Introduction to production and operations

management

Definition

Production and Operations Management ("POM") is about the

transformation of production and operational inputs into "outputs" that,
when distributed, meet the needs of customers.

The process in the above diagram is often referred to as the "Conversion

Process". There are several different methods of handling the conversion
or production process - Job, Batch, Flow and Group

POM incorporates many tasks that are interdependent, but which can be
grouped under five main headings:

PRODUCT

Marketers in a business must ensure that a business sells products that

meet customer needs and wants. The role of Production and Operations is
to ensure that the business actually makes the required products in
accordance with the plan. The role of PRODUCT in POM therefore
concerns areas such as:

- Performance
- Aesthetics
- Quality
- Reliability
- Quantity
- Production costs
- Delivery dates

PLANT

To make PRODUCT, PLANT of some kind is needed. This will comprise the
bulk of the fixed assets of the business. In determining which PLANT to
use, management must consider areas such as:
- Future demand (volume, timing)
- Design and layout of factory, equipment, offices
- Productivity and reliability of equipment
- Need for (and costs of) maintenance
- Heath and safety (particularly the operation of equipment)
- Environmental issues (e.g. creation of waste products)

PROCESSES

There are many different ways of producing a product. Management must

choose the best process, or series of processes. They will consider:

- Available capacity
- Available skills
- Type of production
- Layout of plant and equipment
- Safety
- Production costs
- Maintenance requirements

PROGRAMMES

The production PROGRAMME concerns the dates and times of the products
that are to be produced and supplied to customers. The decisions made
about programme will be influenced by factors such as:

- Purchasing patterns (e.g. lead time)

- Cash flow
- Need for / availability of storage
- Transportation

PEOPLE

Production depends on PEOPLE, whose skills, experience and motivation

vary. Key people-related decisions will consider the following areas:

- Wages and salaries

- Safety and training
- Work conditions
- Leadership and motivation
- Unionisation
- Communication

production - types of production method

Definition

In our introduction to production and operations management ("POM") we

suggested that there are several different methods of handling the
conversion or production process - Job, Batch, Flow and Group. This
revision note explains these methods in more detail.

Introduction

The various methods of production are not associated with a particular

volume of production. Similarly, several methods may be used at
different stages of the overall production process.

Job Method

With Job production, the complete task is handled by a single worker or

group of workers. Jobs can be small-scale/low technology as well as
complex/high technology.

Low technology jobs: here the organisation of production is extremely

simply, with the required skills and equipment easily obtainable. This
method enables customer's specific requirements to be included, often as
the job progresses. Examples include: hairdressers; tailoring

High technology jobs: high technology jobs involve much greater

complexity - and therefore present greater management challenge. The
important ingredient in high-technology job production isproject
management, or project control. The essential features of good project
control for a job are:

- Clear definitions of objectives - how should the job progress

(milestones, dates, stages)
- Decision-making process - how are decisions taking about the needs of
each process in the job, labour and other resources

Examples of high technology / complex jobs: film production; large

construction projects (e.g. the Millennium Dome)

Batch Method

As businesses grow and production volumes increase, it is not unusual to

see the production process organised so that "Batch methods" can be
used.

Batch methods require that the work for any task is divided into parts or
operations. Each operation is completed through the whole batch before
the next operation is performed. By using the batch method, it is possible
to achieve specialisation of labour. Capital expenditure can also be kept
lower although careful planning is required to ensure that production
equipment is not idle. The main aims of the batch method are, therefore,
to:

- Concentrate skills (specialisation)

- Achieve high equipment utilisation

This technique is probably the most commonly used method for organising
manufacture. A good example is the production of electronic
instruments.

Batch methods are not without their problems. There is a high probability
of poor work flow, particularly if the batches are not of the optimal size
or if there is a significant difference in productivity by each operation in
the process. Batch methods often result in the build up of significant
"work in progress" or stocks (i.e. completed batches waiting for their turn
to be worked on in the next operation).

Flow Methods
Flow methods are similar to batch methods - except that the problem of
rest/idle production/batch queuing is eliminated.

Flow has been defined as a "method of production organisation where the

task is worked on continuously or where the processing of material is
continuous and progressive,"

The aims of flow methods are:

- Improved work & material flow

- Reduced need for labour skills
- Added value / completed work faster

Flow methods mean that as work on a task at a particular stage is

complete, it must be passed directly to the next stage for processing
without waiting for the remaining tasks in the "batch". When it arrives at
the next stage, work must start immediately on the next process. In order
for the flow to be smooth, the times that each task requires on each
stage must be of equal length and there should be

no movement off the flow production line. In theory, therefore, any fault
or error at a particular stage

In order that flow methods can work well, several requirements must be
met:

(1) There must be substantially constant demand

If demand is unpredictable or irregular, then the flow production line can

lead to a substantial build up of stocks and possibility storage difficulties.
Many businesses using flow methods get round this problem by "building
for stock" - i.e. keeping the flow line working during quiet periods of
demand so that output can be produced efficiently.

(2) The product and/or production tasks must be standardised

Flow methods are inflexible - they cannot deal effectively with variations
in the product (although some "variety" can be accomplished through
applying different finishes, decorations etc at the end of the production
line).
(3) Materials used in production must be to specification and delivered
on time

Since the flow production line is working continuously, it is not a good

idea to use materials that vary in style, form or quality. Similarly, if the
required materials are not available, then the whole production line will
come to a close - with potentially serious cost consequences.

(4) Each operation in the production flow must be carefully defined -

and recorded in detail

(5) The output from each stage of the flow must conform to quality
standards

Since the output from each stage moves forward continuously, there is no
room for sub-standard output to be "re-worked" (compare this with job or
batch production where it is possible to compensate for a lack of quality
by doing some extra work on the job or the batch before it is completed).

The achievement of a successful production flow line requires

considerable planning, particularly in ensuring that the correct
production materials are delivered on time and that operations in the
flow are of equal duration.

Common examples where flow methods are used are the manufacture of
motor cars, chocolates and televisions.

capacity management - the meaning of capacity

Introduction
The capacity of a production unit (e.g. machine, factory) is its ability to produce or do that which the
customer requires. In production and operations management, three types of capacity are often referred
to:

Potential The capacity that can be made available to influence the

Capacity planning of senior management (e.g. in helping them to
make decisions about overall business growth, investment
etc). This is essentially a long-term decision that does not
influence day-to-day production management
Immediate The amount of production capacity that can be made
Capacity available in the short-term. This is the maximum potential
capacity - assuming that it is used productively
Effective An important concept. Not all productive capacity is
Capacity actually used or usable. It is important for production
managers to understand what capacity is actually
achievable.

Measuring capacity

Capacity, being the ability to produce work in a given time, must be

measured in the unit of work.

For example, consider a factory that has a capacity of 10,000 " machine
hours" in each 40 hour week. This factory should be capable of producing
10,000 "standard hours of work" during a 40-hour week. The actual
volume of product that the factory can produce will depend on:

- the amount of work involved in production (e.g. does a product require

1, 5, 10 standard hours?
- any additional time required in production (e.g. machine set-up,
maintenance)
- the productivity or effectiveness of the factory

Constraints on capacity

In capacity management there are usually two potential constraints

- TIME and CAPACITY

Time may be a constraint where a customer has a particular required

delivery date. In this situation, capacity managers often "plan
backwards". In other words, they allocate the final stage (operation) of
the production tasks to the period where delivery is required; the
penultimate task one period earlier and so on. This process helps identify
whether there is sufficient time to meet the production demands and
whether capacity needs to be increased, albeit temporarily.

Production Scheduling
A schedule is a representation of the time necessary to carry out a
particular task.

A job schedule shows the plan for the manufacture of a particular job. It
is created through "work / study" reviews which determine the method
and times required.

Most businesses carry out several production tasks at one time - which
entails amalgamating several job schedules. This process is called
"scheduling". The result is known as the production schedule orfactory
schedule for the factory/plant as a whole.

In preparing a production schedule, attention needs to be paid to:

- Delivery dates (when are finished products due?)

- Job schedules for each relevant production task
- Capacities of production sections or departments involved
- Efficiency of these production sections or departments
- Planned holidays
- Anticipated sickness / absenteeism / training
- Availability of raw materials, components and packaging

There are two key problems with production scheduling:

(1) Measurement of performance (e.g. should financial performance be

most important (e.g. minimise the amount of stock), or are marketing
objectives more important - e.g. always produce enough to meet
customer demand).

(2) The large number of possible schedules - often caused by too much
complexity or variety in the production needs of the business.

introduction to break-even analysis

Introduction

Break-even analysis is a technique widely used by production

management and management accountants. It is based on categorising
production costs between those which are "variable" (costs that change
when the production output changes) and those that are "fixed" (costs not
directly related to the volume of production).
Total variable and fixed costs are compared with sales revenue in order
to determine the level of sales volume, sales value or production at
which the business makes neither a profit nor a loss (the "break-even
point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of

costs at various levels of activity shown on the same chart as the
variation of income (or sales, revenue) with the same variation in
activity. The point at which neither profit nor loss is made is known as
the "break-even point" and is represented on the chart below by the
intersection of the two lines:

In the diagram above, the line OA represents the variation of income at

varying levels of production activity ("output"). OB represents the total
fixed costs in the business. As output increases, variable costs are
incurred, meaning that total costs (fixed + variable) also increase. At low
levels of output, Costs are greater than Income. At the point of
intersection, P, costs are exactly equal to income, and hence neither
profit nor loss is made.

Fixed Costs
Fixed costs are those business costs that are not directly related to the
level of production or output. In other words, even if the business has a
zero output or high output, the level of fixed costs will remain broadly
the same. In the long term fixed costs can alter - perhaps as a result of
investment in production capacity (e.g. adding a new factory unit) or
through the growth in overheads required to support a larger, more
complex business.

Examples of fixed costs:

- Rent and rates
- Depreciation
- Research and development
- Marketing costs (non- revenue related)
- Administration costs

Variable Costs

Variable costs are those costs which vary directly with the level of
output. They represent payment output-related inputs such as raw
materials, direct labour, fuel and revenue-related costs such as
commission.

A distinction is often made between "Direct" variable costs

and "Indirect" variable costs.

Direct variable costs are those which can be directly attributable to the
production of a particular product or service and allocated to a particular
cost centre. Raw materials and the wages those working on the
production line are good examples.

Indirect variable costs cannot be directly attributable to production but

they do vary with output. These include depreciation (where it is
calculated related to output - e.g. machine hours), maintenance and
certain labour costs.

Semi-Variable Costs

Whilst the distinction between fixed and variable costs is a convenient

way of categorising business costs, in reality there are some costs which
are fixed in nature but which increase when output reaches certain
levels. These are largely related to the overall "scale" and/or complexity
of the business. For example, when a business has relatively low levels of
output or sales, it may not require costs associated with functions such as
human resource management or a fully-resourced finance department.
However, as the scale of the business grows (e.g. output, number people
employed, number and complexity of transactions) then more resources
are required. If production rises suddenly then some short-term increase
in warehousing and/or transport may be required. In these
circumstances, we say that part of the cost is variable and part fixed.

quality management - introduction

One of the most important issues that businesses have focused on in the
last 20-30 years has been quality. As markets have become much more
competitive - quality has become widely regarded as a key ingredient for
success in business. In this revision note, we introduce what is meant by
quality by focusing on the key terms you will come up against.

What is quality? You will comes across several terms that all seem to relate to the
concept of quality. It can be quite confusing working out what the difference is
between them. We've defined the key terms that you need to know below:

Term Description
Quality Quality is first and foremost about meeting the needs and
expectations of customers. It is important to understand that
quality is about more than a product simply "working properly".

Think about your needs and expectations as a customer when

you buy a product or service. These may include performance,
appearance, availability, delivery, reliability, maintainability, cost
effectiveness and price.

Think of quality as representing all the features of a product or

service that affect its ability to meet customer needs. If the
product or service meets all those needs - then it passes the
quality test. If it doesn't, then it is sub-standard.
Quality Producing products of the required quality does not happen by
management accident. There has to be a production process which is properly
managed. Ensuring satisfactory quality is a vital part of the
production process.

Quality management is concerned with controlling activities

with the aim of ensuring that products and services are fit for
their purpose and meet the specifications. There are two main
parts to quality management

(1) Quality assurance

(2) Quality control

Quality Quality assurance is about how a business can design the way a
assurance product of service is produced or delivered to minimise the
chances that output will be sub-standard. The focus of quality
assurance is, therefore on the product design/development stage.

Why focus on these stages? The idea is that - if the processes and
procedures used to produce a product or service are tightly
controlled - then quality will be "built-in". This will make the
production process much more reliable, so there will be less need
to inspect production output (quality control).

Quality assurance involves developing close relationships with

customers and suppliers. A business will want to make sure that
the suppliers to its production process understand exactly what is
required - and deliver!
Quality control Quality control is the traditional way of managing quality. A
further revision note (see the list on the right) deals with this in
more detail.

Quality control is concerned with checking and reviewing work

that has been done. For example, this would include lots of
inspection, testing and sampling.

Quality control is mainly about "detecting" defective output -

rather than preventing it. Quality control can also be a very
expensive process. Hence, in recent years, businesses have
focused on quality management and quality assurance.
Total quality Total quality management (usually shortened to "TQM") is a
management modern form of quality management. In essence, it is about a
kind of business philosophy which emphasises the need for all
parts of a business to continuously look for ways to improve
quality. We cover this important concept in further revision notes.

quality control

Quality control is the more traditional way that businesses have used to
manage quality. Quality control is concerned
with checking and reviewing work that has been done. But is this the
best way for a business to manage quality?

Under traditional quality control, inspection of products and

services (checking to make sure that what's being produced is meeting
the required standard) takes place during and at the end of the
operations process.
There are three main points during the production process when inspection is performed:

1 When raw materials are received prior to entering production

2 Whilst products are going through the production process
3 When products are finished - inspection or testing takes place before products
are despatched to customers

The problem with this sort of inspection is that it doesn't work very well!

There are several problems with inspection under traditional quality control:

1 The inspection process does not add any "value". If there were any guarantees
that no defective output would be produced, then there would be no need for an
inspection process in the first place!
2 Inspection is costly, in terms of both tangible and intangible costs. For
example, materials, labour, time, employee morale, customer goodwill, lost
sales
3 It is sometimes done too late in the production process. This often results in
defective or non-acceptable goods actually being received by the customer
4 It is usually done by the wrong people - e.g. by a separate "quality control
inspection team" rather than by the workers themselves
5 Inspection is often not compatible with more modern production techniques
(e.g. "Just in Time Manufacturing") which do not allow time for much (if any)
inspection.
6 Working capital is tied up in stocks which cannot be sold
7 There is often disagreement as to what constitutes a "quality product". For
example, to meet quotas, inspectors may approve goods that don't meet 100%
conformance, giving the message to workers that it doesn't matter if their work
is a bit sloppy. Or one quality control inspector may follow different
procedures from another, or use different measurements.

As a result of the above problems, many businesses have focused their

efforts on improving quality by implementing quality management
techniques - which emphasise the role of quality assurance. As Deming (a
"quality guru") wrote:

"Inspection with the aim of finding the bad ones and throwing them out is
too late, ineffective, costly. Quality comes not from inspection but from
improvement of the process."

total quality management - tqm

Total quality management is a popular "quality management" concept.

However, it is about much more than just assuring product or service
quality. TQM is a business philosophy - a way of doing business. It
describes ways to managing people and business processes to ensure
complete customer satisfaction at every stage. TQM is often associated
with the phrase - "doing the right things right, first time". This revision
note summarises the main features of TQM.

Like most quality management concepts, TQM views "quality" entirely

from the point of view of "the customer".

All businesses have many types of customer. A customer can be someone

"internal" to the business (e.g. a production employee working at the end
of the production line is the "customer" of the employees involved earlier
in the production process).

A customer can also be "external to the business. This is the kind of

customer you will be familiar with. When you fly with an airline you are
their customer. When Tesco's buys products from food manufacturers, it
is a customer.
TQM recognises that all businesses require "processes" that enable customer requirements to be met.
TQM focuses on the ways in which these processes can be managed - with two key objectives:

1 100% customer satisfaction

2 Zero defects

The Importance of Customer - Supplier Relationships - "Quality Chains"

TQM focuses strongly on the importance of the relationship between

customers (internal and external) and supplier. These are known as
the "quality chains” and they can be broken at any point by one person
or one piece of equipment not meeting the requirements of the
customer. Failure to meet the requirements in any part of a quality chain
has a way of multiplying, and failure in one part of the system creates
problems elsewhere, leading to yet more failure and problems, and so the
situation is exacerbated.

The ability to meet customers’ (external and internal) requirements is

vital. To achieve quality throughout a business, every person in the
quality chain must be trained to ask the following questions about every
customer-supplier chain:

Customers
• Who are my customers?
• What are their real needs and expectations?
• How can I measure my ability to meet their needs and expectations?
• Do I have the capability to meet their needs and expectations? (If not,
what must I do to improve this capability?)
• Do I continually meet their needs and expectations? (If not, what
prevents this from happening when the capability exists?)
• How do I monitor changes in their needs and expectations?
Suppliers:
• Who are my internal suppliers?
• What are my true needs and expectations?
• How do I communicate my needs and expectations to my suppliers?
• Do my suppliers have the capability to measure and meet these needs
and expectations?
• How do I inform them of changes in my needs and expectations?

Main Principles of TQM

The main principles that underlie TQM are summarised below:

Prevention Prevention is better than cure. In the long run, it is cheaper to

stop products defects than trying to find them
Zero defects The ultimate aim is no (zero) defects - or exceptionally low
defect levels if a product or service is complicated
Getting things right Better not to produce at all than produce something defective
first time
Quality involves Quality is not just the concern of the production or
everyone operations department - it involves everyone, including
marketing, finance and human resources
Continuous Businesses should always be looking for ways to improve
improvement processes to help quality
Employee Those involved in production and operations have a vital role
involvement to play in spotting improvement opportunities for quality and
in identifying quality problems

Introducing TQM into a Business

TQM is not an easy concept to introduce into businesses - particularly

those that have not traditionally concerned themselved too much with
understanding customer needs and business processes. In fact - many
attempts to introduce TQM fail!

One of the reasons for the challenge of introducing TQM is that it has
significant implications for the whole business.

For example, it requires that management give employees a say in the

production processes that they are involved in. In a culture of continuous
improvement, workforce views are invaluable. The problem is - many
businesses have barriers to involvement. For example, middle managers
may feel that their authority is being challenged.

So "empowerment" is a crucial part of TQM. The key to success is to

identify the management culture before attempting to install TQM and to
take steps to change towards the management style required for it. Since
culture is not the first thing that managers think about, this step has
often been missed or ignored with resultant failure of a TQM strategy.

TQM also focuses the business on the activities of the business that are
closest to the customer - e.g. the production department, the employees
facing the customer. This can cause resentment amongst departments
that previously considered themselves "above" the shop floor.

quality circles and kaizen teams

Business studies students often come across the concept of quality

circles, or "Kaizen". What does this mean and what are the
practicalities of using Kaizen in a quality management system?

We saw in our revision note on total quality management that a key

principle of quality management is that of "continuous improvement".

Continuous improvement means just what it says. It is a philosohy that

encourages all employees in an organisation so that they perform their
tasks a little better every day. It starts from the assumption that business
processes (e.g. production methods, purchasing, recruitment)
canalways be improved.

So why the use of the term Kaizen? Kaizen is a system for generating and
implementing employee ideas developed in Japan. The Kaizen
suggestion scheme helped many Japanese companies
improve quality and productivity, which allowed them to offer better
products at lower prices and therefore increase their market share.

Much of the success of Kaizen came about because the system

encouraged many small-scale suggestions that were cheap and quick to
implement. They also came from shop-floor employees - who had a
detailed appreciation of the benefit each change might make to the
process concerned. By implementing many small improvements, the
overall effect was substantial.

One of the most publicised aspects of the Japanese approach to quality

management is the idea of Quality Circles or Kaizen teams.
Professor John Oakland (a leading authority on quality) defines a Quality Circle/Kaizen Team as a group
of workers who do similar work and who meet:

- Voluntarily
- Regularly
- In normal working time
- Under the leadership of their supervisor
- To identify, analyse and solve "work-related" problems
- To recommend solutions to management

Evidence of successful Quality Circles suggests that there are no formal rules about how to organise
them. However, the following guidelines are often suggested:

The circle should not get too large - otherwise it becomes difficult for some
-
circle team members to contribute effectively
Meetings should be help away from the work area - so that team members are
-
free from distraction
The length and frequency of quality circle meetings will vary - but when a new
circle is formed, it is advised to meet for about one hour, once per week.
-
Thereafter, the nature of the quality problems to be solved should determine
how often the circle needs to meet
Quality circles should make sure that each meeting has a clear agenda and
-
objective
- The circle should not be afraid to call on outside or expert help if needed