Introduction
Production management “deals with decision making related to production processes so that the resulting goods or services are produced according to specifications, in the right amount and by the schedule demanded and out of minimum cost”.
Thus, POM is concerned with designing, redesigning and supervising business operations that facilitate production of goods, as well as, services. POM ensures efficiency and effectiveness in production. Efficiency involves economical use of resources while effectiveness is concerned with meeting customer’s needs.
In this context, POM can be defined as the area of management “concerned with managing and directing the technical functions of a firm, particularly, those relating to development, production and manufacturing”.
POM functions include but not limited to plant management, production control, systems analysis, and cost controls. This paper argues for the premise that using different production methods on the same plant and equipment lowers production efficiency. The relevance of this premise will be illustrated by analyzing the operations issues affecting Hudson’s Alpine Furniture.
Operations at Hudson’s
Hudson’s Alpine Furniture specializes in the production of custom-made pieces of furniture which are sold to owners of ski lodges and operators of holiday cabins. However, the company has since ventured into the production of more standardized furniture for commercial ski lodge operators.
As a manufacturing firm, Hudson’s depends on its production systems to ensure efficiency and effectiveness. Production system refers to the “manufacturing subsystems that include all functions required for designing, producing, distributing and servicing a manufactured product”.
Hudson’s uses the job-shop production system to manufacture its products. A job shop production system involves manufacturing small quantities of products according to the specifications of the customers.
The specifications, in this context, include the cost, quality, delivery time and quantity. The job shop system suites Hudson’s because the firm serves a specific market with different furniture needs.
The job shop system used at Hudson’s is based on the following factors. Concentrating in the production of custom furniture necessitates production of a variety of products. Each customer gives unique specifications on how his or her furniture is to be manufactured. For instance, the customers normally choose the quality or type of wood to be used for their furniture. Consequently, each order tends to differ from the rest.
Besides, each type of furniture is produced in low volumes since they are meant for specific customers and not the mass market. The uniqueness of each order, however, may require a lot of time in production using the Job shop method (Chakhlevitch, Keller and Glass, 2011, pp. 39-47). Additionally, the uniqueness of each order discourages automation.
Production of a wide variety of products requires great flexibility in the production system. The flexibility enables the firm to adapt its production system to the quality and design expectations of the customers. Hudson’s has ensured flexibility by adopting the use of general purpose equipment.
This type of equipment can be used to produce different types of furniture. However, flexibility comes at a high cost due to the frequent set-up changes associated with it (Chakhlevitch, Keller and Glass, 2011, pp. 39-47).
Producing a variety of products using the job shop system requires detailed planning. The manufacturing department must properly sequence the needs of each product in order to meet the quality specifications. There must also be proper scheduling of production so that products can be manufactured in time and in order of importance.
Consequently, Hudson’s production department has focused on planning for both capacity and production inputs. The firm operates a single production plant in which all pieces of furniture are produced. Equipments within the factory are arranged according to their functions.
This promotes efficient transition from one function to the other. Operating a single production plant has the advantage of reducing transportation costs associated with moving work-in-progress and raw materials from one plant to the other.
Much of the raw materials used by the firm are obtained locally, thereby reducing shipment costs. Hudson’s also uses batch production system in order to achieve economies of scale in the manufacture of commercial ski furniture. However, the expected economies of scale have not been achieved since the cost of producing the commercial ski furniture continues to rise.
The high cost is, perhaps, a reflection of the complex planning and control associated with batch production. In most cases, batch production involves irregular and longer work flows which complicate the process of handling materials. Additionally, batch production involves long and costly down-time.
The company’s decision to venture into the production of commercial ski furniture seems to be the root cause of its production problems. The new orders for commercial ski furniture are not only increasing the production costs but are also causing production bottlenecks.
Production management aims at achieving four objectives namely, “right quality, right quantity, right time and right manufacturing costs” (Wang, Li and O’brien, 2010, pp. 463-474). However, the rise in orders for commercial ski furniture prevents Hudson’s form achieving these objectives. Ideally, the right quality should be based on the customer’s specification.
In reality, however, the right quality depends on cost of production, as well as, the technical requirements for producing the product. The high cost of producing commercial ski furniture limits the firm’s ability to invest in technical operations that can enhance product quality.
Since the market for commercial ski furniture consists of price sensitive buyers, premium prices can not be charged for the commercial orders. This translates into reduced revenues and constrained investment in quality production.
The stringent delivery requirements imposed by commercial buyers coupled with the increase in demand for commercial ski furniture limit the company’s ability to meet time and quantity objectives.
The two lines of product have to compete for production time. Since the production capacity is limited, the lead time in production has significantly increased. This means that the furniture can not be produced and delivered in time as required by customers.
Timeliness in production and delivery is an important indicator of the effectiveness of the production plant. An effective production plant should facilitate production and delivery of goods within the set deadlines. An ineffective production plant on the other hand will take a longer time to produce goods.
Thus, the high lead time means that Hudson’s production plant is no longer effective. As the lead time increase, the stock of work-in-progress also increases. The company has also been forced to hold a very large amount of raw materials and finished products.
The resulting increase in warehousing costs is a reflection of the firm’s inability to hold the optimal or right quantity of inventory. The high cost of holding the excess inventory is also an indication of uneconomical use of resources. This illustrates the reduction in the efficiency of the production plant. In a nutshell, the increase in commercial orders has resulted into serious capacity constraints at Hudson’s Alpine Furniture.
The current capacity constrain has strategic implications for the operations of Hudson’s. In particular, the capacity constrain directly impacts planning, organizing and controlling activities. Additionally, it affects the behavior of managers, as well as, the firm’s business model.
Planning involves defining objectives that guide the operation subsystems of the firm. It also involves formulating the policies and identifying the procedures which can be used to realize the objectives. In the case of Hudson’s, planning activities focus on trade-offs that ensure effective use of the existing capacity.
Implementing the trade-offs requires proper organization. For instance, the production manager must make decisions on role structures, as well as, flow of information in order to coordinate the production of both commercial and custom furniture.
In order to realize the planned production target, control must be exercised over the production process. This involves comparing actual and planned output. Thus, decisions must be made concerning the acceptable costs, quality, as well as, production schedules.
The process of planning, organizing and controlling the production process in order to optimize the limited capacity is quite challenging. In most cases, managers adopt a planning model such as aggregate planning to enhance optimization of existing capacities.
Regardless of the model chosen, the management at Hudson’s must make the following decisions in order to optimize the limited production capacity.
First, the operations manager will have to make a decision on the product to produce. Currently, decisions on which product to give priority in production depends on expected profits. Thus, custom-made pieces of furniture are give priority since they are more profitable.
The management will also have to decide on the level of product quality to maintain. Since capacity constrain can affect quality negatively, the management must identify the quality standards it can achieve under the existing capacity.
Since the two product lines compete for production time, the management must decide on the quantities of each product to produce on a daily basis in order to meet the delivery deadlines. Second, the operations manager will have to make decisions on plant utilization.
Decisions in this area will focus on the time required to operate the plant, productivity of the plant, as well as, reliability of equipment. The duration for running the plant impacts directly on its productivity, mechanical condition and safety standards. Thus, deciding on the expected maintenance costs and safety standards become apparent.
Third, capacity constrain necessitates changes in production process. When production capacity is fixed, output can only be increased in the short-run by changing the production method or adopting several production methods.
For instance, Hudson’s is currently using both job shop and batch production methods. Each production method requires different skills, and is associated with different production costs and safety standards (Wang, Li and O’brien, 2010, pp. 463-474).
Hence, decisions must be made concerning skill requirement. In this case, the management might decide to introduce new training programs or hire new employees in order to access the required skills.
Finally, effectiveness in production is contingent on workers whose skills and motivation vary. Under constrained or fixed capacities, employees are normally over-worked in order to achieve production targets. Thus, the main workers-related decisions that need to be made at Hudson’s include the following.
The management must decide on the wages and salaries that will motivate the workers to increase their productivity. Acceptable work conditions such as safety standards and ability to join unions are decisions which should be made. Lastly and most importantly, the management must decide on the communication channel to be used in the firm.
This is because communication facilitates most production activities such as planning, scheduling and ensuring team work. Thus, a wrong decision on the communication channel to be used by the employees might have serious negative effects on productivity in the firm.
The operations problems created by the move to produce commercial furniture are likely to have significant effects on Hudson’s financial structure. Financial structure refers to the “mixture of long-term debt and equity that a company uses to finance its operations”.
The financial structure determines the percentage of the firm’s cash flow that will be paid to creditors and the percentage that will go to stakeholders. As discussed earlier, the move to produce commercial furniture has resulted into high costs and constrained capacity.
The main financial implication of these problems is that the profits of the firm are likely to reduce significantly if production can not be increased in the short-run to cover the rising costs. Other implications include lose of customers and reputation in the market.
This will happen if the firm is not able to fulfill the orders within the set deadlines and according to the customers’ quality and quantity specifications. In this case, customers will leave the company and source their furniture from efficient producers.
Consequently, Hudson’s market share and sales will reduce. Attempts to solve the operations problems, thus, are likely to focus on either cost cutting measures or expanding the production capacity.
Any restructuring initiative aimed at solving the current operations crisis will require significant amount of financial resources. For instance, expanding the existing capacity will require heavy investment in plant and equipment.
Similarly, changing the layout of the factory in order to create more space will require significant investment in consultancy and engineering services. Cost cutting measures such as outsourcing and lean production also require a lot of money for implementation (Vinod and Rich, 2011, pp. 127-146).
For instance, outsourcing activities such as transportation, might lead to laying-off workers in the transport department. Hence, the firm will incur high costs as it pays terminal benefits to the laid-off workers.
Given the fact that profits have not met the expectations of the management, the firm might not be able to raise enough money to finance its restructuring program. Consequently, the firm might opt for alternative sources of funding such as bank loans. In this case, Hudson’s will have a high debt-equity ratio, especially, if a lot of money is borrowed from financial institutions.
A high debt-equity ratio can adversely affect profits, especially, in the short-run due to the following reasons. First, debts are normally obtained at interest rates which might be very high. Thus, paying for the interest rates represents additional cost to the firm.
Second, expansion programs normally take a long time due to the required construction works. This implies that, there might be no immediate payoffs from capacity expansion initiatives. Therefore, the likely scenario is that a better part of the firm’s earnings, especially, in the short-run will go to the creditors.
In the long-run, the firm is likely to benefit from an expanded production capacity. A larger production capacity will enable the firm to produce more furniture. Hence, the firm’s revenues and profits will increase.
Conclusion
The objective of this paper was to demonstrate that using different production methods on the same plant and equipment lowers production efficiency. Hudson’s initially focused on the production of custom-made furniture. Consequently, the firm adopted a job shop production method. This production method allowed the firm to produce the right quantity and quality of furniture.
Besides, the firm was able to meet its production deadlines and operate within acceptable costs. The move to produce furniture for the commercial buyers necessitated the use of batch production method. The objective of using batch production was to achieve economies of scale in producing commercial furniture.
However, this objective was not achieved since job shop production and batch production involves different procedures. Job shop production requires a lot of time. This led to an increase in lead time since production of custom furniture was prioritized.
Additionally, production costs increased due to the fact that both job shop and batch production involve frequent set-up changes. Batch production requires automation in order to promote efficiency (Wang, Li and O’brien, 2010, pp. 463-474). However, this could not be achieved since production of custom furniture was based on job production which discourages automation.
Finally, unlike job shop production, batch production involves long down time which led to high production and storage costs. Besides, a lot of money was tied up in inventory and work in progress. The resulting capacity constrain led to severe reduction in efficiency. This leads to the conclusion that using different production methods on the same plant reduces efficiency.
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