CHAPTER 11: PRODUCING GOODS AND SERVICES Service Operations: production activities that yield tangible and intangible

e service products, i.e. entertainment, transportation, education, food preparation, etc Goods Production: production activities that yield tangible products; i.e. radios, buses, books, etc WHAT DOES PRODUCTION MEAN TODAY? Production historically referred to the making of physical goods but now it also means services Key difference between production and service operations is the customers involvement in the latter (service) Today, customers are increasingly involved in all kinds of production because electronic communications are key components in winning and keeping customers in competitive industries Often, distinction between production and service companies is blurred All businesses are service providers to some extent The Growth of Global Operations: Many countries have recently joined the global competition that has reshaped production into a faster-paced, more complex business activity Production operations have become more environmentally friendly than before Instead of needing to maintain continuous mass production, firms today face constant change New technologies allow machines to run more cleanly, quickly, safely, and to operate on a global scale CREATING VALUE THROUGH PRODUCTION To understand the production processes of a firm, you need to understand the importance of products both goods and services Products provide businesses with both economic results (profits, wages, goods purchased from other companies) and non-economic results (new technology, innovations, pollution) Products provide consumers with what economists call utility the power of a product to satisfy a human want; something of value Four basic kinds of utility would not be possible without production Time Utility: the quality of a product satisfying a human want because of the time at which it is made available (i.e. supply ornaments during Christmas) Place Utility: the quality of a product satisfying a human want because of where it is made available Ownership (Possession) Utility: the quality of a product satisfying a human want during its consumption or use (i.e. taking a chocolate home and eating it) Form Utility: the quality of a product satisfying a human want because of its form; requires raw materials to be transformed into a finished product The term production has been replaced in recent years by operations, a term which reflects both services and goods production Operations (or production) Management: the systematic direction and control of the processes that transform resources into finished goods Production Managers: managers responsible for ensuring that operations processes create value and provide benefit; are ultimately responsible for creating utility for customers Not all production managers work at factories farmers are also production managers create form utility by converting soil, seeds, sweat, gas, and other inputs beef cattle, tobacco, heat, milk, cash, and other outputs Operations Processes: Operation Process: a set of methods and technologies used in the production of a good or service We classify various types of production according to differences in their operational processes We can describe services according to the extent of customer contact required 1. Goods-Producing Processes All goods-manufacturing processes can be classified in two different ways: by the type of transformation technology that transforms raw materials into finished goods and by the analytic or synthetic nature of the transformation process Types of Transformation Technology Manufacturers use the following types of information processes to turn raw materials into finished goods In chemical processes, raw materials are chemically altered Fabrication processes mechanically alter the basic shape or form of a product Assembly processes put together various components In transport processes, goods acquire place utility by being moved from one location to another Clerical processes transform information

a)

b) 2. a)

Analytic VS. Synthetic Processes A second way of classifying production processes is by the way in which resources are converted into finished goods Analytic Process: any production process in which resources are broken down Synthetic Process: any production process in which resources are combined Service-Producing Processes Services are classified according to the extent of customer contact High-Contact Processes High-Contact System: a system in which the service cannot be provided without the customer being physically in the system (e.g. transit system) Due to this, transit managers must worry about the cleanliness of the trains and buses and the appearance of the stations, which is not the case for low-contact processes

b)

Low-Contact Processes Low-Contact System: a system in which the service can be provided without the customer being physically in the system (e.g. lawn care services) Business Strategy as the Driver of Operations: Production is a flexible activity that can be moulded into many shapes to give quite different production (or operations) capabilities for different purposes Its design is best driven from above by the firms larger business strategy 1. Business Strategy Determines Operations Capabilities Successful firms design their operations to support the companys business strategy In other words, production operations are adjusted to support the firms target markets Operations Capability (Production Capabilities): the activity or process that production must do especially well, with high frequency

2. Expanding into Additional Capabilities Over time, excellent firms learn how to achieve more than just one competence Differences Between Service and Manufacturing Operations: Service and manufacturing operations both transform raw materials into finished products In service production, the raw materials, or inputs, are people who choose among sellers because they have either unsatisfied needs or possessions for which they require some form of care of alteration In service operations, finished products or outputs are people with needs met and possessions serviced There are several key areas where service operations differ from production operations 1. Focus on Performance One obvious difference between service and production operations: whereas goods are produced, services are provided Customer-oriented performance is a key factor in measuring the effectiveness of a service company In many ways, the focus of service operations is more complex than that of goods production Service operations feature a unique link between production and consumption between process and outcome, services are more intangible and more customized and less storable than most products, and quality considerations must be defined and managed differently in the service sector than in the manufacturing operations Focus of Process and Outcome Manufacturing operations emphasize outcomes in terms of physical goods i.e. new jacket Products of most service operations are really a combination of goods and services (i.e. making a pizza (product) and delivering it (service) Service operations require different skills from manufacturing operations Focus on Service Characteristics Service companies transactions always reflect the fact that service products are characterized by three key qualities: intangibility, customization, and unstorability Intangibility Often services cannot be touched, tasted, smelled, or seen

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 b) c) 4. a)

An important value, then, is the intangible value that the customer experiences in the form of pleasure, satisfaction, or a feeling of safety Although all services have some degree of intangibility, some provide tangible elements as well Customization Many services are customized you expect these services to be designed for your needs E.g. when you go to a doctor, you expect to be treated for your symptoms Unstorability If a service is not used when it is available, it is usually wasted Services such as rubbish collection cannot be produced ahead of time and then stored Services, then are typically characterized by a high degree of unstorability Focus on the Customer-Service Link Because service operations transform customer or their possessions, the customer is often present in the operations process As physical participants in the operations process, consumers can affect it Ecommerce: The Virtual Presence of the Customer Consumers interact electronically, in real time, with sellers, collecting information about product features, delivery availability, and aftersales service

5. Focus on Service Quality Consideration Customers use different criteria to judge services and goods Service managers must understand that quality of work and quality of service are not necessarily synonymous OPERATIONS PLANNING Now that weve contrasted goods and services, we can return to a more general consideration of production that encompasses both goods and services Managers from many departments contribute to the firms decisions about operations management The business plan and forecasts estimate of future demand for both new and existing products developed by top managers guide operations planning Business plan outlines goals and objectives, including the specific goods and services that the firm will offer Managers also develop a long-range production plan through forecasts of future demand Covering a 2-5 year period, the production plan specifies the number of plants or service facilities and the amount of labour, equipment, transportation and storage that will be needed to meet demand Also specifies how resources will be obtained In the following section, we survey the main elements of operations planning, discussing the planning activities that fall into one of five categories: capacity, location, layout, quality, and methods planning Capacity Planning: Capacity: the amount of a good that a firm can produce under normal working conditions Capacity of goods or service firm depends on how many people it employs and the number and size of its facilities 1. Capacity Planning for Producing Goods Means ensuring that a manufacturing firms capacity slightly exceeds the normal demand for its product While expanding fast enough to meet future demand and to protect market share from competitors, a company must also weight the increased costs of expanding

2. Capacity Planning for Producing Services In low-contact processes, maintaining inventory allows managers to set capacity at the level of average demand In high-contact processes, managers must plan capacity to meet peak demand Location Planning: Because the location of a factory, office, or store affects its production costs and flexibility, sound location planning is crucial Depending on the site of its facility, a company may be capable of producing a low-cost product or may find itself at an extreme cost disadvantage relative to its competitors 1. Location Planning for Producing Goods

In goods-producing operations, location decisions are influenced by proximity to raw materials and markets, availability of labour, energy and transportation costs, local and provincial regulations and taxes, and community living conditions Some location decisions are now being simplified by the rise of industrial parks which come with necessary zoning, land, shipping facilities, utilities, and waste disposal outlets already in place These sites offer flexibility and faster construction start-ups

2. Location Planning for Producing Services In planning low-contact services, companies have some options Services can be located near resource supplies, labour, customers, or transportation outlets High-contact services are more restricted because they must locate near the customers who are a part of the system Layout Planning: Once a site has been selected, managers must decide on plant layout Layout of machinery, equipment, and supplies determines whether a company can respond quickly and efficiently to customer requests for more and different products or finds itself unable to match competitors production speed or convenience of service 1. Layout Planning for Producing Goods In facilities that produce goods, layout must be planned for three different types of space: Productive Facilities: i.e. workstations and equipment for transforming raw materials Non-Productive Facilities: storage and maintenance areas Support Facilities: offices, restrooms, parking lots, cafeterias, etc. Alternatives for layout planning include process, cellular, and product layouts Process Layouts Is a way of organizing production activities such that equipment and people are grouped together according to their function Is well suited to job specialization in custom work Various tasks are each performed in specialized locations Cellular Layouts Is a layout used to produce goods when families of products can follow similar flow paths Although each product may be unique in shape, size, style, etc, they go through the same production steps Cellular layouts have several advantages Because similar products require less machine adjustment, equipment set-up time in the cell is reduced as compared with set-up times in process layouts Flow distances are shorter so there is less material handling and transit time Inventories of goods in progress are lower and paperwork is similar because material flows are more orderly Disadvantage of cells it the duplication of equipment Product Layouts Is a way of organizing production activities such that equipment and people are set up to produce only one type of good Product layouts are efficient for producing large volumes of product quickly and often use assembly lines a type of product layout in which a partially finished product moves through a plant on a conveyor belt or other equipment Product layouts are efficient because the work skill is built in to the equipment; simplified work tasks can then use unskilled labour However, product layouts tend to be inflexible because, traditionally, they have required heavy investment in specialized equipment that is hard to rearrange for new applications Also, workers are subject to boredom and when someone is absent or overworked, those farther down the line cannot help out Many companies are now emphasizing lean manufacturing to improve productivity Lean Manufacturing: manufacturing that involves getting rid of traditional assembly lines altogether. Suppliers pre-assemble many specific parts into modules, and then production workers combine the various modules to make the finished product This requires fewer production workers, less factory space, and less investment in equipment Other Development in Layout Flexibility There have been experiments in ways to make standard production lines more flexible Some firms have adopted U-shaped production lines production layout in which machines are placed in a narrow U shape rather than a straight line Machines are close together, so one worker in slow period can complete all the tasks needed to make a product by moving from one side of the U to the other

a) b) c) d)

In busier times, workers can be added until there is one per machine Another development is the flexible manufacturing system (FMS) a production system that allows a single factory to produce small batches of different goods on the same production line Goal of FMS is to help produce sufficient numbers of products that are in high demand, while avoiding overproduction of products that are not in as high demand Many companies find large FMS operations to be too complex and prone to breakdowns Some companies have experimented with so-called soft manufacturing reducing huge FMS operations to smaller, more manageable groups of machines Automation is less likely to fail when delegated to jobs it does best, while human workers perform those assembly-line jobs that require dexterity and decision making The very latest development is the disposable and movable factory Some developing countries with lots of labour but little capital are buying up still-modern equipment from industrialized nations and then using it to produce new and untested products in their own country

2. Layout Planning for Producing Services Service firms use some of the same layouts as goods-producing firms In a low-contact system, the facility should be arranged to enhance the production of the service High-contact systems should be arranged to meet customer needs and expectations Quality Planning: In planning production systems and facilities, managers must keep in mind the firms quality goals Thus, any complete production plan includes systems for ensuring that goods are produced to meet the firms quality standards Methods Planning: In designing operations systems, managers must clearly identify every production step and the specific methods for performing them They can then work to reduce waste, inefficiency, and poor performance by examining procedures as a step-by-step basis an approach sometimes called methods improvement 1. 2. a) Methods Improvement in Goods Improvement of production for goods begins when a manager documents the current method A detailed description, often using a diagram called the process flow chart, is usually helpful for organizing and recording all information The process flow chart identifies the sequence of production activities, movement of materials, and work performed at each stage as the product flows through production The flow can then be analyzed to identify wasteful activities, sources of delay in production flows, and other inefficiencies The final step is implementing improvements Methods Improvement in Services In a low-contact process, managers can use methods improvements to speed services In high-contact services, the demands of systems analysis are somewhat different Service Flow Analysis Is an analysis that shows the process flows that are necessary to provide a service to customers; it allows managers to determine which processes are necessary Also helps identify and isolate potential problems (known as fail points)

b) c)

Designing to Control Employee Discretion in Services In some cases, the purpose of service design is to limit the range of activities of both employees and customers By careful planning, managers can make services more customer-oriented because they can ensure product consistency

Design for Customer Contact in Services In high-contact services, the demands on system designs are somewhat different Managers must develop procedures that clearly spell out the ways in which workers interact with customers These procedures must include such activities as exchanging information or money, delivering and receiving raw materials, and even making physical contact OPERATIONS SCHEDULING

Once plans identify needed resources and how they will be used to reach a firms goals, managers must develop timetables for acquiring resources for production This aspect of operations is called scheduling Scheduling Goods Operations: Scheduling of goods production occurs on different levels within the firm First, a top-level or master production schedule shows which products will be produced, when production will occur, and what resources will be used during specified time periods Scheduling Service Operations: Service scheduling may involve both work and workers In a low-contact service, work scheduling may be based either on desired completion dates or on the time of order arrivals In high-contact services, precise scheduling of services may not be possible since the customer is part of the system and must be accommodated (think of emergency rooms in hospitals) In scheduling workers, managers must also consider efficiency and costs 1. a) Tools for Scheduling Special projects, such as plant renovations or relocations, often require close coordination and precise timing In these special cases, special tools, such as Gantt and PERT charts, facilitate scheduling Gantt Chart Is a scheduling tool that diagrams steps to be performed and specifies the time required to complete each step Manager lists all activities needed to complete the work, estimates the time required for each step, and checks the progress of the project against the chart

b)

PERT Chart PERT short for Program Evaluation and Review Technique Is a production schedule specifying the sequence and critical path for performing the steps in a project Unlike Gantt charts, PERT charts do not only show the necessary sequence of activities but identify the critical path for meeting project goals OPERATIONS CONTROL Requires production managers to monitor production performance by comparing results with detailed plans and schedules Follow-Up: checking to ensure that production decisions are being implemented Operations control features materials management and production process control Both activities ensure that schedules are met and that production goals are fulfilled, both in quantity and in quality Materials Management: The process of materials management not only controls but also plans and organizes the flow of materials Even before production starts, materials management focuses on product design by emphasizing materials standardization the use of standard and uniform components rather than new or different components Standardization simplifies paperwork, reduces storage requirements, and eliminated unnecessary material flows Once the product has been designed, materials managers purchase the necessary materials and monitor the production process through the distribution of finished goods There are four major areas in materials management: Transportation includes the means of transporting resources to the company and finished goods to the buyers Warehousing is the storage of both incoming materials for production and finished goods for physical distribution to customers Inventory control includes the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods. It ensures that enough materials inventories are available to meet production schedules Purchasing is the acquisition of all the raw materials and services that a company needs to produce its products; most large firms have purchasing departments to buy proper materials in the amount needed 1. Purchasing Process Purchasing is the acquisition of all the raw materials and services needed to make products and to conduct daily operations For many years, purchasing departments practiced forward buying they routinely bought quantities of materials large enough to fill longterm needs But purchasing power must balance the need for adequate inventory with the need to avoid excess supplies, which drive up holding costs the costs of keeping inventory on hand Holding costs include the real cost of storage, handling, and insurance as well as opportunity costs

 a)

Today, many purchasing departments have opted for the so-called hand-to-mouth pattern placing small orders frequently It requires fast delivery lead times the gaps between the customers order placement and the sellers shipment and delivery reliability

Supplier Selection Purchasing departments also handle supplier selection deciding which supplier to buy from The process of supplier selection typically has four stages: Investigating possible suppliers Evaluating and isolating the best candidates Negotiating terms of service with a final choice Maintaining a positive buyer-seller relationship Maintaining multiple supplier relationships is expensive since it takes time to survey, contact, and evaluate potential suppliers and build good relationships Also, fewer suppliers means stronger, mutually dependent purchaser-supplier relationships, which is why purchasers today try to reduce their number of suppliers Tools for Operating Process Control: Numerous tools assist managers in controlling operations Chief among these are worker training, just-in-time production systems, material requirements planning, and quality control 1. 2. 3. Worker Training Customer satisfaction is closely linked to the employees who provide the service Human relations skills are vital in anyone who has contact with the public Many businesses realize that employees without training in relationship skills can lose customers to better-prepared competitors Just-in-Time (JIT) Production Systems Many companies use this to minimize manufacturing inventory costs Is a method of inventory control in which materials are acquired and put into production just as they are needed All resources are continuously flowing, from their arrival as raw materials, to subassembly, final completion, and shipment of finished products JIT reduces practically nothing but the number of goods in process (goods not yet finished) and saves money by replacing stop-and-go production with smooth movement Once smooth becomes the norm, disruptions become more visible and are resolved quicker Finding and eliminating disruptions by continuous improvement is a major objective of JIT But JIT can also cause some unexpected problems As more and more companies adopt JIT, the ordering of supplies has become much more last-minute and frantic By definition, this makes supply systems more volatile and has been one of the reasons why economic indicators like capital goods orders have been swinging so wildly This, in turn, makes it hard to know what shape the overall economy is in which leads to less investor enthusiasm

Material Requirements Planning (MRP) It seeks to deliver the right amount of materials at the right place and right time for goods production, like JIT MRP uses bill of materials which is basically a recipe for the finished product It specifies the necessary ingredients (raw materials and components), the order in which they should be combined and the quantity of each ingredient needed to make one batch of the product The recipe is fed into the computer that controls inventory and schedules each stage of production The result is fewer early arrivals, less frequent stock shortages, and lower storage costs MRP is most popular among companies whose products require complicated assembly and fabrication activities Manufacturing Resource Planning (MRP II): an advanced version of MRP that ties together all parts of the organization into the companys production activities Quality Control: Is another operation control tool Is the management of the production process to manufacture goods or supply services that meet specific quality standards