PRODUCTION

MANAGEMENT
Lecture no 3

Resource Person: Engr Muhammad Raheel Butt

LECTURE NO 3
• Production Management and Production Planning
• Using Quality, Cost and Service as Competitive Weapons
• Planning and Control Functions in Production
Measuring Productivity

 Sound business strategy and supporting operations strategy make an organization more
competitive in the marketplace. But how does a company measure its competitiveness?
 One of the most common ways is by measuring productivity. We will look at how to measure
the productivity of each of a company’s resources as well as the entire organization.

Productivity

 A measure of how efficiently an organization converts inputs into outputs.

Total Productivity

 Productivity computed as a ratio of output to all organizational inputs.

Measuring Productivity

 Recall that operations management is responsible for managing the transformation of many
inputs into outputs, such as goods or services.
 A measure of how efficiently inputs are being converted into outputs is called productivity.
Productivity measures how well resources are used.
 It is computed as a ratio of outputs (goods and services) to inputs (e.g., labor and materials).
The more efficiently a company uses its resources, the more productive it is:

 This equation can be used to measure the productivity of one worker or many, as well as the
productivity of a machine, a department, the whole firm, or even a nation
Productivity Measure

Partial productivity
Productivity computed as a
ratio of output to only one
input (e.g., labor, materials,
machines).

Multifactor productivity
Productivity computed as a
ratio of output to several, but
not all, inputs
Example

 For example, let’s say that the weekly

dollar value of a company’s output, such
as finished goods and work in progress, is
$10,200 and that the value of its inputs,
such as labor, materials, and capital, is
$8600. The company’s total weekly
productivity would be computed as
follows:
Examples of Partial Productivity Measures
Example of Computing Productivity

 Long Beach Bank employs three loan officers, each working eight hours per day. Each officer
processes an average of five loans per day. The bank’s payroll cost for the officers is $820 per
day, and there is a daily overhead expense of $500. The bank has just purchased new computer
software that should enable each officer to process eight loans per day, although the overhead
expense will increase to $550. Evaluate the change in labor and multifactor productivity before
and after implementation of the new computer software.
 Before You Begin: When solving productivity problems, make sure that the value of outputs
and inputs is computed over the same time period, such as day, week, month, or year. Also,
when evaluating a change in productivity, compute the productivity before and after the
expected change and calculate the percentage difference.
Solution of Computing Productivity
Interpreting Productivity Measures

 To interpret the meaning of a productivity measure, it must be compared with a similar productivity
measure.
 For example, if one worker at a pizza shop produces 17 pizzas in two hours, the productivity of that
worker is 8.5 pizzas per hour. This number by itself does not tell us very much. However, if we
compare it to the productivity of two other workers, one who produces 7.2 pizzas per hour and another
6.8 pizzas per hour, it is much more meaningful.
 We can see that the first worker is much more productive than the other two workers. But how do we
know whether the productivity of all three workers is reasonable? What we need is a standard. We will
discuss ways to set standards and how those standards can help in evaluating the performance of our
workers.
 It is also helpful to measure and compare productivity over time. Let’s say that we want to measure the
total productivity of our three pizza makers (our “labor”) and we compute a labor productivity
measure of 7.5 pizzas per hour. This number does not tell us much about the workers’ performance.
However, if we compare weekly productivity measures over time, perhaps over the last four weeks,
we get much more information:
Interpreting Productivity Measures

 Now we see that the workers’ productivity is improving over time. In fact, productivity changed from 5.4
to 7.5 pizzas per labor-hour, resulting in an increase of 7.5/5.4 = 1.39, or an increase of 39 percent. But
what if we find out that our main competitor, a pizzeria down the street, has a productivity of 9.5 pizzas per
labor-hour? This productivity rate is 26.7 percent (9.5/7.5 = 1.267) higher than our productivity in week 4.
 Suddenly we know that even though our productivity is going up, it should be higher. We may have to
analyze our processes and increase our productivity in order to be competitive. By comparing our
productivity over time and against similar operations, we have a much better sense of how high our
productivity really is.
 When evaluating productivity and setting standards for performance, we also need to consider our strategy
for competing in the marketplace—namely, our competitive priorities. A company that competes based on
speed would probably measure productivity in units produced over time. However, a company that
competes based on cost might measure productivity in terms of costs of inputs such as labor, materials, and
overhead.
 The important thing is that our productivity measure provides information on how we are doing relative to
the competitive priority that is most important to us.
Productivity and Competitiveness

 Productivity is essentially a scorecard of how efficiently resources are used and a measure of
competitiveness.
 Productivity is measured on many levels and is of interest to a wide range of people. As we showed in
earlier examples, productivity can be measured for individuals, departments, or organizations. It can
track performance over time and help managers identify problems. Similarly, productivity can be
measured for an entire industry and even a country.
 The economic success of a nation and the quality of life of its citizens are related to its
competitiveness in the global marketplace. Increases in productivity are directly related to increases in
a nation’s standard of living. That is why business and government leaders continuously monitor the
productivity at the national level and by industry sectors.
 Productivity in the United States had been increasing for over 100 years. Then in the 1970s and
1980s productivity dropped, even lagging behind that of other industrial nations. Fortunately,
productivity rebounded in the mid- and late 1990s. Today, companies understand the importance
of competitiveness, and productivity in the United States continues to improve. Changes in U.S.
productivity.
Productivity and Competitiveness
Productivity and the Service Sector

 Service sector companies have a unique challenge when trying to measure productivity. The
reason is that traditional productivity measures tend to focus on tangible outcomes, as seen
with goods-producing activities. Services primarily produce intangible products, such as ideas
and information, making it difficult to evaluate quality.
 Consequently, accurately measuring productivity improvements can be difficult. A good
example of the difficulty in using traditional productivity measures in the service sector is the
emergency room. Here inputs are the medical staff, yet outputs may not exist if no one needed
treatment on that shift. In that case, by traditional measures, productivity would be zero! The
real issue in this type of environment is the level of readiness, and the challenge is to
adequately measure it.
 .As we discussed previously, employment in the service sector of the U.S. economy has grown
rapidly over the past 30 years. Unfortunately, productivity gains in this sector have been much
lower than those of manufacturing. It is hoped that advancements in information technology
will help standardize services and accelerate productivity in this sector.
 OPERATIONS STRATEGY WITHIN OM:
HOW IT ALL FITS TOGETHER

 We have learned that the strategic decisions of a firm drive its tactical decisions. Operations
strategy decisions are critical in this process because they serve as a linkage between the
business strategy and all the other operations decisions. Recall that operations strategy provides
a plan for the OM function that supports the business strategy.
 In turn, decisions regarding operations strategy directly impact decisions on organizational
structure and infrastructure of the company.
 As in the example of Southwest Airlines, an operations strategy that focuses on cost
competition would translate into specific operations decisions that eliminate all frills from the
system.
 We will study specific decisions that pertain to organizational structure and infrastructure. We
will see that these decisions are governed by the firm’s operations strategy. We will also learn
how these specific decisions impact each other.
 OPERATIONS STRATEGY WITHIN OM:
HOW IT ALL FITS TOGETHER

 The business strategy defines the long-range plan for the entire company and guides the actions of each of
the company’s business functions. Those functions, in turn, develop plans to support the business strategy.
However, in defining their individual strategies, it is important for the functions to work together and
understand each other’s needs.

 Marketing identifies target markets, studies competition, and communicates with customers. In
developing its own strategy, marketing needs to fully understand the capabilities of the operations
function, the types of resources being used, and the way those resources are utilized. Otherwise,
marketing’s strategy could entail making promises that operations cannot deliver. . In turn, marketing
needs to communicate to operations all its observed and anticipated market changes

 Finance develops financial plans to support the business strategy. However, since it is the operations
function that manages all the organization’s resources, the financial plans in effect support operations
activities. Before it can develop its own strategy, finance needs to communicate with operations in order
to understand the financial requirements of planned resources.

 In turn, operations managers cannot fully develop a strategy until they have a clear understanding of
financial capabilities. The strategies of all the business functions need to support each other in achieving
the goals set by the business strategy and are best developed through a team approach.
Problem 1 & 2

 Problem 1 Bluegill Furniture is a small furniture shop that focuses on making kitchen chairs.
The weekly dollar value of its output, including finished goods and work in progress, is
$14,280. The value of inputs, such as labor, materials, and capital, is approximately $16,528.
Compute the total productivity measure for Bluegill Furniture.

 Problem 2 Bluegill has just purchased a new sanding machine that processes 17 chairs in 8
hours. What is the productivity of the sanding machine?
Problem 3 & 4
Problem 5
 TOTAL QUALITY MANAGEMENT
QUALITY As competitive weapon
  QUALITY AS A PHILOSOPHY

As competitive weapon that must be produced efficiently : high performance design and consistency TQM is stressing on
customer satisfaction, employee involvement and continuous improvement in quality Quality is the responsibility of
management Clearly defining quality and bridging the gap between customer expectation and operating capabilities

  CUSTOMER-DRIVEN DEFINITIONS OF QUALITY

The ability to meet or exceeding the expectations of customers : conformance to specifications value fitness for use support
psychological impression

 THE COST OF QUALITY

The cost of achieving good quality : Prevention costs : preventing defects before they happened or preventing poor quality
products from reaching the customer (quality planning, process, training and information costs) Appraisal costs : assessing the
level of quality attained by the operating system or cost of measuring, testing and analyzing the inputs and processes to ensure
that product quality specifications are being met (operator, test equipment, inspection and testing costs) The cost of poor quality
or the cost of nonconformance or failure cost Internal failure costs : defects discovered during the production or before they are
delivered to the customer (scrap, rework, process failure, process downtime, price-downgrading costs) External failure costs :
defects discovered after the customer received the product or service (customer complain, product return, warranty claim,
product liability, lost sale costs)
 TOTAL QUALITY MANAGEMENT
QUALITY As competitive weapon
 THE QUALITY-COST RELATIONSHIP

Less cost if the defect is detected early in the process A service entity has little opportunity to examine and
correct the defective internal process before the employee-customer interaction is happened. So in this case
it becomes an external failure When the sum of prevention and appraisal costs increased, internal and
external failure cost decreased Increase in sales and market share resulting from increased customer
confidence in quality will offset the high cost of achieving good quality

 THE QUALITY-COST RELATIONSHIP

The cost of achieving good quality will be less because of the innovations in technology, processes & work
methods. Higher quality products charge higher prices Achieving quality at minimum cost by focusing more
on improving the capabilities & training of employees, getting them more involved in preventing poor
quality and focusing less on engineering solutions Improving quality at the new product development stage
rather than in the production process of developed product to reduce appraisal cost
 TOTAL QUALITY MANAGEMENT
QUALITY As competitive weapon
 EMPLOYEE INVOLVEMENT Cultural change : instilling the awareness of the importance
of quality to all employees and functions Teams : small group, commitment, leadership role,
common goals and approaches Individual development : training program Awards and
incentives : the role of monetary and non monetary incentives for improving quality

 CONTINUOUS IMPROVEMENT Continually seeking ways to improve operations (quality

and process improvement) Benchmarking Sense of employees’ ownership Any aspects of
operations to be improved Five steps to get started Problem-solving process (plan-do-check-
act)
 IMPROVING QUALITY THROUGH TQM Purchasing considerations - the quality of
inputs : high quality products/services (defect-free parts) at reasonable cost, clear and realistic
specifications, process capability studies, cross function coordination with engineering and
quality control Product and service design : influence methods, materials and specifications
that consequently affect defect rate, market share, reliability, added time and cost
 TOTAL QUALITY MANAGEMENT
QUALITY As competitive weapon
 IMPROVING QUALITY THROUGH TQM (continued) Process design : shorten the waiting
time, investing new machinery Quality function deployment : translating customers’
requirements into the design of products/services and their processes that requires inter
functional communication and coordination Benchmarking (competitive, functional and
internal) : measures the firm’s products/services and process against the industry leaders

 IMPROVING QUALITY THROUGH TQM (continued) Data analysis tools : data collection to
identify quality problems and causes (see more detail and examples on Russell & Taylor) Data
snooping : using different data analysis tools together
Planning and Control Functions in Production
Planning and Control Functions in Production

Materials Methods Routing Estimating

Machines & Loading &

Inspection Materials
Equipment's Scheduling

Expediting Evaluating Dispatching

 Planning and Control Functions in Production

 The main functions of PPC are the coordination of all the activities, which exist during production or
manufacturing.
 Materials :

This function is concerned with ensuring that the Raw material, standard finished parts, finished parts of
products must be available while starting the operation within the time. Raw materials, finished parts and
bought out components should be made available in required quantities and at required time to ensure the
correct start and end for each operation resulting in uninterrupted production. The function includes the
specification of materials (quality & quantity) delivery dates, variety reduction (standardisation) procurement
and make or buy decisions.
 Methods :

This function is concerned with the analysis of all methods of manufacturing and selecting the best
appropriate method according to the given set of circumstances and facilities. This function is concerned with
the analysis of alternatives and selection of the best method with due consideration to constraints imposed.
Developing specifications for processes is an important aspect of PPC and determination of sequence of
Operations.
 Planning and Control Functions in Production

 Routing:

It refers to the flow of sequence of operation and processes to be followed in producing a particular finish product. It
determines manufacturing operation and their sequence. It is concerned with selection of path or route which the raw should
follow to get transformed in to finished product.

 Machines and Equipment's:

It is important that methods of manufacturing should to be related to the available production facilities coupled with a detail
study of equipment replacement policy.

This function is concerned with the detailed analysis of the production facilities, maintenance procedures and equipment policy.

This function is related with the detailed analysis of available production facilities, equipment down time, maintenance policy
procedure and schedules. Concerned with economy of jigs and fixtures, equipment availability.

Thus the duties include the analysis of facilities and making their availability with minimum down time because of
breakdowns.
 Planning and Control Functions in Production

 Estimating:

This function is concerned with estimation of operations time. The operation time can be worked Out once the overall method
and sequence of operation is fixed and process sheet for each operation is available. Once the overall method and sequence of
operations is fixed and process sheet for each operation is available, then the operations times are estimated. This function is
carried out using extensive analysis of operations along with methods and routing and standard times for operation are
established using work measurement techniques.

 Loading & Scheduling:

It is important that machine should be loaded according to their capabilities performance the given and according to the
capacity. It is concerned with preparation of machine loads and fixation of starting and completion dates for a particular
operation. Scheduling is concerned with preparation of machine loads and fixation of Starting and completion dates for each
of the operations. Machines have to be loaded according to their capability of performing the given task and according to their
capacity.

Thus, the duties include:

 (a) Loading the machines as per their capability and capacity.
 (b) Determining the start and completion times for each operation.
 (c) To Co-ordinate with sales department regarding delivery schedules.
 Planning and Control Functions in Production
 Dispatching:

It means the assignment of work to different machines or work places which involve authorities to start of production activities in
order of their priority as determined by scheduling.
 Expediting:

It is also called Follow Up or Progress. Follow up which regulates the progress of materials and parts through the production process.
It is closely interrelated with activities of dispatching. This is the control tool that keeps a close observation on the progress of the
work. It is a logical step after dispatching which is called “follow-up” or “Progress”. It co-ordinates extensively to execute the
production plan. Progressing function can be divided in to three parts, i.e. follow up of materials, follow up of work in process and
follow up of assembly.
 Inspection :

It is an important control tool. Its assessment is important in the execution of current program and planning stage of undertaking
when the limitations of the processor, method and manpower are known. It forms a basis for future investigations with respect to
method, process etc. which is useful for evaluation phase.
 Evaluating :

This is the integral part of control function. The evaluating function is concerned with providing a feedback mechanism on the long
term basis so that the past experience can be evaluated with the aim of improving utilization of method and facilities.
 The Supply Chain Link

 The operations strategy of a firm directly impacts decisions on its structure and infrastructure,
including its supply chain. This includes the design of the supply chain, such as its length, and
the relationships the firm has with its supply chain partners.
 Together, the operations strategy and the firm’s supply chain must support the business strategy
of the firm. This can be illustrated by the competitive priorities of the firm, which directly
impact the type of supply chain a company has in place.
 For example, a company that competes on cost must have a highly efficient supply chain with
high integration of the OM function between supply chain partners. The reason is that the
supply chain plays a critical role in keeping both production and delivery costs down.
 Therefore, a firm competing on cost might structure its supply chain so that the least expensive
suppliers are used rather than those with the highest quality supplies. In contrast, a company
that competes on quality will likely have a different supply chain.
 The Supply Chain Link

 Competing on quality means that a company’s products and services are known for their premium nature,
such as product consistency and reliability. Many aspects of the supply chain are altered when companies
compete on quality versus another competitive priority, such as cost.

 The company will likely source its components from suppliers known for quality who have implemented
total quality management throughout their production process.

 The concept of quality will also be embedded in other aspects of the supply chain, such as transportation,
delivery, and packaging.

 An excellent example of aligning operations strategy with the supply chain is illustrated by Wal-Mart.
Sam Walton, Wal-Mart’s founder, was a strategic visionary who developed the low-cost retail strategy
that is supported by its supply chain.

 Wal-Mart’s supply chain is designed to buy not from distributors but directly from manufacturers in order
to lower costs and offer a broad range of merchandise. In fact, Wal-Mart has had a legendary partnership
with Procter & Gamble, where replenishment of inventories is done automatically.

 These supply chain actions were designed to help Wal-Mart meet its overall competitive strategy, which is
to provide its customers with a wide product offering at a low price. This has helped Wal-Mart become
the world’s largest retailer