Chapter 14

OPERATIONS:
Producing Goods and
Services
Learning Objectives
After reading this chapter, you should be able to do the following:

● Discuss the strategic value-adding role

operations plays in the supply chain.
● Explain the concept of a transformation
process and its application to goods and
services.
● Appreciate the tradeoffs and challenges
involved in production operations.
● Understand the primary production
strategies and types of planning.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 2
part.
Learning Objectives, continued

● Discuss the primary assembly processes

and production methods for goods
creation.
● Describe the various production process
layouts.
● Explain the role of productivity and quality
metrics for improving operations
performance.
● Know how information technology
supports efficient production of goods and
services.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 3
part.
The Role of Production Operations in SCM

Manufacturing and service production supplies a economic utility called form

utility. Effective production operations are supported by and support the supply
chain. Supply chain tradeoffs must be understood and made.

● Production Process Functionality

• No two processes are organized exactly alike or
perform to the same level.
• Process functionality helps the success of an
organization.
• Assemble-to-order methods tend to be more complex,
be more labor intensive, and require longer
processing time than the mass-production-oriented,
make-to-stock operations.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 4
part.
Figure 14.1
The Production Process

Source: Brian J. Gibson, Ph.D.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 5
part.
The Role of Production Operations in SCM, continued

● Production Tradeoffs
• Processes that can produce a range of products are
said to have economies of scope.
• Low-volume production runs of a wide variety of
products are required to meet changing customer
demand.
• Tradeoffs between production processes for goods
and the costs involved in manufacturing them must
also be understood.
• Production and supply chain costs vary for make-to-
stock, assemble-to-order, and build-to-order products.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 6
part.
Figure 14.2
Total Cost of Manufacturing

Source: Adapted from Bowersox, Closs & Cooper, Supply Chain Logistics Management, 3rd ed. (2010)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 7
part.
The Role of Production Operations in SCM, continued

● Production Challenges
• Intensified competition, more demanding customers,
and relentless pressure for efficiency as well as
adaptability.
• Competitive pressures for many established
manufacturers and service providers
• Customers’ demand for choice and rapidly changing
tastes.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 8
part.
Operations Strategies and Planning
● Production Strategies
• In the era of mass production, operations strategy
focused on reduction, efficiency, and scale.
• The push-based strategy works well for supply chains
that focus on the immediate delivery of off-the-shelf,
low-cost, standardized goods.
• Lean production tries to have materials arrive at the
needed location just in time for rapid processing and
flow through the system.
• Lean production relies on pull-based systems to
coordinate production and distribution with actual
customer demand.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 9
part.
Figure 14.3
Evolution of Production Strategies

Source: Adapted from Manufacturing Strategy: An Adaptive Perspective (SAP 2003)

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 10
part.
Table 14.1
TPS Seven Deadly Wastes

Source: Ohno, Toyota Production System: Beyond Large Scale Production (1988)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 11
part.
Operations Strategies and Planning, continued

● Production Strategies, continued

• Machine flexibility
○ General purpose machines and equipment staffed by cross-
trained workers provide the ability to produce different types
of products
• Routing flexibility
○ Provides managers with a choice between machines for a
part’s next operation
• Offshoring
○ Activity be relocated to a contract manufacturer in another
country
• Adaptive manufacturing
○ Provides companies with the ability to replace planning and
replanning with execution based on real-time demand

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 12
part.
Operations Strategies and Planning, continued

● Production Planning
• Long-range plans
○ Covering a year or more, focus on major decisions regarding
capacity and aggregate production plans
• Medium-range plans
○ Span 6 to 18 months and involve tactical decisions regarding
employment levels and similar issues
• Short-range plans
○ Ranging from a few days to a few weeks

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 13
part.
Figure 14.4
Production Planning Activities

Source: Adapted from Wisner, Tan, & Leong, Principles of Supply Chain Management, 2nd ed. (2009)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 14
part.
Operations Strategies and Planning, continued

● Production Planning, continued

• Resource requirements planning (RRP)
○ Long-run, macro-level planning tool
• Rough-cut capacity plan (RCCP)
○ Checks the feasibility of the master production schedule
• Capacity requirements planning (CRP)
○ Checks the feasibility of the materials requirement plan
• Aggregate production plan (APP)
○ Long-range materials plan that translates annual business
plans, marketing plans into production plan
• Master production schedule (MPS)
○ Medium-range plan that is more detailed than the APP

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 15
part.
Production Execution Decisions
● Assembly Processes
• (MTS), make to order
• (ATO), assemble-to-order
• (BTO), build-to-order
• (ETO), engineer-to-order
● Production Process Layout
• Facility layout
○ Involves the arrangement of machines, storage areas,
and other resources within the four walls of a
manufacturing or an assembly facility.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 16
part.
Production Execution Decisions, continued

● Production Process Layout, continued

• Successful layout is one that does the following:
○ Reduces bottlenecks in moving people or materials
○ Minimizes materials-handling costs
○ Reduces hazards to personnel
○ Utilizes labor efficiently
○ Increases morale and ease of supervision
○ Utilizes available space effectively and efficiently
○ Provides flexibility
○ Facilitates coordination and face-to-face communication
• Project layout
○ Fixed location layout where the product remains in place for
the duration of production
• Workcenter
○ Process-focused layout that groups together similar
equipment or functions

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 17
part.
Production Execution Decisions, continued

● Production Process Layout, continued

• Manufacturing cell
○ Process-focused layout that dedicates production areas to a
narrow range of products that are similar in processing
requirements
• Assembly line
○ Product-focused layout in which machines and workers are
arranged according to the progressive sequence of
operations
• Continuous process facilities
○ Similar to assembly lines, with product flowing through a
predetermined sequence of stops.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 18
part.
Figure 14.5
Facility Layout Matrix

Source: Adapted from Jacobs & Chase, Operation and Supply Chain Management: The Core (2008)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 19
part.
Production Execution Decisions, continued

● Packaging
• Design issues can affect labor and facility efficiency.
• Can provide another level of product differentiation.
• Design impacts ability to use space and equipment.
• Ease of handling during materials handling and
transportation.
• Protecting the goods in the package.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 20
part.
Production Metrics
● Total cost
• All money spent on manufacturing must be
summarized and the total compared to the previous
period.
● Total Cycle Time
• Total cycle time is a measure of manufacturing
performance that is calculated by studying major
purchased components and determining the total
days on hand of each one.
● Delivery performance
• Is the percentage of customer orders shipped when
the customer requested them to be shipped.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 21
part.
Production Metrics, continued

● Quality
• This may vary by company but it must focus on
quality from the perspective of the customer.
● Safety
• The standard metrics of accident/incident frequency,
severity, and cost are important to monitor, with
continuous improvement (i.e., reduction) as the goal.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 22
part.
Production Technology
● Manufacturing Execution Systems (MES)
• Central software used to monitor and control
production operations.
• Linked to other enterprise tools like ERP systems,
product life cycle management tools, and scheduling
and planning systems.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 23
part.
Table 14.3
MES Key Functionality

Source: Manufacturing Execution Solutions Association International, MES Functionality & MRP to
MFS Data Flow Possibilities, (2011)
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 24
part.
Summary
● Production operations include all activities and
processes involved in changing the composition of a
good or service—component fabrication, product
assembly, and service request execution—for the
purpose of creating form utility.
● Numerous tradeoffs must be made regarding production:
volume versus variety, responsiveness or efficiency,
make or outsource, and focusing on a limited number of
competitive dimensions.
● Intensified competition, more demanding customers, and
relentless pressure for efficiency as well as adaptability
are driving significant changes across many
manufacturing industry settings.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 25
part.
Summary, continued

● There have been significant development and shifts in

production strategy. Organizations have advanced from
forecast-driven mass production to demand-driven lean,
flexible, and adaptive approaches.
● Capacity planning and materials planning are used to
balance inputs, capacity (resources), and outputs so that
customer demand can be fulfilled without creating waste.
● Most manufacturers use a combination of four
production methods—make-to-stock, assemble-to-order,
build-to-order, and engineer-to-order—to satisfy demand
for their products.
● Within the make-to-order method, companies can
leverage assemble-to-order, build-to-order, or engineer-
to-order options, based on product complexity and
weakness.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 26
part.
Summary, continued

● Facility layout involves the arrangement of machines,

storage areas, and other resources within the four walls
of a manufacturing or an assembly facility.
● Facility layout is influenced by the product
characteristics, production strategy, and assembly
process employed by the organization.
● Packaging plays important roles in the smooth transfer of
finished goods from the plant to the distribution center
and customer locations.
● Sustainability is a key consideration in packaging
selection, and companies are turning to recyclable and
reusable materials for exterior and interior packaging.
● Production KPIs must be linked to corporate goals and
objectives, customer requirements, and overall
performance of the production operation.
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 27
part.
Summary, continued

● Critical production KPIs address total cost, total cycle

time, delivery performance, quality, and safety.
● Manufacturing execution systems software solutions
improve an organization’s ability to manage production
operations and make them more responsive to
disruptions, challenges, and changing marketplace
conditions.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in 28
part.