1. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 1 CHAPTER 15 CHAPTER 15 Management 3rd Edition Chuck Williams Managing Service and Manufacturing Operations Prepared by Deborah Baker Texas Christian University

2. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 2 CHAPTER 15 What Would You Do? You are the manager of the England furniture factory…  The furniture industry is a laggard—a low tech industry  You need to improve manufacturing speed and productivity to remain competitive—and still provide custom products What’s the best way to optimize productivity and hold down costs? How can you keep inventory costs under control?

3. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 3 CHAPTER 15 Managing for Productivity and Quality After reading the next two sections, you should be able to: 1.discuss the kinds of productivity and their importance in managing operations. 2.explain the role that quality plays in managing operations.

4. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 4 CHAPTER 15 Productivity 1 Productivity = Outputs Inputs Productivity = Outputs Inputs Why Productivity Matters Different Kinds of Productivity

5. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 5 CHAPTER 15 Why Productivity Matters 1.1 Higher Productivity Higher Productivity Lower Costs Lower Costs Lower Prices Lower Prices Higher Market Share Higher Market Share Higher Profits Higher Profits Higher Standard of Living Higher Standard of Living

6. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 6 CHAPTER 15 Kinds of Productivity 1.2 Partial productivity = Outputs Single Kind of Input Multifactor productivity = Outputs Labor + Capital + Materials + Energy

7. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 7 CHAPTER 15 Baldrige National Quality Award Baldrige National Quality Award Total Quality Management Total Quality Management Quality 2 ISO 9000 Quality-Related Product Characteristics Quality-Related Service Characteristics

8. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 8 CHAPTER 15 Meanings for Quality 2 …A product or service free of deficiencies …The characteristics of a product or service that satisfy customer needs …The characteristics of a product or service that satisfy customer needs

9. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 9 CHAPTER 15 Quality-Related Product Characteristics 2.1 Reliability Serviceability Durability

10. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 10 CHAPTER 15 Quality-Related Service Characteristics 2.2 Responsiveness Assurance Empathy Reliability Tangibles

11. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 11 CHAPTER 15 ISO 9000 2.3  A series of five international standards: ISO 9000 to ISO 9004  Certifies quality processes  Customers are increasingly demanding ISO 9000 certification http://www.iso.ch

12. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 12 CHAPTER 15 Baldrige National Quality Award 2.4 http://www.quality.nist.gov  Given to U.S. companies  Recognizes achievement in quality and business performance  Raises awareness about the importance of quality and performance excellence as a competitive edge  Winners have been financially successful

13. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 13 CHAPTER 15 Criteria for the Baldrige National Quality Award 2.4 1.Leadership 2.Strategic Planning 3.Customer and Market Focus 4.Information and Analysis 5.Human Resource Focus 6.Process Management 7.Business Results

14. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 14 CHAPTER 15 Total Quality Management 2.5 Principles of TQM Customer focus and satisfaction Continuous improvement Teamwork

15. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 15 CHAPTER 15 Total Quality Management 2.5 50150250350450550650750 Defects Per Million Parts ( in thousands ) Sigma Quality Level 6 Sigma 5 Sigma 4 Sigma 3 Sigma 2 Sigma 1 Sigma 690,000 3.4 230 6,210 66,800 308,538 Adapted from Exhibit 15.7

16. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 16 CHAPTER 15 Managing Operations After reading the next three sections, you should be able to: 3.explain the essentials of managing a service business. 4.describe the different kinds of manufacturing operations. 5.explain why and how companies should manage inventory levels.

17. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 17 CHAPTER 15 Service Operations 3 Services…  are performed  are intangible  are unstorable  50.3% of GDP Goods…  are made  are tangible  are storable  29.7% of GDP

18. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 18 CHAPTER 15 Service Operations 3 Service-Profit Chain Service Recovery and Empowerment Service Recovery and Empowerment

19. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 19 CHAPTER 15 The Service-Profit Chain 3.1 Internal Service Quality Employee Satisfaction Service Capability High Value Service Customer Satisfaction Customer Loyalty Profit and Growth Adapted From Figure 15.8

20. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 20 CHAPTER 15 Components of Internal Service Quality 3.1 Adapted From Figure 15.9 Do service employees have tools needed? Are good performers rewarded/recognized? Does management aid or hinder employees? Is there teamwork among individuals and departments? Do they facilitate serving customers? Is job-specific training available? Both vertical and horizontal communication? Are goals of senior management and frontline service employees aligned? Policies and Procedures Tools Effective Training Rewards and Recognition Communication Management Support Goal Alignment Teamwork

21. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 21 CHAPTER 15 Service Recovery and Empowerment 3.2  Service recovery is restoring customer satisfaction to strongly dissatisfied customers  Fixing the mistakes that were made  Performing “heroic” service  Empowering workers can help solve customer dissatisfaction  The goal is zero customer defections

22. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 22 CHAPTER 15 Costs of Empowering Service Employees 3.2 1. Finding service workers capable of solving problems 2. Training service workers 3. Higher wages 4. Less emphasis on service reliability 5. Eagerness to provide “giveaways” 6. Unintentional unfair customer treatment Adapted from Exhibit 15.10

23. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 23 CHAPTER 15 Benefits of Empowering Service Employees 3.2 1. Quicker response to customer complaints 2. Employees feel better 3. Enthusiastic employee interaction with customers 4. Employees offer ideas for improvement and prevention Adapted from Exhibit 15.10

24. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 24 CHAPTER 15 Manufacturing Operations 4 Amount of Processing Flexibility of Manufacturing

25. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 25 CHAPTER 15 Amount of Processing in Manufacturing Operations 4.1  Make-to-order operations  manufacturing doesn’t begin until an order is placed  Assemble-to-order operations  used to create semi-customized products  Make-to-stock operations  manufacture standardized products

26. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 26 CHAPTER 15 Amount of Processing in Manufacturing Operations 4.1 More Processing Make-to-Order Operations Assemble-to-Order Operations Make-to-Stock Operations Less Processing More Processing Make-to-Order Operations Assemble-to-Order Operations Make-to-Stock Operations Less Processing Adapted from Exhibit 15.11

27. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 27 CHAPTER 15 Flexibility of Manufacturing Operations Continuous-flow productionProduces products continuously, like oil drilling Line-flow productionUses predetermined, linear steps, like beverage bottling Batch productionProduces specific quantities of different items, like a bakery or commissary Job shopsHandle small, specialty batches Project manufacturingIs for large, expensive, specialized products like aircraft carriers

28. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 28 CHAPTER 15 Flexibility of Manufacturing Operations 4.2 LEAST FLEXIBLE Continuous-Flow Production Line-Flow Production Batch Production Job Shops Project Manufacturing MOST FLEXIBLE LEAST FLEXIBLE Continuous-Flow Production Line-Flow Production Batch Production Job Shops Project Manufacturing MOST FLEXIBLE Adapted from Exhibit 15.12

29. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 29 CHAPTER 15 Costs of Maintaining Inventory Systems for Managing Inventory Inventory 5 Types of Inventory Measuring Inventory Levels

30. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 30 CHAPTER 15 Types of Inventory 5.1 Raw materials Component parts Work-in-process Finished goods Fabrication Initial Assembly Final Assembly Adapted from Exhibit 15.13 More

31. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 31 CHAPTER 15 Types of Inventory 5.1 Finished goods Field Warehouses Distribution Centers Wholesalers Retailers Customers Adapted from Exhibit 15.13

32. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 32 CHAPTER 15 Types of Inventory Raw Materials Distribution Centers Field Warehouses Wholesalers Retailers Component Parts Fabrication Work-in- Progress Initial Assembly Finished Goods Final Assembly Adapted From Figure 15.13 Vendors Purchasing Customers

33. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 33 CHAPTER 15 Measuring Inventory 5.2 1.Average aggregate inventory  the average overall inventory for a certain time period 2.Stockout  running out of inventory 3.Inventory turnover  the number of times a year that a company sells its average inventory

34. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 34 CHAPTER 15 Inventory Turn Rates 5.2 Aerospace Automotive Chemicals Construction Consumer Packaged Goods/Nondurables Consumer Product Durables High Tech Industrial Equipment & Machinery Pharmaceuticals Printing and Publishing Average 0 5 10 15 20 25 30 Average Inventory Turn Rate 75th Percentile Inventory Turn Rate Adapted from Exhibit 15.14

35. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 35 CHAPTER 15 5.2 Blast From The Past Guns, Geometry, and Fire  Guns: Eli Whitney and standardized parts  interchangeable parts  fewer defects  Geometry: Gaspard Monge used three-dimensional drawings  more precise designs  Fire: A fire at Oldsmobile led to “hand-to-mouth” inventories  just-in-time inventory systems

36. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 36 CHAPTER 15 5.3 Costs of Maintaining an Inventory Ordering Cost Setup Cost Setup Cost Holding Cost Stockout Costs all costs associated with ordering inventory, correcting mistakes, determining when/how much to order all costs associated with ordering inventory, correcting mistakes, determining when/how much to order costs of downtime and lost efficiency when a machine is changed to produce different kinds of inventory cost of keeping inventory until it is used or sold costs when a company runs out of a product

37. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 37 CHAPTER 15 5.3 Managing Inventory Economic Order Quantity Just-in-Time Inventory Materials Requirement Planning EOQ JIT MRP

38. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 38 CHAPTER 15 5.3 Been There Done That Lean Manufacturing at Wiremold  Wiremold has used continuous improvement and just-in-time inventory systems  Quality has increased and costs have been reduced  It is imperative to keep going back and improving operations

39. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 39 CHAPTER 15 Economic Order Quantity D = Demand O = Ordering costs H = Holding costs

40. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 40 CHAPTER 15 Demand Systems Independent Demand Systems Dependent Demand Systems EOQ MRP JIT

41. Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved 41 CHAPTER 15 What Would You Do—II? Chrysler  The Jeep Cherokee is being replaced with the Liberty  make it right—the first time  eliminate component parts inventory  build in a state-of-the-art manufacturing facility How would you organize the manufacturing operations? How do you increase the quality and make cars quickly?