Manufacturing and production operations create form utility.

Operations—Producing Goods and Services

Chapter 6

CHAPTER 6 OPERATIONS—PRODUCING GOOD AND SERVICES

CHAPTER OVERVIEW

Introduction

Operations focus on the “make/build” portion of the supply chain. They focus on production of goods and services needed to fulfill customer requirements. Production involves the transformation of inputs into outputs that customers demand. In the execution of these processes, production facilities must interact with various supply chain functions and operations create the outputs that are distributed through supply chain networks. All activities in the purchase, production, and delivery of goods and services need to be synchronized to ensure consistent, efficient product and service flow.

The Role of Production Operations in Supply Chain Management (SCM)

Many of the supply chain and logistics activities discussed in previous chapters focus on operations—procurement operations that provide access to materials, transportation operations that support the flow of goods, distribution operations that streamline order fulfillment, and so on. Collectively, they create time and place utilities. However, the potential contributions of goods manufacturing and service production to supply chain effectiveness are often overlooked because they focus on a different, but also important, dimension of economic utility called form utility.

Form utility drives the need for supply chain capabilities (i.e., time and place utilities). It takes a great deal of effort and coordination to run an effective production operation that is supported by and also supports the supply chain. Processes must be effectively designed and flawlessly executed, supply chain tradeoffs must be understood and made, and economies of scale need to be achieved, all while the organization addresses competitive challenges and other problems.

Production Process Functionality

Manufacturers, contract assemblers, and service providers all engage in production processes. The production process also uses resources such as facilities, equipment, knowledge, labor, and capital to support the transformation. Feedback of key information is used to make adjustments within the process in an attempt to synchronize production more closely to demand. Ignoring these feedback signals will lead to excess inventory of unpopular products or inventory shortages of hot items. The basic principles of production processes, no two processes are organized exactly alike or perform to the same level.

Process functionality also plays a role in the success of an organization. The ability to perform different processes from those of competitors to create unique products and services can create a competitive advantage. On the other hand, the ability to perform common processes better than the competition can also generate efficiencies and lower costs for the organization.

Production Tradeoffs

One of the most important issues for supply chain professionals to understand is the tradeoffs involved within production operations and between production operations, other supply chain functions, and corporate strategy. All decisions are interrelated and can impact costs, productivity, and quality in other areas. In the next few paragraphs, common tradeoffs are discussed.

Higher volume leads to lower cost per unit of output, according to the long-established economies of scale principle. In situations where production processes have high fixed costs and equipment like chemical production or paper manufacturing, it makes sense to pursue volume. In contrast, processes that can produce a range of products are said to have economies of scope.

Fundamental tradeoffs between responsiveness and efficiency arise when production facility decisions are made. Centralized production facilities provide operating cost and inventory efficiencies, while regional production facilities allow companies to be closer to customers and more responsive. 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

Another consideration is whether to conduct your own production operations or to outsource production to external suppliers. The make versus buy decision can be very complex and involves sacrifice whichever way the company chooses to go.

Finally, traditional wisdom suggests that production operations cannot strive to be all things to all people and tradeoffs must be made. When designing and executing production processes, they should focus on the following competitive dimensions: low cost, high quality (features and reliability), fast delivery speed, high delivery reliability, ability to cope with demand change, or the flexibility to offer variety.

Production Challenges

Operations managers face numerous challenges and tradeoffs that must be managed successfully if the organization and supply chain are to achieve their performance goals. Competitive pressures are a major challenge for many established manufacturers and service providers. Customers’ demand for choice and rapidly changing tastes make life difficult for product makers. While mass-production processes (and their economies of scale) are losing relevance in many customer-driven industries, company executives are no less demanding on the productivity and efficiency fronts. Operations managers face many other operations challenges. Labor availability and productivity issues, synchronization of activities with the supply chain, and capital costs are just a few of the additional obstacles that must be overcome.

Operations Strategy and Planning

Production Strategies

A great deal of planning, preparation, and engagement of multiple parties is required for production operations to make a positive contribution to supply chain effectiveness. Over the last 30 years, significant development and shifts have occurred in production strategy. Organizations have advanced from forecast-driven production strategies to demand-driven approaches.

In the era of mass production, operations strategy focused on reduction, efficiency, and scale. The strategy of choice for mass production is a push-based system that relies on long-term forecasts for production planning and decision making. In reality, few companies enjoy perfectly stable demand for their products and the related opportunity to maintain level production that is quickly consumed. More often, organizations must deal with demand variation.

The push-based strategy works well for supply chains that focus on the immediate delivery of off-the-shelf, low-cost, standardized goods. Operating from forecasts that are derived from supply chain partners’ predictions may limit the producer’s responsiveness. Without visibility to actual end-consumer demand, the producer will be slow to react to changes in the marketplace. The result may be continued production of items whose demand is dropping and may soon be obsolete. Alternatively, the producer may fail to recognize changing customer requirements and ramp up production of desired goods. The ultimate impact will be missed opportunities, unrecoverable costs, and/or missed revenues.

Lean production is an integrated set of activities designed to minimize the movement and use of raw materials, work-in-process, and finished goods inventories during production. A principal focus of lean manufacturing is to minimize all forms of waste and to produce quality products without the need for rework and production relies on pull-based systems to coordinate production and distribution with actual customer demand rather than a potentially error-laden forecast of demand.

In a pull system, the producer only responds to customer demand. No action is taken until an order is placed or a purchase is made. One of the main benefits of a lean, pull-based system is the reduction of waste.

There are a few challenges inherent in the pull-based strategy, such as customers who want immediate access to products and don’t want to wait for production and delivery, and it can be difficult to achieve economies of scale in assemble-to-order and build-to-order product operations, making them more expensive to produce. Finally, a lack of technological capabilities makes it difficult to achieve the supply chain visibility and synchronization needed in pull-based systems. Although many companies have made significant gains during the evolution from mass production to lean production processes, perfection has not been achieved.

Flexible manufacturing emerged in the early 1990s in response to the production challenges and the purpose is to build some flexibility into the production system in order to react effectively to change, whether predicted or unpredicted. One type of reactive capability is machine flexibility. Under this strategy, general purpose machines and equipment staffed by cross-trained workers provide the ability to produce different types of products as well as change the order of operations executed on a product.

Another type of reactive capability (there are eight in all) is called routing flexibility, which provides managers with production options and the ability to adapt to changing needs. In its simplest terms, routing flexibility provides managers with a choice between machines for a part’s next operation.

A primary advantage of the flexible manufacturing strategy is the ability to leverage production resources but, the flexible strategy is not perfect. Its main flaw is cost so should the activity be relocated to a contract manufacturer in another country, it is commonly called offshoring. Today, a popular location for offshore production is China due to its low labor costs. The business case for outsourcing varies by situation, but reasons for outsourcing often focus on cost and capacity issues.

Other reasons for production outsourcing include the following:

• The ability to focus on core competencies by getting rid of peripheral ones

• Lack of in-house resources

• Getting work done more efficiently or effectively

• Increased flexibility to meet changing business and commercial conditions

• Tighter control of budget through predictable costs

• Lower ongoing investment in internal infrastructure

• Access to innovation and thought leadership

While outsourcing has proven to be a valuable strategy whose popularity has grown dramatically, it is important to conduct a full analysis of the benefits and drawbacks of offshoring. Moving production offshore raises transportation costs, inventory carrying costs of goods in transit, customs costs, and some hidden expenses. As production spreads out among multiple facilities in different countries, it becomes more difficult to maintain visibility and synchronize activities. Finally, companies may lose control over quality, intellectual property rights, and customer relationships. Given these challenges, many manufacturers are pursuing the concepts of on-shoring and nearshoring. On-shoring seeks to return production to the home country while nearshoring focuses on production in nearby or neighboring countries.

A relatively new development in the evolution of production strategy is adaptive manufacturing. The goal of this strategy is to provide companies with the ability to replace planning and replanning with execution based on real-time demand. Technology is a key driver of the adaptive strategy. The main concern regarding adaptive manufacturing is limited adoption of the strategy.

Production Planning

This section briefly discusses two types of planning: capacity planning and materials planning. Three planning timeframes are covered: long-range, intermediate-range, and short-range. 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, deal with specific issues and the details of production, quantities of items to be produced, schedules, and sequences. Capacity planning focuses on determining the appropriate production levels that the company is capable of completing. Capacity is the maximum amount of work that an organization is capable of completing in a given period of time.

Resource requirements planning (RRP) is a long-run, macro-level planning tool. It helps the operations leaders determine whether aggregate resources are capable of satisfying the aggregate production plan.

The next step is to create a rough-cut capacity plan (RCCP) to check the feasibility of the master production schedule.

Capacity requirements planning (CRP) is used to check the feasibility of the materials requirement plan. This short-range capacity planning technique determines, in detail, the amount of labor and equipment resources required to accomplish production requirements.

The aggregate production plan (APP) is a long-range materials plan that translates annual business plans, marketing plans, and forecasts into a production plan for all products produced by a facility.

The master production schedule (MPS) is a medium-range plan that is more detailed than the APP. The MPS breaks down the APP, listing the exact end items to be produced within a specific period.

The materials requirement plan (MRP) is a short-range materials plan that converts information regarding end-items in the MPS into a set of time-phased component and part requirements.

MRP to provide effective planning knowledge, the following three sets of information are needed:

1. Independent demand information

2. Parent-component relationship

3. Inventory status of the final product and all components

Production Execution Decisions

The production strategy and planning outcomes, along with product characteristics, influence the execution methods used for day-to-day operations. Organizations must also establish facility layouts and production flows that are well matched to the demand volume and product variation.

Assembly Processes

Earlier in the chapter, we alluded to products that are built either according to plan or demand. Their production occurs via one of four manufacturing methods: make-to-stock (MTS), assemble-to-order (ATO), build-to-order (BTO), and engineer-to-order (ETO).

MTS is the traditional production method where end-item products are usually finished before receipt of a customer order.

ATO production commences after receipt of a customer’s order. The finished ATO product is generally a combination of standard components and options or accessories specified by the customer. ATO production commences after receipt of a customer’s order. The finished ATO product is generally a combination of standard components and options or accessories specified by the customer.

The BTO (also called make-to-order) production approach also delays assembly until a confirmed order is received for the product. The end-item finished product is generally a combination of standard and custom-designed components that meet the unique needs of a specific customer. It differs from ATO in the higher level of customization and lower volume level of production. The main advantage of the BTO approach is its ability to handle variety and supply customers with the exact product specification required.

ETO production focuses on the creation of highly tailored products for customers whose specifications require unique engineering design or significant customization. In this manufacturing environment, no two products are identical, and each order requires detailed cost estimates and tailored pricing. Also known as project manufacturing, successful ETO initiatives depend on effective collaboration between all supply chain participants.

Given the widespread proliferation of products, a number of manufacturers take a hybrid approach, where some items are built to stock and others are built to order. Delayed differentiation is one hybrid strategy in which a common product platform is built to stock.

Production Process Layout

One of the key drivers of how production activities will be carried out is facility layout. Facility layout involves the arrangement of machines, storage areas, and other resources within the four walls of a manufacturing or an assembly facility.

An appropriate, 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

Production process layouts generally fit into a spectrum that moves from projects to continuous processes. Projects consist of a series of discrete steps that lead to a unique product, like building a bridge.

As firms move from project to continuous process layout, the following may occur

• Labor skill requirements decrease.

• Material requirements become better known.

• High capacity utilization becomes more important to controlling costs.

• Product flexibility declines.

• Ability to adapt rapidly to changing market conditions diminishes.

A project layout is a fixed location layout where the product remains in place for the duration of production.

A workcenter is a process-focused layout that groups together similar equipment or functions. The materials move from department to department for completion of similar activities and tasks. This layout provides flexibility in that equipment, and personnel can be used where they are needed, lower equipment investment is needed, and supervisors gain expertise in their functions. The downsides of the workcenter layout are related to the materials-handling and movement costs, worker idle time between tasks, and the cost of training and developing a highly skilled workforce that can move between areas.

The manufacturing cell is another process-focused layout that dedicates production areas to a narrow range of products that are similar in processing requirements. Setting up a manufacturing cell involves four activities: (1) identifying families of parts with similar flow paths, (2) grouping machines into cells based on part families, (3) arranging cells so materials movement is minimized, and (4) locating large shared machines at the point of use.

An assembly line is a product-focused layout in which machines and workers are arranged according to the progressive sequence of operations need to make a product. An assembly line can begin as many different lines, each devoted to a different component of a product, with the lines converging upon one another, becoming fewer until only one line is left for the final product.

Continuous process facilities are similar to assembly lines, with product flowing through a predetermined sequence of stops. The main difference is the continuous, rather than discrete, nature of the flow.

Packaging

As product comes off the assembly line, the handoff from production operations to logistics begins. Packaging plays important roles in the smooth transfer of finished goods and design issues can affect labor and facility efficiency. Well-designed packaging facilitates efficient handling and shipping of the products, keeping landed costs in check. Package design impacts an organization’s ability to use space and equipment. A major packaging concern is the ease of handling in relation to materials handling and transportation. Handling ease is quite important to the production manager, whose labor must be used to place the goods in the packages.

Another primary concern is protecting the goods in the package. Packaging plays a key role in providing information about the package contents. Barcodes, RFID tags, and other auto-ID tools can be attached to or built into the packaging to make product information more readily accessible. When selecting packaging materials, companies today must consider environmental protection as well as product protection and transportation efficiency. Consumer advocates and government regulators are pushing manufacturers to alter their packaging practices.

Sustainability in packaging is being driven by increased awareness about environmental hazards related to disposal and recycling of packaging wastes, government initiatives to minimize greenhouse gasses, and stringent regulations. According to the Sustainable Packaging Coalition, sustainable packaging meets several criteria:

· It is beneficial, safe, and healthy for individuals and communities throughout its lifecycle

· It meets criteria for performance and cost

· It is sourced, manufacture, transported, and recycled using renewable energy

· It optimizes the use of renewable or recycled source materials

· It is manufactured using clean production technologies and best practices

· It is made from materials healthy in all probable end of life scenarios

· It is physically designed to optimize materials and energy

· It is effectively recovered and utilized in biological and/or industrial closed loop cycles

Production Metrics

The use of measurements and key performance indicators (KPIs) that do not support operational strategies, organizational objectives, or customer requirements should avoid the following mistakes when establishing production metrics for the organization:

· Using KPIs that are too narrow—Limit the use of metrics that focus on discrete events and isolated points as indicators of overall success of the process.

· Encouraging wrong outcomes—Eliminate measurements that promote activity rather than needed output.

· Focusing on issues that are not key priorities—Avoid the development of internally focused, myopic production goals that are disconnected from the overall strategy of the organization.

Total Cost

The most meaningful measurement of total cost is on a cash basis. All money spent on manufacturing must be summarized and the total compared to the previous period, rather than to a flexible budget or a plan.

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

Delivery performance is the percentage of customer orders shipped when the customer requested them to be shipped.

Quality

The definition of quality will 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.

Production Technology

The enterprise resource planning systems don’t provide detailed visibility within the four walls of the production facility or ensure that operations are being managed proactively. World-class manufacturers understand the importance of sharing real-time information across their extended manufacturing and supply chain network. Firms are employing a new generation of manufacturing execution systems (MES) that link to ERP and supply chain applications to ensure that operations are being managed in real time.

The MES is a control system for managing and monitoring work-in-process on a factory floor. It keeps track of all manufacturing information in real time, receiving up-to-the-minute data from robots, machine monitors and employees.31

MES derives its name from its inherent purpose of providing intelligent process control through an electronic system designed to execute instructions to control manufacturing operations. The goal is to supply a continuous flow of meaningful instructions, and most importantly, for those instructions to be carried out correctly and reliably. The primary functions of MES include:

• Resource Allocation and Status • Operation/Detail Scheduling

• Dispatching production Unit • Document control

• Data Collection • Labor Management

• Quality Management • Process Management

• Exception management • Maintenance

• Management • Product Tracking and Genealogy

• Performance Analysis32

A supply chain solutions provider suggests that MES can make strategic contributions to the organization beyond the factory floor. This will only occur if the following improvements are achieved in the near future:

· MES must become more agile and capable of dealing with product and process customization to the shop floor level than is possible today.

· MES must be capable of orchestrating suppliers across a global industry landscape.

· MES must optimize resources and constraints far beyond the four walls of the manufacturing plant to drive more rapid time-to-market and better cost controls.

· MES needs to scale up and support multi-site, globally deployed production planning, supplier coordination, compliance and quality management initiatives that span the entire value chain.

· The MES-level data must support the extraction of metrics that drive overall business performance and profitability.34

SUMMARY

The key concept from this chapter is the critical and codependent link between production operations and logistics. Just as your heart and arteries need to work together to move blood through your circulatory system, production and logistics must work in concert to move product through the supply chain. For their part, production managers must coordinate demand information, inputs, and resources to transform them into outputs (products and materials) that are desired by customers. The faster and more flexible the transformation processes are, the more responsive the production operation can be to changing conditions and disruptions. This in turn makes the supply chain more dynamic and competitive.

Additional topics from the chapter include the following:

· 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 few versus many 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.

· There have been significant developments and shifts in production strategy. Organizations have advanced from forecast-driven mass production to demand-driven, lean, flexible, adaptive, and smart manufacturing 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 make-to-stock and make-to-order production methods 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 uniqueness.

· 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, safe, and economical 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.

· 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.

14-1

Supply Chain Management: A Logistics Perspective