Production and operations management
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:
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:
– Production costs
– Delivery dates
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)
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
– Production costs
– Maintenance requirements
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
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
production – types of production method
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.
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.
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 is project 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)
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 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
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:
The capacity that can be made available to influence the 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
The amount of production capacity that can be made available in the short-term. This is the maximum potential capacity – assuming that it is used productively
An important concept. Not all productive capacity is actually used or usable. It is important for production managers to understand what capacity is actually achievable.
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.
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 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 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
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 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
– Research and development
– Marketing costs (non- revenue related)
– Administration 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.
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:
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.
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 control
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 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 management
Total quality management (usually shortened to “TQM”) is a 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 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:
When raw materials are received prior to entering production
Whilst products are going through the production process
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:
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!
Inspection is costly, in terms of both tangible and intangible costs. For example, materials, labour, time, employee morale, customer goodwill, lost sales
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
It is usually done by the wrong people – e.g. by a separate “quality control inspection team” rather than by the workers themselves
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.
Working capital is tied up in stocks which cannot be sold
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:
100% customer satisfaction
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:
Ã¢â‚¬Â¢ Who are my customers?
Ã¢â‚¬Â¢ What are their real needs and expectations?
Ã¢â‚¬Â¢ How can I measure my ability to meet their needs and expectations?
Ã¢â‚¬Â¢ Do I have the capability to meet their needs and expectations? (If not, what must I do to improve this capability?)
Ã¢â‚¬Â¢ Do I continually meet their needs and expectations? (If not, what prevents this from happening when the capability exists?)
Ã¢â‚¬Â¢ How do I monitor changes in their needs and expectations?
Ã¢â‚¬Â¢ Who are my internal suppliers?
Ã¢â‚¬Â¢ What are my true needs and expectations?
Ã¢â‚¬Â¢ How do I communicate my needs and expectations to my suppliers?
Ã¢â‚¬Â¢ Do my suppliers have the capability to measure and meet these needs and expectations?
Ã¢â‚¬Â¢ 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 is better than cure. In the long run, it is cheaper to stop products defects than trying to find them
The ultimate aim is no (zero) defects – or exceptionally low defect levels if a product or service is complicated
Getting things right first time
Better not to produce at all than produce something defective
Quality involves everyone
Quality is not just the concern of the production or operations department – it involves everyone, including marketing, finance and human resources
Businesses should always be looking for ways to improve processes to help quality
Those involved in production and operations have a vital role 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.