Production management - Chapter 12

BME

Production management system

Deals with the conversion of raw materials into finished goods or services

done by deciding on the inputs, outputs, processes and controls that need to take place

Purpose of production management system

Monitior and control production processes to ensure:

• inputs are organized

• outputs meet quality standards and customers requirement

Goal - product goods and services at the

• right quantity

• right time

• right quality

• minimum cost

Benefits of a good production management system

• Build a positive public image

• Achieve business goal - meet customer needs

Features of product development

Involves time, money, skills and high risk

Based on

• clear plan

• market research

• Business environment research

Incremental innovation

concerns an existing product, service, process organization

performance has been significantly enhanced or upgraded

• longer battery phone life

Disruptive innovation

significant impact on a market and economic activity of firms in that market

• cloud computing

• digital radio

Stages of product development

1. Product ideas - find out unmet customer needs

2. Evaluation of ideas - evaluate possible product ideas with leaders

3. Concept evaluation - more details to the idea

4. prototype testing - best idea will be developed into prototype

5. Market testing - sample distribute to increase interest and desire

6. Product launch - inventory ready

Features of quality management

Quality control

Quality assurance

Quality improvement

Quality control

• checking and reviewing work processes to determine if the requirements of the business are met

• Ensure product meets a defined set of quality criteria and the requirements of the customers

• comparing the results of the plan at the end of the production process

Example:

Service industry

• International organization for standardization (ISO)

• ISO 9000 Quality management

High quality product means (benefits)

Meets legislated standards for product safety

Meets or exceeds customer expectations

Quality assurance

• Process of verifying or determining whether product or services meet or exceed customer expectations

• Process driven approach

• Ensures products/services meet the customers requirements at the highest standard

• To prevent defect

• Happens at the beginning of production process

Benefits of quality assurance

• Improved staff morale

• No formal inspection of the final product - checked at every stage

Quality improvement

• to increase efficiency, actions and procedures, with the purpose of achieving additional benefits for the business and its users

Results in:

• products/services of higher quality

• customer loyalty

• attracting new customers and company reputation

Improvements

• waste is eliminated

• improving product quality

• maximizing the skills of the workforce

Quality improvement definition and methods

• continuous study and improvement of a process, system or organisation

• improves how things work or how things are done

Methods:

• Six sigma - reducing defects based on data

• Toyota production system - eliminate waste

• Benchmarking - comparing products with direct competitors

Inventory control techniques (Define, advantages & disadvantages)

Just in time

Just in case

Just in time - Zara, Mcdonalds

Increases efficiency and decreases waste by receiving goods only when needed in the production process

Advantages:

• Reduce inventory cost

• Minimal inventory releases cash flow

• reduce the chance of outdated stock

• Greater customization

• focus on quality and zero defects lowering waste levels

Disadvantages:

• heavy reliance of suppliers - failures in delivery lead to expensive production delay and stock out

• no economies of scale

• expensive computer technologies and robotics for smooth operation

Just in case - Hospitals

• Ensure consistent availability of stock to meet customer demand

• Reduce delivery cost

• Business keep high amount of stock to avoid running out

Advantages:

• allows company to meet increases in demand by a faster production rate

• Economies of scale from bulk discounts

• Meet sudden increase in demand

Disadvantages

• High opportunity costs of working capital tied up in stock

• High storage costs

• Risk of goods being outdated

Financial ratios

Commonly used tools for measuring the firm’s liquidity, profitability and reliance on debt financing

• effectiveness of management resource utilization

• Allows comparison with other companies and own past performance

• Assist managers by pinpoint problem and excellence areas

Financial ratios categories

Liquidity

Profitability

Stability

Liquidity

Current ratio aka working capital

• measure business ability to pay short term debts as they mature

• If >=100% able to pay

• If <100% improve by increasing CA and decreasing CL

Formula: CA/CL x 100%

Profitability

1. Gross profit ratio

2. Profit ratio

3. Expense ratio

4. Return on equity ratio

Gross profit ratio aka gross profit margin

measure a biz profitability before expenses how profitable a company sells its inventory

Formula: Gross profit/Net sales x 100

Profit ratio

measure a biz profitability after all expenses have been paid

Formula: Net profit / Net sales x 100

Expenses ratio

measure amount of expenses in each dollar of income earned

• reflects efficiency of the operation from one period to the next

• cost control is needed to improve the expenses ratio

Expenses ratio: Operating expenses / Net sales x 100

Return on equity ratio

measure return on the owners investment on business

• reflects how much profit the company can earn from money invested

Net profit / shareholder equity x 100

Stability ratio

Debt to equity ratio

• indicates how reliant on debt a business is for operating fund

• debts may provide funds for operations and expansion but also a drain on cash as debt repayments must be met

>100 = use more debts

100 = half half

<100 = use more equity