11 – Production Management

Introduction

Following the marketing plan, the production/operations plan must be created. The production/operations plan is a blueprint for running a business’s production unit/operational activity to maximise resource usage. Like the marketing plan, the operation/production plan should be based on a strategic plan or overall business strategy. If the strategic plan calls for expansion and growth, the production/operation plan should include strategies for expanding the production/operation unit.

11.1 Material and Production Management

The process of translating input into output is known as production management. Land, labour, raw materials, machinery, capital, and information are examples of inputs (information is a new addition to the inputs after the growing importance of the service industry). In manufacturing businesses, transformation occurs through machinery, while in service businesses, transformation occurs through employee abilities.

The following are some of the primary considerations that must be made in an operational/production plan:

1. Which location (Plant Location) would offer the best strategic advantage regarding proximity to the raw material and market, labour and electricity availability, subsidies, and tax holidays?
2. How big would the operation be?
3. How would you design the layout?
4. What machines and equipment would be required to run the production/operation unit?
5. What should the ideal plant capacity be?
6. What production/operations schedules should be in place?
7. How would you handle the supply chain?
8. What is the ideal level of inventory?
9. What would be the requirements for storage, distribution, and sales?
10. What would be the administrative obligations, such as housekeeping, rent insurance, and so on?
11. What health and safety precautions would be taken?
12. What steps will be taken to ensure that quality requirements are met?
13. Will the company use TQM and Kaizen, and if so, how?
14. What methods would be used to meet ISO requirements and get certificates?
15. What kind of raw materials, work-in-progress, and finished items inventories would be kept?
16. How will the operational strategy be carried out?

11.1.1 Capacity Planning

Capacity planning refers to a facility’s ability to produce goods. The operations manager must plan capacity so that the production/operation has some flexibility regarding expansion or decrease based on market demand.

The following considerations should be made while planning capacity:

• Production/operational flexibility
• Cost of capacity maintenance
• Organizational vision and objectives
• Assessment of existing capacity
• Forecasting capacity needs based on organisational goals

The capacity of a hospital is determined by the number of services it can provide, the number of patients it can serve, the number of wards it can have, and the number of emergency cases it can handle at any given moment.

The number of students who can study in classrooms, the number of specialisations that can be offered, the type and size of laboratory necessary, the size of the library, the number of computers, and the number of teachers that can be employed all contribute to an educational institution’s capacity.

Capacity planning is essential to meet the organization’s current needs and long-term goals. If an entrepreneur opens a school up to Class V and establishes a positive brand image over time, he should be able to expand his space to accommodate higher classes.

This also depends on the organization’s goal, whether it aspires to expand to the level of a school, a graduate college, or a postgraduate college.

Based on the period for which the planning is done, capacity planning may be classified into three types:

• Capacity planning for the short-term
• Capacity planning for the medium-term
• Capacity planning for the long-term

Capacity planning for the short term: Short-term capacity planning refers to capacity planning that lasts from one day to the next, month to month, and up to a year. Fundamental capacity remains fixed in short-term capacity planning. Still, various short-term adjustments are possible, such as stopping production for one shift (in case of demand reduction), clearing inventories (in case of stockpiling), hiring temporary employees (in case of seasonal demand increase), and layoffs (in case of demand reduction).

Capacity planning for the medium term: Medium-term capacity planning spans one to five years. Demand forecasting and task/operation scheduling are critical to satisfy expected demand. Material requirements, staff rotation, and machine scheduling are all options for medium-term capacity planning.

Capacity planning for the long term: Long-term capacity planning is planning operations for more than five years. It is possible to make significant adjustments to capacity planning. It is possible to expand/contract the production/operation and resources. Demand forecasts and cost-benefit analyses can be helpful when making long-term decisions. Long-term capacity plans can give the organisation a new look. Capacity contraction strategies may include the sale of premises, equipment, inventories, and a reduction in the workforce. Hiring, purchasing new facilities, and other expansion strategies will be implemented.

The following are the steps involved in capacity planning:

1. Predicting future needs
2. Assessing current facilities
3. Evaluating Strategic Capacity Alternatives
4. Choosing the optimal option

For capacity planning, the following factors must be taken into account:

1. Demand forecasting: Predicting future demand will give you an idea of what your production/operation will need.
2. Capacity planning also relies on overall production/operational aggregate planning, including decisions on material need planning, production scheduling, and inventory management.
3. Business strategy in general: The overall corporate strategy of development, contraction, or continuous production/operation determines capacity planning. Even though market demands are essential, the entrepreneur’s vision ultimately drives capacity planning.
4. Workers Availability: Capacity planning is also influenced by the availability of manpower in the area (for expansion) and labour rules governing retrenchment, layoffs, overtime, and other issues.

11.1.2 Inventory Control

Regardless of how efficient a manufacturing process is or how well it is planned, there is always room for unpredictably rising or falling demand, raw material availability, and/or lead time between machines owing to machine breakdowns. As a result, inventory must be maintained. There are three layers of inventory management:

• Raw material inventory: Raw material inventory is retained to meet unforeseen market dynamics.
• Inventory of goods in process: Inventory is controlled at every work-in-progress stage.
• Inventory of finished items: The inventory of finished goods is also monitored.

There are two sorts of inventories: physical inventories and electronic inventories.

1. Normal inventory: This is the inventory that ensures the availability of resources at various stages in normal conditions.
2. Buffer inventory: Buffer inventory ensures the availability of materials during times of uncertainty.

However, inventory costs money, so only a few goods should be kept at each level. It’s important to remember the following:

When should inventory be ordered? (Reorder Point)

• Order Lead Time: The time it takes from placing an order to receiving the products.
• Usage Rate: Over some time, the average rate at which inventory is drawn.
• Reorder Point: The point at which a fresh order must be placed to replace inventory before it runs out.

Economic Order Quantity (EOQ): How Much Should I Order?

The formula for the Economic Order Quantity (EOQ) is:

$$EOQ = sqrt{frac{2DS}{H}}$$

EOQ=H2DS​​

Where:

• 
  $D$ 

  $D$ = Annual demand for the product

• 
  $S$ 

  $S$ = Order cost per order

• 
  $H$ 

  $H$ = Holding or carrying cost per unit per year

The EOQ formula helps determine the optimal order quantity that minimizes the total inventory costs, including ordering and holding costs.

11.1.3 ABC Analysis

Pareto (ABC) Analysis might be utilised to classify stock groups. Stock items are plotted on a cumulative frequency curve in descending order of utilisation value. It is expected that 20% of goods account for 80% of the utilisation value, with the other 30% accounting for 15%. The remaining 50% is only worth 5% of the total.

The ABC or Pareto analysis shows where control efforts should be focused. On key inventory items or security issues that Pareto analysis alone does not uncover, judgment is required.

11.2 Quality Management System

The motto of highly competitive and growth-oriented businesses is “quality first.” Production/operation management is concerned with quality. The value of quality has risen in recent years. Consumers have grown concerned about quality due to increased competition and a large variety of products/services, and quality can now determine an enterprise’s fortune.

Quality must be maintained at all stages of production. Conformance to specifications is the definition of quality (Crosby). According to Deming and Fiegenbaum, quality is the nature or feature of a product or service that reflects its capacity to meet, express, or imply a statement of need. Quality is also the characteristics of a product or service offered by design, marketing, manufacturing, maintenance, and service that meet customers’ expectations.

The definitions imply that quality refers to the product or service’s perceived standard. It is the product’s performance following the producer’s pledge.

ISO 9000 (International Organization for Standardization)

The International Organization for Standardization (ISO), headquartered in Geneva, is an acronym for the International Organization for Standardization. ISO 9000 establishes international quality standards for the design, installation, and operation of quality management systems.

The ISO 8402 standard is concerned with the standardisation of quality definitions.

The ISO 9000 Quality Management and Quality Assurance Standards provide selection guidelines.

ISO 9001: Quality Systems Model for Quality Assurance establishes guidelines for an organization’s design, development, manufacture, installation, and service processes.

Quality systems – a quality model or standard for quality inspection and testing (ISO 9002).

ISO 9003 is a set of guidelines for measuring and evaluating quality systems.

The ISO 9000 series contains 20 parts of a company’s quality management system. They are as follows:

1. Management Obligation
2. Quality management system
3. Contract review
4. Design and Control
5. Document and data management
6. Purchasing
7. Product control
8. Product traceability and identification
9. Controlling the process.
10. Inspection and testing are number ten.
11. Inspection, measuring, and testing equipment control
12. Status of inspections and tests
13. Controlling non-conforming items is number 13 on the list.
14. Remedial and preventative measures
15. Handling, storage, packaging, preservation, and transport are all factors to consider.
16. Record-keeping quality control
17. Internal quality inspections
18. Training
19. Servicing
20. Statistical Techniques

ISO 9000’s goals are to:

• Achieve, maintain, and strive for continual quality improvement.
• Increase the efficiency of operations.
• Assist management in ensuring that quality requirements are met.
• Instil confidence in customers by ensuring that quality standards are met.

Benefits

Although ISO 9000 is not a legal requirement, it does give a window for national and worldwide recognition of quality requirements. Furthermore, while adhering to ISO 9000 ensures an organization’s internal stability, it is costly and entails a lengthy bureaucratic process.

Total Quality Management (TQM) 

“Total quality management is a management philosophy that focuses on constant enhancement through the prevention of issues and errors,” according to Wake and Moti (1999). It necessitates continual process, performance, quality monitoring and control, the prioritisation of the customer, and a sense of awareness, dedication, and involvement on the part of management, all employees, customers, and suppliers.”

As a result, TQM entails a commitment to continual quality improvement, customer focus, and employee empowerment.

According to Schmidt and Finnigan (1992), TQM has its roots in:

1. Scientific Management: Identifying the most effective method of accomplishing a task.
2. Group Dynamics: Putting the strength of group experience to the test and structuring it.
3. Education and training: This is an investment in human capital.
4. Achievement Motivation: Achieving something gives people a sense of success.
5. Employee Involvement: Employees should have a say in running the company.
6. Socio-technical System: The organisation functions as a system.
7. Organizational Development: Assisting the organisation in learning and adapting to new situations.
8. Corporate Culture: Beliefs, beliefs, and values that govern people’s behaviour across the company.
9. New Leadership Theory: Motivating and Enabling People to Take Action.
10. The Organizational Linking Pin Concept: Creating Cross-Cultural Teams
11. Strategic planning: deciding where the organisation should go and how and when it should get there.

As a result, TQM is more than simply about products and services; it also includes quality at the people, process, and management levels. TQM is a philosophy that entails including everyone in the system’s cycle of continuous improvement to achieve customer satisfaction.

11.3 Break-Even Analysis

A break-even study depicts the link between expenses, profits, and sales volume. It identifies the activity in which total cost equals total sales, i.e., the point of no profit or loss. It can be used to determine the most likely outcome.

Break-even Analysis Mathematically Calculated:

Break-Even Point (BEP) = Fixed Costs / (Selling Price per Unit – Variable Costs per Unit)

Break-even Point = Fixed Cost / P/V Ratio

Break-even Point (Units) = Fixed Cost / Contribution Per Unit

P/V Ratio = Contribution/Sales x 100

Contribution = Sales – Marginal Cost

Margin of Safety = Actual Sales Revenue – Break-even Sales Revenue

Margin of Safety Ratio = Margin of Safety/Actual Sales

Profit = Margin of safety x P/V Ratio

Graphics for Break-Even

A break-even diagram graphically depicts the relationship between costs, volume, and profits. It shows not only BEP but also the effects of costs and income at various sales levels.

Assumptions about the BEP graph:

1. Costs can be broken down into two categories: variable and fixed.
2. During the relevant volume range of the graph, the fixed cost remains constant.
3. During the relevant volume range of the graph, the variable cost per unit will remain constant.
4. With the relevant range of the graph, the selling price per unit will remain constant regardless of the quantity sold.
5. In the case of a multi-product company, the sales mix stays the same.
6. The volume of production and sales are equal.

BEP is a valuable management tool because it reveals the effects of interrelationships among factors that influence project earnings. The project’s profit structure comprises the relationship between cost, volume, and profit. It’s great for budgeting and profit forecasting.

Graph of Profit Volume: It depicts the profit-to-volume connection. It’s also known as a P/V graph. It’s made up of the following components:

1. On the horizontal axis, choose an acceptable scale for sales volume. This scale will be known as the sales line. The sales line is drawn in the middle of the chart to show gains and losses.
2. Choose an acceptable profit and loss (fixed cost) scale on the vertical axis. Fixed costs are indicated on the left-hand side of the vertical axis below the sales line, and earnings are shown on the right-hand side above the sales line.
3. Points are drawn on a P/V graph for required FC and profit at 2–3 anticipated sales levels. The profits are chosen to be above the sales line and the other below it.
4. At the zero level of sales, the curve’s origin is a point in the entire fixed cost.
5. Now, if we connect the points of origin with the two points generated in step 3 by a diagonal line that crosses the sales line, we get the even Point (BEP)