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Introduction to Business3e
9
Part III: Management
Improving Productivity
and Quality
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Learning Goals
Identify the key resources used for production.
Identify the factors that affect the plant sitedecision.
Describe how various factors affect the designand layout decision.
Describe the key tasks that are involved in
production control. Describe the key factors that affect production
efficiency.
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Improving Productivity and
Quality
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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 determiningthe proper amount and mix of productionresources to use:
Human resources , materials and otherassets (buildings, machinery, equipment)
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Achieving Low-Cost Production
Managers try to combine resources inways 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 individuallydesigned to cover specific phases of the
production processEfficiency improves when specific
employees are responsible for specific tasksthat utilize their expertise.
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business onlineee--bus
iness
business
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Resources Used in Production
Exhibit 9.1
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Selecting a Site
Location of a factory or office Impacts production costs and the firms
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
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Evaluating Possible Sites
Using weighted criteria to compare thedesirability 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 onthe site evaluation matrix.
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Example of Site Evaluation Matrix
Exhibit 9.2
Possible
Sites Rating
Weighted Rating
(80% of Weight) Rating
Weighted
Rating
(80% of Weight)Total Rating
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
Land Cost Supply of Labor
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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
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Selecting Design and Layout
Design and layout decisions affectoperating 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 productioncapacity over time in the most efficientmanner possible.
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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
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Factors Affecting Design and Layout
(contd) 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 anddemand for products.
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Production Control
Purchasing materials Inventory control
Routing
Scheduling
Quality control
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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 tasksto suppliers
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Small Business Survey
Exhibit 9.10u
Why Do Firms Outsource Rather ThanProduce Some Products Themselves?
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Effects of Disintegration
Exhibit 9.3
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Inventory Control
The process of managing inventory at alevel 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
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Illustration of IBMs Effortsto Minimize Inventory
Exhibit 9.4
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Routing and Scheduling
Routing The sequence (or route) of tasks necessary
to complete the production of a product
Should be evaluated periodically to improvespeed or reduce costs
Scheduling
The act of setting time periods for each task
in the production process
Production schedule: a plan for the timingand volume of production tasks.
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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 completeall tasks in precedence order; allowsmanagers to estimate slack time on otherpaths and reduce inefficiencies.
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Example of a Gantt Chart
Exhibit 9.5
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Determining the Critical Path Basedon a Sequence of of Production Tasks
Exhibit 9.6
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Quality Control
Quality The degree to which a product or service
satisfies a customers requirements or
expectations. Quality control
A process of determining whether productquality meets the desired quality level.
Total quality management (TQM)
The act of monitoring and improving thequality of products and services.
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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.
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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 ateach stage of the assembly line
Use quality control circles to assess qualityand make suggestions for improvement
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Assessing Quality (contd)
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 beapparent until after the product is sold.
Correcting deficiencies
Determining what caused the quality defects.
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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 improveefficiency.
Firms use stretch targets to improveefficiency.
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Improving Production Efficiency
(contd)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 isreduced to a pre-specified level.
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Guidelines for Effective Automation
Plan to decide what type of automation ismost appropriate.
Use automation where the benefits are
greatest. Train to make sure automation isimplemented effectively.
Evaluate costs and benefits over time.
Exhibit 9.8
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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 numberof units produced increases.
Variable costs vary directly with thenumber of products produced.
Break-even pointReflects the total quantity of units sold at
which total revenue equals total costs(fixed and variable) and profitability begins.
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Relationship between ProductionVolume and Costs
Quantity
of Books
Produced
Fixed
Costs
Variable
Cost
($2 per
unit)
Total
Cost
Average
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
Exhibit 9.9a
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Relationship
betweenProduction
Volume and Costs
Exhibit 9.9b
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Relationship between Volumeand Profitability
Quantity
of Books
Produced Price
Total
Revenue
Total
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
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Relationship between Volumeand Profitability
Exhibit 9.10a
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Improving Production Efficiency
(contd) Restructuring
Revision of the production process in an
attempt to improve efficiency. Reengineering
Redesign of a firms organizational structure
and operations to improve efficiency.
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Improving Production Efficiency
(contd) Downsizing
A reduction in the number of employees
without affecting the volume or quality ofproducts produced
Firms must be careful not to downsize too
much (corporate anorexia).
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Integrating Production Tasks
If any integrated production task breaksdown, the entire production schedule isaffected
Consequently, firms must monitor its supplychain and its processes from the beginningof the production process until the productreaches the customer
Service firms must also manage thesupply chain effectively.
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Chapter Summary
Key production resources Human resources, materials, and other
resources (buildings, equipment, andmachinery)
Plant site decision depends on:
Costs of workplace space and labor
Tax incentives
Source of demand
Access to transportation
Supply of labor
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Chapter Summary (contd)
Design and layout of a plant Dependent on site characteristics
Production process used
Product line offered Desired production capacity
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Chapter Summary (contd)
Production control involves purchasingmaterials, inventory control, routing,
scheduling, and quality control
Key methods for improving productionefficiency are technology, economies of
scale, and restructuring
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Summary of Management