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Historically, the U.S. economy was driven by manufacturing, or the transformation of goods into products that people around the world can buy. Although manufacturing has declined since the end of the 20th century, the vision most people have of “operations management” is large factories with machinery that makes things, like cars, clothing, and home computers. These companies sold all or most of their goods through stores owned and operated by other companies. However, even historically, many manufacturers provided some services, such as a factory store or catalog. That is, while throughout this class we will separate “goods” and “services,” as we describe the primary function of a business, keep in mind that many manufacturers have some degree of “service” in their organizational structure.
EXAMPLE
Until the 1990s, most of clothing manufacturer L.L. Bean’s sales were through catalogs and other vendors. The only store was one next to the factory in Freeport, Maine, and it specialized in slightly flawed goods at discount prices. But in the mid-1990s, the company started opening other outlets, and as of 2024, it has 54 stores open across the U.S. and 37 more in Canada and Japan. As with many American companies in that timeframe, service has become a much bigger part of their business model.To remain competitive and viable, manufacturers must continually strive to improve operational efficiency. They must fine-tune their production processes to focus on quality, to hold down the costs of materials and labor, and to eliminate all costs that add no value to the finished product.
During production planning, managers determine how goods will be produced, where production will take place, and how manufacturing facilities will be laid out. The decisions made in the planning stage have long-range implications and are crucial to a firm’s success. Before making decisions about the operations process, managers must consider the goals set by marketing managers. Does the company intend to be a low-cost producer and to compete on the basis of price? Or does it plan to focus on quality and go after the high end of the market? Perhaps it wants to build a reputation for reliability. What if it intends to offer a wide range of products? To make things even more complicated, all these decisions involve trade-offs. Upholding a reputation for reliability isn’t necessarily compatible with offering a wide range of products. Low cost doesn’t normally go hand in hand with high quality.
With these factors in mind, let’s look at the specific decisions that must be made in the production planning process. We’ve divided these decisions into those dealing with production methods, site selection, facility layout, and components and materials management.
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:
At one time, most consumer goods, such as furniture and clothing, were made by individuals practicing various crafts. By their very nature, products were make-to-order, or customized, made to meet the specific needs of the buyers who ordered them. This process 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 20th century, however, a new concept of producing goods had been introduced: Mass production (or make-to-stock strategy) 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.
EXAMPLE
Some products are sold in both mass-produced and make-to-order forms, such as “off-the-rack” and tailor-made clothes. In these cases, the make-to-order option usually has a much higher price.There’s a disadvantage to mass production: Customers, as one contemporary advertising slogan puts it, can’t “have it their way.” They must accept standardized products as they come off the 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 customization, 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 product, 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. Common examples are personal computers and automobiles, where customers can choose which features to include in their own purchase, as well as some colors and other customizations. The list of companies devoting at least a portion of their operations to mass customization is growing steadily.
EXAMPLE
In the garment industry, mass customization is common as a mid-tier price option between “off-the-rack” clothes and tailor-made clothes; these are clothes that are made to stock but unfinished so they can be fitted to the buyer.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. Some companies, such as Zenni Optical, for example, have found a way to completely customize eyeglasses and sunglasses with a prescription, and they even provide technological tools, such as virtual “try-ons” at reasonable prices.
After selecting the best production process, operations managers must then decide where the goods will be manufactured, how large the manufacturing facilities will be, and how those facilities will be laid out.
In choosing a location, managers must consider several factors:
To minimize shipping costs, both for raw materials coming into the plant and for finished goods going out, managers often want to locate plants close to suppliers, customers, or both.
Now that you know where you’re going to locate, you have to decide on the quantity of products that you’ll produce. You begin by forecasting demand for your product. Forecasting isn’t easy. To estimate the number of units that you’re likely to sell over a given period, you have to understand the industry that you’re in and estimate your likely share of the market by reviewing industry data and conducting other forms of research.
Once you’ve forecasted the demand for your product, you can calculate the capacity, the maximum number of products that a facility can produce over a given period under normal working conditions. In turn, having calculated your capacity requirements, you’re ready to determine how much investment in the plant and equipment you’ll have to make, as well as the number of labor hours required for the plant to produce at capacity.
Like forecasting, capacity planning is difficult. Unfortunately, failing to balance capacity and projected demand can be seriously detrimental to your bottom line. If you set capacity too low (and so produce less than you should), you won’t be able to meet demand, and you’ll lose sales and customers. If you set capacity too high (and turn out more units than you should), you’ll waste resources and inflate operating costs.
The planning phase of operations management never ends. As we noted in the model we constructed in the last tutorial, operations management involves a constant evaluation of both product and process. Two principal forms of control are:
Source: This tutorial has been adapted from Saylor Academy and NSCC “Operations Management”. Access for free at https://pressbooks.nscc.ca/operationsmanagement2/. License: Creative Commons Attribution 4.0 International.
