What is the management of systems or processes that convert or transform resources into goods and services?

The first step in production planning is deciding which type of production process is best for making the goods that your company intends to manufacture. In reaching this decision, you should answer such questions as the following:

One way to appreciate the nature of this decision is by comparing three basic types of processes or methods: make-to-order, mass production, and mass customization. The task of the operations manager is to work with other managers, particularly marketers, to select the process that best serves the needs of the company’s customers.

At one time, most consumer goods, such as furniture and clothing, were made by individuals practicing various crafts. By their very nature, products were customized to meet the needs of the buyers who ordered them. This process, which is called a make-to-order strategyProduction method in which products are made to customer specification., is still commonly used by such businesses as print or sign shops that produce low-volume, high-variety goods according to customer specifications.

By the early twentieth century, however, a new concept of producing goods had been introduced: mass production (or make-to-stock strategy)Production method in which high volumes of products are made at low cost and held in inventory in anticipation of future demand. is the practice of producing high volumes of identical goods at a cost low enough to price them for large numbers of customers. Goods are made in anticipation of future demand (based on forecasts) and kept in inventory for later sale. This approach is particularly appropriate for standardized goods ranging from processed foods to electronic appliances.

But there’s a disadvantage to mass production: customers, as one contemporary advertising slogan puts it, can’t “have it their way.” They have to accept standardized products as they come off assembly lines. Increasingly, however, customers are looking for products that are designed to accommodate individual tastes or needs but can still be bought at reasonable prices. To meet the demands of these consumers, many companies have turned to an approach called mass customizationProduction method in which fairly high volumes of customized products are made at fairly low prices., which (as the term suggests) combines the advantages of customized products with those of mass production.

This approach requires that a company interact with the customer to find out exactly what the customer wants and then manufacture the good, using efficient production methods to hold down costs. One efficient method is to mass-produce a product up to a certain cut-off point and then to customize it to satisfy different customers.

The list of companies devoting at least a portion of their operations to mass customization is growing steadily. One of the best-known mass customizer is Nike, which has achieved success by allowing customers to configure their own athletic shoes, apparel, and equipment through Nike’s iD program. The Web has a lot to do with the growth of mass customization. Levi’s, for instance, lets a woman find a pair of perfect fitting jeans by going through an online fitting process that first identifies her “curve” type: slight (straight figure), demi (evenly proportioned), bold (curvy figure, which experiences waist gapping in the back), and supreme (curviest shape, which needs a higher rise in the back). Oakley offers customized sunglasses, goggles, watches, and backpacks, while Mars, Inc. can make M&M’s in any color the customer wants (say, school colors) as well as add text and pictures to the candy.

Naturally, mass customization doesn’t work for all types of goods. Most people don’t care about customized detergents or paper products (although a customized Kleenex tissue box with your picture on it and a statement that says, “go ahead…cry over me!” might come in handy after a relationship breakup with your significant other.) And while many of us like the idea of customized clothes, footwear, or sunglasses from Levi’s, Nike, or Oakley, we often aren’t willing to pay the higher prices they command.

A company's conversion processes involve the activities related to the transformation of resources into goods or services. These resources include the following:

• Materials, including raw materials inventory
• Labor, namely, the human resources required for operations
• Overhead, including fixed assets, indirect materials, indirect labor, and various other expenses necessary to run the operating facility

Exhibit 11-1 highlights the portions of the conversion processes addressed in this chapter, as they relate to the overall accounting system.

A company must have systems in place to capture, record, summarize, and report all of its conversion activities. The major activities within this process include operational planning that supports the company's strategies, optimizing the use of the employees, property, and inventories that are needed in operations, controlling production flows, ensuring product quality, and preparing the related cost accounting and financial accounting records. These are considered routine processes in most companies because of the large number of transactions encountered on a daily basis.

Exhibit 11-1 Conversion Processes within the Overall System

Although many companies are not considered manufacturing firms—that is, their principal functions are not manufacturing operations—most companies do conduct ...

1. Why is production and operations management important in both manufacturing and service firms?

Production, the creation of products and services, is an essential function in every firm. Production turns inputs, such as natural resources, raw materials, human resources, and capital, into outputs, which are products and services. This process is shown in (Figure). Managing this conversion process is the role of operations management.

Exhibit 10.2 With new oil reserves now available through “fracking,” the United States is challenging Saudi Arabia and is set to become a vast supplier of oil worldwide. Unlike the smooth petroleum that gushes from Arabian wells, however, America’s black gold in the Marcellus, Bakken, and other shale regions has to be drilled horizontally through new technology. The process is rigorous: oil and gas companies drill into the ground to extract crude oil and natural gas from the shale rock that lies thousands of feet under the ground. Once the formation is reached, gallons of water, sand, and an extensive list of man-made chemicals are injected into the well under high pressure. This combination inserted in the well will fracture the rock and release crude oil and natural gas. It is estimated that the gas within these rock formations could supply the United States for generations to come as technologies evolve to drill below the earth’s surface. What are key inputs in the fracking process? (Credit: Mark Dixon/ Flickr/ Attribution 2.0 Generic (CC BY 2.0))

The goal of customer satisfaction is an important part of effective production and operations. In the past, the manufacturing function in most companies was inwardly focused. Manufacturing had little contact with customers and didn’t always understand their needs and desires. In the 1980s, many U.S. industries, such as automotive, steel, and electronics, lost customers to foreign competitors because their production systems could not provide the quality customers demanded. As a result, today most American companies, both large and small, consider a focus on quality to be a central component of effective operations management.

Exhibit 10.3 Production Process for Products and Services (Attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license.)

Stronger links between marketing and manufacturing also encourage production managers to be more outwardly focused and to consider decisions in light of their effect on customer satisfaction. Service companies find that making operating decisions with customer satisfaction in mind can be a competitive advantage.

Operations managers, the people charged with managing and supervising the conversion process, play a vital role in today’s firm. They control about three-fourths of a firm’s assets, including inventories, wages, and benefits. They also work closely with other major divisions of the firm, such as marketing, finance, accounting, and human resources, to ensure that the firm produces its goods profitably and satisfies its customers. Marketing personnel help them decide which products to make or which services to offer. Accounting and human resources help them face the challenge of combining people and resources to produce high-quality goods on time and at reasonable cost. They are involved in the development and design of goods and determine what production processes will be most effective.

Production and operations management involve three main types of decisions, typically made at three different stages:

1. Production planning. The first decisions facing operations managers come at the planning stage. At this stage, managers decide where, when, and how production will occur. They determine site locations and obtain the necessary resources.
2. Production control. At this stage, the decision-making process focuses on controlling quality and costs, scheduling, and the actual day-to-day operations of running a factory or service facility.
3. Improving production and operations. The final stage of operations management focuses on developing more efficient methods of producing the firm’s goods or services.

All three decisions are ongoing and may occur simultaneously. In the following sections, we will take a closer look at the decisions and considerations firms face in each stage of production and operations management.

An important part of operations management is production planning. Production planning allows the firm to consider the competitive environment and its own strategic goals to find the best production methods. Good production planning has to balance goals that may conflict, such as providing high-quality service while keeping operating costs low, or keeping profits high while maintaining adequate inventories of finished products. Sometimes accomplishing all these goals is difficult.

Exhibit 10.4 From its storied creation in post-war Italy to its big-screen immortalization in movies such as Roman Holiday and Quadrophenia, the Vespa scooter has a reputation for romance, rebellion, and style. Manufactured by Italy’s Piaggio Group, the Vespa’s svelte, stainless-steel chassis and aeronautic-inspired designs are seen everywhere in Europe and more and more in the United States. The Piaggio Group presently operates factories in Italy, Vietnam, India, and China. What important production-planning decisions does Piaggio need to make as it considers expanding into more overseas markets? (Credit: Steve Watkins/ Flickr/ Attribution-2.0 Generic (CC BY2.0))

Production planning involves three phases. Long-term planning has a time frame of three to five years. It focuses on which goods to produce, how many to produce, and where they should be produced. Medium-term planning decisions cover about two years. They concern the layout of factory or service facilities, where and how to obtain the resources needed for production, and labor issues. Short-term planning, within a one-year time frame, converts these broader goals into specific production plans and materials management strategies.

Four important decisions must be made in production planning. They involve the type of production process that will be used, site selection, facility layout, and resource planning.

1. What are the three types of decisions that must be made in production planning?
2. What are the three phases of production planning?

operations management Management of the production process. production The creation of products and services by turning inputs, such as natural resources, raw materials, human resources, and capital, into outputs, which are products and services. production planning The aspect of operations management in which the firm considers the competitive environment and its own strategic goals in an effort to find the best production methods.