Unit Twelve
Production and Quality Management
Objectives
 Get the students to be familiar with the concept of
production and quality management.
 Cultivate the students’ ability of problem-solving.
 Help the students to grasp the techniques for fast
reading.
Section A
 Introduction
 Production and quality are the most important issues in any
business. Efficient and effective production and best quality
always increase productivity and thus make the business more
profitable.
 Production is the process of transforming inputs such as raw
materials into outputs such as goods and services. As markets
have become much more competitive, quality has become
widely regarded as a key ingredient for success in business.
Pre-reading
 Before reading the following passage, answer these
questions:
 1. Do you know about production?
 2. What role does quality play in business?
Text Production Management

Production management refers to the management of a firm’s
production activities. Production management is crucial to both
manufacturing and service organizations. As an organization
grows, it can capitalize on a number of factors that accompany
their larger size. Each of these factors is associated with the
experience curve, the reduction in per-unit costs that occurs as
an organization gains experience producing a product or service.

Whenever a company’s output doubles, production costs
typically decline by a specific percentage, depending on
industry. For instance, with a sales volume of 2 million
units, per-unit costs may be $100 in a particular industry.
With a doubling of volume to 4 million units, per-unit costs
may decline by 15 percent. Another doubling of volume to
8 million units may lower per-unit costs another 15 percent.
The experience curve has been observed in a wide range of
manufacturing and service industries, including
automobiles, personal computers, and airlines. Although
the precise percentages are not always known, the principle
of the curve can be accurately applied to most production
environments.

The experience curve is based on the notion that unit
costs in most industries decline with experience and is
based on three underlying concepts: learning, economies of
scale, and capital-labor substitution possibilities. Learning
refers to the idea that employees become more efficient
when they perform the same task many times. An increase
in volume fuels this process, also increasing expertise. This
reasoning can be approved in all jobs—line and staff,
managerial and non-managerial—at all levels in the
organization. Economies of scale—the reductions in perunit costs as volume increases—can be great for business
such as automobile manufacturers or Internet service
providers.
Capital-labor substitution refers to an organization’s ability
to substitute labor for capital, or vice versa as volume
increases, depending upon which combination minimizes
costs and/or maximizes effectiveness. A number of
American manufacturers, for example, have shifted their
assembly operations across the Mexican border where
labor costs are much lower. Firms in other countries have
taken similar measures.

Recent developments in production technology have
modified the traditional capital versus labor dichotomy. A
number of facilities have advanced to the point that
products are manufactured while no workers are present,
often during the night. The role of the workers in such
facilities is not to produce the products, but to prepare them
for delivery.
Seeking to exploit the experience curve can be risky.
Increases in volume often involve substantial investments
in plant and equipment and a commitment to the prevailing
technology. However, as technology changes and renders
the plant’s production processes obsolete, outdated capital
equipment may have to be discarded. Balancing current
investments in plant and equipment with the risk that
technology will change, prompting a number of firms to
invest in flexible manufacturing systems that can be
retooled quickly to respond to market changes.

In the late 1980s and early 1990s, popularity increased
in the United States and parts of Europe for a concept
called business process reengineering—the application
technology and creativity in an effort to eliminate
unnecessary operations or drastically improve those that
are not performing well. As such, companies sought to
“eliminate any process that did not add value” to the
organization’s goods and services. For example, a number
of consumer goods manufacturers during this period began
to rethink their packaging operations and many of them
eliminated large, cumbersome boxes in favor of less costly
shrink-wrapping. Some analysts have noted a reemergence
of this trend in the early 2000s.

Speed in developing, making, and distributing products
and services can be the source of a significant competitive
advantage. In fact, an application of speed known as “timebased strategy” is a top priority in many organizations.
Companies that can deliver quality products in a timely
fashion become problem-solvers for their customers and
are more likely to prosper. Motorola, for instance, cut the
time it takes to produce a cellular telephone, from fourteen
hours to less than two, while retail prices have fallen
dramatically. Speed is equally important in customer
service.
 Production Quality

In the late 1970s and early 1980s, strategic managers
became interested in a concept borrowed from the
Japanese known as quality circles, whereby managers and
workers would meet to discuss and implement production
changes that improved quality and efficiency. This interest
evolved in the late 1980s and early 1990s into a
heightening of interest in quality broadly known as total
quality management (TQM). Developed by W. Edwards
Deming, TQM refers to the totality of features and
characteristics of a product or service that bear on its
ability to satisfy customer needs.
Historically, quality has been viewed largely as a
controlling activity that takes place at or near the end of the
production process, an after-the fact measurement of
production success (i.e., the “quality control” department).
However, the notion that quality is measured after an
output is produced has eroded, and quality is now seen as
an essential ingredient of the product or service being
provided and a concern of all members of the organization.
Hence, from a production standpoint, producing a quality
product lowers defects and minimizes rework time, thereby
increasing productivity. In addition, making the operative
employees responsible for quality eliminates the need for
inspection.

As an extension of the TQM philosophy, Six Sigma
seeks to increase profits by eliminating variability in
production, defects and waste that undermine customer
loyalty. Six Sigma is a systematic process that utilizes
information and sophisticated statistical tools to improve
production efficiency and quality. Practitioners receive
training and advance to various levels of certification in
Six Sigma concepts. A number of companies began
adopting the approach in the late 1990s and early 2000s
and have reported substantial savings.

Even in the best-managed businesses, problems can
arise that result in poor product or service quality.
Companies must guarantee an acceptable level of quality
to install confidence among buyers and avoid loss of
business when such problems occur. The concept of the
guarantee is both a quality and a marketing concern. Some
companies even offer unlimited money-back guarantees.

In an effort to minimize short-term costs, however,
many companies ignore this competitive advantage. Often,
guarantees lapse after a very-short period or time or
contain too many exceptional conditions to be effective
competitive weapons. Managers must balance the costs
associated with a superior guarantee with its benefits and
tailor the package to the organization’s strategy.

Changes in the competitive environment can even spark
quality decisions from competitors within a given industry.
For example, following the terrorist attacks of September
11, 2001, many airlines engaged in vigorous cost-cutting to
help stop losses that were to follow. Although a number of
airlines eliminated meals on domestic flights, Continental
actually took steps to improve cabin comfort and retain
quality meals on its flights. Hence, while most airlines
moved to address critical short-term financial concerns,
Continental perceived an opportunity to emphasize quality
and seek to develop long-term competitive advantage.
 Research and Development

Another function closely related to production is research
and development (R&D). Product/service R&D refers to
efforts directed towards improvements or innovations in the
quality or uniqueness of a company’s outputs. Process R&D
seeks to reduce operational costs and make them more
efficient. R&D is most important in rapidly changing
industries where production modifications are most often
required to remain competitive.

Process innovations may need to be technologically
sophisticated to be implemented effectively, or they may not
even be used at all. For this reason, a number of ideas for
process innovations are never fully implemented.

Product/service innovations also involve risks. Once
introduced, new products or services may not generate a
level of demand sufficient to justify the R&D investment.
RJR Nabisco, for example, has spent millions of dollars to
develop and produce a smokeless cigarette. Although the
new brands such as Premier and Eclipse were introduced
with considerable fanfare, demand never materialized and
the product was canceled after a short time.

Interestingly, Japanese companies often abandon their
new products as soon as they are introduced in order to
force themselves to develop new replacement products
immediately. U.S. companies have responded by
increasingly forming direct research links with their
domestic competitors, asking their suppliers to participate
in new-product design programs, and taking ownership
positions in small start-up companies that have promising
technologies.
 Purchasing

All organizations have a purchasing function. The
relationship between purchasing and production is critical.
In many respects, the quality of a firm’s outputs cannot
readily exceed the quality of its raw materials.

In manufacturing firms, the purchasing department
procures raw materials and parts so that the production
department may process them into finished products. At
the retail level, company buyers purchase items from
manufacturers for resale to the consumer. Buyers must
identify potential suppliers, evaluate them, solicit bids and
price quotes, negotiate prices and terms of payment, place
orders, manage the order process, inspect incoming
shipments, and pay suppliers.

It is critical to note that low costs are not the only
consideration in purchasing activities. A low price is
useless if the item breaks down in the production process
or fails to meet customer demands. On the other hand,
excessive quality unnecessarily raises costs and prices.

Purchasing is the first step in the materials management
process. Indeed, purchasing also includes the operation of
storage and warehouse facilities and the control of
inventory. Consequently, these related tasks can only be
efficiently and effectively conducted if they are viewed as
parts of a single operation. The just-in-time inventory
system (JIT) demonstrates the interrelationships. JIT was
popularized by Japanese manufacturers to reduce materials
management costs. Using this technique, the purchasing
manager asks suppliers to ship parts at the precise time
they are needed in production in order to hold inventory,
storage, and warehousing costs to a minimum. As such, JIT
has reduced costs for a number of large firms.

Although American manufacturers have moved in the
direction of JIT, this approach works particularly well in
Japan where large manufacturers wield considerable
bargaining power over their much smaller suppliers.
Because it places great delivery demands on suppliers, JIT
does not tend to work well when manufacturers do not
possess great bargaining power, as is often the case in the
United States. In addition, an occasional late supplier can
cripple a firm’s production process.

A JIT system also makes a company highly vulnerable to
labor strike. Recently, for example, one of the plants that
supplies parts to GM’s Saturn, which uses the JIT system,
suddenly found itself unable to produce any cars because it
had no inventory of the more than three hundred metal
parts that it purchased exclusively from the supplier whose
plant was struck.

Many large manufacturers in the United States seek a
middle ground between traditional inventory systems and
JIT. Most have reduced their number of suppliers from a
dozen or more to two or three to control delivery times and
quality. Companies are also strengthening their
relationships with their suppliers and providing them with
detailed knowledge of their requirements and
specifications. By working together, buyers and suppliers
can improve the quality and lower the costs of the
purchased items.
Post-reading
 Answer the questions on the text:
1. Does production management refer to only manufacturing
organizations? Why?
2. What does “experience curve” mean? Can you give some
examples?
3. What is the role of the workers in a factory with advanced
facilities?
4. What does “BPR” mean?
5. How can changes spark quality decisions?
6. Why do Japanese companies often abandon their new
products as soon as they are introduced?
7. Why is “JIT” important?
8. Why do many large manufacturers in the United States
seek a middle ground between traditional inventory
systems and JIT?
Section B Reading skills
 Identifying the Author’s Purpose
 People write for a purpose: to inform, to persuade, to
entertain.
 Some clues that effective readers can watch for to help
them identify what kind of writing they’re dealing with:
1) Informational writing features facts and evidence,
not opinions or value judgment;
2) Persuasive writing features emotional appeals:
opinions and arguments; rhetorical questions;
evaluating language and/or judgmental language
Speed Reading Task
 When you read Section B, scan it for clues that help you
identify the author’s purpose. Is the text informational,
persuasive or meant mainly to entertain? Or does the
author have more than one purpose?
True or False
1. __ Total quality management is a business philosophy of organization-wide
commitment to continuous improvement, with the focus on teamwork,
increasing customer satisfaction, and lowering costs.
2. The objective of TQM programs is to build an organization that only
produces products that are considered first-in-class by its customers.
3.
“Getting things right first time” means better not produce at all than
produce something defective.
4. Quality circle members are free to collect data and take surveys and often
focus on personal complaints and problems.
5. Benchmarking is defined as the continuous process of measuring products,
services, and practices against the toughest competitors or those companies
recognized as industry leaders.
6. Continuous improvement ignores small innovations and changes.
KEY: T F T F T F
Section C
Case Study
Task
Study the case and discuss the questions in groups.
 Selling a Bright Idea—Along with the Kilowatts
By the time Florida Power & Light (FPL) Co. became the first
U.S. company to capture Japan’s prestigious W. E. Deming Prize in 1989,
the Miami-based utility had become a kind of mecca for corporate
America’s quality mavens. Visitors marveled at FPL’s quality department,
numbering 80 staffers. And they were awestruck by the utility’s 1,800
quality-improvement teams. “We had checkers checking checkers in
everything we did.” Says J. Thomas Petillo, then an executive in the
quality office.
In the end, however, FPL kept better tabs on
quality than it did on its basic business. The utility’s
managers, preoccupied with such quality issues as
timely billing and preventing downed power lines,
woke up too late to the population explosion in
southern Florida and the sudden surge in demand for
power. FPL had to buy electricity from nearby utilities.
It even had to initiate rolling brownouts to conserve
power. The year it won the Deming, FPL’s profits fell
8%, to $412 million, even though its revenues
climbed 13% to $5.3 billion.
 With results like that, many companies would have turned out the lights
on quality programs. Not FPL. Instead, the utility revamped its entire
quality approach—this time with an emphasis on cost reduction.
Nowadays, FPL’s bottom line is much brighter. Its profits rose 23% last
year, to $572.4 million. And building on its reputation as a Deming
winner, FPL has launched a thriving return-on-quality consulting business.
FPL’s Qualtec Quality Services Inc. unit has 52 consultants, annual
billings of more than $13 million, and a list of 199 clients worldwide,
from US West Inc. to Britain’s Nuclear Electric PLC.
 Qualtec’s approach is straightforward. First, it tries to persuade managers
to throw out their old views of quality. The consultants break up
management—from top executives through middle managers—into
groups to talk about quality and how it should be used only as a means to
produce healthier results. The message is spread through teams made up
of managers and blue-collar workers. Then, with everyone in agreement
on how to define quality, Qualtec does a top-to-bottom review of the way
a company operates, identifying potential quality improvements that
could yield financial benefits.
 At American President Co., a shipping company based in Oakland, Calif.,
Qualtec consultant Joe L. Webb made three transpacific voyages before
singling out 45 processes that were key to keeping American President’s
ships running smoothly. Of those, Webb figured that 25, including loading
cargo and meeting schedules, were critical to customers—and therefore
likely candidates for quality improvements. Since then, Webb hs
recommended a number of measures, such as streamlining paperwork to
reduce the time it takes customs officials to clear cargo.
 Not all of Qualtec’s consultants have time for cruises. As more companies
look for tangible payoffs from quality, they are also demanding speedier
results. “Twelve to 18 months? Surely you can do better than that?” is the
common refrain from clients, says Petillo, now Qualtec’s president. In
response, Qualtec has formed “turbo teams” of consultants and managers to
develop quality programs in a matter of weeks, not months. Gauging the
financial impact of quality improvements is still a challenge. To help its
clients, Qualtec is developing new computer software to measure the cost
of quality against projected financial results, such as sales and return on
capital.
 As for the old Deming process that FPL once championed, Petillo
thinks it still has merits. But even the Japanese quality devotees he sees
these days are no longer blind to cost. Japan’s weakened economy has
seen to that. “Before, the Japanese wouldn’t talk about cost,” says
Petillo. “Now they understand.” It’s a revelation that Qualtec is helping
to spread.
Questions for discussion:
 1. What were the positive outcomes of Florida Power &
Light’s obsession with total quality management? What
were the negative outcomes?
 2. The Florida Power & Light case highlights a potential
flaw in the TQM philosophy. What is this flaw?
 3. Given the information in this case, how do you think
the TQM philosophy needs to be modified in order to
improve its effectiveness as a management tool?
NOTES
1. the experience curve
经验曲线(又称波士顿经验曲线)。1960年，波士顿咨询
公司（Boston Consulting Group）的布鲁斯•亨得森（
Bruce D. Henderson）发现生产成本和总累计产量之间
存有一致相关性，首先提出了经验曲线效应（
Experience Curve Effect）。它是一种表示生产单位时
间与连续生产单位之间的关系曲线。简而言之，就是如
果一项生产任务被多次反复执行，它的生产成本将会随
之降低。每一次当产量倍增的时候，代价值（包括管理
、营销、分销和制造费用等）将以一个恒定的、可测的
比率下降。
2. Six Sigma
六希格玛管理理论。希格玛是用来衡量流程品质的变
异或分配状况的, 也就是说, 控制流程的产出, 将产出
的变异控制在一定界限之内, "流程每百万次的操作机
会, 只允许出现3~4个失误". 这种理论是许多一流国际
企业如摩托罗拉、德州仪器、花旗银行、福特汽车、
柯达等对抗景气变化、确保市场领先地位的经营新手
法.
3. the just-in-time inventory system (JIT)
一种库存管理的方法,旨在降低库存水准，将需求与供
应达成至当需求产生时供应就能及时到达去满足需求
的库存管理方法。