston: Houghton Mifflin, 2007), p. 503
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46
Quality Improvement Techniques
Continuous Improvement
Ongoing effort to eliminate
problems and improve quality
Statistical Process Control
(SPC)
Sampling to obtain data that
are plotted on charts and
graphs to pinpoint problem
areas in process
Statistical Quality Control
(SQC)
Detailed set of specific
statistical techniques used to
monitor all aspects of
production process
© DUCU59US/SHUTTERSTOCK
Benchmarking
Identifying industry best
practices
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47
Quality Control: Employee Participation
Quality Circle
 Team of employees who
meet on company time to
solve quality problems
Inspection
 Examination of the quality
of a work-in-progress
© YURI ARCURS/SHUTTERSTOCK
© MICHAELJUNG/SHUTTERSTOCK
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48
Quality Control: Total Quality Management
Customer
Satisfaction
Atmosphere
of
Continuous
Quality
TQM
Employee
Participation
Supplier
Relationships
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49
© JOAN KERRIGAN/SHUTTERSTOCK
Quality Control: Six Sigma
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50
Quality Control: World Quality Standards
International Organization for
Standardization (ISO)
 Network of national standards institutes and
similar organizations from over 160 countries
charged with developing standards for quality
products
 Standardization achieved
through consensus agreements
 American National Standards
Institute (Washington, D.C.)
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51
World Quality Standards: ISO
© DIETMAR HOEPFL/SHUTTERSTOCK
ISO 9000 Certification for
manufacturers and service
providers based on quality
management
 Design
 Production Process
 Product Testing
ISO 14000 International standards for
incorporating environmental concerns into
operations and product standards
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52
Using the Internet
There are several web-based sources of
information and journals devoted to quality
management and production issues.
© VICTOR CORREIA/SHUTTERSTOCK
 National Association of Manufacturers: www.nam.org
 Quality Digest: www.qualitydigest.com
 Industry Week: http://www.industryweek.com
Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
53
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?
 What specific steps would be used to manufacture a
paper clip?
 Should you be concerned with quality control for
inexpensive products like paper clips?
Copyright ©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
54
Improving Productivity with Technology
Productivity –
Average level of
output per worker
per hour
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55
Improving Productivity Growth:
Lean Manufacturing
Lean manufacturing – Eliminating waste from
activities required to produce a product or service
 Reduction in resources
required
 More efficient use
of employee time
 Improved quality
 Increased profits
© DUSIT/SHUTTERSTOCK
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56
Productivity Growth Rates
Nations with the largest increase in output per hour
2011
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57
Improving Productivity with Technology:
U.S. Productivity
Real Value-Added Output divided by
combined inputs
U.S. Major Sector Multifactor
Productivity
110
105
100
95
90
85
80
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58
Improving Productivity with Technology:
U.S. Productivity (cont’d)
How can the U.S. improve productivity and
compete globally?




Stabilize economy
Increase employee motivation
Eliminate unreasonable government regulations
Use manufacturing techniques to increase
productivity in service industry
 Increase use of automation, robotics, and computer
manufacturing systems
 Emphasize customer satisfaction
 Increase innovation and research and
development efforts
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59
Impact of Automation,
Robotics, and Computers
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© MAKSIM DUBINSKY/SHUTTERSTOCK
© MAKSIM DUBINSKY/SHUTTERSTOCK
© RAINER PLENDL/SHUTTERSTOCK
 Automation
• The total or near total use of machines to do work
 Robotics
• The use of programmable machines to perform a
variety of tasks by manipulating materials and tools
• Work quickly, accurately, and steadily
• Effective in tedious, repetitious, and hazardous tasks
60
Computer Manufacturing Systems: CAD
Computer-aided
design (CAD) – the
use of computers to
aid in the
development of
products
© RAGMA IMAGES/SHUTTERSTOCK
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61
Computer Manufacturing Systems: CAM
Computer-aided
manufacturing
(CAM) – The use
of computers to
plan and control
manufacturing
processes
© JANEZ HABJANIC/SHUTTERSTOCK
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62
Computer Manufacturing Systems: CIM
CAD + CAM = CIM
(Computer-integrated manufacturing)
 Improved flexibility
 More efficient
scheduling
 Higher product
quality
© MAKSIM DUBINSKY/SHUTTERSTOCK
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63
Flexible Manufacturing Systems
 Traditional assembly
lines require expensive
retooling of equipment
when a new product is
introduced (continuous
process)
© DMITRY KALINOVSKY/SHUTTERSTOCK
 Flexible manufacturing system
(FMS) combines electronic machines and
computer-integrated manufacturing in a single
production system (intermittent process)
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64
Flexible Manufacturing Systems:
Customer-Driven Production
 Customer-driven production
– A manufacturing system
driven by customer needs
and what customers want
to buy
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© 300DPI/SHUTTERSTOCK
 Can customize
manufacturing for
each customer
65
Sustainability
© ALEXMILLOS/SHUTTERSTOCK
 Meeting the needs of the
present without
compromising the ability
of future generations to
meet their own needs
 Resources are limited
 Efforts to reduce waste
and sustain the planet
can improve profitability
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66
© DVPODT/SHUTTERSTOCK
Technological Displacement
 Automation cuts manufacturing time,
reduces error, and simplifies retooling
procedures
 Many robots work with humans
to make jobs safer and easier
 Automation will bring change
to many jobs; many workers will
have to retrain or seek jobs in other
sectors of the economy
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67