Appraising Production
Production, as used here, is the process of making the product or service.
CRITICAL FACTORS IN PRODUCTION
Although there may be some factors that are common to many businesses, there will be others that are more specific to the particular business. For example:
• A manufacturer of lifts. Two critical factors are on-time delivery and quality performance. The factory has to be in a position to ship all the required sub-units of a contract to the field installation unit at the date specified in the contract. The sub-units might include several lift cars, doors, architraves, controllers and motors. If the factory is late in delivering even one sub-unit, it may delay the completion of the whole building. The same effect can be caused if one of the sub-units does not meet the quality standards and has to be replaced. Besides losing the goodwill of the contractor, architect and building owner, delay means additional costs in the field, and exposure to penalties.
• A contract packer of own-label detergents. Own-label manufacturers provide a substitute for branded products. Their customers include the major supermarket chains, whose brands appear on the products. Critical factors for this business include flexible production, so that requirements for new products can be met speedily, manufacture to a tight production cost and the ability to meet the volume requirements of customers.
• A management training organisation. Two critical factors for an organisation providing in-company training courses, in addition to the expected capabilities in training skills and subject knowledge, are about keeping customers.A feature of this type of consultancy is a relationship with the client, which can last for many years. So the first production criterion is to be able to meet each client's needs for the number of times a course is to be run, and the time and place where it is to be run. This does not mean that there will be no flexibility at all over dates, but if the client's needs cannot be met there is a high chance that another consultancy will be brought in instead. It is better to decide not to bid to a new client than to decline to teach some of the programmes an existing client requires. A second criterion is continuity of professional staff. This does not mean that no changes can be made over time, but changes that are over-frequent, or the withdrawal of the professionals who have built the relationship, can cause dissatisfaction.
GETTING THE FACTS
There are two different areas to audit: the basic facts, which include the operating results, and the production strategy. Although logically the facts are the outcome of the strategy, they also indicate its effectiveness, so looking at these first makes the task of appraising the strategy somewhat easier.
What Is the Capacity of the Present Production Unit(s)?
What Was the Capacity Utilisation?
What Are the Implications for Increasing or Reducing Capacity?
What about Productivity?
THE PRODUCTION STRATEGY
a) World Class Production
Hayes, Wheelwright and Clark (1988) define world class manufacture as "Basically this means being better than almost every company in your industry in at least one important aspect of manufacture."
A four-stage journey to being world class was postulated by Hayes, Wheelwright and Clark:
• Stage 1 they term "internally neutral". The task is seen as just to "make the stuff", or provide the service without surprises. The organisation at this stage is likely to set its standards on the basis on its own past performance. It may be seeking to improve its performance, but without reference to anything outside the organisation's own interpretation of what should be achieved.
• Stage 2 is "externally neutral". The reference is taken with regard to competitors and the industry, and the task is seen as to meet the standards of main competitors, following industry practice, and using the same materials and suppliers of plant as the industry. Many organisations at stage 2 restrict their comparisons with competitors to those manufacturing within the country.
• Stage 3 is "internally supportive". It is no longer seen as appropriate just to copy competitors, and the organisation moves beyond this, with its actions being related to the specific strategies of the whole organisation.
• Stage 4, "externally supportive", is when the whole organisation seeks not merely to be better than competitors, but to be the best in the world in every important thing that it does. The comparison is no longer just with the industry, but with any organisation from any industry that is best at any of the relevant processes. However, being the best means much more than copying. It requires continuous, creative attention to every aspect of the organisation.
b) Global or Local Production
The factors which lead to the appropriate position on the continuum begin with the requirements of customers, and are followed by the nature of the technology. Production has to meet the needs of the customers, yet itself is subject to a number of factors which affect its optimum organisation.
Factors which are purely related to production include:
• Scale efficiencies. High efficiencies of scale bring an economic incentive for a few large centres of production. Very low efficiencies of scale remove this incentive.
• Procurement economies of scale. Where these are low, the incentive for concentration is low. The converse applies when they are high.
• Experience curve. The experience curve means that production costs in a plant fall as cumulative production volume rises. Where the curve is steep, such as in the manufacture of many electronic products, there is another incentive to concentrate in a few factories.
• Nature of raw materials. Where the raw materials are perishable, as in the quick freezing of vegetables or the production of wine, the economic incentive is likely to be the sources of raw materials, rather than seeking the benefits of global production.
• Transport costs. High transport costs in relation to the value of the product are likely to pull the decision towards local plants. Where costs are low, there is less disincentive for fewer plants operating on a global basis.
In manufacturing, the incentive to move towards the global end of the continuum is driven by customer requirements, technology and manufacturing advantages. In service industries the driver comes mainly from the customer or, less frequently, the technology (for example telecommunications).
c) The Focused Factory
A factory that focuses on a narrow product area for a particular market will outperform the conventional plant, which attempts a broader mission. Because the equipment, supporting systems, and procedures can concentrate on a limited task for one set of customers, its costs and especially its overheads are likely to be lower than those of the conventional plant. But more important, such a plant can become a competitive weapon because the entire operation is focused to accomplish the particular manufacturing task demanded by the company's overall strategy and marketing objective.
Focus avoids at least three manufacturing problems:
1. Equipment is obtained which is optimally suited to what it has to produce. Where there is no focus, equipment bought for a different manufacturing task may be used, and although the product can be made on it, it is not necessarily the most effective method of production.
2. People who are trained to be excellent at a particular thing may be expected to change their standards when making the next product. Defence and aeronautical parts may have to be made to extremely high tolerances and with zero defects. The machinery may well be capable of making products which require less stringent standards. To produce them to the higher standard means that the cost of production is higher than it need be, but to keep telling the workforce to change the standards they apply depending on the type of contract causes confusion and leads to failures in both product areas.
3. The main line of importance may have to be interrupted because of a need to make other products. This causes more downtime and set-up costs, as well as disruption. A common example is the production of spares on the main line used to produce the original equipment, particularly as the spares may be for products that are no longer made. A result is failure to meet the manufacturing objectives of either, and there is often a conflict over which to produce. The issue is not what can be produced on any given line, but what should be produced.
d) Outsourcing
The main reasons for considering outsourcing, and why the current situation should be assessed as part of the appraisal, are:
• Flexibility. The problem of managing peaks and troughs is reduced as far as the organisation is concerned, because its own employees are fewer in number. The problem of managing the fluctuations is shifted to a specialist supplier.
• Reduction of risk. This may be related to flexibility, but may also be a reduction in exposure. A highly integrated operation means that a number of corporate eggs are in one basket. If some of these can be removed, and the risks passed to someone else, the organisation may be in a healthier position.
• Cost. An external organisation which is focused on a particular product or service can often deliver cost reductions because of the economies of scale it can achieve.
• Inventory reduction. In some situations outsourcing can lead to a reduction in the inventory of raw materials and work in process, particularly if just-in-time methods are used.
• Focus. The removal of important, but peripheral, areas of activity means that the organisation can focus on the things that are important, and which it can really do well.
• Quality. Specialised suppliers should be able to provide products and services to a high quality standard.
There are pitfalls to avoid. Things which are core to the organisation's future success should be protected, and should not be outsourced. This includes core knowledge. The last thing that is wanted is to set up a new competitor.
PRODUCTION STRATEGY
1. At which stage is your organisation on the journey to world class performance?
2. Is your organisation operating in the appropriate position on the continuum from local to global production?
3. Does your organisation follow the concept of the focused factory?
EQUIPMENT AND PRODUCTION TECHNIQUES
1. To what extent does your firm's production facility or facilities match current and future needs?
2. How well is machinery able to meet desired production output?
3. To what extent is production space utilised effectively?
4. How do the present production techniques compare to other alternatives?
5. Who handles maintenance?
6. How do you utilise the prospective possibilities for "sourcing" of components and product modules outside the firm (buy versus make)?
7. Is the firm's production equipment ahead or behind in comparison with other firms in your industry and with the available technical possibilities?
PRODUCTION AND QUALITY CONTROL
1. What basis do you use for production planning?
2. To what degree is the production scheduled efficiently?
3. Do rush orders cause problems?
4. To what degree are production schedules monitored and controlled?
5. Is material work flow satisfactory?
6. How well do materials flow throughout the manufacturing area?
7. Is the plant organised and tidy?
8. Is there any organised form of quality control?
9. What is the basis of production with respect to drawings, standards, tolerances, preparations, instructions etc.?
10. Are measurement and quality control techniques satisfactory?
PURCHASING AND INVENTORY MANAGEMENT
1. On what basis do you evaluate your firm's vendors?
2. Does the supply of materials to the firm work satisfactorily?
3. Do you perform systematic receiving control with regard to quality and quantity of purchases?
4. How are materials and production tools purchased?
5. How does inventory control work?
6. How do you evaluate purchasing and stock order sizes?
For more Information
* Business Strategy, Strategic Management, Superior Competitive Advantage, Corporate Strategy *
Production, as used here, is the process of making the product or service.
CRITICAL FACTORS IN PRODUCTION
Although there may be some factors that are common to many businesses, there will be others that are more specific to the particular business. For example:
• A manufacturer of lifts. Two critical factors are on-time delivery and quality performance. The factory has to be in a position to ship all the required sub-units of a contract to the field installation unit at the date specified in the contract. The sub-units might include several lift cars, doors, architraves, controllers and motors. If the factory is late in delivering even one sub-unit, it may delay the completion of the whole building. The same effect can be caused if one of the sub-units does not meet the quality standards and has to be replaced. Besides losing the goodwill of the contractor, architect and building owner, delay means additional costs in the field, and exposure to penalties.
• A contract packer of own-label detergents. Own-label manufacturers provide a substitute for branded products. Their customers include the major supermarket chains, whose brands appear on the products. Critical factors for this business include flexible production, so that requirements for new products can be met speedily, manufacture to a tight production cost and the ability to meet the volume requirements of customers.
• A management training organisation. Two critical factors for an organisation providing in-company training courses, in addition to the expected capabilities in training skills and subject knowledge, are about keeping customers.A feature of this type of consultancy is a relationship with the client, which can last for many years. So the first production criterion is to be able to meet each client's needs for the number of times a course is to be run, and the time and place where it is to be run. This does not mean that there will be no flexibility at all over dates, but if the client's needs cannot be met there is a high chance that another consultancy will be brought in instead. It is better to decide not to bid to a new client than to decline to teach some of the programmes an existing client requires. A second criterion is continuity of professional staff. This does not mean that no changes can be made over time, but changes that are over-frequent, or the withdrawal of the professionals who have built the relationship, can cause dissatisfaction.
GETTING THE FACTS
There are two different areas to audit: the basic facts, which include the operating results, and the production strategy. Although logically the facts are the outcome of the strategy, they also indicate its effectiveness, so looking at these first makes the task of appraising the strategy somewhat easier.
What Is the Capacity of the Present Production Unit(s)?
What Was the Capacity Utilisation?
What Are the Implications for Increasing or Reducing Capacity?
What about Productivity?
THE PRODUCTION STRATEGY
a) World Class Production
Hayes, Wheelwright and Clark (1988) define world class manufacture as "Basically this means being better than almost every company in your industry in at least one important aspect of manufacture."
A four-stage journey to being world class was postulated by Hayes, Wheelwright and Clark:
• Stage 1 they term "internally neutral". The task is seen as just to "make the stuff", or provide the service without surprises. The organisation at this stage is likely to set its standards on the basis on its own past performance. It may be seeking to improve its performance, but without reference to anything outside the organisation's own interpretation of what should be achieved.
• Stage 2 is "externally neutral". The reference is taken with regard to competitors and the industry, and the task is seen as to meet the standards of main competitors, following industry practice, and using the same materials and suppliers of plant as the industry. Many organisations at stage 2 restrict their comparisons with competitors to those manufacturing within the country.
• Stage 3 is "internally supportive". It is no longer seen as appropriate just to copy competitors, and the organisation moves beyond this, with its actions being related to the specific strategies of the whole organisation.
• Stage 4, "externally supportive", is when the whole organisation seeks not merely to be better than competitors, but to be the best in the world in every important thing that it does. The comparison is no longer just with the industry, but with any organisation from any industry that is best at any of the relevant processes. However, being the best means much more than copying. It requires continuous, creative attention to every aspect of the organisation.
b) Global or Local Production
The factors which lead to the appropriate position on the continuum begin with the requirements of customers, and are followed by the nature of the technology. Production has to meet the needs of the customers, yet itself is subject to a number of factors which affect its optimum organisation.
Factors which are purely related to production include:
• Scale efficiencies. High efficiencies of scale bring an economic incentive for a few large centres of production. Very low efficiencies of scale remove this incentive.
• Procurement economies of scale. Where these are low, the incentive for concentration is low. The converse applies when they are high.
• Experience curve. The experience curve means that production costs in a plant fall as cumulative production volume rises. Where the curve is steep, such as in the manufacture of many electronic products, there is another incentive to concentrate in a few factories.
• Nature of raw materials. Where the raw materials are perishable, as in the quick freezing of vegetables or the production of wine, the economic incentive is likely to be the sources of raw materials, rather than seeking the benefits of global production.
• Transport costs. High transport costs in relation to the value of the product are likely to pull the decision towards local plants. Where costs are low, there is less disincentive for fewer plants operating on a global basis.
In manufacturing, the incentive to move towards the global end of the continuum is driven by customer requirements, technology and manufacturing advantages. In service industries the driver comes mainly from the customer or, less frequently, the technology (for example telecommunications).
c) The Focused Factory
A factory that focuses on a narrow product area for a particular market will outperform the conventional plant, which attempts a broader mission. Because the equipment, supporting systems, and procedures can concentrate on a limited task for one set of customers, its costs and especially its overheads are likely to be lower than those of the conventional plant. But more important, such a plant can become a competitive weapon because the entire operation is focused to accomplish the particular manufacturing task demanded by the company's overall strategy and marketing objective.
Focus avoids at least three manufacturing problems:
1. Equipment is obtained which is optimally suited to what it has to produce. Where there is no focus, equipment bought for a different manufacturing task may be used, and although the product can be made on it, it is not necessarily the most effective method of production.
2. People who are trained to be excellent at a particular thing may be expected to change their standards when making the next product. Defence and aeronautical parts may have to be made to extremely high tolerances and with zero defects. The machinery may well be capable of making products which require less stringent standards. To produce them to the higher standard means that the cost of production is higher than it need be, but to keep telling the workforce to change the standards they apply depending on the type of contract causes confusion and leads to failures in both product areas.
3. The main line of importance may have to be interrupted because of a need to make other products. This causes more downtime and set-up costs, as well as disruption. A common example is the production of spares on the main line used to produce the original equipment, particularly as the spares may be for products that are no longer made. A result is failure to meet the manufacturing objectives of either, and there is often a conflict over which to produce. The issue is not what can be produced on any given line, but what should be produced.
d) Outsourcing
The main reasons for considering outsourcing, and why the current situation should be assessed as part of the appraisal, are:
• Flexibility. The problem of managing peaks and troughs is reduced as far as the organisation is concerned, because its own employees are fewer in number. The problem of managing the fluctuations is shifted to a specialist supplier.
• Reduction of risk. This may be related to flexibility, but may also be a reduction in exposure. A highly integrated operation means that a number of corporate eggs are in one basket. If some of these can be removed, and the risks passed to someone else, the organisation may be in a healthier position.
• Cost. An external organisation which is focused on a particular product or service can often deliver cost reductions because of the economies of scale it can achieve.
• Inventory reduction. In some situations outsourcing can lead to a reduction in the inventory of raw materials and work in process, particularly if just-in-time methods are used.
• Focus. The removal of important, but peripheral, areas of activity means that the organisation can focus on the things that are important, and which it can really do well.
• Quality. Specialised suppliers should be able to provide products and services to a high quality standard.
There are pitfalls to avoid. Things which are core to the organisation's future success should be protected, and should not be outsourced. This includes core knowledge. The last thing that is wanted is to set up a new competitor.
PRODUCTION STRATEGY
1. At which stage is your organisation on the journey to world class performance?
2. Is your organisation operating in the appropriate position on the continuum from local to global production?
3. Does your organisation follow the concept of the focused factory?
EQUIPMENT AND PRODUCTION TECHNIQUES
1. To what extent does your firm's production facility or facilities match current and future needs?
2. How well is machinery able to meet desired production output?
3. To what extent is production space utilised effectively?
4. How do the present production techniques compare to other alternatives?
5. Who handles maintenance?
6. How do you utilise the prospective possibilities for "sourcing" of components and product modules outside the firm (buy versus make)?
7. Is the firm's production equipment ahead or behind in comparison with other firms in your industry and with the available technical possibilities?
PRODUCTION AND QUALITY CONTROL
1. What basis do you use for production planning?
2. To what degree is the production scheduled efficiently?
3. Do rush orders cause problems?
4. To what degree are production schedules monitored and controlled?
5. Is material work flow satisfactory?
6. How well do materials flow throughout the manufacturing area?
7. Is the plant organised and tidy?
8. Is there any organised form of quality control?
9. What is the basis of production with respect to drawings, standards, tolerances, preparations, instructions etc.?
10. Are measurement and quality control techniques satisfactory?
PURCHASING AND INVENTORY MANAGEMENT
1. On what basis do you evaluate your firm's vendors?
2. Does the supply of materials to the firm work satisfactorily?
3. Do you perform systematic receiving control with regard to quality and quantity of purchases?
4. How are materials and production tools purchased?
5. How does inventory control work?
6. How do you evaluate purchasing and stock order sizes?
For more Information
* Business Strategy, Strategic Management, Superior Competitive Advantage, Corporate Strategy *
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