Production & Materials Management Functions
1) To increase product quality.
Product quality is increased by eliminating defective products from both the supply
chain and the manufacturing process.
Improved quality reduces costs by:
Increasing productivity since time is not wasted manufacturing poor-quality
products
Reducing the number of products that cannot be sold, directly reducing unit
costs
Lowering re-work and scrap costs
Lowering warranty costs
Quality can be improved by:
Minimizing variation in the manufacturing process
Reducing the number of defects in products
Eliminating waste in processes
Reducing costs throughout the company
Continuously improving processes by regularly examining different processes
and implementing improvements.
Total quality management (TQM)
- Total quality management consist of organization-wide efforts to improve the
quality of a firms products and services offerings
International Organization for Standardization (ISO)
ISO 9000: A series of international quality management standards developed for the
purpose of increasing business efficiency and customer satisfaction.
Many NA companies conducting business internationally often ask clients and
suppliers to adhere to ISO standards. Additionally, the EU requires firms to be
certified under ISO 9000.
The goal of ISO is to embed a quality management system within
organizations, increasing productivity, reducing costs, and ensuring quality of
goods/services.
With ISO organizations can identify the source of problems for various
products and services, finding solutions and maximizing products
When multiple organizations use ISO, an internationally known supply chain
with a high degree of reliability can be created.
2) The allocation of production
Costs are lowered by dispersing production activities to various locations where
each activity can be performed the most efficiently.
Allocation should be done in a manner so that production and logistics are able to:
Respond quickly to shifts in consumer demand
Be locally responsive
Be cost effective
Factors firms should consider when picking a location:
Country factors- Political economy, national culture, relative cost factors
differ from country to country, influencing the benefits, costs, and risks of
doing business in different countries
A firm should locate its various manufacturing activities where the economic, political,
and cultural conditions, including relative factor costs, are conducive to the performance
of those activities.
Technological factors- Depending on the constraints associated with different
technologies, manufacturing may take place in a limited number of location
or many locations.
High fixed costs: In some cases, the fixed costs of setting up a
manufacturing plant are so high that a firm must reduce the number of
plants it sets up.
Flexible manufacturing and mass customization: Manufacturing
technologies are designed to reduce set-up times for complex
equipment, increase the utilization of individual machines through
better scheduling and improve quality control at all stages through the
manufacturing process.
Minimum efficient scale: A minimum scale of output a plant must
operate at to realize the minimum cost of production. The larger the
minimum efficient scale of a plant, the greater the argument is for
centralizing production in a limited number of locations.
Product factors
Value-to-weight ratios affect transportation costs. The higher the
value-to-weight ratio, the more practical it is to produce a product in a
limited number of locations.
Universal needs affect location decisions because it directly affects a
firm’s need for local responsiveness. The less need for local
responsiveness, the more practical it is to produce a product in a
limited number of locations
Concentrated manufacturing is appropriate when:
There are significant differences in country factors
Trade barriers are low
There are externalities arising from the concentration of like
enterprises favouring certain locations
Exchange rates are stable
Flexible manufacturing technology exists
The product has a high value-to-weight ratio
The product serves universal needs
Sourcing Decisions
International firms frequently face sourcing decisions about whether or not components going
into their final products should be made or bought from elsewhere.
➢Decisions on outsourcing a firm’s manufacturing or services are very important for a for a
firm’s strategies.
Advantages of making components internally:
Lower costs- If the firm is more efficient at a production activity than
other firms, it is more cost-efficient to keep the production activity in-
house.
Facilitating specialized investments- When substantial investments in
specialized assets are required to manufacture a component, a firm
will prefer to manufacture internally.
Proprietary product technology protection-If a firm’s competitive
advantage is its technology or if a firm wishes to maintain control over
its technology, outsourcing tends to be avoided.
Improved scheduling- Manufacturing internally may make planning,
coordinating, and scheduling adjacent processes easily.
Advantages of outsourcing components:
Lower costs-Manufacturing internally increases the scope and complexity of
an organization,
which may increase costs.
Strategic flexibility- Firms can switch between different suppliers whenever
necessary to
drive down cost structures.
Offsets- Outsourcing from independent suppliers based in other countries
may help firms
capture more orders from the country of the supplier.
Growth of Global Sourcing
Key drivers of the growth of global sourcing include:
Technological advances in communications
Falling costs of conducting business internationally
Entrepreneurship and rapid economic transformation in emerging markets
Implications for Businesses
Supply chain: All parties involved in the production and distribution of a product or
service
Can include...
➢ Raw materials providers, refiners, manufactures, parts suppliers, assembly providers,
systems providers, distributors, wholesalers, retailers, etc.
Can also include...
➢ Banks, third party logistics providers, consulting companies, marketing
companies, research labs, universities, etc
1) Coordinating a global manufacturing system
Materials management: The activity that controls the transmission of material
through the supply chain from suppliers to consumers.
• Materials management has a significant impact on the cost structure of a firm. 2)
Just-in-time
2) Just-in-Time (JIT): A manufacturing strategy that increases return on investment
by reducing in- process inventory and carrying costs.
Reduces warehousing costs
Helps identify and reduce defects
Has no buffer stock to cope with unexpected demand or supply problems
3) The role of information technology
Allows firms to optimize production scheduling
Facilitates the tracking of inputs
Allows suppliers and firms to communicate in real time
Vocabulary
Production: Activities involved in creating a product or service.
Supply chain: All parties involved in the production and distribution of a
product or service. Materials management: The activity that controls the
transmission of material through the supply chain from suppliers to
consumers.
Total quality management (TQM): A management philosophy in which the
central focus is the need to improve the quality of a company’s products and
services.
Logistics: Procurement and physical transmission of material through the
supply chain from suppliers to consumers.
ISO 9000: A certification process that requires certain quality standards that
must be met.
