Chap 9

Lean Manufacturing Lean manufacturing is the production of goods using less of everything than in mass production: less human effort, less manufacturing space, less investment in tools, and less engineering time to develop a new product. A company becomes lean by continuously increasing its capacity to produce high-quality goods while decreasing its need for resources.

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Time to market is another decision-making factor. As manufacturers attempt to compete globally, they need sites that allow products to move quickly, at the lowest costs, so they can be delivered to customers fast. Access to highways, rail lines, waterways, and airports is thus critical.26 Information technology (IT) is also important to quicken response time, so many firms seek countries with the most advanced information systems. Another way to work closely with suppliers to satisfy customers' needs is to locate production facilities near supplier facilities. That cuts the cost of distribution and makes communication easier. Many businesses build factories in foreign countries to get closer to their international customers.

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Production is the creation of finished goods and services using the factors of production: land, labor, capital, entrepreneurship, and knowledge (see Chapter 1). Production has historically meant manufacturing, and the term production management has described the activities that helped firms create goods. (As we discussed in the previous section, though, in recent decades the U.S. economy has been largely driven by services rather than manufacturing.)

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Operations management is a term that is used in both manufacturing and service organizations. Operations management is a specialized area in management that converts or transforms resources, including human resources like technical skills and innovation, into goods and services. It includes inventory management, quality control, production scheduling, follow-up services, and more. In an automobile plant, operations management transforms raw materials, human resources, parts, supplies, paints, tools, and other resources into automobiles. It does this through the processes of fabrication and assembly. In a service-based setting like a college or university, operations management takes inputs—such as information, professors, supplies, buildings, offices, and computer systems—and creates services that transform students into educated people. It does this through processes like teaching and explanation.

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Computer-Aided Design and Manufacturing One development that has changed production techniques is the use of computers to design products. Called computer-aided design (CAD), businesses ranging from construction companies to carmakers to video game designers depend on 3D modeling software to create new products.16

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Purchasing Purchasing is the function that searches for high-quality material resources, finds the best suppliers, and negotiates the best price for quality goods and services. Some manufacturers purchase from many suppliers so that if one can't deliver, the firm can get materials from someone else. Others, however, develop close relationships with just a few suppliers so that they can secure affordable prices in the long term.29 The Internet has also transformed the purchasing function. Businesses that once needed connections to a certain industry can now go online to find the best items at the best price. Similarly, a company wishing to sell supplies can use the Internet to find all the companies looking for such supplies. The time and dollar cost of purchasing items has thus been reduced tremendously.

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ISO 14001 is a collection of the best practices for managing an organization's impact on the environment. As an environmental management system, it does not prescribe a performance level. Requirements for certification include having an environmental policy, having specific improvement targets, conducting audits of environmental programs, and maintaining top management review of the processes.

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Facility Layout Facility layout is the physical arrangement of resources, including people, to most efficiently produce goods and provide services for customers. Facility layout depends greatly on the processes that are to be performed.

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It usually makes more sense when responding to specific customer orders to use an intermittent process. Here the production run is short (one or two eggs) and the producer adjusts machines frequently to make different products (like the oven in a bakery or the toaster in a diner). Manufacturers of custom-designed furniture would use an intermittent process.

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Production processes are either continuous or intermittent. A continuous process is one in which long production runs turn out finished goods over time. As a chef, you could have a conveyor belt that continuously lowers eggs into boiling water for three minutes and then lifts them out. A three-minute egg would be available whenever you wanted one. A chemical plant, for example, is run on a continuous process.

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CAD can greatly improve productivity for businesses. In the past CAD machines couldn't talk to CAM machines directly. Today, however, software programs unite CAD and CAM: the result is computer-integrated manufacturing (CIM). The software is expensive, but it can drastically reduce the time needed to program machines to make parts.

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Facility Location Facility location is the process of selecting a geographic location for a company's operations. In keeping with the need to focus on customers, one strategy is to find a site that makes it easy for consumers to use the company's services and to communicate about their needs. Flower shops and banks have placed facilities in supermarkets so that their products and services are more accessible than in freestanding facilities. Starbucks has also set up operations in supermarkets and Target stores. You can find a McDonald's inside some Walmart stores or even in gas stations.

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Quality Control Maintaining quality means consistently producing what the customer wants while reducing errors before and after delivery. In the past, firms often conducted quality control at the end of the production line. Products were completed first and then tested for quality. This resulted in several problems: - The need to inspect work required extra people and resources. - If an error was found, someone had to correct the mistake or scrap the product. This, of course, was costly. - If the customer found the mistake, he or she might be dissatisfied and might even buy from another firm thereafter.

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OPERATIONS MANAGEMENT PLANNING Operations management planning helps solve many of the problems in the service and manufacturing sectors. These include facility location, facility layout, materials requirement planning, purchasing, inventory control, and quality control. The resources used may be different, but the management issues are similar.

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Interfirm Operations Management Many rapidly growing companies do very little production themselves. Instead, they outsource engineering, design, manufacturing, and other tasks to companies such as Flextronics and Sanmina-SCI that specialize in those functions. They create new relationships with suppliers online, making operations management an interfirm process in which companies work closely together to design, produce, and ship products to customers. Manufacturing companies are developing Internet-focused strategies that will enable them and others to compete more effectively in the future.27 These changes are having a dramatic effect on operations managers as they adjust from a one-firm system to an interfirm environment. So rather than a relatively stable system that companies can solely control, they must now deal with an environment that is constantly changing and evolving.

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Let's use the breakfast example to understand process and assembly. Process manufacturing physically or chemically changes materials. For example, boiling physically changes an egg. Similarly, process manufacturing turns sand into glass or computer chips. The assembly process puts together components (eggs, toast, and coffee) to make a product (breakfast). Cars are made through an assembly process that puts together the frame, engine, and other parts.

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The Need to Improve Production Techniques and Cut Costs The ultimate goal of operations management is to provide high-quality goods and services instantaneously in response to customer demand. As we stress throughout this book, traditional organizations were simply not designed to be so responsive to the customer. Page 223Rather, they were designed to make goods efficiently (inexpensively). The idea behind mass production was to make a large number of a limited variety of products at very low cost. As a result of new global competition, companies have had to make a wide variety of high-quality custom-designed products at low cost. Clearly, something had to change on the production floor to make that possible. Several major developments have made U.S. companies more competitive: (1) computer-aided design and manufacturing, (2) flexible manufacturing, (3) lean manufacturing, (4) mass customization, (5) robotics, and (6) 3D printing.

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Flexible Manufacturing Flexible manufacturing means designing machines to do multiple tasks so they can produce a variety of products. Allen-Bradley uses flexible manufacturing to build motor starters. Orders come in daily, and within 24 hours the company's machines and robots manufacture, test, and package the starters—which are untouched by human hands. Allen-Bradley's machines are so flexible that managers can include a special order, even a single item, in the assembly without slowing down the process.

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3D Printing One of the most exciting production processes to emerge in recent years has been 3D printing. During this advanced procedure, also known as additive manufacturing, a product is created one layer at a time by a nozzle similar to those found in inkjet printers. So far, manufacturers have largely used 3D printing to create prototype models or molds for other industrial projects.23 But experts claim that 3D printing could someday revolutionize the production of all sorts of items.

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Robotics Industrial robotics can work 24 hours a day, seven days a week with great precision. Mass customization is no problem for them. (At least, no one has heard them complain.) Robots have completely changed manufacturing by improving productivity while also reducing the number of jobs available to humans.18 Along with assembly-line jobs in factories, robots have begun to take over in service businesses as well. At Aloft Hotels, a robot butler called Botlr roams the halls delivering room service to guests.19 Even Wall Street financial analysts have had to start competing for jobs with robots.20 In other words robots are slowly but surely either helping people perform better or are replacing them completely. Soon we may be entering what could be known as the robot economy.21 Many people think that China is so successful because of cheap labor, but China may soon be the world's largest robot market.22

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Using Sensing, Measurement, and Process Control Most advanced manufacturing techniques are driven by computers working with vast amounts of data. Such data control sensors that measure humidity, global positioning trackers (that fix location), or calipers that measure a material's thickness. Products can be tracked from the beginning of production to the point of delivery. The moment anything goes wrong, a sensor can detect it immediately and notify someone to make the needed changes

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Many companies are moving from an assembly-line layout, in which workers do only a few tasks at a time, to a modular layout, in which teams of workers combine to produce more complex units of the final product. There may have been a dozen or more workstations on an assembly line to complete an automobile engine in the past, but all that work might be done in one module today. When working on a major project, such as a bridge or an airplane, companies use a fixed-position layout that allows workers to congregate around the product to be completed. A process layout is one in which similar equipment and functions are grouped together. The order in which the product visits a function depends on the design of the item. This allows for flexibility

PG 228 w unnecessary text? The Igus manufacturing plant in Cologne, Germany, can shrink or expand in a flash. Its flexible design keeps it competitive in a fast-changing market. Because the layout of the plant changes so often, some employees use scooters in order to more efficiently provide needed skills, supplies, and services to multiple workstations.

Quality control should thus be part of the operations management planning process rather than simply an end-of-the-line inspection. Companies have turned to the use of modern quality-control standards such as Six Sigma. Six Sigma quality, which sets a benchmark of just 3.4 defects per million opportunities, detects potential problems to prevent their occurrence. That's important to a company that makes 4 million transactions a day, like some banks.

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The Baldrige Awards A standard was set for overall company quality with the introduction of the Malcolm Baldrige National Quality Awards, named in honor of a former U.S. secretary of commerce. Companies can apply for these awards in each of the following areas: manufacturing, services, small businesses, nonprofit/government, education, and health care. To qualify, an organization has to show quality in key areas such as leadership, strategic planning, customer and market focus, information and analysis, human resource focus, process management, and business results. Major criteria for earning the award include whether customer wants and needs are being met and whether customer satisfaction ratings are better than those of competitors. As you can see, the focus is shifting away from just making quality goods and services to providing top-quality customer service in all respects.

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CONTROL PROCEDURES: PERT AND GANTT CHARTS Operations managers must ensure products are manufactured and delivered on time, on budget, and to specifications. How can managers be sure all will go smoothly and be completed by the required time? One popular technique for monitoring the progress of production was developed in the 1950s for constructing nuclear submarines: the program evaluation and review technique (PERT). PERT users analyze the tasks to complete a given project, estimate the time needed to complete each task, and compute the minimum time needed to complete the whole project. The steps used in PERT are (1) analyzing and sequencing tasks that need to be done, (2) estimating the time needed to complete each task, (3) drawing a PERT network illustrating the information from steps 1 and 2, and (4) identifying the critical path. The critical path is the sequence of tasks that takes the longest time to complete. We use the word critical because a delay anywhere along this path will cause the project or production run to be late.

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FIGURE 9.1 THE PRODUCTION PROCESSThe production process consists of taking the factors of production (land, etc.) and using those inputs to produce goods, services, and ideas. Planning, routing, scheduling, and other activities are the means to accomplish the objective—output. Form utility is the value producers add to materials in the creation of finished goods and services, such as by transforming silicon into computer chips or putting services together to create a vacation package. Form utility can exist at the retail level as well. For example, a butcher can produce a specific cut of beef from a whole cow, or a baker can make a specific type of cake from basic ingredients. We'll be discussing utility in more detail in Chapter 15. Grove says this task encompasses the three basic requirements of production: (1) to build and deliver products in response to the demands of the customer at a scheduled delivery time, (2) to provide an acceptable quality level, and (3) to provide everything at the lowest possible cost.

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The next step was to bring computers directly into the production process with computer-aided manufacturing (CAM). CAD/CAM, the use of both computer-aided design and computer-aided manufacturing, makes it possible to custom-design products to meet the needs of small markets with very little increase in cost. A manufacturer programs the computer to make a simple design change, and that change is readily incorporated into production. In the clothing industry, a computer program establishes a pattern and cuts the cloth automatically, even adjusting to a specific person's dimensions to create custom-cut clothing at little additional cost. In food service, CAM supports on-site, small-scale, semiautomated, sensor-controlled baking in fresh-baked cookie shops to make consistent quality easy to achieve. Of course, 3D printers are among the latest CAM technology. A product is made layer by layer until it appears, almost by magic, as a finished good.

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Mass Customization To customize means to make a unique product or provide a specific service to specific individuals. Although it once may have seemed impossible, mass customization, which means tailoring products to meet the needs of a large number of individual customers, is now practiced widely. The National Bicycle Industrial Company in Japan makes 18 bicycle models in more than 2 million combinations, each designed to fit the needs of a specific customer. The customer chooses the model, size, color, and design. The retailer takes various measurements from the buyer and sends the data to the factory, where robots handle the bulk of the assembly. More and more companies are learning to customize their products. The fashion start-up Proper Cloth uses software called Smart Sizes to custom-design shirts for online shoppers.17 At General Nutrition Center (GNC), health-minded buyers can customize their own vitamin plans. For those with more of a sweet tooth, you can even buy custom-made M&M's in colors of your choice. Mass customization exists in the service sector as well. Capital Protective Insurance (CPI) uses the latest computer software and hardware to sell customized risk-management plans to companies. Health clubs offer unique fitness programs for individuals, travel agencies provide vacation packages that vary according to individual choices, and some colleges allow students to design their own majors. It is much easier to custom-design service programs than to custom-make goods, because there is no fixed tangible good to adapt. Each customer can specify what he or she wants, within the limits of the service organization—limits that seem to be ever-widening.

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Even though labor is becoming a smaller percentage of total cost in highly automated industries, the availability of low-cost labor or the right kind of skilled labor remained a key reason many producers moved their plants to Malaysia, China, India, Mexico, and other countries. In general, U.S. manufacturing firms tend to pay more and offer more benefits than firms elsewhere in the world.

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Facility Location for Manufacturers Why would companies spend millions of dollars to move their facilities from one location to another? They consider labor costs; availability of resources, including labor; access to transportation that can reduce time to market; proximity to suppliers; proximity to customers; crime rates; quality of life for employees; cost of living; and the need to train or retrain the local workforce.

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Inexpensive resources are another major reason for moving production facilities. Companies usually need water, electricity, wood, coal, and other basic resources. By moving to areas where these items are inexpensive and plentiful, firms can significantly lower not only the cost of buying such resources but also the cost of shipping finished products. Often the most important resource is people, so companies tend to cluster where smart and talented people are, such as Silicon Valley.

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N/A Businesses also study the quality of life for workers and managers. Are good schools nearby? Is the weather nice? Is the crime rate low? Does the local community welcome new businesses? Do the chief executive and other key managers want to live there? Sometimes a region with a high quality of life is also an expensive one, which complicates the decision. In short, facility location has become a critical issue in operations management. The Making Ethical Decisions box looks at the kinds of decisions companies must make when it comes to locating.

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Facility Location in the Future Information technology (IT)—that is, computers, WiFi, e-mail, voice mail, texting, and so forth—is giving firms and employees increased flexibility to choose locations while staying in the competitive mainstream. Telecommuting, working from home via computer, is a major trend in business. Companies that no longer need to locate near sources of labor will be able to move to areas where land is less expensive and the quality of life may be higher. Plus, it's never been easier to stay in touch either by computer or phone thanks to videoconferencing apps like Skype and Adobe Connect.28

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Materials Requirement Planning Materials requirement planning (MRP) is a computer-based operations management system that uses sales forecasts to make sure needed parts and materials are available at the right time and place. Enterprise resource planning (ERP), a newer version of MRP, combines the computerized functions of all the divisions and subsidiaries of the firm—such as finance, human resources, and order fulfillment—into a single integrated software program that uses a single database. The result is shorter time between orders and payment, less staff needed to do ordering and order processing, reduced inventories, and better customer service. For example, the customer can place an order, either through a customer service representative or online, and immediately see when the order will be filled and how much it will cost. The representative can instantly see the customer's credit rating and order history, the company's inventory, and the shipping schedule. Everyone else in the company can see the new order as well; thus when Page 229one department finishes its portion, the order is automatically routed via the ERP system to the next department.

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Just-in-Time Inventory Control One major cost of production is the expense of holding parts, motors, and other items in storage for later use. Storage not only subjects items to obsolescence, theft, and damage but also requires the construction and maintenance of costly warehouses. To cut such costs, many companies have implemented a concept called just-in-time (JIT) inventory control. JIT systems keep a minimum of inventory on the premises—and deliver parts, supplies, and other needs just in time to go on the assembly line. To work effectively, however, the process requires an accurate production schedule (using ERP) and excellent coordination with carefully selected suppliers, who are usually connected electronically so they know what will be needed and when. Sometimes the suppliers build new facilities close to the main producer to minimize distribution time. JIT runs into problems such as weather delays when suppliers are farther away. When all the right pieces are in place, though, JIT systems make sure the right materials are at the right place at the right time at the cheapest cost to meet both customer and production needs. That's a key step in modern production innovation.

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Statistical quality control (SQC) is the process some managers use to continually monitor all phases of the production process and ensure quality is being built into the product from the beginning. Statistical process control (SPC) is the process of testing statistical samples of product components at each stage of production and plotting the test results on a graph. Managers can thus see and correct any deviation from quality standards. Making sure products meet standards all along the production process reduces the need for a quality-control inspection at the end because mistakes are caught much earlier in the process. SQC and SPC thus save companies much time and money.

PG 230 to PG 231 w Unnecessary Text? Some companies use a quality-control approach called the Deming cycle (after the late W. Edwards Deming, the "father" of the movement toward quality). Its steps are Plan, Do Check, Act (PDCA). Again, the idea is to find potential errors before they happen.

ISO 9001 and ISO 14001 Standards The International Organization for Standardization (ISO) is a worldwide federation of national standards bodies from more than 170 countries that set global measures for the quality of individual products.30 ISO is a nongovernmental organization established to promote the development of world standards to facilitate the international exchange of goods and services. (ISO is not an acronym. It comes from the Greek word isos, meaning "oneness.") ISO 9001 is the common name given to quality management and assurance standards. The standards require that a company determine what customer needs are, including regulatory and legal requirements, and make communication arrangements to handle issues such as complaints. Other standards cover process control, product testing, storage, and delivery.

PG 231 w Unnecessary Text? What makes ISO 9001 so important is that the European Union (EU) demands that companies that want to do business with the EU be certified by ISO standards. Some major U.S. companies are also demanding that suppliers meet these standards. Several accreditation agencies in Europe and the United States will certify that a company meets the standards for all phases of its operations, from product development through production and testing to installation.

Another, more basic strategy manufacturers use for measuring production progress is a Gantt chart. A Gantt chart (named for its developer, Henry L. Gantt) is a bar graph, now also prepared by computer, that clearly shows what projects are being worked on and how much has been completed at any given time. Figure 9.4, a Gantt chart for a doll manufacturer, shows that the dolls' heads and bodies should be completed before the clothing is sewn. It also shows that at the end of week 3, the dolls' bodies are ready, but the heads are about half a week behind. Using a Gantt-like computer program, a manager can trace the production process minute by minute to determine which tasks are on time and which are behind, so that adjustments can be made to allow the company to stay on schedule. FIGURE 9.4 GANTT CHART FOR A DOLL MANUFACTURERA Gantt chart enables a production manager to see at a glance when projects are scheduled to be completed and what the status is now. For example, the dolls' heads and bodies should be completed before the clothing is sewn, but they could be a little late as long as everything is ready for assembly in week 6. This chart shows that at the end of week 3, the dolls' bodies are ready, but the heads are about half a week behind.

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Figure 9.3 illustrates a PERT chart for producing a music video. The squares indicate completed tasks, and the arrows indicate the time needed to complete each. The path from one completed task to another illustrates the relationships among tasks; the arrow from "set designed" to "set materials purchased" indicates we must design the set before we can purchase the materials. The critical path, indicated by the bold black arrows, shows producing the set takes more time than auditioning dancers, choreographing dances, or designing and making costumes. The project manager now knows it's critical that set construction remain on schedule if the project is to be completed on time, but short delays in dance and costume preparation are unlikely to delay it. FIGURE 9.3 PERT CHART FOR A MUSIC VIDEOThe minimum amount of time it will take to produce this video is 15 weeks. To get that number, you add the week it takes to pick a star and a song to the four weeks to design a set, the two weeks to purchase set materials, the six weeks to construct the set, the week of rehearsals, and the final week when the video is made. That's the critical path. Any delay in that process will delay the final video.

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