Production and operations managment notes


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Production and operations managment notes

  1. 1. Chapter 1:Introduction to production andoperations managementDefinitionProduction and Operations Management ("POM") is about the transformation ofproduction and operational inputs into "outputs" that, when distributed, meet the needs ofcustomers.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 GroupPOM incorporates many tasks that are interdependent, but which can be grouped underfive main headings:PRODUCTMarketers in a business must ensure that a business sells products that meet customerneeds and wants. The role of Production and Operations is to ensure that the businessactually makes the required products in accordance with the plan. The role of PRODUCTin POM therefore concerns areas such as:- Performance
  2. 2. - Aesthetics- Quality- Reliability- Quantity- Production costs- Delivery datesPLANTTo make PRODUCT, PLANT of some kind is needed. This will comprise the bulk of thefixed assets of the business. In determining which PLANT to use, management mustconsider 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)PROCESSESThere are many different ways of producing a product. Management must choose the bestprocess, or series of processes. They will consider:- Available capacity- Available skills- Type of production- Layout of plant and equipment- Safety- Production costs- Maintenance requirementsPROGRAMMESThe production PROGRAMME concerns the dates and times of the products that are tobe produced and supplied to customers. The decisions made about programme will beinfluenced by factors such as:- Purchasing patterns (e.g. lead time)- Cash flow- Need for / availability of storage- TransportationPEOPLE
  3. 3. Production depends on PEOPLE, whose skills, experience and motivation vary. Keypeople-related decisions will consider the following areas:- Wages and salaries- Safety and training- Work conditions- Leadership and motivation- Unionisation- CommunicationChapter 2:Capacity management - the meaning ofcapacityIntroductionThe capacity of a production unit (e.g. machine, factory) is its ability to produce or dothat which the customer requires. In production and operations management, three typesof capacity are often referred to:Potential The capacity that can be made available to influence the planning ofCapacity 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 managementImmediate The amount of production capacity that can be made available in theCapacity short-term. This is the maximum potential capacity - assuming that it is used productivelyEffective An important concept. Not all productive capacity is actually used orCapacity usable. It is important for production managers to understand what capacity is actually achievable.Measuring capacityCapacity, being the ability to produce work in a given time, must be measured in the unitof work.
  4. 4. For example, consider a factory that has a capacity of 10,000 " machine hours" in each 40hour 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 willdepend on:- the amount of work involved in production (e.g. does a product require 1, 5, 10 standardhours?- any additional time required in production (e.g. machine set-up, maintenance)- the productivity or effectiveness of the factoryConstraints on capacityIn capacity management there are usually two potential constraints - TIME andCAPACITYTime may be a constraint where a customer has a particular required delivery date. In thissituation, capacity managers often "plan backwards". In other words, they allocate thefinal stage (operation) of the production tasks to the period where delivery is required; thepenultimate task one period earlier and so on. This process helps identify whether there issufficient time to meet the production demands and whether capacity needs to beincreased, albeit temporarily.Production SchedulingA 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 createdthrough "work / study" reviews which determine the method and times required.Most businesses carry out several production tasks at one time - which entailsamalgamating several job schedules. This process is called "scheduling". The result isknown as the production schedule or factory 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 packagingThere are two key problems with production scheduling:
  5. 5. (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 orvariety in the production needs of the business.Chapter 3:Production - types of production methodDefinitionIn our introduction to production and operations management ("POM") we suggested thatthere 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.IntroductionThe various methods of production are not associated with a particular volume ofproduction. Similarly, several methods may be used at different stages of the overallproduction process.Job MethodWith Job production, the complete task is handled by a single worker or group ofworkers. 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 therequired skills and equipment easily obtainable. This method enables customers specificrequirements to be included, often as the job progresses. Examples include: hairdressers;tailoringHigh technology jobs: high technology jobs involve much greater complexity - andtherefore present greater management challenge. The important ingredient in high-technology job production is project management, or project control. The essentialfeatures of good project control for a job are:
  6. 6. - 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 inthe job, labour and other resourcesExamples of high technology / complex jobs: film production; large construction projects(e.g. the Millennium Dome)Batch MethodAs businesses grow and production volumes increase, it is not unusual to see theproduction process organised so that "Batch methods" can be used.Batch methods require that the work for any task is divided into parts or operations. Eachoperation 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. Capitalexpenditure can also be kept lower although careful planning is required to ensure thatproduction equipment is not idle. The main aims of the batch method are, therefore, to:- Concentrate skills (specialisation)- Achieve high equipment utilisationThis 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 workflow, particularly if the batches are not of the optimal size or if there is a significantdifference in productivity by each operation in the process. Batch methods often result inthe build up of significant "work in progress" or stocks (i.e. completed batches waitingfor their turn to be worked on in the next operation).Flow MethodsFlow methods are similar to batch methods - except that the problem of rest/idleproduction/batch queuing is eliminated.Flow has been defined as a "method of production organisation where the task is workedon 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 fasterFlow methods mean that as work on a task at a particular stage is complete, it must bepassed directly to the next stage for processing without waiting for the remaining tasks in
  7. 7. the "batch". When it arrives at the next stage, work must start immediately on the nextprocess. In order for the flow to be smooth, the times that each task requires on eachstage must be of equal length and there should be no movement off the flow productionline. In theory, therefore, any fault or error at a particular stageIn order that flow methods can work well, several requirements must be met:(1) There must be substantially constant demandIf demand is unpredictable or irregular, then the flow production line can lead to asubstantial build up of stocks and possibility storage difficulties. Many businesses usingflow methods get round this problem by "building for stock" - i.e. keeping the flow lineworking during quiet periods of demand so that output can be produced efficiently.(2) The product and/or production tasks must be standardisedFlow 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 timeSince the flow production line is working continuously, it is not a good idea to usematerials that vary in style, form or quality. Similarly, if the required materials are notavailable, then the whole production line will come to a close - with potentially seriouscost consequences.(4) Each operation in the production flow must be carefully defined - and recordedin detail(5) The output from each stage of the flow must conform to quality standardsSince 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 ispossible to compensate for a lack of quality by doing some extra work on the job or thebatch 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 andthat operations in the flow are of equal duration.Common examples where flow methods are used are the manufacture of motor cars,chocolates and televisions.
  8. 8. Chapter 4:Introduction to break-even analysisIntroductionBreak-even analysis is a technique widely used by production management andmanagement accountants. It is based on categorising production costs between thosewhich are "variable" (costs that change when the production output changes) and thosethat 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 thelevel of sales volume, sales value or production at which the business makes neithera profit nor a loss (the "break-even point").The Break-Even ChartIn its simplest form, the break-even chart is a graphical representation of costs at variouslevels 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 isknown as the "break-even point" and is represented on the chart below by the intersectionof the two lines:
  9. 9. In the diagram above, the line OA represents the variation of income at varying levels ofproduction activity ("output"). OB represents the total fixed costs in the business. Asoutput 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 ofintersection, P, costs are exactly equal to income, and hence neither profit nor loss ismade.Fixed CostsFixed costs are those business costs that are not directly related to the level of productionor output. In other words, even if the business has a zero output or high output, the levelof 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 costsVariable CostsVariable costs are those costs which vary directly with the level of output. They representpayment 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" variablecosts.Direct variable costs are those which can be directly attributable to the production of aparticular product or service and allocated to a particular cost centre. Raw materials andthe wages those working on the production line are good examples.Indirect variable costs cannot be directly attributable to production but they do vary withoutput. These include depreciation (where it is calculated related to output - e.g. machinehours), maintenance and certain labour costs.Semi-Variable CostsWhilst the distinction between fixed and variable costs is a convenient way ofcategorising business costs, in reality there are some costs which are fixed in nature butwhich 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 relativelylow levels of output or sales, it may not require costs associated with functions such as
  10. 10. human resource management or a fully-resourced finance department. However, as thescale of the business grows (e.g. output, number people employed, number andcomplexity of transactions) then more resources are required. If production rises suddenlythen some short-term increase in warehousing and/or transport may be required. In thesecircumstances, we say that part of the cost is variable and part fixed.Chapter 5:Quality management - introductionOne of the most important issues that businesses have focused on in the last 20-30 yearshas been quality. As markets have become much more competitive - quality has becomewidely regarded as a key ingredient for success in business. In this revision note, weintroduce what is meant by quality by focusing on the key terms you will come upagainst.What is quality? You will comes across several terms that all seem to relate to theconcept of quality. It can be quite confusing working out what the difference is betweenthem. Weve defined the key terms that you need to know below:Term DescriptionQuality 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 doesnt, then it is sub-standard.
  11. 11. Quality management Producing products of the required quality does not happen by 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 controlQuality assurance Quality assurance is about how a business can design the way a 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 modern form ofmanagement 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.
  12. 12. Chapter 6:Quality controlQuality 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 bestway for a business to manage quality?Under traditional quality control, inspection of products and services (checking to makesure that whats being produced is meeting the required standard) takes place during andat 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 production2 Whilst products are going through the production process3 When products are finished - inspection or testing takes place before products are despatched to customersThe problem with this sort of inspection is that it doesnt 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 sales3 It is sometimes done too late in the production process. This often results in defective or non- acceptable goods actually being received by the customer4 It is usually done by the wrong people - e.g. by a separate "quality control inspection team" rather than by the workers themselves5 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
  13. 13. 7 There is often disagreement as to what constitutes a "quality product". For example, to meet quotas, inspectors may approve goods that dont meet 100% conformance, giving the message to workers that it doesnt 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 onimproving quality by implementing quality management techniques - which emphasisethe 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 theprocess."Chapter 7:Total quality management - TQMTotal quality management is a popular "quality management" concept. However, it isabout much more than just assuring product or service quality. TQM is a businessphilosophy - a way of doing business. It describes ways to managing people and businessprocesses to ensure complete customer satisfaction at every stage. TQM is oftenassociated with the phrase - "doing the right things right, first time". This revision notesummarises the main features of TQM.Like most quality management concepts, TQM views "quality" entirely from the pointof view of "the customer".All businesses have many types of customer. A customer can be someone "internal" tothe 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 befamiliar with. When you fly with an airline you are their customer. When Tescos buysproducts from food manufacturers, it is a customer.
  14. 14. TQM recognises that all businesses require "processes" that enable customerrequirements to be met. TQM focuses on the ways in which these processes can bemanaged - with two key objectives:1 100% customer satisfaction2 Zero defectsThe Importance of Customer - Supplier Relationships - "Quality Chains"TQM focuses strongly on the importance of the relationship between customers (internaland external) and supplier. These are known as the "quality chains” and they can bebroken at any point by one person or one piece of equipment not meeting therequirements of the customer. Failure to meet the requirements in any part of a qualitychain has a way of multiplying, and failure in one part of the system creates problemselsewhere, 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 achievequality throughout a business, every person in the quality chain must be trained to ask thefollowing 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 toimprove this capability?)• Do I continually meet their needs and expectations? (If not, what prevents this fromhappening 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 TQMThe 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
  15. 15. Zero defects The ultimate aim is no (zero) defects - or exceptionally low defect levels if a product or service is complicatedGetting things right first Better not to produce at all than produce something defectivetimeQuality involves everyone Quality is not just the concern of the production or operations department - it involves everyone, including marketing, finance and human resourcesContinuous improvement Businesses should always be looking for ways to improve processes to help qualityEmployee involvement Those involved in production and operations have a vital role to play in spotting improvement opportunities for quality and in identifying quality problemsIntroducing TQM into a BusinessTQM is not an easy concept to introduce into businesses - particularly those that have nottraditionally concerned themselved too much with understanding customer needs andbusiness processes. In fact - many attempts to introduce TQM fail!One of the reasons for the challenge of introducing TQM is that it has significantimplications for the whole business.For example, it requires that management give employees a say in the productionprocesses that they are involved in. In a culture of continuous improvement, workforceviews are invaluable. The problem is - many businesses have barriers to involvement. Forexample, 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 themanagement culture before attempting to install TQM and to take steps to changetowards the management style required for it. Since culture is not the first thing thatmanagers think about, this step has often been missed or ignored with resultant failure ofa TQM strategy.TQM also focuses the business on the activities of the business that are closest to thecustomer - e.g. the production department, the employees facing the customer. This cancause resentment amongst departments that previously considered themselves "above"the shop floor. ( The End)