Managing Operations and Improving Quality

Managing Operations and Improving Quality



Managing Operations and Improving Quality

Chapter 7

Managing Operations and Improving Quality

Chapter Overview

Operations (or production) is the process and activities for transforming resources into finished services and goods for customers.  The operations function creates four kinds of utility – time utility, place utility, possess utility, and form utility – to meet customer needs.

Performing a service is different from manufacturing a good in several key ways:  the raw material for service production includes the people who are seeking the service.  In addition, most services are intangible, customized, and can not be stored.  Because of these characteristics, service providers generally focus on the customer service, often acknowledging the customer as part of the operations process.

Operations planning for both goods and services involves the analysis of five key factors:  Capacity planning requires determining how much of a product a firm must be able to produce.  Location planning involves choosing among potential facility sites.  Layout planning entails designing an effective, efficient facility.  Quality planning ensures that products meet a firm’s quality standards. Methods planning involves identifying specific production steps and methods for performing them.

Total quality management (TQM) includes any activity designed to get high quality products to the marketplace.  Important TQM tools include statistical process control, quality/cost studies, getting closer to the customer, business process reengineering, IS 9000, and outsourcing.

The concept behind supply chain management is that members of the supply chain – the stream of all activities and companies that create a product – can gain competitive advantage by working together as a coordinated system of units.  Managing the chain as a whole has yielded better service and lower prices, leading customers to prefer the products produced by the supply chain, which, in turn, benefits all of its members.

Chapter Objectives

  1. Explain the meaning of the term operations and describe the four kinds of utility operations processes provide.
  2. Identify the characteristics that distinguish service operations from goods production and explain the main differences of the service focus.
  3. Describe the factors involved in operations planning.
  4. Identify some of the key tools for total quality management, including strategies for getting closer to the customer.
  5. Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.



Opening Case:  A Supersonic Project Gets Off the Ground (I)

  1. Goods and Services Operations
    1. Growth in the Service and Goods Sectors
    2. The Growth of Global Operations


  1. Creating Value Through Operations
    1. Operations Processes
      1. Goods-Manufacturing Processes:  Analytic vs. Synthetic Processes
      2. Service Processes:  Extent of Customer Contact
    2. Differences between Service and Manufacturing Operations
      1. Focus on Performance
      2. Focus on Process and Outcome
      3. Focus on Service Characteristics
      4. Focus on the Customer-Service Link
      5. Focus on Service Quality Considerations
  1. Operations Planning
    1. Capacity Planning
      1. Capacity Planning for Producing Goods
      2. Capacity Planning for Producing Services
    2. Location Planning
      1. Location Planning for Producing Goods
      2. Location Planning for Producing Services
    3. Layout Planning
      1. Layout Planning for Producing Goods
      2. Layout Planning for Producing Services
    4. Quality Planning
    5. Methods Planning
      1. Methods Improvement in Goods
      2. Methods Improvement in Services


  1. Operations Scheduling
    1. Scheduling Goods Operations
    2. Scheduling Service Operations
  1. Operations Control
    1. Materials Management
    2. Tools for Operations Process Control
      1. Work Training
      2. Team Production Systems:  Just-Time Operations
      3. Material Requirements Planning
      4. Quality Control


  1. Quality Improvement
    1. Managing for Quality
      1. Planning for Quality
      2. Organizing for Quality
      3. Directing for Quality
      4. Controlling for Quality
    2. Tools for Total Quality Management
      1. Statistical Process Control
      2. Quality/Cost Studies
      3. Getting Closer to the Customer
      4. ISO 9000
      5. Process Reengineering
      6. Outsourcing
  1. Adding Value Through Supply Chains
    1. The Supply Chain Strategy
    2. Supply Chain Management



  1. Goods and Services Operations  (Use PowerPoint 7.4.)


Service operations provide tangible and intangible services; firms that make tangible products are engaged in goods production.

    1. Growth in the Service and Goods Sectors  (Use PowerPoint 7.5.)


The economic significance of the manufacturing sector is increasing.  Real income from manufacturing has been steadily rising, increasing by more than 30 percent in the past decade; in addition, the United States returned to the number-one spot for the eighth straight year in 2001 – ahead of Japan and Germany.

    1. The Growth of Global Operations  (Use PowerPoint 7.6.)


Global competition has made production a faster-paced, higher-tech, “cleaner” activity.

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

  1. Creating Value Through Production  (Use PowerPoint 7.7.)


Both services and goods provide consumers with utility, which is the ability of a product to satisfy a human want.  Time utility is created when marketers make products available when consumers want them; place utility is created when products are made available where they are convenient for consumers; ownership utility is created when products become available for consumer to own and use; and, form utility is created merely through transforming raw materials into finished goods.

    1. Operations Processes  (Use PowerPoint 7.8.)


An operations process is a set of methods and technologies used in the production of goods and services.

      1. Goods-Manufacturing Processes:  Analytic vs. Synthetic Processes.  An analytic process converts raw materials into components; a synthetic process converts raw materials into finished goods.


      1. Service Processes:  Extent of Customer Contact.  In high-contact processes, the customer must be a part of the service; in low-contact processes, customers do not have to be present while the service transaction is being performed.


    1.  Differences between Service and Manufacturing Operations  (Use PowerPoint 7.9.)
      1. Focus on Performance.   Goods are produced, while services are performed.  Because services are more intangible and customized than most products, service operations tend to be more complex than goods production.


      1. Focus on Process and Outcome.  Manufacturing operations focus on the outcome of the production process, but the products of most service operations are combinations of goods and services.
      2. Focus on Service Characteristics.  Intangibility, services that cannot be touched, tasted, or smelled; customization, services that are designed for individuals’ needs; and, unstorability, services that cannot be packaged and stored, characterize service transactions.
      1. Focus on Customer-Service Link.  Service operations often acknowledge the customer as part of the service transaction itself.


      1. Focus on Quality Considerations.  Customers use different criteria to judge services and goods; consumer perceptions of service quality are highly subjective because of the intangible nature of services.

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

  1. Operations Planning  (Use PowerPoint 7.10.)


Managers from many departments contribute to the firm’s decisions about operations management; this is a process of logical steps upon which the success of the firm depends.  The overall business plan guides operations planning, as do qualitative and quantitative forecasts.

    1. Capacity Planning


The amount of a product that a company can produce under normal working conditions is its capacity.  A firm’s capacity depends on how many people it employs and the number and size of its facilities.

      1. Capacity Planning for Producing Goods.  Capacity planning means ensuring that a firm’s capacity just slightly exceeds the normal demand for its product.


      1. Capacity Planning for Producing Services.  Capacity in service operations depends on the number of people employed and the number and size of its facilities.



    1. Location Planning

Facility location affects production costs and flexibility.  Depending on the site of its facility, a company may either be capable of producing a low-cost product or may find itself at an extreme cost disadvantage.

      1. Location Planning for Producing Goods.  A manufacturer’s optimal location depends on raw material and labor availability, proximity to suppliers and markets, transportation and energy costs, and local and state regulations and taxes.


      1. Location Planning for Producing Services.  Low-contact services are usually located near resource supplies, service employees, or transportation outlets, whereas high-contact services must locate near customers.
    1. Layout Planning


Layout determines whether firms can respond quickly and efficiently to customer requests for additional or different products or finds itself unable to match competitors’ speed and convenience.

      1. Layout Planning for Producing Goods.  In a process layout, equipment is grouped according to function; in a product layout, equipment is set up to produce goods in a fixed sequence of steps along an assembly line.  In a cellular layout, the spatial arrangement of production facilities is designed to move families of products through similar flow paths.  In a fixed-position layout, the product is so large that the materials and equipment are brought to the work location.


      1. Layout Planning for Producing Services.  Layout for low-contact services should be arranged to enhance the production of the service.  Layout for high-contact services should be arranged to meet customer needs and expectations.
    1. Quality Planning


Operations processes must be geared to creating fitness for use; that is, offering features that customers want.  Any complete operations plan must ensure that products are produced to meet the firm’s standards of quality.

    1. Methods Planning


In operations systems, methods improvement refers to methods implemented to reduce waste, inefficiency, and poor performance.

      1. Methods Planning in Goods.  Improvement in goods production processes entails monitoring activity in each stage of the production process to more clearly identify the areas requiring improvements.


      1. Methods Improvement in Services.  In a low-contact process, methods improvements are implemented to reduce delays in order to speed up services.  In a high-contact process, managers must clearly define how service performers interact with customers to create consistency between service transactions.

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

  1. Operations Scheduling  (Use PowerPoint 7.11.)


Operations scheduling involves developing timetables for acquiring resources needed for production.

    1. Scheduling Goods Operations


Goods scheduling occurs on different levels of the firm:  A master production schedule shows which products will be produced, when production will occur, and what resources will be used; detailed schedules indicate start-up and stop times and employee work assignments.

    1. Scheduling Service Operations


In a low-contact service, scheduling can be based either on desired completion dates or on the time of order arrivals.  In a high-contact service, scheduling may not always be possible; the customer is part of the system and must be accompanied.  Gantt charts diagram steps to be performed and specify the time required to complete each step.  PERT charts break down large projects into steps and specify the time required to perform each one.

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

  1. Operations Control  (Use PowerPoint 7.12.)


Once long-range plans have been put into action and schedules have been drawn up, operations control requires production managers to monitor production performance.  If schedules or quality standards are not met, managers must take corrective action.

    1. Materials Management 


The process of materials management plans, organizes, and controls the flow of materials.  The five major areas of materials management are transportation, warehousing, purchasing, supplier selection, and inventory control.

    1. Tools for Operations Process Control  (Use PowerPoint 7.13.)


      1. Worker Training.  Customer satisfaction is closely linked to service employee attitude and performance. 
      1. Lean Production Systems:  Just-in-Time Operations.  JIT brings together all the needed materials and parts at the precise moment they are required for each production stage; all resources, therefore, are continuously flowing.


      1. Materials Requirements Planning (MRP).  MRP uses a bill of materials, which is a “recipe” for the finished good; the bill of materials specifies the needed ingredients, the order in which they should be combined, and the quantity needed of each ingredient.  The recipe is fed into a computer that controls inventory and schedules each stage of production.
      1. Quality Control.  Quality control is the management of the production process so as to manufacture goods or supply services that meet specific quality standards.



Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

  1. Quality Improvement


    1. Managing for Quality  (Use PowerPoint 7.14.)

Total Quality Management (TQM) includes all of the activities necessary for getting quality goods and services into the marketplace; this process involves all parts of the business, including customers, suppliers, and employees.  To bring all the interests of the stakeholders together, TQM involves planning, organizing, directing, and controlling.

      1. Planning for Quality.  This process begins in a product’s pre-design stage, in which managers set goals for performance quality and quality reliability.


      1. Organizing for Quality.  Everyone in a company, from the chairperson of the board to the part-time clerk, contributes to product quality.  The overall goal is to make the product correctly from the beginning, reducing waste and potential problems.
      1. Directing for Quality.  Directing for quality means that managers must motivate employees throughout the firm to achieve quality goals; managers must help employees see how they affect the firm’s quality and how the firm’s quality affects their jobs.


      1. Controlling for Quality.  Managers must establish quality standards with which to measure the production of goods and services in order to detect mistakes and to make corrections.
    1. Tools for Total Quality Management  (Use PowerPoint 7.15.)


      1. Statistical Process Control.  Statistical process control involves the use of statistical tools that allow firms to study variations in products and services and in production processes.  Corrections can then be made to the sources of unit-to-unit variations once they have been identified.
      2. Quality/Cost Studies.  In raising quality capabilities firms must identify those improvements that offer the greatest promise.  These studies identify a firm’s current costs as well as the areas with the largest cost-savings potential.
      1. Getting Closer to the Customer.  Customers are the driving force for all business activity; the most successful firms keep close to their customers and know what they want in the products they consume.


      1. ISO 9000.  ISO 9000 is a certification program attesting to the fact that a firm or laboratory has met the quality-management requirements set by the International Organization for Standardization.  ISO 9000 began in Europe as an attempt to standardize materials received from suppliers in such high-technology industries as electronics, chemicals, and aviation.  Today, more than 90 countries have adopted ISO9000 as national standards.
      1. Process ReengineeringProcess reengineering is a process which focuses on productivity and quality and which entails rethinking each by starting over from scratch.  Reengineering involves the redesign of business processes to achieve improvements in cost, quality, service, and speed.


      1. Outsourcing.  Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes as to provide needed materials or services.

Notes:  ______________________________________________________________________________________________________________________________________________________________________________________________________

  1. Adding Value Through Supply Chains  (Use PowerPoint 7.16, 7.17.)


A supply chain for any product is the flow of information, materials, and services that starts with raw-materials suppliers and continues through other stages in the operations process until the product reaches the end customer.


    1. The Supply Chain Strategy


Supply chain strategy is based on the idea that members of the chain, working as a coordinated unit, will gain competitive advantage.

    1. Supply Chain Management


This process looks at the supply chain as a whole in order to improve the overall flow through a system composed of companies working together.

Answers to Questions and Exercises

Questions for Review

  1. What are the four different kinds of production-based utility?


Time utility involves making products available when customers want them.  Place utility involves making products available where they are convenient for customers.  Possession utility involves giving customers the ability to benefit from possessing and using a product.  Form utility involves creating the product in the first place.

  1. What are the major differences between goods-production operations and service operations?


Service operations focus on performance, process and outcome, service characteristics, customer-service link, and service quality considerations.

  1. What are the five major categories of operations planning?


Capacity planning, location planning, layout planning, quality planning, and methods planning are the five major categories of operations planning.

  1. What activities are involved in total quality management?


Statistical process control, quality/cost studies, getting closer to the customer, business process reengineering, ISO 9000, and outsourcing are all involved in total quality management.

  1. What is supply chain management?


Supply chain management is managing the supply chain as a whole to more closely coordinate activities.  The result is often better service at lower prices, leading to a competitive advantage for all the players in the chain.

Questions for Analysis

  1. What are the resources and finished products for the following services?


For a real estate firm, labor and customers are the resources; coordinating buyers and sellers is the product.  For a child care facility, labor, customers, and products are the resources; child care is the product.  For a bank, labor, equipment, and money are the resources; financial services are the products.  For the city water and electric department, labor, equipment, and raw materials are the resources; continuous supplies of water and power are the products.  In a hotel, labor, equipment, and facilities are the resources; lodging and amenities are the products.

  1. Analyze the layout of a local firm with which you do business – perhaps a restaurant or a supermarket.  What problems do you see with this layout?  What recommendations would you make to management?


Answers will vary, but students should recognize the process involved in producing the relevant goods or services and possible inefficiencies stemming from poor operations planning.

  1. Select one of your favorite products and identify the supply chain that provides it.  How many different firms contribute to the development and delivery of the product from beginning to end?


Answers will vary, but students should identify the full range of stages in the supply chain, including less obvious ones such as raw materials, storage, transportation, and distribution.

Application Exercises

  1. Interview the manager of a local service business, such as a laundry and/or a dry-cleaning shop.  Identify the major decisions that were involved in planning for its service operations.  Prepare a class report suggesting areas for improvement.


Students’ answers will vary.

  1. Using a local company as an example, show how you would conduct a quality/cost study.  Identify the cost categories and give some examples of the costs in each category.  Which categories do you expect to have the highest and lowest costs?  Why?


Answers will vary, but students should consider external and internal failures.  Anticipated costs should include the costs of correcting external failures.

Answers to Exercising Your Ethics

  1. What are the underlying ethical issues in this situation?


The underlying ethical issues are management’s commitment to its own quality program and to its employees.  To what financial extent should the company pursue quality?  Should the company have more effectively communicated cost/benefit analysis to its employees?  Should the company have fired Ruth for putting customers first regardless of cost?  What message does that send to other employees?

  1. What are the respective roles of profits, obligations to customers, and employee considerations for the appliance firm in this situation?


Senior management has clearly opted to rank short-term profit considerations first.  The long-term impact on quality may be negative, depending on how they communicate their decision to employees, who in turn interact with customers.

  1. Suppose that you were an employee who realized that your company was selling defective appliances.  Suppose that the cost of correction might put the firm out of business.  What would you do?


Answers will vary, but students should recognize that different levels of correction are possible.

Answers to Building Your Business Skills

  1. Why is the customization of and easy access to personal services so desirable in the twenty-first century?


Answers will vary, but students should point out that technology makes customization easier, cheaper, and more accessible than ever before, which raises customer expectations.

  1. As services are personalized, do you think quality will become more or less important?  Why?


Answers will vary, but it seems quite likely that consumers will expect more from products and services that are tailored just for them.

  1. Why does the trend to have personalized, one-to-one services present unique opportunities for entrepreneurs?


The trend creates new needs and wants that entrepreneurs can fill.

  1. In a personal one-to-one business, how important are the human relations skills of those delivering the service?  Can you make an argument that they are more important than the service itself?


Answers will vary, although human relations skills clearly play a critical role in any personal, one-to-one business.  A doctor, for example, may be valued more for medical skills than human relations skills, while a manicurist may be valued more for human relations skills.

Classroom Activities

  1. Divide the class into two-member groups.  Ask each group to complete either a Gantt chart or a PERT chart that illustrates the process of writing a research paper.  Or, if preferred, allow each group to choose an individual process.


  1. Total quality management involves customers, suppliers, and employees – everyone involved with the organization – in creating a world-class good or service.  Divide the class into three-member groups.  Each group shall identify two processes within their college or university that, given the authority, they would like to change.  This could involve the admissions process, financial aid processing, customer service in the bookstore, etc.  Ask the groups to offer suggestions on how improvements in those identified areas/processes could be made, also identifying what benefit the students, faculty, staff, etc., would receive from the suggested changes.



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Managing Operations and Improving Quality


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Managing Operations and Improving Quality



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Managing Operations and Improving Quality