10 January 2013
CHAPTER 1: PRODUCING GOODS & SERVICES
Service Operations are production activities that yield tangible and intangible service products.
Goods Production is production activities that yield tangible products.
WHAT DOES “PRODUCTION” MEAN TODAY?
A business is an organised effort to provide things that customers want to buy. This implies the ability to
provide the things that people want to buy. A business must offer what it claims to offer (IE: A coffee
shop must have coffee). It is the direction and control of processes that transform resources into
finished goods or the management of the creation of goods and services, using the factors of
production. Operations make things or make things happen. Production implCanadian
businesses make products. In fact, 80% of Canadians work in services. Bankers, doctors, lawyers,
professors, and accountants don’t make products; they provide ideas, analyses, and information but
these things still need to be planned, managed, and supplied.
Service sector mangers focus less on equipment and technology than on the human element in
operations because success or failure may depend on provider-customer contact. Employees who deal
directly with customers affect customers feelings about the service, and is a key difference between
production and service operations in the customer’s involvement. Customers are involved in all kinds of
production because electronic communications are key components in winning and keeping customers
in a huge range of competitive industries.
Production operations have become more environmentally friendly. New technologies allow machines
to run more cleanly, quickly, and safely, and to operate on a global scale. They can communicate with
other machines in the company (via an intranet) and with other companies’ machines (via the internet).
With the internet, producers of both services and goods are integrating their production activities with
those of far off suppliers and customers.
Importance of Services
Contribution to total Canadian GDP, 2007:
Agriculture Services Manufacturing (IE: Finance: loans, deposits, investment advice; Consulting services: marketing, head-hunting; Legal
services: leases, wills, contracts; Education: schools, colleges, universities; Transportation: Air Canada,
TTC, Taxis; Accounting: book-keeping, auditors, tax advice; Medical Services: hospitals, doctors, dentists;
Leisure Services: ski-hill operators, cinemas; Hospitality: hotels, bars, restaurants, coffee shops; Business
Services: photographers, PR companies)
CREATING VALUE THROUGH PRODUCTION
Products provide businesses with both economic results (IE: profits, wages, goods purchased from other
companies) and non-economic results (IE: new technology, innovations, pollution). Products (IE: books)
can be stored, services (IE: serving a meal) cannot. Products can be made without customer, services (IE:
bus trip) cannot. Products (IE: jeans) should be the same, services (IE: haircuts) should not.
Production has historically been associated with manufacturing; it has been replaced in recent years by
operation. Operations (Production) Management is the systematic direction and control of the
processes that transform resources into finished goods. Managers are responsible for ensuring that
operations processes create value and provide benefits – creating utility for customers, bringing raw
materials, equipment, and labor together under a production plan that effectively uses all the resources
available in the production facility. As demand for a good increase, they must schedule and control work
to produce the amount required, controlling costs, quality levels, inventory, and plant and equipment.
Farmers can be production managers.
Operations Process is a set of methods and technologies used in the production of a good or a service.
We describe goods according to the kind of transformation technology they require, or according to
whether their operations process combines resources or breaks them into component parts. We can
describe services according to the extent of customer contact required.
Production System Inputs Transformation Outputs
Farm Land, tractors, fertilizer Cultivation of livestock Food products
Jewelry Store Merchandise, showroom Exchange of merchandise Customers
Good-manufacturing processes can be classified in two different ways: by the type of transformation
technology that transforms raw materials into finished goods and by the analytic or synthetic nature of
the transformation process.
Types of transformation technology:
Chemical Processes are raw materials and chemically altered through heat, cold or mixture
change in material’s composition (IE: Aluminum, steel, fertilizer, petroleum, and paint
Fabrication Processes mechanically alter the basic shape or form of a product, cutting
something in half, bending it (IE: Tree into paper, metal forming, woodworking, textile
Assembly Processes putting together various components, pieces or different ingredients (IE:
Making bread and cheese into a sandwich, electronics, appliance, automotive)
Transport Processes are goods that acquire place utility by being moved from one location to
another, moving products or raw materials from A to B (IE: Trucks moving bicycles, moving
furniture from Halifax to Winnipeg) Clerical Processes transforms information, adding information, advice or packaging knowledge
(IE: Combining data on employee absences, turning financial data into an investment analysis)
Analytic Process is any production process in which resources are broken down (IE: Extracting aluminum
from an ore called bauxite)
Synthetic Process is any production process in which resources are combined (IE: Combining raw
materials to produce finished products such as fertilizer or paint)
Service Producing Processes
Classifying services to whether a given service can be provided without the customer being part of the
High Contact Processes is a system in which the service cannot be provided without the
customer being physically in the system (IE: Transit system)
Low Contact Processes is a system in which the service can be provided without the customer
being physically in the system (IE: Lawn care services, cashing in a cheque)
Differences between Service and Manufacturing Operations
In service production the raw materials or inputs are people who choose among sellers because they
have either unsatisfied needs or possessions for which they require some form of care or alteration. The
finished products or outputs are people with needs met and possessions serviced.
Focus on Performance – Goods are processed but services are performed. Service operations
feature a unique link between production and consumption between process and outcome/
Services are more intangible and more customized and less storable than most products. Quality
considerations must be defined, and managed, differently in the service sector than in
Focus on Process and Outcome – Local gas company employees may need the interpersonal
skills necessary to calm and reassure frightened customers who have reported gas leaks, factory
workers who install gas pipes are far less likely to need such skills
Focus on Service Characteristics
o Intangibility are services that cannot be touched, tasted, smelled, or seen (IE: Customer
experiences of pleasure, satisfaction, safety)
o Customization is when you expect services to be designed for your needs (IE: Physician,
o Unstorability is a service that is not used when it is available (IE: Rubbish collection,
Focus on Customer Service Link – The customers expect the business to be conveniently located,
to be open at convenient times, to offer needed services at reasonable prices, and to extend
o E-Commerce, electronically sellers collecting information about product features,
delivery availability, and after-sales service with around the clock services
Focus on Service Quality Considerations – Service managers must understand that quality of
work and quality of service are not necessarily synonymous (IE: Dissatisfaction if you had to pick
up a repaired car a day later than promised)
The business plan and forecasts developed by top managers guide operations planning. The business
plan outlines goals and objectives including the specific goods and services that the firm will offer. Demand Planning forecasts how much you need to make (IE: A bad example would be a coffee
shop that runs out of coffee). Forecasts estimate the future demand for both new and existing
products. It covers a 2-5 year period. Operations planning and control: Business plan and
forecasts Long-range operations plan Operations schedules Operations control
Output to customers.
Capacity Planning is the amount of good that a firm can produce under normal working
conditions. It ensures enough space, and workers to meet demand (IE: A bad example would be
Tim Horton's at UTSC)
o Producing Goods – Ensuring that a manufacturing firm’s capacity slightly exceeds the
normal demand for its product. If capacity is too small to meet demand, the company
must turn away customers. If capacity greatly exceeds demand, the firm is wasting
money by maintaining a plant that is too large, by keeping excess machinery online, or
by employing too many workers
o Producing Services – In low contact processes, maintaining inventory allows managers
to set capacity at the level of average demand. In high contact processes, managers
must plan capacity to meet peak demand
Location Planning is finding the best location for getting materials, good employees, and
transport to market. The location of a business affects its production costs and flexibility, sound
location planning is crucial (IE: A good example would be auto making in Ontario)
o Producing Goods – Location decisions are influenced by proximity to raw materials and
markets, availability of labor, energy and transportation costs, local and provincial
regulations and taxes, and community living conditions.
o Producing Services – In low contract processes, companies have some options, services
can be located near resource suppliers, labour, customers, or transportation outlets. In
high contract processes, services are more restricted, they must locate near the
customers who are a part of the system.
Layout Planning is arranging the store or factory for smooth flow of materials (IE: When garbage
is always under the sink)
o Producing Goods – Facilities that produce goods must be planned for three different
types of space:
Productive Facilities are works