Chapter 8
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 and services.
3. Describe how research and development lead to new
products and services.
4. Discuss the components involved in planning the
production process.
5. Explain how purchasing, inventory control, scheduling,
and quality control affect production.
6. Summarize how productivity and technology are related.
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Chapter 8 | Slide 2
Operations Management
…all activities managers engage in to
produce goods and services.
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Chapter 8 | Slide 3
Spotlight
Production Salaries
Source: Monster website, www.monster.com, accessed September 21, 2008.
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Chapter 8 | Slide 4
Where U.S. Jobs Have Gone
2%
Mexico
7%
China
27%
14%
India
Asia (Other than
China & India)
Latin American &
Caribb. (Except
Mexico)
Eastern Europe
15%,
23%
12%
Other
Source: Bronfenbrenner & Luce, “Offshoring: The Evolving Profile of Corporate Global Restructuring,”
Multinational Monitor, Dec. 2004, http://www.multinationalmonitor.org/mm2004/122004/bronfenbrenner.html .
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Chapter 8 | Slide 5
How Successful U.S. Firms Compete
in the Global Marketplace
 Motivate employees to cooperate and improve
productivity
 Select suppliers offering higher-quality raw
materials at good prices
 Replace outdated equipment
 Use computerized manufacturing
 Improve control procedures
 Build new facilities in foreign countries
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Chapter 8 | Slide 6
Output per Hour in Manufacturing
Source: U.S. Department of Labor, Bureau of Labor Statistics, September 2008,
“Output per Hour in Manufacturing: 15 Countries or Areas,1950–2007,”
ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/prodsuppt01.txt.
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Chapter 8 | Slide 7
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.
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Chapter 8 | Slide 8
Analytical Process
…a process in operations management
in which raw materials are broken into
different component parts.
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Chapter 8 | Slide 9
Synthetic Process
…a process in operations management in
which raw materials or components are
combined to create a finished product.
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Chapter 8 | Slide 10
Today’s
Operations Managers Must
 Be able to motivate/lead
 Understand technology
 Appreciate control processes
 Understand customer
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Chapter 8 | Slide 11
Utility
…the ability of a good or service to
satisfy a human need.
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Chapter 8 | Slide 12
Types of Utility
 Form
 Place
 Time
 Possession
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Chapter 8 | Slide 13
Form Utility
…created by converting raw materials,
people, finances, and information into
finished goods or services.
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Chapter 8 | Slide 14
Figure 8.1: The Conversion Process
The conversion process enables
business firms to convert ideas
and resources such as materials,
finances, and information into
useful goods and services.
The ability to produce products,
services, and ideas is a crucial
step in the economic development
of any nation.
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Chapter 8 | Slide 15
Conversion Process
 Focus ─ resource(s) that make up the
major input
 Magnitude of change ─ degree to which
physical resources are physically changed
 Number of production processes ─ varies by
product/industry
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Chapter 8 | Slide 16
Service Economy
…an economy in which more effort is
devoted to the production of services than
to the production of goods.
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Chapter 8 | Slide 17
Figure 8.2: Service Industries
Source: U.S. Bureau of Labor Statistics website, www.bls.gov, accessed September 20, 2008.
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Chapter 8 | Slide 18
Production of Services vs. Goods
 Services consumed immediately; goods can
be stored
 Services provided when/where customer desires
 Services usually labor-intensive
 Services intangible
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Chapter 8 | Slide 19
Major Activities in
Operations Management
 New Product Development
 Planning for Production
 Operations Control
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Chapter 8 | Slide 20
Research and Development (R&D)
…a set of activities intended to identify
new ideas that have potential to result
in new goods and services.
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Chapter 8 | Slide 21
Types of R&D Activities
 Basic Research
Aimed at uncovering new knowledge
 Applied Research
Geared toward discovering new knowledge with some
potential use
 Development and Implementation
Undertaken specifically to put new or existing knowledge
to use in producing goods and services
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Chapter 8 | Slide 22
Product Modification
Product extension or refinement gives new life to a
product whose sales make up for the declining
sales of a product…introduced earlier.
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Chapter 8 | Slide 23
Figure 8.3: Planning for Production
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Chapter 8 | Slide 24
Design Planning
…the development of a plan for
converting a product idea into an
actual product or service.
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Chapter 8 | Slide 25
Product Line
…a group of similar products that differ only
in relatively minor characteristics.
Requires balancing customer preferences
and production requirements
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Chapter 8 | Slide 26
Product Design
…the process of creating a set
of specifications from which a
product can be produced.
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Chapter 8 | Slide 27
Capacity
…the amount of products or
services that an organization can
produce in a given time.
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Chapter 8 | Slide 28
Use of Technology
 Automation
 Labor-intensive technology
Process in which people do most
of the work
 Capital-intensive technology
Process in which machines and
equipment do most of the work
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Chapter 8 | Slide 29
Produce a New Product
in Existing Factory If
 Existing has enough capacity
 Cost of refurbishing is less than
cost of building new
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Chapter 8 | Slide 30
Production Facility Location Variables





Locations of major customers and suppliers
Availability and cost of skilled and unskilled labor
Quality of life for employees and management
Cost of land and construction
Local and state taxes, environmental regulations,
zoning laws
 Financial support from local and state governments
 Special requirements such as great amounts of
energy or water
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Chapter 8 | Slide 31
Plant Layout
…arrangement of machinery,
equipment, personnel within
a production facility.
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Chapter 8 | Slide 32
Figure 8.4: Facilities Planning
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Chapter 8 | Slide 33
Operational Planning
Step 1: Selecting a Planning Horizon
Step 2: Estimating Market Demand
Step 3: Comparing Market Demand
with Capacity
Step 4: Adjusting Products/Services
to Meet Demand
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Chapter 8 | Slide 34
When Demand Exceeds Capacity
 Operate facility overtime
 Add 2nd, 3rd shift
 Outsource a portion
 Expand current facility
or build another
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Chapter 8 | Slide 35
When Capacity Exceeds Demand
 Reduce number of employees
 Shorten workweek
 Close part of facility
 Shift to production of other goods or services
 Sell unused facilities
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Chapter 8 | Slide 36
Figure 8.5: Four Aspects of Operations
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Chapter 8 | Slide 37
Purchasing
…all activities involved in obtaining
required materials, supplies, components,
and parts from other firms.
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Chapter 8 | Slide 38
Objective of Purchasing
Ensure
 Required materials
 Available when needed
 In proper amounts
 At minimum cost
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Chapter 8 | Slide 39
Factors in Choosing Supplier
 Price
 Quality
 Reliability
 Credit Terms
 Shipping Costs
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Chapter 8 | Slide 40
Inventory
Types:
 Raw Materials
 Work-in-Process
 Finished Goods
Associated Costs:
 Holding/Storage
 Stock-Out
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Chapter 8 | Slide 41
Inventory Control
…the process of managing inventories
in such a way as to minimize inventory
costs, including …holding costs and
potential stock-out costs.
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Chapter 8 | Slide 42
Materials Requirements Planning (MRP)
…a computerized system that
integrates production planning
and inventory control.
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Chapter 8 | Slide 43
Extensions of MRP
 Manufacturing Resource Planning
Less-sophisticated software; involves just production
and inventory personnel
 Enterprise Resource Planning
More-sophisticated software; can monitor not only
inventory and production processes but also quality,
sales, etc.
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Chapter 8 | Slide 44
Just-in-Time
Inventory System (JIT)
…a system designed to ensure that
materials or supplies arrive at a facility just
when they are needed so storage and
holding costs are minimized.
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Chapter 8 | Slide 45
Debate: Should JIT Be Used
to Reduce Inventory Costs?
YES
•JIT ensures that materials or
supplies arrive when they are
needed.
•JIT reduces inventory storage
costs because suppliers must
deliver goods when they are
needed.
•Former storage space can be
diverted to more productive
activities like manufacturing.
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NO
•Firm can encounter stock-out
costs if supplier doesn’t deliver.
•Supplier storing goods passes
on storage cost in the form of
higher prices.
•If suppliers don’t deliver on
time, manufacturer may have to
shut down assembly line.
Chapter 8 | Slide 46
Scheduling
…the process of ensuring that materials
and other resources are at the right
place at the right time.
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Chapter 8 | Slide 47
Scheduling Concerns
 Place/time
 Routing of materials
 Timing
 Follow-up
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Chapter 8 | Slide 48
Quality Control
…the process of ensuring that goods and
services are produced in accordance with
design specifications.
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Chapter 8 | Slide 49
Malcolm Baldrige
National Quality Award
 Given by U.S. President
 Results in
•
•
•
•
•
Better employee relations
Higher productivity
Greater customer satisfaction
Increased market share
Improved profitability
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Chapter 8 | Slide 50
Inspection
…the examination of the quality
of work in process.
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Chapter 8 | Slide 51
Improving Quality
Through Employee Participation
 Total Quality Management
(TQM) program
 Six Sigma: Disciplined
approach that relies on
statistical data and
improved methods to
eliminate defects in
products
and services
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Chapter 8 | Slide 52
Six Sigma Belts
 White ─ intensive, short-term training for
small-scale or localized quality projects
 Green ─ extensive training for more-complex
or department-wide projects
 Black ─ long-term training plus hands-on
experience; for leading projects involving
multiple areas
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Chapter 8 | Slide 53
Production and Quality Management
Websites
• There are several web-based sources of
information and journals devoted to quality
management and production issues.
National Association of Manufacturers: www.nam.org
Quality Digest: www.qualitydigest.com
Industry Week: www.industryweek.com
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Chapter 8 | Slide 54
Productivity
…the average level of output
per worker per hour.
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Chapter 8 | Slide 55
Average % Changes in Productivity 1999–2008
Source: U.S. Bureau of Labor Statistics.
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Chapter 8 | Slide 56
Productivity Trends
 U.S 5th largest increase
 U.S. rate of productivity growth lagging
 Determines standard of living
 Increased cooperation between management
and labor
 Changing reward system
 More money invested in facilities, equipment,
and training
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Chapter 8 | Slide 57
Automation
…the total or near-total use
of machines to do work.
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Chapter 8 | Slide 58
Robotics and Computerization
 Robotics
Use of programmable machines to perform a variety of
tasks by manipulating materials and tools
 Computer manufacturing systems
•
•
•
Computer-aided design
Computer-aided manufacturing
Computer-integrated manufacturing
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Chapter 8 | Slide 59
Flexible Manufacturing Systems
 Continuous process = a firm produces the same
product over a long period of time
 Intermittent process = a firm’s machines and
equipment are changed to produce different
products
 Customer-driven production
 Technological displacement
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Chapter 8 | Slide 60
Chapter Quiz
1.
A(n) __________ process breaks raw materials into different
component parts.
a)
b)
c)
d)
e)
mechanical
analytic
synthetic
technological
productive
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Chapter 8 | Slide 61
Chapter Quiz
2. In the manufacturing process, the resource that comprises the
major or most important input is referred to as the
a)
b)
c)
d)
e)
number of technologies.
magnitude of change.
focus of the conversion process.
resource utilization process.
resource manufacturing process.
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Chapter 8 | Slide 62
Chapter Quiz
3.
Today, approximately __________ percent of American
workers are employed by service industries.
a)
b)
c)
d)
e)
92
83
76
40
28
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Chapter 8 | Slide 63
Chapter Quiz
4.
A __________ layout is used when different operations are
required for creating small batches of different products or
working on different parts of a product.
a)
b)
c)
d)
e)
labor intensive
capital intensive
process
product
fixed
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Chapter 8 | Slide 64
Chapter Quiz
5.
The average level of output per worker per hour
a)
b)
c)
d)
e)
is the definition of productivity.
is the focus of the production process.
applies only to a synthetic manufacturing process.
applies only to an analytic manufacturing process.
can be improved if the magnitude of the change is
eliminated.
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Chapter 8 | Slide 65