ADM 3318 Chapter Notes - Chapter 15: Materials Management, Inventory Turnover, Total Quality Management
16 Jun 2018
School
Department
Course
Professor
Global Production, Outsourcing, and Logistics
Strategy, Production, and Logistics
There are two main activities that clarify how production and materials
management are performed
Lower the costs of value creation
There are two main activities, production and materials
management (policies)
Production can be defined as the activities involved in
creating a product
It detonates both service and manufacturing
activities, since one can only produce a service or
produce a physical product
◊
®
Materials management is the activity that controls the
transmission of physical materials through the value
chain, from procurement through production and into
distribution
This includes logistics, which is the procurement
and physical transmission of materials through
the supply chain
◊
®
□
Efficient supply chain management reduces the amount of
inventory in the system and increases inventory turnover
□
§
Add value by better customer needs
Increase product quality by eliminating defective products
from both the supply chain and the manufacturing process
□
The firms that improves its quality control will also reduce its
costs of value creation
□
Improved quality control reduced costs in three ways
Improves performance reliability
Increasing productivity because time is not
wasted manufacturing poor-quality
products
Leading to a direct reduction in unit
costs
–
}
Lowering rework and scrap costs
}
Lowering warranty costs
}
Increases productivity
Lowers manufacturing costs
Increase profits
–
}
◊
Lowers rework and scrap costs
Lowers manufacturing costs
Increase profits
–
}
◊
Lowers warranty costs
Lowers service costs
Increase profits
–
}
◊
®
□
§
○
Companies are utilizing total quality management (TQM) to boost their
product quality
This takes a central focus the need to improve the quality of a
company's products and services
§
TQM philosophy was developed by a number of American
consultants
They identified a number of steps that should be part of any
TQM program
□
They also argued that management should embrace the
philosophy that mistakes, defects, and poor-quality materials
are not acceptable and should be eliminated
□
Quality of supervision should be improved by allowing more
time for supervisors to work with employees and by providing
them with the tools needed to do the job
□
Employers should create an environment in which employees
will not fear reporting problems or recommending
improvements
□
§
○
Six Sigma is the modern successor to TQM
This is a statistically based philosophy that aims to reduce defects,
boost productivity, eliminate waste, and cut costs throughout a
company
§
At six sigma, a production process would be creating 3.4 defects per
million units, since this is impossible it is a goal that several strive
toward
§
○
The growth of international standards has also focused greater attention
on the importance of product quality
The European Union requires that the quality of a firm's
manufacturing processes and products be certified under a quality
standard known as ISO 9000
However, ISO 9000 does not focus on management attention
on the need to improve the quality of products and processes
□
§
Another important thing international businesses have to do is
production and materials management must be able to
accommodate demands for local responsiveness
Demands for local responsiveness create pressures to
decentralize manufacturing activities to the major national or
regional markets
□
§
Manufacturing and materials management must also be able to
respond quickly to shifts in customer demands
§
○
•
Where to Produce
Locating manufacturing activities is an essential decision for an
international company
○
There are many factors to be considered
Country factors
Other things equal, a firm should locate its various
manufacturing activities where the economic, political, and
cultural conditions are conducive to the performance of those
activities
□
In some industries, the presence of global concentrations of
activities at certain locations can be very important
□
Externalities also have an important role in deciding where to
locate
□
§
Technological factors
The technological factor to be concerned with it the
technology that performs specific
□
Sometimes because of technological constraints, some
activities can only be done in one location
□
There are three characteristics of a manufacturing technology
of interest
The level of fixed costs
It has become very expensive to set up a state-
the-art manufacturing plant
◊
Having multiple locations allows firms to
accommodate demands
It can also help firms avoid becoming too
dependent on one location
}
◊
®
The minimum efficient scale
As plant output expands, unit cost decreases
◊
Once the plant reaches a certain level of output,
few additional scale economies are available
◊
The "unit cost curve" declines with output until a
certain point
◊
®
The flexibility of the technology
Mass production of a standardized output helps
achieve high efficiency and low unit costs
◊
Producing a greater variety from a factory implies
shorter production runs
This is a trade-off firms have to think about
}
◊
Flexible manufacturing technology covers a range
of manufacturing technologies designed to…
Reduce setup times for complex equipment
}
Increase the utilization of individual
machines through better scheduling
}
Improve quality control at all stages of the
manufacturing process
}
◊
Flexible manufacturing technologies allow the
company to produce a wider variety of end
products at a unit cost that at one time and only
be achieved through mass production
◊
Mass customization has been coined to describe
the ability of companies to use flexible
manufacturing technology to reconcile two goals
that were once though to be incompatible
◊
A flexible machine cell is a grouping of various
types of machinery, a common materials handler,
and a centralized cell controller
◊
®
□
§
Product factors
Two product features affect location decisions
The first is the product's value-to-weight ratio because
of its influence on transportation costs
Some products are expensive but cheap to ship
◊
Some products are inexpensive but expensive to
ship
◊
®
Another feature that can influence is whether the
product serves universal needs
Examples may include industrial products, and
modern consumer products
◊
®
□
§
○
Locating production facilities
There are two basic strategies for locating production facilities
Concentrating them in a centralized locating and serving the
world market from there
This makes more sense when…
Differences between countries have substantial
impact on manufacturing costs
◊
Trade barriers are low
◊
Externalities arising from the concentration of like
enterprises favour certain locations
◊
Important exchange rates are expected to remain
relatively stable
◊
The production technology has high fixed costs, a
high minimum efficient scale, or flexible
manufacturing technology exists
◊
The product's value-to-weight ratio is high
◊
The
◊
®
□
Decentralizing them in various regional or national locations
that are close to major markets
This makes more sense when…
Differences between countries do not have a
substantial impact on the costs of manufacturing
◊
Trade barriers are high
◊
Location externalities are not important
◊
Volatility in important exchange rates is expected
◊
The production technology has low fixed rates,
low minimum efficient scale, and flexible
manufacturing is not available
◊
The product's value-to-weight ratio is low
◊
The product does not serve universal needs
◊
®
□
§
○
The Hidden Costs of Foreign Locations
There are many hidden costs to basing production in a foreign
location like…
High employee turnover□
Shoddy workmanship□
Poor product quality□
Low productivity □
§
○
•
The Strategic Role of a Foreign Production Site
Initially, many foreign factories are established where labour costs are low
This is done to typically to produce labour-intensive products at as
low a cost as possible
§
○
Upward migration in the strategic role of foreign factories arises because
many foreign factories upgrade their own capabilities
This comes from two sources
Pressure from the head office to improve a factory's cost
structure and/or customize a product to the demands of
consumers in a particular nation can start a chain of events
that ultimately leads to development of additional capabilities
at that factory
□
The source of improvement in the capabilities of a foreign
factory can be the increasing abundance of advanced factors
of production in the nation in which the factory is located
□
§
○
•
Outsourcing Production: Make-or-Buy Decisions
International businesses frequently face sourcing decisions, decisions
about whether they should make or buy the component parts that go into
their final product
○
Make-or-buy decisions are important factor in many firms' manufacturing
strategies
○
Make-or-buy decisions pose plenty of problems for purely domestic
businesses but even more problems for international businesses
The arena are complicated by the volatility of countries' political
economies, exchange rate movements, changes in relative factor
costs, etc.
§
○
Factors to consider before deciding whether to make-or-buy
Lower costs
It may be more efficient for a firm to have in-house
production activity than any other enterprise
□
§
Facilitate specialized investments
When one firm must invest in specialized assets to supply
another, mutual dependency is created
□
§
Protect proprietary product technology
This is technology which is unique to a firm □
If it enables the firm to produce a product containing superior
features, it can give the firm a competitive advantage
□
§
Accumulating dynamic capabilities
The capability to effectively and efficiently produce goods and
services is one that evolves over time
□
Firms can learn through their experiences how to lower costs,
design better products, increase product reliability, and so on
They skills are dynamic, they are learnt through
experience
®
□
§
Improve scheduling
This is very important for just-in-time inventory systems□
Resources that the company buys should not be wasted and
should be used as soon as possible
□
§
Strategic flexibility
Buying components from individual suppliers can help a firm
maintain its flexibility, switching between suppliers if need be
□
§
Offsets
Sometimes outsourcing manufacturing may help the firm
capture more orders from that country
□
§
○
Trade-offs
The benefits of manufacturing components in-house seem to be
greatest when…
Highly specialized assets are involved□
Vertical integration is necessary for protecting proprietary
technology
□
The firm is simply more efficient than external suppliers at
performing a particular activity
□
§
○
Strategic alliances with suppliers
Strategic alliances build trust between firm and its suppliers
Both need to be ready for a long-term commitment □
§
A firm that enters long-term alliances may limit its strategic
flexibility by the commitments it makes to its alliance partners
§
○
•
Chapter 15
Friday, January 26, 2018
21:24
Global Production, Outsourcing, and Logistics
Strategy, Production, and Logistics
There are two main activities that clarify how production and materials
management are performed
Lower the costs of value creation
There are two main activities, production and materials
management (policies)
Production can be defined as the activities involved in
creating a product
It detonates both service and manufacturing
activities, since one can only produce a service or
produce a physical product
◊
®
Materials management is the activity that controls the
transmission of physical materials through the value
chain, from procurement through production and into
distribution
This includes logistics, which is the procurement
and physical transmission of materials through
the supply chain
◊
®
□
Efficient supply chain management reduces the amount of
inventory in the system and increases inventory turnover
□
§
Add value by better customer needs
Increase product quality by eliminating defective products
from both the supply chain and the manufacturing process
□
The firms that improves its quality control will also reduce its
costs of value creation
□
Improved quality control reduced costs in three ways
Improves performance reliability
Increasing productivity because time is not
wasted manufacturing poor-quality
products
Leading to a direct reduction in unit
costs
–
}
Lowering rework and scrap costs
}
Lowering warranty costs
}
Increases productivity
Lowers manufacturing costs
Increase profits
–
}
◊
Lowers rework and scrap costs
Lowers manufacturing costs
Increase profits
–
}
◊
Lowers warranty costs
Lowers service costs
Increase profits
–
}
◊
®
□
§
○
Companies are utilizing total quality management (TQM) to boost their
product quality
This takes a central focus the need to improve the quality of a
company's products and services
§
TQM philosophy was developed by a number of American
consultants
They identified a number of steps that should be part of any
TQM program
□
They also argued that management should embrace the
philosophy that mistakes, defects, and poor-quality materials
are not acceptable and should be eliminated
□
Quality of supervision should be improved by allowing more
time for supervisors to work with employees and by providing
them with the tools needed to do the job
□
Employers should create an environment in which employees
will not fear reporting problems or recommending
improvements
□
§
○
Six Sigma is the modern successor to TQM
This is a statistically based philosophy that aims to reduce defects,
boost productivity, eliminate waste, and cut costs throughout a
company
§
At six sigma, a production process would be creating 3.4 defects per
million units, since this is impossible it is a goal that several strive
toward
§
○
The growth of international standards has also focused greater attention
on the importance of product quality
The European Union requires that the quality of a firm's
manufacturing processes and products be certified under a quality
standard known as ISO 9000
However, ISO 9000 does not focus on management attention
on the need to improve the quality of products and processes
□
§
Another important thing international businesses have to do is
production and materials management must be able to
accommodate demands for local responsiveness
Demands for local responsiveness create pressures to
decentralize manufacturing activities to the major national or
regional markets
□
§
Manufacturing and materials management must also be able to
respond quickly to shifts in customer demands
§
○
•
Where to Produce
Locating manufacturing activities is an essential decision for an
international company
○
There are many factors to be considered
Country factors
Other things equal, a firm should locate its various
manufacturing activities where the economic, political, and
cultural conditions are conducive to the performance of those
activities
□
In some industries, the presence of global concentrations of
activities at certain locations can be very important
□
Externalities also have an important role in deciding where to
locate
□
§
Technological factors
The technological factor to be concerned with it the
technology that performs specific
□
Sometimes because of technological constraints, some
activities can only be done in one location
□
There are three characteristics of a manufacturing technology
of interest
The level of fixed costs
It has become very expensive to set up a state-
the-art manufacturing plant
◊
Having multiple locations allows firms to
accommodate demands
It can also help firms avoid becoming too
dependent on one location
}
◊
®
The minimum efficient scale
As plant output expands, unit cost decreases
◊
Once the plant reaches a certain level of output,
few additional scale economies are available
◊
The "unit cost curve" declines with output until a
certain point
◊
®
The flexibility of the technology
Mass production of a standardized output helps
achieve high efficiency and low unit costs
◊
Producing a greater variety from a factory implies
shorter production runs
This is a trade-off firms have to think about
}
◊
Flexible manufacturing technology covers a range
of manufacturing technologies designed to…
Reduce setup times for complex equipment
}
Increase the utilization of individual
machines through better scheduling
}
Improve quality control at all stages of the
manufacturing process
}
◊
Flexible manufacturing technologies allow the
company to produce a wider variety of end
products at a unit cost that at one time and only
be achieved through mass production
◊
Mass customization has been coined to describe
the ability of companies to use flexible
manufacturing technology to reconcile two goals
that were once though to be incompatible
◊
A flexible machine cell is a grouping of various
types of machinery, a common materials handler,
and a centralized cell controller
◊
®
□
§
Product factors
Two product features affect location decisions
The first is the product's value-to-weight ratio because
of its influence on transportation costs
Some products are expensive but cheap to ship
◊
Some products are inexpensive but expensive to
ship
◊
®
Another feature that can influence is whether the
product serves universal needs
Examples may include industrial products, and
modern consumer products
◊
®
□
§
○
Locating production facilities
There are two basic strategies for locating production facilities
Concentrating them in a centralized locating and serving the
world market from there
This makes more sense when…
Differences between countries have substantial
impact on manufacturing costs
◊
Trade barriers are low
◊
Externalities arising from the concentration of like
enterprises favour certain locations
◊
Important exchange rates are expected to remain
relatively stable
◊
The production technology has high fixed costs, a
high minimum efficient scale, or flexible
manufacturing technology exists
◊
The product's value-to-weight ratio is high
◊
The
◊
®
□
Decentralizing them in various regional or national locations
that are close to major markets
This makes more sense when…
Differences between countries do not have a
substantial impact on the costs of manufacturing
◊
Trade barriers are high
◊
Location externalities are not important
◊
Volatility in important exchange rates is expected
◊
The production technology has low fixed rates,
low minimum efficient scale, and flexible
manufacturing is not available
◊
The product's value-to-weight ratio is low
◊
The product does not serve universal needs
◊
®
□
§
○
The Hidden Costs of Foreign Locations
There are many hidden costs to basing production in a foreign
location like…
High employee turnover□
Shoddy workmanship□
Poor product quality□
Low productivity □
§
○
•
The Strategic Role of a Foreign Production Site
Initially, many foreign factories are established where labour costs are low
This is done to typically to produce labour-intensive products at as
low a cost as possible
§
○
Upward migration in the strategic role of foreign factories arises because
many foreign factories upgrade their own capabilities
This comes from two sources
Pressure from the head office to improve a factory's cost
structure and/or customize a product to the demands of
consumers in a particular nation can start a chain of events
that ultimately leads to development of additional capabilities
at that factory
□
The source of improvement in the capabilities of a foreign
factory can be the increasing abundance of advanced factors
of production in the nation in which the factory is located
□
§
○
•
Outsourcing Production: Make-or-Buy Decisions
International businesses frequently face sourcing decisions, decisions
about whether they should make or buy the component parts that go into
their final product
○
Make-or-buy decisions are important factor in many firms' manufacturing
strategies
○
Make-or-buy decisions pose plenty of problems for purely domestic
businesses but even more problems for international businesses
The arena are complicated by the volatility of countries' political
economies, exchange rate movements, changes in relative factor
costs, etc.
§
○
Factors to consider before deciding whether to make-or-buy
Lower costs
It may be more efficient for a firm to have in-house
production activity than any other enterprise
□
§
Facilitate specialized investments
When one firm must invest in specialized assets to supply
another, mutual dependency is created
□
§
Protect proprietary product technology
This is technology which is unique to a firm □
If it enables the firm to produce a product containing superior
features, it can give the firm a competitive advantage
□
§
Accumulating dynamic capabilities
The capability to effectively and efficiently produce goods and
services is one that evolves over time
□
Firms can learn through their experiences how to lower costs,
design better products, increase product reliability, and so on
They skills are dynamic, they are learnt through
experience
®
□
§
Improve scheduling
This is very important for just-in-time inventory systems□
Resources that the company buys should not be wasted and
should be used as soon as possible
□
§
Strategic flexibility
Buying components from individual suppliers can help a firm
maintain its flexibility, switching between suppliers if need be
□
§
Offsets
Sometimes outsourcing manufacturing may help the firm
capture more orders from that country
□
§
○
Trade-offs
The benefits of manufacturing components in-house seem to be
greatest when…
Highly specialized assets are involved□
Vertical integration is necessary for protecting proprietary
technology
□
The firm is simply more efficient than external suppliers at
performing a particular activity
□
§
○
Strategic alliances with suppliers
Strategic alliances build trust between firm and its suppliers
Both need to be ready for a long-term commitment □
§
A firm that enters long-term alliances may limit its strategic
flexibility by the commitments it makes to its alliance partners
§
○
•
Chapter 15
Friday, January 26, 2018 21:24
Document Summary
There are two main activities that clarify how production and materials management are performed. There are two main activities, production and materials management (policies) Production can be defined as the activities involved in creating a product. It detonates both service and manufacturing activities, since one can only produce a service or produce a physical product. Materials management is the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution. This includes logistics, which is the procurement and physical transmission of materials through the supply chain. Efficient supply chain management reduces the amount of inventory in the system and increases inventory turnover. Increase product quality by eliminating defective products from both the supply chain and the manufacturing process. The firms that improves its quality control will also reduce its costs of value creation. Improved quality control reduced costs in three ways. Increasing productivity because time is not wasted manufacturing poor-quality products.
