Operations Management, Productivity, and Quality

ADMN 201 — Ch10: Operations Management, Productivity, and Quality

This chapter covers the full lifecycle of operations: how firms plan and run production of goods and services, how they connect productivity to quality, and how they manage the extended network of suppliers that feeds their operations.

mindmap
  root((Ch10: Operations))
    Operations Management
      Four Utilities
        Form · Time · Place · Possession
      Goods vs Services
        4 Differences
        High/Low Contact
        Service Quality ≠ Work Quality
      Process Types
        Goods: Analytic vs Synthetic
        Goods: Make-to-Order vs Make-to-Stock
        5 Transformation Technologies
        Services: High vs Low Contact
      Operations Capability
        Quality · Price · Flexibility · Dependability
    Operations Planning
      Capacity Planning
      Location Planning
      Layout Planning
        Process · Product · Fixed-Position
        FMS · Soft Manufacturing
      Quality Planning
      Methods Planning
    Operations Control
      Materials Management
        Supplier Selection · Purchasing
        Inventory Control · JIT Lean
      Production Process Control
        Bill of Materials · MRP · MRP II
        Gantt Charts · PERT Charts
      4 Types of Schedules
    Productivity and Quality
      Productivity Formula
      Quality Wheel - Heskett 1987
      Two Dimensions
        Performance Quality
        Quality Reliability
      TQM Toolkit - 9 Tools
        Analysis Tools
        Process Control
        System-Wide Redesign
      Fishbone Diagram
    Supply Chain Management
      Value Chain
      SCM vs Traditional
      Outsourcing
      Social Responsibility

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Learning Objectives Map

LO	Topic
LO 10.1	Production, operations, four utilities
LO 10.2	Goods vs. service operations; 4 differences; high/low contact
LO 10.3	Two types of operations processes (analytic/synthetic for goods; high/low contact for services)
LO 10.4	Operations planning (5 areas) and operations control
LO 10.5	Productivity–quality connection
LO 10.6	TQM, two dimensions, 9 tools
LO 10.7	Supply chain strategy vs. traditional coordination

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LO 10.1 — Operations Management & The Four Utilities

Operations (or production) = all the processes and activities for transforming resources into finished goods and services for customers.

Operations is not isolated: marketing research determines what to make, accounting tracks costs, finance raises capital, and operations makes it happen. Production is directly linked to quality, which determines long-term profitability.

The Four Utilities

Production creates value by delivering utility — the power of a product to satisfy a human want:

Utility	What it means	Example
Form	Inputs transformed into a usable product	Trees → Lumber → Furniture
Time	Product available when customers want it	Grocery store open at 7am; next-day delivery
Place	Product available where it’s convenient	Corner store; e-commerce site
Possession	Ownership transferred to customer	Smooth checkout; financing available

Key: Operations must deliver all four — failing one kills customer value. A haircut creates all four: it transforms your hair (form), in a salon nearby (place), when you booked (time), and the result is yours (possession).

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LO 10.2 — Goods vs. Service Operations

Goods production = activities that yield tangible products (iPhones, cars, newspapers).
Service operations = activities that yield tangible and intangible service products (consulting, accounting, entertainment).

The line is blurry: natural gas is a physical product to the producer but a service to the consumer (you never see it — you just get heat).

4 Ways Services Differ from Goods

Difference	Goods	Services
1. Customer interaction	Low — customers rarely contact the manufacturing process	High — service workers need human relations skills; they are also salespeople
2. Intangibility & unstorability	Tangible; can be stored in inventory	Intangible; unused service capacity is permanently lost (empty airline seat = lost forever)
3. Customer presence	Customer is absent	Customer may be present in the process, affecting it unpredictably (high-contact) or absent (low-contact)
4. Quality considerations	Quality is built-in; measurable before delivery	Service quality ≠ Work quality — a car fixed perfectly (work quality ✓) but returned two days late (service quality ✗) fails on service even when the work is correct

High-Contact vs. Low-Contact Systems

High-contact system: Customer must be physically present during delivery (transit, dentist, hair salon, ER).

• The customer’s experience and environment are part of the product.
• Manager must control both the service output AND the customer interaction simultaneously.

Low-contact system: Customer is absent during delivery (lawn care, cheque processing, utilities, auto repair).

• Manager controls output only.

Exam tip: For high-contact services, the environment is part of the product. Customers also introduce unpredictability — a customer who asks for an extra service mid-process disrupts scheduling.

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LO 10.3 — Two Types of Operations Processes

Every operations process transforms inputs into outputs. The classification differs for goods vs. services.

Goods: Analytic vs. Synthetic

• Analytic process: Breaks a resource down into component parts.
  • Examples: Extracting aluminum from bauxite ore; refining crude oil into gasoline and jet fuel.
  • Think: separation — one input, many outputs.
• Synthetic process: Combines several raw materials to produce a finished product.
  • Examples: Making paint or fertilizer; assembling a car from components.
  • Think: combination — many inputs, one output.

Key test: Are we starting with one thing and pulling it apart (analytic), or starting with many things and combining them (synthetic)?

Goods: Make-to-Order vs. Make-to-Stock

	Make-to-Order	Make-to-Stock
What	Custom-designed products for specific orders	Standard items produced in large quantities for the general market
Example	Custom furniture, tailored suits	Canned food, mass-produced electronics

5 Transformation Technologies

Goods operations use these physical transformation methods:

Technology	What happens	Example
Chemical	Raw materials are chemically altered	Turning bauxite → aluminum; crude oil → gasoline
Fabrication	Mechanically alters the shape or form of a product	Stamping steel into car panels; woodworking
Assembly	Joins components together	Building a smartphone; assembling appliances
Transport	Goods acquire place utility by moving from one location to another	Trucking bicycles from factory to store
Clerical	Transforms information into useful data	Combining absence records + machine breakdowns → productivity report

Services: High-Contact vs. Low-Contact Processes

(See LO 10.2 above — for services, the two “types of operations processes” are the high-contact and low-contact systems.)

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Operations Capability — Strategy Drives Operations

Operations capability = the activity or process that production must do especially well to support the firm’s business strategy. Every firm’s operations capability should align with its strategy.

Company	Strategy	Operations Implementation
Toyota	Quality	JIT material flows; high quality supplier standards; continuous improvement culture
No Frills	Low price	Minimal staffing; no-frills layout; customers pack their own groceries; sell from shipping cartons
3M	Flexibility	Excess production capacity for fast startup; adaptable equipment for changeovers; employees who thrive on change
FedEx	Dependability	Company air force; global weather forecasting; wireless package scanning; 30 automated hubs processing 45,000 packages/hour

Strong firms eventually build proficiency in more than one capability, but every firm starts by mastering one that aligns with its core strategy.

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LO 10.4 — Operations Planning (5 Areas)

The long-range operations plan (2–5 years) addresses five strategic areas:

1. Capacity Planning

Capacity = the amount a firm can produce under normal working conditions (determined by number of employees and size/number of facilities).

Operation Type	Set capacity at…	Why
Goods producers	Slightly above average demand	Excess output can be stored as inventory for peak periods
Low-contact services	Average demand	Overflow can queue — “to-be-done” file; no urgency
High-contact services	Peak demand	Customers are physically present; turning them away damages the relationship permanently

Too little capacity = lost customers and lost revenue.
Too much capacity = wasted money on idle facilities and staff.

2. Location Planning

Operation Type	Locate near…	Example
Goods producers	Raw materials, labour, transportation	Slovak auto plants near the Danube River (easy input/output transport; skilled cheap labour)
Low-contact services	Resource supplies or transportation hubs	Walmart distribution centres near the stores they supply
High-contact services	Customers — high-traffic areas	McDonald’s in malls, hospitals, college campuses

Key question: Who or what needs to move most efficiently? For high-contact, customers come to you — so locate near them. For goods and low-contact, materials come to you — so locate near inputs.

3. Layout Planning — 5 Types

Layout	Logic	Best For
Process (Custom-Product)	Equipment grouped by function; jobs move to equipment areas	Job shops; small custom batches (FedEx Office, medical clinics)
Product (Assembly Line)	Equipment set up for one product in a fixed sequence	High-volume single-product runs (car assembly, food processing)
Fixed-Position	Product stays in one location; resources come to it	Aircraft, buildings, ships
Flexible Manufacturing System (FMS)	Computer-controlled equipment reprogrammable for different products on one line	Multiple car models on one platform (Toyota, Nissan, Honda)
Soft Manufacturing	Software and computer networks rather than heavy machinery	Automated or knowledge-intensive production

Quick layout test: If you swapped two products and their path through the facility would change → process layout. If no change → product layout. A car always needs the same steps; a hospital patient does not.

FMS vs. Soft Manufacturing:

• FMS = the physical system (adaptable equipment, one line, many products)
• Soft manufacturing = the philosophy (use software and networks instead of massive machinery)

4. Quality Planning

Quality standards must be built into the design before production begins — not inspected after the fact.

Stage	Cost of failure	Why
Design	Lowest	Adjust before any resources are committed
Production	Higher	Materials acquired, labour spent, process must halt
Post-sale	Highest	Refunds, recalls, lawsuits, reputational damage

Quality planning = proactive. Quality control = reactive. Both matter; planning comes first.

5. Methods Planning

Identifies every production step and the specific method for performing it — to eliminate waste, inefficiency, and unnecessary steps.

Tool: Process Flowchart — maps the sequence of every production activity, material movement, and work performed at each stage.

Example: A hotel that redesigned checkout from 5 steps (walk to desk, wait in line, sign papers, return key, receive receipt) to 1 step (scan bill on room TV) is methods improvement applied to a service process.

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LO 10.4 (cont.) — Operations Control

Once plans are in motion, operations control requires managers to monitor performance against plans and schedules, and take corrective action when they diverge.

Two key activities: Materials Management and Production Process Control.

Operations Scheduling — 4 Types of Schedules

Schedule Type	What it covers
Master Operations Schedule	Which products will be produced, when, and what resources will be used (volume over months)
Detailed Schedules	Daily work assignments with start/stop times at each workstation
Staff Schedules	Who works when
Project Schedules	Large, one-time projects

Scheduling tools:

• Gantt Chart — bar chart showing task durations on a timeline. Answers: When does each task happen, and are we on schedule?
• PERT Chart — sequence diagram showing task dependencies and the critical path (the chain of dependent tasks where any delay cascades into the whole project being late). Answers: What depends on what, and which delay will kill the whole project?

Use both together on large projects: Gantt tracks progress, PERT reveals risk.

Materials Management

Controls the flow from raw material purchase through to finished goods distribution.

• Materials cost 50–75% of total expenses — the single largest expense category for most firms.
• Key activities: supplier selection, purchasing, transportation, inventory control.

JIT (Just-in-Time) Production = lean production where materials arrive at the exact moment needed — reducing inventory to near zero.

• Benefit: eliminates “goods-in-process” inventory; saves storage costs.
• Risk: no buffer — supply disruptions hit immediately.
• Example: Sobeys reduced storage room sizes by ~10% because products now move directly to shelves.

Production Process Control Tools

Tool	Function
Bill of Materials	”Recipe” specifying ingredients, order to combine them, and quantities per batch
MRP (Material Requirements Planning)	Computerizes the Bill of Materials to schedule resource acquisition; buy only what is needed, when needed
MRP II (Manufacturing Resource Planning)	Advanced MRP — ties Finance, HR, and Marketing into the production plan
Gantt Chart	Timeline showing task durations and overlaps; tracks whether tasks are on schedule
PERT Chart	Sequence diagram identifying the critical path (minimum completion time)
Worker Training	Ensures consistent quality — especially critical in service delivery (example: Disney)

MRP vs. MRP II: MRP controls inventory and production scheduling; MRP II connects those schedules to every other department in the organization.

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LO 10.5 — Productivity and Quality Connection

Productivity

Productivity = a measure of economic performance; how much is produced relative to the resources used to produce it.

Formula: Output ÷ Input
Example: 150 cases ÷ 10 workers = 15 cases/worker/day. Higher ratio = more productive.

Labour Productivity (national measure) = GDP ÷ Total number of workers.

High productivity gives a firm a competitive edge — it lowers cost per unit, allowing the firm to either lower prices (more customers) or earn higher margins.

The Productivity–Quality Link

High quality prevents waste → boosts productivity → lowers cost per unit → competitive edge.

But productivity alone isn’t enough. Producing 150 units, then scrapping 30 for poor quality, consumed full labour and materials — real productivity means producing outputs customers will actually accept.

Poor quality is typically more expensive than the savings from cutting corners:

• Internal failures: rework, scrap during production
• External failures (far more costly): refunds, recalls, lawsuits, lost customers

Research repeatedly shows that quality and firm profitability are strongly linked.

The Quality Wheel (Heskett, 1987)

graph LR
    A[Satisfied Employees] --> B[High-Quality Output]
    B --> C[Satisfied Customers]
    C --> D[Firm Success & Profit]
    D --> E[Employee Recognition]
    E --> A

Quality starts with people. Satisfied employees produce quality goods, which create satisfied customers, which produce profit, which allows recognition of employees — and the cycle continues.

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LO 10.6 — Total Quality Management (TQM)

TQM = all activities necessary to get high-quality goods and services to market. No defects are tolerable. All employees — not just inspectors — are responsible for maintaining quality standards.

Traditional view: quality is the quality department’s problem.
TQM view: quality is everyone’s problem. “Total” means whole-organization ownership.

Two Dimensions of Quality

Dimension	Definition	Example
Performance Quality	How well the product’s features meet consumer needs; how well it performs	The taste, aroma, and texture of Godiva chocolate
Quality Reliability	Consistency of quality from unit to unit	Every Marriott hotel room worldwide offers the same standards

TQM — 9 Tools (3 Categories)

Category 1: Analysis Tools

1. Competitive Product Analysis
Disassemble a competitor’s product to identify desirable improvements (“legal industrial espionage”). Example: Toshiba dismantles a Xerox photocopier to test every component against its own.

2. Value-Added Analysis
Evaluate every activity, material flow, and paperwork step to determine whether it adds value for customers. Eliminate all steps that don’t. Goal: reveal and remove wasteful steps.

3. Quality/Cost Studies
Identify current quality-related costs and find areas with the greatest cost-saving potential. Divides failures into:

• Internal failures: Expenses during production (overfilling boxes, scrapping bad parts before they leave the factory)
• External failures: Costs after a bad product reaches the customer (refunds, recalls, lawsuits) — far more expensive

Category 2: Process Control & Improvement

4. Statistical Process Control (SPC)
Mathematical techniques to monitor production and detect when adjustments are needed. Two sub-tools:

• Control Charts: Plot sample measurements over time with upper and lower limits. When data points drift toward the edges, it is an early warning before a full batch fails.
• Process Variation Studies: Analyze why variation is occurring (e.g., is Machine A consistent while Machine B is erratic?).

5. Quality Improvement (QI) Teams
Cross-functional employee groups that meet regularly to define, analyze, and solve production problems. Example: Motorola uses team competitions to encourage a culture of continuous improvement.

6. Benchmarking
Compare firm performance against:

• Internal benchmarking: Your own past performance (this month’s phone response time vs. last month’s)
• External benchmarking: Industry leaders (your shipping speed vs. FedEx)

Category 3: System-Wide Standards & Redesign

7. ISO 9000 / ISO 14000
International certification programs:

• ISO 9000: Certifies that a factory, lab, or office has met rigorous quality management requirements. Requires documenting every step so the product is exactly the same every day. Over 1 million certificates issued worldwide.
• ISO 14000: Certifies improvements in environmental performance. Requires a documented plan for resource use, pollution management, and hazardous waste.

8. Business Process Re-Engineering (BPR)
Fundamental rethinking and radical redesign of a process from scratch when incremental improvement isn’t enough. Example: Caterpillar Finance switched to an entirely online system — retraining every employee, connecting customers directly to their database — achieving dramatic gains in speed.

9. Getting Closer to the Customer
Staying obsessed with what customers actually want and building feedback loops directly into product design. Example: Coast Capital Savings created a “You’re the Boss Mortgage” after listening to customer frustrations with traditional banking.

The Fishbone Diagram (Ishikawa)

A visual root-cause analysis tool used alongside SPC and QI teams. The problem sits at the “head” of the fish; branches map possible causes across 5 categories:

graph LR
    P[Personnel] --> X[Problem / Defect]
    E[Equipment] --> X
    M[Materials] --> X
    PR[Procedures] --> X
    EV[Environment] --> X

Forces systematic diagnosis before jumping to a fix — instead of blaming the nearest cause, the team maps all 5 categories and finds the actual root cause.

Quality Ownership: Every employee creates or destroys quality — it is not the inspector’s job alone.

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LO 10.7 — Supply Chain Management

The Supply Chain (Value Chain)

The supply chain = the flow of information, materials, and services from raw material suppliers through every stage of production to the end customer. Each stage adds value.

Example chain: Farmer → Grain Storage → Flour Mill → Baking Company → Distributor → Grocery Store → Customer

SCM vs. Traditional Strategy

	Traditional Strategy	Supply Chain Management (SCM)
Perspective	Each firm acts only in its own interest	Managers look at the whole chain as a single coordinated system
Information	Guarded; limited sharing between firms	Shared accurately across all stages
Inventory	Each firm buffers independently; can lead to excess stock	Coordinated; reduced chain-wide
Result	Delays, excess inventory, miscommunication	Lower cost, faster delivery, better quality, higher customer value

Example of SCM in action: When a grocery chain tells its bakery supplier that bread sales are spiking this week, the bakery tells the flour miller, who tells the wheat farmer. The whole chain responds before shelves go empty — not after.

Key distinction: SCM replaces secrecy and self-interest with transparency and coordination. The whole chain produces more value cooperating than each firm optimizing alone.

Outsourcing & Global Supply Chains

Outsourcing = paying suppliers and distributors to perform certain business processes or provide needed materials/services.

Benefits: lower costs, access to specialized labour, higher efficiency.
Risk: single-point-of-failure — one broken link can paralyze the entire chain downstream.
Example: During COVID-19, a shortage of cardboard boxes in one region prevented hand sanitizer from reaching stores elsewhere, even though the sanitizer was available.

The outsourcing tradeoff: global efficiency vs. self-sufficiency. COVID pushed many governments to reshore critical manufacturing (PPE, pharmaceuticals) because the vulnerability became too costly.

Social Responsibility in SCM

Modern firms are accountable for their suppliers’ labour and environmental practices, not just their own. Example: Patagonia (a B Corporation) audits factories worldwide for fair labour practices and environmental safety — even in facilities they don’t own — and publishes a “Footprint Chronicles” making their supply chain transparent to customers.

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Key Terms Quick Reference

Term	Definition
Utility	Power of a product to satisfy a human want
Operations Capability	What production must do especially well to support the firm’s business strategy
High-Contact System	Customer must be present during service delivery
Low-Contact System	Service provided without customer present
Service Quality ≠ Work Quality	A car fixed perfectly (work ✓) but returned two days late (service ✗) fails on service
Analytic Process	Breaks inputs down into components (e.g., oil refining)
Synthetic Process	Combines inputs into a finished product (e.g., car assembly)
Make-to-Order	Custom-designed products for specific orders
Make-to-Stock	Standard items produced in large quantities
JIT	Materials arrive exactly when needed; near-zero inventory
MRP	Computerized production scheduling using Bill of Materials
MRP II	MRP extended to connect all departments (Finance, HR, Marketing)
Gantt Chart	Bar chart scheduling tool — when does each task happen?
PERT Chart	Sequence + critical path scheduling tool — what depends on what?
Critical Path	Chain of dependent tasks where any delay makes the whole project late
TQM	All employees responsible; no defects tolerable; customer focus
Performance Quality	How well features meet consumer needs
Quality Reliability	Consistency of quality unit to unit
Quality Ownership	Every employee creates or destroys quality
Internal Failure	Quality cost incurred during production
External Failure	Quality cost incurred after the product reaches the customer (much more expensive)
ISO 9000	Quality management certification
ISO 14000	Environmental performance certification
BPR	Radical redesign of a process from scratch
Fishbone Diagram	Visual root-cause analysis tool across 5 categories: Personnel, Equipment, Materials, Procedures, Environment
Supply Chain	Flow of materials/info/services from suppliers to end customer
SCM	Managing the whole chain as one integrated system
Outsourcing	Paying external parties to perform processes or supply materials

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Exam Mnemonics & Key Distinctions

• Capacity Logic:
  • Goods Producers → slightly above average (inventory buffers peaks)
  • Low-Contact Services → average demand (queuing is okay)
  • High-Contact Services → peak demand (customers won’t wait)
• Layout Test: Can you swap two products/customers without changing their path through the facility? If yes → product layout. If no → process layout.
• Gantt vs. PERT: Gantt answers “are we on time?” PERT answers “what depends on what, and which delay will kill the project?”
• Analytic vs. Synthetic: One thing pulled apart (analytic) vs. many things combined (synthetic).
• Internal vs. External Failure: During production (cheaper to fix) vs. after delivery (refunds, recalls, lawsuits — far more costly).
• SCM Key Shift: From secrecy + self-interest → transparency + coordination.
• Fishbone Categories: Personnel · Equipment · Materials · Procedures · Environment

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Related Pages

OperationsManagement, OperationsPlanning, TotalQualityManagement, SupplyChainManagement