PRODUCTION AND OPERATIONS MANAGEMENT

PPODUCTION (POM) -Is the transformation of inputs that is, raw materials, and labor into outputs (finished products). -It is any activity undertaken by an organization which adds value to the contributing resources by converting them into another good or service designed to meet human needs. -The inputs of production differ from one organization to another. The outputs of one organization may be the inputs of another. -POM seeks to ensure that goods/services are made with the required quantity, required standard and at the right time and in the most efficient manner. POM is concerned with acquiring the necessary inputs, allocating and utilizing them in such a way as to maximize output. -Production can be initiated from one of the following 3 key sources: 1. Replenishing low stock levels 2. Completing an individual customer’s order 3. To meet demand anticipated in response to marketing effort -The objectives of production are: 1. Achievement of required level of production 2. Reduce production costs 3. Maintain high quality levels. Production Constraints 1. Finance - capital 2. Available technology 3. Skills of the workforce 4. Legislation 5. Economic conditions 6. Market Nature of Production Added Value –it is the difference between a firm’s sales revenue and cost of its bought-in components, materials and services. -It represents a profit for the firm. It excludes the cost of labor, land and capital. -An organization will seek to increase its added value and this can be achieved in the following ways: 1. A commitment to total quality 2. Investing in R & D 3. Improving work conditions 4. Improving purchasing and stock control 5. Value analysis/value engineering Classification of Costs of Production -From an economist’s point of view production costs may be fixed or variable (marginal). Fixed Costs -These are costs which do not vary in direct proportion to a firm’s output. Fixed costs are not always fixed, they can be stepped, that is, costs which stay constant over a range of output and then rise suddenly at certain levels. If a firm does not operate at its capacity, it still has to pay fixed costs. Variable Costs -These are costs which vary directly with output, that is, an increase in output has a corresponding increase in costs. Variable costs can be clearly allocated to a particular product/service. Semi-variable Costs -Comprise both fixed and variable elements e.g. salaries of sales representatives, telephone charges Direct Costs -These are costs which can be directly identified with the product being produced e.g. DL, DM. DE Indirect Costs -These are costs incurred but cannot be allocated to specific departments or specific output. Costing -The ascertaining of costs of producing goods/services. There is need for accurate costing for pricing purposes, calculation of profits, determining levels of output or resources required and productivity agreements. Absorption/Total Costing -The nature of this technique involves allocation of costs to units of output. It includes both direct and indirect costs. It establishes a full cost per unit item so that the setting of selling price does not cover costs only but ensures a satisfactory profit. -Absorption costing is useful in that it gives a general cost of production in valuation of finished goods. Marginal/Variable Costing -The nature of this technique is based only on the variable cost of production. It avoids arbitrary allocation of costs. If contribution is greater than fixed costs, profit is realized. -Marginal costing is used in the following circumstances: 1. Make or buy decisions 2. Analyzing the performance of the department/production 3. Whether or not to continue in business 4. Break-even analysis Advantages 1. Very easy to calculate 2. Avoids difficulties in apportionment 3. Contribution of each product can be assessed Disadvantages 1. Can give the impression that variable costs are important than fixed costs 2. Can also give the impression that fixed costs are divorced from production. Break-Even Analysis -This is an extension of marginal costing which is used to identify a business’ break-even point, that is, the point at which it makes neither a profit nor a loss because Total Sales = Total Costs. -It provides a minimum output which the firm must achieve to avoid a loss and start making profit. Break-Even (unit output) = Total Fixed Costs (F) Contribution per Unit (C) Break-Even (Sales revenue) = Fixed Costs x Price/Unit Contribution/Unit Contribution = SP-VC Margin of Safety –this is the amount by which sales could fall from the planned level before the organization ceases to make a profit. Assumptions Underlying the BEP Graph 1. Expenses may be classified into variable and fixed 2. Costs vary in a linear manner with output and revenue 3. All goods produced are sold 4. Selling price remains constant 5. If a fixed expense increases the BEP increases Usefulness of Break-Even Analysis -It anticipates probable future performances by attempting to answer the following questions: 1. What will be the profit/loss at a given sales volume? 2. What sales volume is required to earn a designated profit? 3. How will a given reduction in gross margin change the BEP? 4. What sales volume is needed to cover variable costs? 5. What additional sales volume will be required to cover the additional fixed costs arising from a store modernization programme? Limitations of Break-Even Analysis 1. Involves estimates – can create false sense of security. 2. Useful over a limited range of sales volume- a large increase in sales volume alters its effect. 3. Fixed costs are not always fixed. 4. Variable costs nor sales revenue are likely to be linear because of discounts, overtime payments etc. 5. Assumes all production will be sold – it translates production into demand, which may not be realistic. Business Location -Businesses have to make the important decision of the best place to locate in order to operate well. Influence on the final location depends on the type of business, size, demands of the production process and the market. Factors affecting Choice of Location 1. historical reasons (power and raw materials) 2. natural resources – primary industries locate where the raw material is found e.g. farming, fishing, mining -Manufacturing industries may locate near the source of raw materials especially if they are bulky and costly to transport. 3. nearness to markets and labor 4. transport 5. communication services 6. geographical factors 7. political situation 8. image of the area 9. government influence – financial incentives etc Siting -The site of a business is the actual area of ground it will occupy in a given location. Factors affecting Siting 1. availability of transport 2. local bylaws and reaction of local residents 3. size, cost and physical qualities of the site 4. national and international pressure groups 5. provision of services. Factors Influencing Single/Multi-Site Operations 1. Type and size of the business – sole traders do better on single-site having several outlets, depending on size of market 2. The product range – different products can have different location and citing requirements 3. Trade restrictions – effective barriers to imports are favorable to many MNCs 4. Organization structure - a decentralized organization is easier to manage and avoiding possible diseconomies of scales 5. Cost – changes in technology 6. Environmental considerations – attempts to develop new sites can meet with opposition 7. Proximity of similar businesses (external economies of scale) 8. Economies of scale – managerial and administrative costs are cheaper on a single site. When an organization expands, it can gain the advantage of operating on a large scale. a) Internal Economies 1. Production Economies -mass production aided by better technology, specialization and R&D. 2. Financial Economies –large firms find it cheaper and easier to borrow money and float shares. 3. Marketing Economies –bulk buying, advertising spread over a wide range of products, transport, packaging and administration costs. 4. Managerial Economies –Departmentation and use of specialized staff. 5. Risk-bearing economies –diversification and wide range of products and multi- sourcing of raw materials. b) External Economies -these are factors which can keep firms in an area or attract new firms. They include: 1. Labor –supply of suitable skilled labor. 2. Ancillary/support industry. 3. Marketing and distribution facilities. 4. Commercial services e.g. college training, chamber of commerce. 5. Industrial inertia – many industries can remain in their location even though the initial advantages have declined. 6. Disintegration –individual firms specialize in single processes e.g. spinning, weaving, ginning. c) Diseconomies of Scale -It is possible for a firm to grow large and then meet with problems, besides the above stated advantages. Problems which decrease efficiency and increase cost per unit of output are called diseconomies of scale. They include: 1. Co-ordination and control - communications and management become more complex and difficult to organize. 2. Industrial relations – if employees are out of touch with management, motivation becomes low and job-dissatisfaction increases. 3. Technical limitations – inability to increase production and adapt quickly to new production methods. Plant Layout -The lay-out of a factory should enable a proper positioning of machinery, equipment and people to extract the maximum productivity from the available resources. - It should be designed to secure maximum; - flexibility - safety - efficiency - coordination - accessibility - handling - security - visibility - movement Factors to consider on a single or multi-storey building depend on the nature of the business but basically they are; 1. Costs – multi-storey buildings have lower site costs, hence office buildings have more storey buildings than manufacturers. 2. Organization of departments – single-storey buildings can make flow of goods from one department to another easier. Service industries do better in multi-storey buildings. 3. Ventilation and use of natural light – quite cheaper in a single-storey building. 4. Use of floor space – heavy machinery need more space, hence convenient for a single- storey building. Questions to ask in making Plant Layout Decisions - What is the available space? - What type of work is going to be done? - What volume of work is going to be done? - Can people and stock be clearly seen? - What communications will be necessary? - Are there any special servicing requirements? - What equipment is going to be used? - How much flexibility is required? - How can you maximize comfort? Analytical Plant Layout Methods 1 Layout by Process - involves grouping of machinery performing similar tasks - associated with batch production (e.g. bakery) - can accommodate many different product routes (an advantage) - ensures high utilization of machinery in a batch set-up 2 Layout by Product - a system in which machines and tasks are arranged according to the sequence of steps in the production of a single product - associated with line and flow production - work is reduced, simplified and broken down into smaller tasks (an advantage) - control of process is facilitated 3 Cellular Layout - called group technology - involves the formation of tasks, jobs and products into families with the resources required being formed into “cells”. 4 Fixed Position Layout - resources are taken to the site at which production occurs e.g. large construction projects. Production Design - the scheduling of production involves organizing the activities in a manufacturing plant or service industry to ensure that the product or service is completed at the expected time. There are 3 basic ways of production design namely job, batch and flow production. The method chosen will depend on the following factors: 1. Type of product – whether durable or perishable 2. Size of the business – demand of product and capital investment to operate on a large scale 3. Size and location of the market – therefore the volume of production required 4. Frequency of demand – whether product is a regular purchase e.g. bread, or infrequent e.g. heaters 1. Job Production - Used when a single product or small orders are completed by one/a group of people from start to finish to meet the customer’s individual requirements. - It is suitable when the product is simple and demand is small. It is common in small businesses e.g. carpentry, car servicing etc. It is the most expensive form of production, very labor intensive and requires considerable flexibility and technical skills. Advantages 1. product can be tailored to meet customer needs 2. it makes it easier to isolate problem(s) during production 3. the workforce has greater involvement with the product. This increases job satisfaction Disadvantages 1. For a complex technical product tailored to the needs of a customer, there has to be a relatively large sales force with a high degree of technical expertise. This can increase selling costs. 2. Business may need more machinery to meet delivery dates and production schedules so as to remain competitive. 3. It requires a flexible workforce, especially in a more sophisticated product – need a highly skilled workforce, technical supervision and competent supervisors and management. 2 Flow Production It uses a series of repetitive processes so that each item moves on to the next stage as soon as a process is completed. Products pass along a conveyor belt or assembly line. It demands a high degree of standardization, simplification and specialization. Advantages 1. eliminates waiting time 2. encourages automation and mass production of essential goods like consumer durables (cars, fridges, tinned foods) Disadvantages 1. suitable for products with a large market and high demand 2. business has to be specific about design of product and demands a high degree of standardization 3. heavy use of machinery puts people out of their jobs Careful planning and organization is needed to ensure continuous flow from one process to the next. 3 Batch Production - It falls between job and flow production - It is the method of organizing the work on any product so that it is divided into a number of operations and each operation is completed for a group of products (batch) before the batch moves on to the next operation. - All items move from one process to another, simultaneously. - Careful planning and monitoring of production is required to reduce costs of changeover and idle production. - Examples are point manufacturers, housing estates, bakeries etc. Advantages 1. enables the use of a costing system which allocates costs to each area and therefore to each product as it passes through that process. 2. Compared with job production, it can lead to a saving in the amount of machinery used 3. Generates large quantities of stock between different production processes. 4. Provides opportunities for quality control. Disadvantages 1. large amount of capital work in progress. 2. no product will be completed before another, lead time. 3. there is need for a very efficient control system in planning production-increases costs 4 Cell Production Master Production Scheduling (MPS) -The operation managers regularly meet to review market forecasts, customer orders, inventory levels, facility loading and capacity information so that MPS can be developed. -The MPS is a plan for future production of end items over a short-range planning horizon that usually spans from a few weeks to several months. Objectives of Master Production Scheduling 1. to schedule end items to be completed promptly and when promised to customers 2. to avoid overloading and under loading the production facility so that production capacity is efficiently utilized and low production costs results -Planning a Management Production Scheduling will consider the; 1. location 2. site 3. plant layout 4. best way of working 5. scale of production 6. who will do the work 7. controls required Procedure for developing MPS 1. schedulers must estimate total demand for product from all sources 2. assign orders to production lots 3. make delivery promises to customers 4. make the detailed calculation for the MPS *Quality is fitness for purpose Quality Control * Quality is fitness for purpose -The objective is to prevent faulty components or finished goods being produced thereby reducing scrap and rework costs and helping to increase customer satisfaction. Aspects of Quality Control 1. quality of design –standards that meet consumer expectations 2. quality of conformance –production to required standards (SAZ, ISO) 3. quality of performance –extent to which product achieves what consumers expect 4. quality of reliability –consistency in performance over a period of time Methods of Quality Control 1. Quality Assurance -An approach to production in which checks and audits are carried out to ensure that quality control procedures are followed. -It involves working with suppliers to ensure that materials and components meet the required standard e.g. safety, reliability, performance. 2. Production Engineering (VALUE ENGINEERING) -This involves the use of specialist production engineers in selection, planning and installation of modern, highly sophisticated technology in the manufacturing process. -They monitor and evaluate manufacturing processes with a view to finding ways of improving them. They also draw up specifications for machines and equipment that define standards of quality to be achieved. 3. Zero Defects -Mainly directed at workers. ‘Zero defects’ programs seek to provide rewards, financial and non-financial to workers if output of the desired quality is achieved. -The aim is to eliminate human error at work due to boredom, fatigue and job dissatisfaction. 4. Quality Circles -These are groups of shop floor workers who volunteer to meet regularly and discuss production problems e.g. rising costs, wastages, identifying their causes and looking for solutions. -Members are trained in statistical analysis and problem-solving techniques. Worker participation improves employee motivation and productivity. 5. Quality Standards -The Standards Association of Zimbabwe (SAZ) adopts international standards of quality, safety and performance and modifies them where necessary to suit local conditions. -It works with the International Standards Organization (ISO) to promote the use of internationally agreed terms, definitions and standards. 6. Statistical Process Control -A 100% check on each and every product and quality is neither practical nor cost effective. For this reason it is more usual to spot check a sample of the products using statistical sampling techniques. Total Quality Management (TQM) -It is an element of loan production of redirecting organization culture toward superior product quality. -The quality of a product or service is a customer perception of the degree to which the product/service meets his/her expectations. Dimensions of Product Quality 1. Performance –how well the product performs its intended use 2. Features –special characteristics that appeal to customers 3. Reliability –likelihood of breakdowns, malfunctions or need for repairs 4. Serviceability –the speed, cost and convenience of repairs and maintenance 5. Durability –length of time/amount of use before need for repair or replacement 6. Appearance –effects on human senses –look, feel, taste, smell or sound 7. Customer service –the treatment recognized by customers before, during and after sale 8. Safety –how well the product protects users before, during and after use Elements of Total Quality Management 1. Top management commitment and involvement –‘leadership through quality’ 2. Customer involvement –“focus groups” 3. Design products for quality –“designing for robustness” 4. Design production processes for quality 5. Control production processes for quality 6. Developing supplier partnerships 7. Customer service, distribution and installation 8. Building teams of empowered employees –quality circles 9. Benchmarking and continuous improvement. Benchmarking is the practice of establishing internal standards of performance by looking at how world-class companies run their business. Productivity -It is a measure of the efficiency of production. It shows the relationship between output of a system and factor inputs. Productivity = Output Input -Labor is used as a measure of productivity, for example Number of items produce Average number of employees To improve Productivity there are two main ways; 1. Increasing output as cost remains constant 2. Reducing cost whilst output is maintained Work Study -It is the technique of determining the most efficient use of labor in relation to the other factor inputs in an organization. -It consists of two parts, namely: 1. Method Study –used to analyze how jobs are performed with a view of improving them. The steps involved are: Select -the job to be studied Record -the details of the job and method used Examine -the details critically to eliminate any duplicate effort Develop -a devised and improved method for equipment design, changes and layout of workplace, sequence of operations and improvements etc Install -the new method Maintain - the method by reviewing on a regular basis 2. Work measurement (time study) -used to measure and compare the time required to perform jobs by various methods, steps involved are: Select -work to be measured Define -method to be used for measurement Measure -the work to be done and how long it takes Obtain -details of the work, content, and allowances for factors like personal needs and fatigue Establish -a standard time for the defined method Benefits of Work Study 1. An improved flow of work and avoidance of bottlenecks 2. Closer control of operations 3. Improved employee performance 4. Better utilization of space, equipment and materials 5. Provision of a basis for incentive pay 6. Increase in efficiency and productivity Stock Control -The basic objective in purchasing is to obtain the right quality at the right time, in the right quantity, from the right source and at the right time. -The purchasing department aims to: 1. supply the business with a flow of inputs to meet its requirements 2. maintain continuity of supply through good relationships with existing suppliers while exploring alternative sources of supply 3. obtain the best value for money, taking into account reliability and quality as well as price -One policy decision to be made is whether large quantities should be ordered and received infrequently or small quantities should be ordered and received frequently. Benefits of frequent small orders 1. tests risk of obsolescence and deterioration 2. economies on insurance 3. lower capital requirements 4. economies on space Benefits of infrequent large orders 1. economies of purchasing and delivery (bulk buying discounts) 2. profits from rise in price of stock 3. security of supply The criteria for choosing a supplier are likely to include:  available capability and capacity  delivery speed  flexibility  past performance  price  delivery reliability  quality Why stocks are held Stocks take three forms: 1. Raw materials 2. Work-in-progress 3. Finished goods Stocks are held: 1. to allow the variations in supply and to take advantage of bulk-buying discounts and anticipated price rises 2. to allow greater flexibility and improve machine (capacity) utilization 3. for finished goods to cope with variations in demand, however, businesses can also have stocks of unwanted goods due to: a) inability to sell goods b) mistakes in planning c) lack of satisfactory stock control procedures d) poor communication between various departments Purpose of Stock Control 1. to ensure adequate supply of raw materials and production purposes 2. to ensure that finished goods are available for dispatch 3. for valuation purposes 4. to control cash tied up in stock 5. to control wastage and pilferage (a) Stock Control Charts -A stock control chart is a graphical technique used to ensure that a business holds the optimum levels of stock that is sufficient for the business to trade without interruption while at the same time minimizing costs. -It works under the following assumptions: 1. demand is known and is reasonably constant 2. all other costs are known 3. items arrive on time - each vertical line represents a new delivery - stoping lines represents depletion of stock through usage - when stocks fall to the reorder level, a new batch is ordered - the time gap between the reorder time and delivery of suppliers is called lead time - the reserve that is carried to cater for eventual stock out or uncertainties is called buffer stock. Buffer stock -It is held in order to avoid stock out costs which are: 1. lost production 2. lost contribution from lost sales 3. loss of customer goodwill 4. high unit costs associated with urgent purchases 5. loss of bulk buying discounts (b) Economic order Quality (EOQ) -It is the quantity of materials ordered at cash point that minimize the total annual stocking costs. The costs of holding stock are: 1. interest on capital 2. storage costs 3. wastage costs 4. handling costs 5. insurance costs EOQ = 2 pd c p = procurement cost per order d = annual use of the material c = carrying cost per annum EOQ however ignores lead time needed for stock replacement. It can create a risk of stock out situation. (c) Just In Time (JIT) /Zero Stock System/Stockless -It is a stock control system in which material is scheduled to arrive exactly when it is needed for production, and in the exact quantity. -Raw materials inventories are recorded to zero and finished goods inventories are minimized by matching production to demand. Main Features of JIT JIT Manufacturing 1. stick to production schedules 2. elimination of waste 3. enforced problem solving and continuous improvement 4. total quality management 5. dedicated and multi-skilled workforce 6. reduced equipment breakdown through preventive maintenance 7. develop long-term supplier relations JIT Purchasing 1. develop vendor relations 2. develop long-term supplier relations 3. suppliers should be located near the firm 4. shipment delivered directly to production line Factors to consider before switching to JIT - eliminate all sources of uncertainty in manufacturing system - drastically reduced time needed to set up machines - efficient transport system - eliminate existence of bottleneck in production system - establish reliable suppliers - demand should be predictable