CHAPTER 6

PRODUCTION OF
GOODS AND
SERVICES

MGT153

DEFINITION OF PRODUCTION
Production refers to all activities involved in converting natural
resources into finished goods

(Jackson & Mussleman, 1987)

Production is defined as the physical process of transforming
resources into goods and services

(Ferrel & Hirt,

1993)

Production is the process of creating goods and services by

converting raw materials into finished form
-

Goods are anything that a company

produces

Services are intangible and are performed

organizations

by

OPERATION MANAGEMENT

Operation management is the process of coordinating the

production of goods and services

Operation management is a systematic direction and control of

the processes that transform resources into finished goods and
services into outputs or finished products or services.

(Griffin,
1996)

THREE component in operation management

a)

Input

b)

Transformation process

c)

Output

INPUT

TRANSFORMA
TION
PROCESS

INPUT

PRODUCTION PROCESS

A production process is the series of tasks in which resources are

used to produce a product or service

The organizations type of products produces have bearing on the

types of production processes used. There are two types:
a)

Standard products

b)

Custom products

CLASSIFICATION OF PRODUCTION
PROCESS

There are two major classification in the production process:

a)

Analytic process and Synthetic process

- based on the nature of the process

b)

Continuous process and Intermittent

process

- based on the length of the production runs

ANALYTIC & SYNTHETIC PROCESS

1)

Analytic Process
It is a manufacturing process that breaks
down
substances and reduces raw material to
its component parts
for the purpose of obtaining
one or more products.

2)

Synthetic Process
It is a process of converting a number of raw
materials or
basic parts components or chemicals into finished products. It
involves two
process:
a) Fabrication
b) Modification

CONTINUOUS & INTERMITTENT PROCESS

1)

Continuous Process
production sequence in which the flow of
material is steady and constant
-

2)

it is characterized by long production run

Intermittent Process
production sequence in which the flow of
materials is non-continuous
also known as batch process where there is a
production run on various products

short

RESOURCES USED FOR THE PRODUCTION

PROCESS
1)

Human resources

2)

Materials

3)

Other resources

4)

Combining resources for production

Work stations are areas to which one or
more workers
re assigned together to
perform a specific task
-

Assembly line consist of a sequence of work stations

SELECTING A SITE
Factors affecting the site decision:
1) Cost of workplace space
2) Cost of labor
3) Tax incentives
4) Source of demand
5) Access to transportation
6) Supply of labor

SELECTING THE DESIGN AND LAYOUT

Design refers to the size and structure of the facility

Layout refers to the arrangement of machinery and equipment within
the facility

Factors affecting design and layout

1) Site characteristics
2) Production process
-

product layout

fixed-position layout

flexible manufacturing

3) Product line
4) Desired production capacity

Reducing the layout space

a)

Using space more efficiently

b)

Downsizing

c)

Flexible layout
- hotelling/just-in-time office

PRODUCTION CONTROL
There are five steps in production control:
1) Purchasing materials
2) Inventory control
3) Routing
4) Scheduling
5) Quality control

PURCHASING MATERIALS
Requires production managers to perform the
following steps:
a)
Selecting a supplier of materials requires
managers to evaluate such factors as the
price, quality,
speed, reliability, servicing, and credit availability offered
by potential suppliers to pick the best sources for its
materials

b)
Many firms now rely on e-procurement, or
the use of the
Internet to purchase
materials. Thus, the ability of a
supplier to react to an Internet-based order system
may
be a consideration when buyers select
suppliers
c)
Managers of large firms will also attempt
to negotiate
volume discounts when they
order large quantities of
materials

d)
Production managers must also determine
the degree
they want to make use of
outsourcing, which is the act of
purchasing component parts from suppliers rather than
producing the components internally.
A related issue is whether to make use of
which is the strategy of
delegating some parts
production process itself to other firms. These
can reduce a firm's expenses if the suppliers
producers can perform the tasks at lower cost

deintegration,
of the
strategies
and outside

INVENTORY CONTROL

Process of managing inventory at a level that minimizes costs

Requires the firm to control the costs of materials inventories, workin-process inventories, and finished goods inventories

Firms must control two different types of costs when dealing with
materials inventories
Firm must be concerned with carrying costs, which involve
the cost of storing, insuring, and
financing inventories
Firm must control ordering costs, which deal with
the
expense of placing orders for additional
inventory as needed
-

A tradeoff exists between carrying cost and

ordering cost

Just-in-time inventory technique minimizes the amount of

materials inventory
Materials requirements planning (MRP) is a
computerized
technique that helps managers
determine when and how
much to order

The work-in-process inventory consist of inventories of partially

completed products
to control cost while ensuring that
arise

shortages do not

Inventories of finished goods will fluctuate as the result of

mismatches between the supply and the demand for the firms
products

ROUTING
Represents the sequence of tasks necessary to complete the
production of a product
Determines the path raw materials and component parts follow
as they proceed from work station to work station and are
converted into the final product

SCHEDULING

Scheduling involves setting time periods for the completion of

tasks

A production schedule is a plan for the timing and volume of

production activities

helps workers understand what they are

accomplish each time period

expected to

allows manager to forecast how much will

each time period

be produced

Technology is having an impact on production scheduling

Scheduling special projects that are complex and that must be

completed on time requires special scheduling techniques:
(i)
Gantt chart shows the expected timing of each activity that
must be performed to complete a
project
(ii) Program evaluation and review technique
enables managers to schedule tasks so as to
project completion time
A key element of PERT is the
identification of the critical path which
sequence of interrelated tasks
longest to complete

(PERT)
minimize

is the
that takes the

QUALITY CONTROL
Process of determining whether the quality of a product meets
a desired standard of quality level and identifying any
improvements that must be made in the production process
The purpose of the quality control process is to identify and
correct deficiencies

Firms may assess quality through various techniques:

a)

Technology

b)

Employees

c)

Sampling

d)

Complaint monitoring

PRODUCTION EFFICIENCY
The ability to produce products at low cost (production
efficiency) is a goal towards which firms strive
Many firms use benchmarking as a method of evaluating
performance
Some firms set production efficiency targets that the firm
cannot achieve under present conditions. It is called stretch
targets

Production efficiency can be improved through the following

methods:
a)

New technology adoption

b)

Economies of scale

c)

Restructuring/reengineering

d)

Downsizing

- it is possible to downsize too much

corporate anorexia

resulting in

QUESTIONS
1.

Explain the factors that affect site decision.

2.

Explain the factors that affect design and layout.