Part III: Management

Improving Productivity
and Quality 9

Introduction to Business 3e
Jeff Madura
Copyright © 2004 South-Western. All rights reserved.
 Learning Goals
• Identify the key resources used for production.
• Identify the factors that affect the plant site
decision.
• Describe how various factors affect the design
and layout decision.
• Describe the key tasks that are involved in
production control.
• Describe the key factors that affect production
efficiency.

Copyright © 2004 South-Western. All rights reserved. 9–2

 Improving Productivity and
Quality

Copyright © 2004 South-Western. All rights reserved. 9–3

 Resources Used for Production
• Production
– A series of tasks in which resources are
used to produce a product or service.
• Production (or operations) management
– Focuses on developing efficient and high-
quality production process by determining
the proper amount and mix of production
resources to use:
 Human resources, materials and other
assets (buildings, machinery, equipment)

Copyright © 2004 South-Western. All rights reserved. 9–4

 Achieving Low-Cost Production
• Managers try to combine resources in
ways that are efficient and reduce costs.
– Work stations are areas in which one or
more employees are assigned a specific task
– Assembly line
A sequence of work stations individually
designed to cover specific phases of the
production process
 Efficiency improves when specific
employees are responsible for specific tasks
that utilize their expertise.
Copyright © 2004 South-Western. All rights reserved. 9–5
 business online

e-business
Copyright © 2004 South-Western. All rights reserved. 9–6
 Resources Used in Production

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.1 9–7

 Selecting a Site
• Location of a factory or office
– Impacts production costs and the firm’s
ability to compete effectively.
• Site location decision factors
– Cost of workplace space
– Cost and supply of labor
– Tax incentives
– Source of demand
– Access to transportation

Copyright © 2004 South-Western. All rights reserved. 9–8

 Evaluating Possible Sites
• Using weighted criteria to compare the
desirability of various sites:
– Identify evaluation criteria and create a site
evaluation matrix.
– Assign weights based on importance of each
criterion.
– Rate each site on the individual criteria.
– Determine the total rating for each site.
– Select the most appropriate site based on
the site evaluation matrix.
Copyright © 2004 South-Western. All rights reserved. 9–9
 Example of Site Evaluation Matrix

Land Cost Supply of Labor

Weighted
Possible Weighted Rating
Rating
Sites Rating (80% of Weight) Rating Total Rating
(80% of Weight)
Austin, TX 3 2.4 1 .2 2.6

Chicago, IL 4 3.2 2 .4 3.6

Los Angeles, CA 5 4.0 1 .2 4.2

Omaha, NE 1 .8 1 .2 1.0

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.2 9–10

 Design and Layout
• Design
– Dictates the eventual size and structure of
the plant or office
• Layout
– The arrangement of machinery and
equipment within the plant or office

Copyright © 2004 South-Western. All rights reserved. 9–11

 Selecting Design and Layout
• Design and layout decisions affect
operating expenses
– Determine cost of rent, machinery and
equipment
– Influence the amount of money that must be
borrowed and interest expense.
• Desired production capacity
– Allows the flexibility to increase production
capacity over time in the most efficient
manner possible.
Copyright © 2004 South-Western. All rights reserved. 9–12
Factors Affecting Design and Layout
• Site characteristics
– Cost of land
• Production process
– Assembly line often uses a product layout.
– Product layout positions tasks in sequence.
– Fixed-position layout requires employees to
go to the product.
– Flexible manufacturing is be easily adjusted to
accommodate future revisions.
 Requires employees to have flexible skills
Copyright © 2004 South-Western. All rights reserved. 9–13
Factors Affecting Design and Layout
(cont’d)
• Product line
– A narrow product line focuses on the
production of one or a few products.
– Firms with a broad product line offer a wide
range of products.
– The layout must change in response to
changes in customer preferences and
demand for products.

Copyright © 2004 South-Western. All rights reserved. 9–14

 Production Control
• Purchasing materials
• Inventory control

• Routing

• Scheduling

• Quality control

Copyright © 2004 South-Western. All rights reserved. 9–15

 Purchasing Materials
• Selecting suppliers
– Buyers consider price, speed of delivery,
quality, servicing and credit availability.
– Some firms use the Internet for e-
procurement.
• Obtaining volume discounts
• Delegating production to suppliers
– Outsourcing the production of parts
 Deintegration: delegating production tasks
to suppliers
Copyright © 2004 South-Western. All rights reserved. 9–16
 Small Business Survey
Why Do Firms Outsource Rather Than
Produce Some Products Themselves?

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.10u 9–17

 Effects of Disintegration

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.3 9–18

 Inventory Control
• The process of managing inventory at a
level that minimizes costs by:
– Using inventory control systems to reduce
carrying and ordering costs.
 Just-in-Time (JIT) inventory
 Materials requirements planning (MRP)

– Controlling work-in-process and finished

goods inventories.
 Use expected demand to determine how
much product should be held in inventory

Copyright © 2004 South-Western. All rights reserved. 9–19

 Illustration of IBM’s Efforts
to Minimize Inventory

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.4 9–20

 Routing and Scheduling
• Routing
– The sequence (or route) of tasks necessary
to complete the production of a product
 Should be evaluated periodically to improve
speed or reduce costs
• Scheduling
– The act of setting time periods for each task
in the production process
 Production schedule: a plan for the timing
and volume of production tasks.

Copyright © 2004 South-Western. All rights reserved. 9–21

 Scheduling Special Projects
• Gantt chart
– Illustrates the expected timing for each task
in the production process.
• Program evaluation and review technique
(PERT)
– Schedules tasks to minimize delays.
 Critical path: the time required to complete
all tasks in precedence order; allows
managers to estimate slack time on other
paths and reduce inefficiencies.

Copyright © 2004 South-Western. All rights reserved. 9–22

 Example of a Gantt Chart

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.5 9–23

 Determining the Critical Path Based
on a Sequence of of Production Tasks

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.6 9–24

 Quality Control
• Quality
– The degree to which a product or service
satisfies a customer’s requirements or
expectations.
• Quality control
– A process of determining whether product
quality meets the desired quality level.
• Total quality management (TQM)
– The act of monitoring and improving the
quality of products and services.
Copyright © 2004 South-Western. All rights reserved. 9–25
Interaction between Management and Marketing Functions
When Implementing Total Quality Management

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.7 9–26

 Total Quality Management
• Key guidelines for improving quality
– Provide managers and other employees with
the education and training they need to excel
in their jobs.
– Encourage employees to take responsibility
for quality and to provide leadership.
– Encourage all employees to search for ways
to improve the production process.

Copyright © 2004 South-Western. All rights reserved. 9–27

 Assessing Quality
• Control by technology
– Computers can determine whether each
component of a product meets specific
quality standards
• Control by employees
– Assign an employee to assess quality at
each stage of the assembly line
– Use quality control circles to assess quality
and make suggestions for improvement

Copyright © 2004 South-Western. All rights reserved. 9–28

 Assessing Quality (cont’d)
• Control by sampling
– Randomly selecting some of the products
produced and testing them to see if they
satisfy quality standards.
• Control by monitoring complaints
– Some quality deficiencies may not be
apparent until after the product is sold.
• Correcting deficiencies
– Determining what caused the quality defects.

Copyright © 2004 South-Western. All rights reserved. 9–29

 Improving Production Efficiency
• Production Efficiency
– Having the ability to produce products at a
low cost while maintaining quality.
• Benchmarking
– A method of evaluating performance by
comparison to some specified level
 Many firms use benchmarking to improve
efficiency.
 Firms use stretch targets to improve
efficiency.

Copyright © 2004 South-Western. All rights reserved. 9–30

 Improving Production Efficiency
(cont’d)
• Adopting new technology
– Automated tasks are completed by machines
without the use of employees:
 Using computers to track inventory and
sales volume on a daily basis.
 Programming computers to automatically
reorder some products once inventory is
reduced to a pre-specified level.

Copyright © 2004 South-Western. All rights reserved. 9–31

 Guidelines for Effective Automation
• Plan to decide what type of automation is
most appropriate.
• Use automation where the benefits are
greatest.
• Train to make sure automation is
implemented effectively.
• Evaluate costs and benefits over time.

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.8 9–32

 Measuring Production Efficiency
• Economies of scale
– The effect of cost per product unit declines
as production volume increases
 Fixed costs do not decrease as the number
of units produced increases.
 Variable costs vary directly with the
number of products produced.
– Break-even point
 Reflects the total quantity of units sold at
which total revenue equals total costs
(fixed and variable) and profitability begins.
Copyright © 2004 South-Western. All rights reserved. 9–33
 Relationship between Production
Volume and Costs
Variable
Quantity Cost Average
of Books Fixed ($2 per Total Cost
Produced Costs unit) Cost Per Unit
1,000 $40,000 $2,000 $42,000 $42.00

3,000 40,000 6,000 46,000 15.33

5,000 40,000 10,000 50,000 10.00

10,000 40,000 20,000 60,000 6.00

15,000 40,000 30,000 70,000 4.67

20,000 40,000 40,000 80,000 4.00

25,000 40,000 50,000 90,000 3.60

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.9a 9–34

 Relationship
between
Production
Volume and Costs

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.9b 9–35

 Relationship between Volume
and Profitability
Quantity
of Books Total Total
Produced Price Revenue Cost Profits
1,000 $10.00 $10,000 $42,000 -$32,000

3,000 10.00 30,000 46,000 -$16,000

5,000 10.00 50,000 50,000 $0

10,000 10.00 100,000 60,000 $40,000

15,000 10.00 150,000 70,000 $80,000

20,000 10.00 200,000 80,000 $120,000

25,000 10.00 250,000 90,000 $160,000

Copyright © 2004 South-Western. All rights reserved. 9–36

 Relationship between Volume
and Profitability

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.10a 9–37

 Improving Production Efficiency
(cont’d)
• Restructuring
– Revision of the production process in an
attempt to improve efficiency.
• Reengineering
– Redesign of a firm’s organizational structure
and operations to improve efficiency.

Copyright © 2004 South-Western. All rights reserved. 9–38

 Improving Production Efficiency
(cont’d)
• Downsizing
– A reduction in the number of employees
without affecting the volume or quality of
products produced
– Firms must be careful not to downsize too
much (corporate anorexia).

Copyright © 2004 South-Western. All rights reserved. 9–39

 Integrating Production Tasks
• If any integrated production task breaks
down, the entire production schedule is
affected
– Consequently, firms must monitor its supply
chain and its processes from the beginning
of the production process until the product
reaches the customer
• Service firms must also manage the
supply chain effectively.

Copyright © 2004 South-Western. All rights reserved. 9–40

 Chapter Summary
• Key production resources
– Human resources, materials, and other
resources (buildings, equipment, and
machinery)
• Plant site decision depends on:
– Costs of workplace space and labor
– Tax incentives
– Source of demand
– Access to transportation
– Supply of labor
Copyright © 2004 South-Western. All rights reserved. 9–41
 Chapter Summary (cont’d)
• Design and layout of a plant
– Dependent on site characteristics
– Production process used
– Product line offered
– Desired production capacity

Copyright © 2004 South-Western. All rights reserved. 9–42

 Chapter Summary (cont’d)
• Production control involves purchasing
materials, inventory control, routing,
scheduling, and quality control
• Key methods for improving production
efficiency are technology, economies of
scale, and restructuring

Copyright © 2004 South-Western. All rights reserved. 9–43

 Summary of Management

Copyright © 2004 South-Western. All rights reserved. Exhibit 9.2u 9–44