Production and Operations Management

People sometimes use the terms production and manufacturing interchangeably, but the two are actually different. Production spans both manufacturing and nonmanufacturing industries. For instance, companies that engage in fishing or mining engage in production, as do firms that provide package deliveries or lodging. Similarly, a hospital's services could be thought of as production—in this case, the number of patients seen versus the number of cars produced or the number of packages delivered. FIGURE 10.2 lists five examples of production systems for a variety of goods and services.

But whether the production process results in a tangible good such as a car or an intangible service such as cable television, it always converts inputs into outputs. A cabinetmaker combines wood, tools, and skill to create finished kitchen cabinets for a new home. A transit system combines buses, trains, and employees to create its output: passenger transportation. Both of these production processes create utility.

This chapter describes the process of producing goods and services, the importance of production and operations management, and discusses the new technologies that are transforming the production function.

The Four Main Categories of Production Processes

Along with marketing and finance, production is a vital business activity. Without goods or services to sell, companies cannot generate money to pay their employees, lenders, and stockholders. And without profits, firms quickly fail. The production process is just as crucial in not-for-profit organizations, such as St. Jude Children's Research Hospital, because without financially profitable operations they too will fail. Effective production and operations management can lower a firm's costs of production, allowing it to respond dependably to customer demands and create sufficient cash to renew itself, providing new products to its customers. Throughout their business operations, firms must continually strive to provide high-quality goods and services. Quality is an essential element of all modern business operations. By building quality into every one of its business processes, a firm will be able to consistently meet customers' expectations and compete in their industry. The most successful firms in any industry are those that are able to provide the greatest utility to their customers.

When thinking about production, it is not surprising that an Apple iPad and a computer mouse pad are produced with very different processes. Some products, like the iPad, require a wide range of processes. Others, like the mouse pad, may require only a few. However, whether it's one process or many thousand, almost all production processes can be separated into several unique groups.

An analytic production process reduces a raw material to its component parts in order to extract one or more marketable products. Petroleum refining breaks down crude oil into several marketable products, including gasoline, heating oil, and aviation fuel. When corn is processed, the resulting marketable food products include animal feed and corn sweetener.

A synthetic production process is the reverse of an analytic process. It combines a number of raw materials or parts or transforms raw materials to produce finished products. Canon's assembly line produces a camera by assembling various parts such as a shutter or a lens cap. Other synthetic production systems make drugs, chemicals, computer chips, and canned soup.

A continuous production process generates finished items over a lengthy period of time. The steel industry provides a classic example. Its blast furnaces never completely shut down except for malfunctions. Petroleum refineries, chemical plants, and nuclear power facilities also practice continuous production. A shutdown can damage sensitive equipment, with extremely costly results.

An intermittent production process generates products in short production runs, shutting down machines frequently or changing their configurations to produce different products. Most services result from intermittent production systems. For instance, accountants, plumbers, and dentists traditionally have not attempted to standardize their services because each service provider confronts different problems that require individual approaches.

To view some interesting production processes, take a look at the Discovery Channel How Its Made series on the Internet. This series details the many processes used to create some everyday products, from stackable chips to turbine blades to paintballs. The manufacture of paintballs is a good example of a synthetic process using both intermittent (the production of the shell material) and continuous processes (the molding and filling of the shell).²

Three Major Production Methods

Production activity can take place under various arrangements. Mass production is a system for manufacturing products in large quantities through effective combinations of employees with specialized skills, mechanization, and standardization. Mass production makes outputs (goods and services) available in large quantities at lower prices than individually crafted items would cost. Mass production is effective for creating large quantities of one item; flexible production is usually more cost-effective for producing smaller runs. A customer-driven production system evaluates customer demands in order to make the connection between products manufactured and products bought.

MASS PRODUCTION

Mass production begins with the specialization of labor, dividing work into its simplest components so that each worker can concentrate on performing one task. By separating jobs into small tasks, managers create conditions for high productivity through mechanization, in which machines perform much of the work previously done by people. Standardization involves producing uniform, interchangeable goods and parts. Standardized parts simplify the replacement of defective or worn-out components. For instance, if your car's windshield wiper blades wear out, you can easily buy replacements at a local auto parts store such as AutoZone.

A logical extension of these principles of specialization, mechanization, and standardization led to development of the assembly line process, a common process in today's industries. This manufacturing method moves the product along a conveyor belt past a number of workstations, where workers perform specialized tasks such as welding, painting, installing individual parts, and tightening bolts. Henry Ford's application of this concept revolutionized auto assembly. Before the assembly line, it took Ford's workers 12 hours to assemble a Model T car. But with an assembly line, it took just 1.5 hours to make the same car.

Although mass production has important advantages, it has limitations, too. Mass production is highly efficient for producing large numbers of similar products, but it is highly inefficient when producing small batches of different items. This trade-off might tempt some companies to focus on efficient production methods rather than on making what customers really want. In addition, the labor specialization associated with mass production can lead to boring jobs because workers keep repeating the same task. To improve their competitive capabilities, many firms adopt flexible production and customer-driven production systems. These methods won't replace mass production in every case, but in many instances might lead to improved product quality and greater job satisfaction. It might also enhance the use of mass production.

FLEXIBLE PRODUCTION

Flexible production can take many forms, but it generally involves using information technology to share the details of customer orders, programmable equipment to fulfill the orders, and skilled people to carry out whatever tasks are needed to fill a particular order. This system is even more beneficial when combined with lean production methods that use automation and information technology to reduce requirements for workers and inventory. Flexible production requires a lot of communication among everyone in the organization.

Flexible production is now widely used in the auto industry: Henry Ford revolutionized auto production in the early 20th century; current automakers such as Toyota and Honda are innovating with new methods of production. Changing from mass production to flexible production has enabled these companies to produce different kinds of cars at the same plant. Honda's flexible manufacturing plant in Marysville, Ohio, now builds more than 90 percent of all Honda sedans sold in the United States. The facility accomplishes this through team-based operations, relying on the expertise and knowledge of individual workers to innovate and improve manufacturing processes.³

CUSTOMER-DRIVEN PRODUCTION

A customer-driven production system evaluates customer demands in order to make the connection between products manufactured and products bought. Many firms use this approach with great success. One method is to establish computer links between factories and retailers' scanners, using data about sales as the basis for creating short-term forecasts and designing production schedules to meet those forecasts. Another approach to customer-driven production systems is simply not to make the product until a customer orders it—whether it's a taco or a computer.

Shibui Designs creates custom-made dresses in high-end fabrics for female executives and other women over 40. Each item of clothing is custom cut and fit to a single customer's measurements. Founder Elizabeth Nill started the business because she couldn't find clothing that fit well. “I don't have the body of a model, and the bulges are real. Truly made classic clothing that is custom made-to-measure helps camouflage these inevitable imperfections and makes me feel more elegant.” Nill's customers agree.⁴

The Strategic Decisions Made by Production and Operations Managers

Developing a production strategy often begins with a rereading of a firm's mission statement, identifying its core strengths, comparative advantages, and vision for the future. For example, an Internet retailer may decide that one of its core strengths is the management of a complex inventory system. Consequently, the organization may create an extensive warehousing system to offer customers quick, efficient product delivery (Amazon). Or a firm may decide the customer interface is its core strength, and it may then choose to rely on others to fulfill customer orders (eBay). Similarly, a firm may decide that they want to develop an extensive manufacturing capability (GE), or they may decide that they want to let others produce merchandise for them (Apple). These types of strategic choices often come down to what is known as a make, buy, or lease decision, choosing whether to produce a good or service in-house or purchase it from an outside supplier.

Many factors affect the make, buy, or lease decision, including the costs of leasing or purchasing parts from vendors compared with the costs of producing them in-house. The decision sometimes hinges on the availability of outside suppliers that can dependably meet a firm's standards for quality and quantity. A firm might not yet have the technology to produce certain components or materials, the technology might be too costly, or the firm may be concerned about maintaining control over its intellectual property (patents and copyrights).

THE LOCATION DECISION

Once the basic strategy is established, one of the next decisions is where to locate an output facility. This decision often hinges on well-understood factors such as the cost of construction, availability of utilities, transportation, and availability of workers (as shown in TABLE 10.1). Transportation factors include proximity to markets and raw materials and the availability of alternative modes for transporting both inputs and outputs. Automobile assembly plants are located near major rail lines. Inputs—such as engines, plastics, and metal parts—arrive by rail, and the finished vehicles are shipped out by rail. Shopping malls are often located next to major streets and freeways in suburban areas because most customers arrive by car.

Physical variables involve such issues as weather, water supplies, available energy, and options for disposing of hazardous waste. Theme parks, such as Walt Disney World, are often located in warm climates so they can be open and attract visitors year-round. A manufacturing business that wants to locate near a community must prepare an environmental impact study that analyzes how a proposed plant would affect the quality of life in the surrounding area. Regulatory agencies typically require these studies to cover topics such as the impact on transportation facilities; energy requirements; water and sewage treatment needs; natural plant life and wildlife; and water, air, and noise pollution.

Human factors in the location decision include an area's labor supply, local regulations, taxes, and living conditions. Management considers local labor costs as well as the availability of qualified workers. Software makers and other computer-related firms concentrate in areas with the technical talent they need, including Boston, California's Silicon Valley, and Austin, Texas. By contrast, some labor-intensive industries have located plants in rural areas with readily available labor pools and limited high-wage alternatives. And some firms with headquarters in the United States and other industrialized countries have moved production off-shore in search of low wages.

A recent trend in location strategy is bringing production facilities closer to the markets where the goods will be sold. One reason for this is reduced time and cost for shipping. Another reason is a closer cultural affinity between the parent company and supplier (in cases where production remains overseas). German automaker Volkswagen decided to build a $1 billion manufacturing plant in Chattanooga, Tennessee, for the construction of its new midsize sedan. The new Passat was engineered specifically for the U.S. market, featuring a clean diesel fuel option and a larger interior than competing models. Volkswagen plans to roll 150,000 vehicles out of the Chattanooga plant each year, with possibilities for a major expansion that would increase production capacity for even more.⁵

DETERMINING THE FACILITY LAYOUT

Once decisions are made as to the basic design of the production process and location, production management's task is determining the best layout for the facility. An efficient facility layout can reduce material handling, decrease costs, and improve product flow through the facility. This decision requires managers to consider all phases of production and the necessary inputs at each step. FIGURE 10.3 shows three common layout designs: process, product, and fixed-position layouts.

A process layout groups machinery and equipment according to their functions. The work in process moves around the plant to reach different workstations. A process layout often facilitates production of a variety of nonstandard items in relatively small batches. Its purpose is to process goods and services that have a variety of functions. For instance, a typical machine shop generally has separate departments where machines are grouped by functions such as grinding, drilling, pressing, and lathing. Process layouts accommodate a variety of production functions and use general-purpose equipment that can be less costly to purchase and maintain than specialized equipment. Similarly, a service firm should arrange its facilities to enhance the interactions between customers and its services. If you think of patients as inputs, a hospital implements a form of the process layout. Banks, libraries, dental offices, and hair salons also use process layouts.

A product layout, also referred to as an assembly line, sets up production equipment along a product-flow line, and the work in process moves along this line past workstations. This type of layout efficiently produces large numbers of similar items, but it may prove inflexible and able to accommodate only a few product variations. Although product layouts date back at least to the Model T assembly line, companies are refining this approach with modern touches. Many auto manufacturers continue to use a product layout, but robots perform many of the activities that humans once performed. Automation overcomes one of the major drawbacks of this system—unlike humans, robots don't get bored doing a dull, repetitive job.

A fixed-position layout places the product in one spot, and workers, materials, and equipment come to it. This approach suits production of very large, bulky, heavy, or fragile products. For example, a bridge cannot be built on an assembly line. Fixed-position layouts dominate several industries including construction, shipbuilding, aircraft and aerospace, and oil drilling, to name a few. In all of these industries, the nature of the product generally dictates a fixed-position layout.

SELECTION OF SUPPLIERS

Once a company decides what inputs to purchase, it must choose the best vendors for its needs. To make this choice, production managers compare the quality, prices, dependability of delivery, and services offered by competing companies. Different suppliers may offer virtually identical quality levels and prices, so the final decision often rests on factors such as the firm's experience with each supplier, speed of delivery, warranties on purchases, and other services.

For a major purchase, negotiations between the purchaser and potential vendors may stretch over several weeks or even months, and the buying decision may rest with a number of colleagues who must say yes before the final decision is made. The choice of a supplier for an industrial drill press, for example, may require a joint decision by the production, engineering, purchasing, and quality-control departments. These departments often must reconcile their different views to settle on a purchasing decision.

The Internet has given buyers powerful tools for finding and comparing suppliers. Buyers can log on to business exchanges to compare specifications, prices, and availability. Ariba, with headquarters in California, offers organizations online software and other tools that allow them to source $120 billion worth of goods and services from suppliers around the world.⁶

APPROACH TO INVENTORY CONTROL

Production and operations managers' responsibility for inventory control requires them to balance the need to keep stock on hand to meet demand against the costs of carrying inventory. Among the expenses involved in storing inventory are warehousing costs, taxes, insurance, and maintenance. Firms waste money if they hold more inventory than they need. On the other hand, having too little inventory on hand may result in a shortage of raw materials, parts, or goods for sale that could lead to delays and unhappy customers.

A just-in-time (JIT) system implements a broad management philosophy that reaches beyond the narrow activity of inventory control to influence the entire system of production and operations management. A JIT system seeks to eliminate anything that does not add value in operations activities by providing the right part at the right place at just the right time—right before it is needed in production.

Production using JIT shifts much of the responsibility for carrying inventory to vendors, which operate on forecasts and keep stock on hand to respond to manufacturers' needs. This concept is known as vendor-managed inventory. Suppliers that cannot keep enough high-quality parts on hand may be assessed steep penalties by purchasers. Another risk of using JIT systems is what happens if manufacturers underestimate demand for a product. Strong demand will begin to overtax JIT systems, as suppliers and their customers struggle to keep up with orders with no inventory cushion to tide them over.

Besides efficiency, effective inventory control requires careful planning to ensure the firm has all the inputs it needs to make its products. How do production and operations managers coordinate all of this information? They rely on materials requirement planning (MRP), a computer-based production planning system that ensures a firm has all the parts and materials it needs to produce its output at the right time and place and in the right amounts.

Production managers use MRP programs to create schedules that identify the specific parts and materials required to produce an item. These schedules specify the exact quantities needed and the dates on which to order those quantities from suppliers so that they are delivered at the correct time in the production cycle. A small company might get by without an MRP system. If a firm makes a simple product with few components, a telephone call may ensure overnight delivery of crucial parts. However, for a complex product like a high-definition TV or commercial aircraft, a more sophisticated system is required.

Steps in the Production Control Process

While senior production executives set the strategy for a production operation, it is often the mid-level managers creating an operations plan that gets the facility “up and running.” As a key component of an operations plan, production control creates a well-defined set of procedures for coordinating people, materials, and machinery to provide maximum production efficiency.

Suppose a watch factory must produce 80,000 watches during October. Production control managers break down this total into a daily production assignment of 4,000 watches for each of the month's 20 working days. Next, they determine the number of workers, raw materials, parts, and machines the plant needs to meet the production schedule. Similarly, a manager in a service business such as a restaurant must estimate how many dinners the kitchen will serve each day and then determine how many people are needed to prepare and serve the food, as well as what food to purchase. Production managers are responsible for all aspects of the production process, and careful planning, scheduling, routing, and monitoring are critical to their success.

PLANNING DETAILS

In manufacturing, a production manager often starts with a Bill of Materials (BOM), a document that lists all the parts and materials needed to create the product. By comparing information about needed parts and materials with the firm's inventory data, purchasing staff can identify necessary purchases. Production managers will also identify the equipment, supplies, and labor required to build the product. Building more of a product, where the product design, manufacturing process, and production equipment exist, may be relatively straightforward. However, when a company is considering a new product (as Apple did with the iPad), it will spend considerable time and effort understanding the costs and the lead times of the new production processes, equipment, materials, and worker skills. Establishing the costs and times for production is an important part of a production manager's work, and often a company's success or failure is built on getting these details right.

SCHEDULING

In the scheduling phase of production control, managers develop timetables that specify how long each operation in the production process takes and when workers should perform it. Efficient scheduling ensures that production will meet delivery schedules and make efficient use of resources.

Whether the product is complex or simple to produce and whether it is a tangible good or a service, scheduling is important. A pencil is simpler to produce than a computer, but each production process has scheduling requirements. A stylist may take 25 minutes to complete each haircut with just one or two tools, whereas every day a hospital has to schedule procedures and treatments ranging from Xrays to surgery to follow-up appointments.

Production managers use a number of analytical methods for scheduling. One of the oldest methods, the Gantt chart, tracks projected and actual work progress over time. Gantt charts like the one in FIGURE 10.4 remain popular because they show at a glance the status of a particular project. However, they are most effective for scheduling relatively simple projects.

A complex project might require a PERT (program evaluation and review technique) chart, which seeks to minimize delays by coordinating all aspects of the production process. First developed for the military, PERT has been modified for industry. The simplified PERT diagram in FIGURE 10.5 summarizes the schedule for purchasing and installing a new robot in a factory. The heavy, gold line indicates the critical path—the sequence of operations that requires the longest time for completion. In this case, the project cannot be completed in fewer than 17 weeks.

In practice, a PERT network may consist of thousands of events and may cover months of time. Complex computer programs help production managers develop such a network and find the critical path among the maze of events and activities. The construction of a huge office building requires complex production planning of this nature.

ROUTING AND DISPATCHING

Moving an item through the production process is called routing. In general, routing determines the path or sequence of work throughout the facility, specifying who will perform the work at what location. Routing choices depend on two factors: the nature of the good or service and the facility layouts (discussed earlier in the chapter)—product, process, fixed position, or customer oriented. Dispatching is the phase of production control in which management instructs operators when to do the work. The dispatcher (often an automated system) authorizes performance, provides instructions, and sets priorities. For example, FedEx trucks are routed and then dispatched based on a complicated formula of package pick-up time, location, and type of shipment. Minimizing cost, maximizing employee productivity, and creating a high level of customer satisfaction are key goals of the FedEx operations.

METRICS AND MEASURES

Measuring output is an important part of a production manager's responsibilities. The first step in implementing financial controls is to create a budget for the expected cost of the good or service. Budget elements include labor, materials, and overhead as well as test and inspection costs. Once the budget is established, the production manager can use the budget to determine whether the process is in financial control. Cost variances are the differences between the actual cost and the budgeted costs, with positive cost variances indicating that a process has higher costs than budgeted and negative cost variances showing a process costing less than budgeted. Operational controls are items such as throughput, yield, number of reworked parts, and production staffing level. Obviously, maintaining strict control over all these elements will allow the production manager to achieve their production targets.

AUTOMATION

Many manufacturers have freed workers from boring, sometimes dangerous jobs by replacing them with automated systems. A robot is a reprogrammable machine capable of performing a variety of tasks that require the repeated manipulation of materials and tools. Robots can repeat the same tasks many times without varying their movements. Many factories use robots today to stack their output on pallets and shrink-wrap them for shipping. Other types of automated systems include those that inspect, transport, and measure products. Inspection technology, for example, allows production managers to continuously track a process, including those that measure a product's length, width, weight, fill level, and the like. Automated systems extend well beyond individual robots and measurement stations. The whole assembly line can be automated with many robotic systems linked together. The end results of these efforts are production processes with lower costs, high yields, faster throughput, and better quality.

COMPUTER-AIDED DESIGN AND MANUFACTURING

Of all the technologies used in the Star Trek series, probably none is as interesting as the transporter. “Beam me up, Scotty” became one of the more memorable lines from the television show and movies. Being able to decompose a solid, transport it through space, and reconstruct it perfectly would be an extraordinary technical accomplishment. For now, “beaming” Captain Kirk or anyone “up” is clearly in the realm of science fiction. However, the rapid development of imaging, printing, and material technology has allowed “beaming” of a sort to take place. Today what is “beamed” is not the object itself but rather the information that describes the object. Teleportation in this way starts with a digital map of an object. Whether this map is made in a computer program such as AutoCAD or from images of the object, a geometric representation of the object is created in a digital format and stored in a computer memory. This information composed solely of 1's and 0's describes an object's size, shape, color, and material composition. When uploaded onto a 3D printer, the image becomes real.

Chuck Hull developed many of the key technologies for this process, which he went on to name photo stereo lithography. His process used a liquid compound called photo resist (a material that hardens when exposed to light). By illuminating the photo resist with carefully directed beams of light, he was able to produce solid objects from the liquid photo resist. The company Hull founded, 3D Systems Inc., brought this technology to market.⁷

In addition to photoresist, today's 3D printers use a wide variety of processes and materials to create solid objects. And instead of costing many tens of thousands of dollars, desktop versions can be purchased for a few thousand dollars. While the object itself is not transported, the information used to describe the object can be “beamed” around the world and even into space.

What makes this technology possible is the combination of computer-aided design (CAD) software and computer-aided manufacturing (CAM) processes. Using these technologies, engineers can design components as well as entire products faster and with fewer mistakes that they could achieve using traditional systems. Software such as AutoCAD or TurboCAD allows designers to create entire products in the computer, specifying the physical dimensions, materials finishes, and mechanical properties. In the realm of architecture, AutoCAD is often the first and only drafting program used to render a building, creating wall, window, door, and structural elements as well as the mechanical and electrical fixtures. The customer gets a chance to see the building, including the ability to “fly” through the rooms long before it is built. When created in this fashion, engineers can make any changes required in the computer, saving both cost and time.

The process of CAM picks up where CAD systems leave off. When using CAM, engineers first develop a plan for creating the product. For example, if a metal part is required, the engineer would specify the size and shape of the block of metal from which the part will be fabricated. Then, the engineer would determine which parts of a block are to be cut away and which are to remain.

Programmable tools such as milling machines, lathes, laser cutters, and water jets are then chosen to perform these steps based on the amount of material to be removed and the configuration of the final product. Electronic files with this information are created and transmitted to the processing equipment. Automated systems take over from there with operators standing by to load and unload finished product. In the production of integrated circuits, no humans are involved, and the entire CAM process is handled by automated equipment. CAD and CAM technologies are used together in most modern production facilities, saving time and money and creating more precise products.

The Importance of Quality Control

As it relates to the production of goods and services, quality is defined as being free of deficiencies. Quality matters because fixing, replacing, or redesigning deficient products or services is costly. If Seagate makes a defective computer hard drive, it has to either fix the drive or replace it to keep a customer happy. If American Airlines books too many passengers for a flight, it has to offer vouchers worth several hundred dollars to encourage passengers to give up their seats and take a later flight. As such, quality defines virtually all of a firm's processes from the way it designs products, delivers services, and handles customer complaints.

For most companies, the costs of poor quality can amount to 20 percent of sales revenue, if not more. Some typical costs of poor quality include downtime, repair costs, rework, and employee turnover. Poor quality can also result in lost sales and a tarnished image, something companies want to avoid. Bumble Bee Foods recently voluntarily recalled cans of tuna because the seal on the cans didn't meet company standards. The company was concerned with maintaining their high-quality standards and didn't want anyone to get sick from bacteria entering the cans because of a loose seal.⁹

STATISTICAL PROCESS CONTROL

Quality control involves measuring output against established quality standards. Firms need such checks to spot defective products and to avoid delivering inferior shipments to customers. Standards should be set high enough to meet customer expectations. A 90 or 95 percent success rate might seem to be a good number, but consider what your phone service or ATM network would be like if it worked only 90 percent of the time. You would feel frustrated and inconvenienced and would probably switch your account to another phone service or ATM network provider.

Because the typical factory can spend up to half its operating budget identifying and fixing mistakes, a company cannot rely solely on inspections to achieve its quality goals. Instead, quality-driven production managers identify all processes involved in producing goods and services and work to maximize their efficiency. The causes of problems in the processes must be found and eliminated. If a company concentrates its efforts on better designs of products and processes with clear quality targets, it can ensure virtually defect-free production.

Statistical Process Control (SPC) is one method that companies use to evaluate a product or process quality. This method requires knowledge of the capabilities of the process and the requirement for the output. The process is then designed to achieve the desired result with data collected on the process measurements. With these data, production managers can create charts showing the process performance over time and allow corrections in the process before it creates out-of-tolerance parts.

General Electric, Heinz, 3M, Sears, and the U.S. military are just a few of the major organizations using the Six Sigma concept to achieve quality goals. Six Sigma means a company tries to make error-free products 99.9997 percent of the time—a tiny 3.4 errors per million opportunities. The goal of Six Sigma programs is for companies to eliminate virtually all defects in output, processes, and transactions. Motorola—a Six Sigma firm—recently completed an initiative to redesign and simplify much of its software architecture in order to improve operational efficiencies and cut costs by reducing redundant IT applications.¹⁰

BENCHMARKING

One process that companies use to ensure that they produce high-quality products from the start is benchmarking—determining how well other companies perform business functions or tasks. In other words, benchmarking is the process of determining other firms' standards and best practices. Automobile companies routinely purchase each other's cars and then take them apart to examine and compare the design, components, and materials used to make even the smallest part. They then make improvements to match or exceed the quality found in their competitors' cars.

Companies may use many different benchmarks, depending on their objectives. For instance, some organizations that want to make more money may compare their operating profits or expenses to those of other firms. Retailers concerned with productivity may want to benchmark sales per square foot. It's important when benchmarking for a firm to establish what it wants to accomplish, what it wants to measure, and which company can provide the most useful benchmarking information. A firm might choose a direct competitor for benchmarking, or it might select a company in an entirely different industry—but one that has processes the firm wants to study and emulate.

ISO STANDARDS

The International Organization for Standardization (ISO, as it is often called) is an organization whose mission is to develop and promote international standards for business, government, and society to facilitate global trade and cooperation.

Operating since 1947, ISO is a network of national standards bodies from 163 countries. Its mission is to develop and promote international standards to facilitate global trade and cooperation. ISO has developed voluntary standards for everything from the format of banking and telephone cards to freight containers to paper sizes to metric screw threads. The U.S. member body of ISO is the American National Standards Institute.

The ISO 9000 family of standards gave requirements and guidance for quality management to help organizations ensure that their goods and services achieve customer satisfaction and also provide a framework for continual improvement. The ISO 14000 family of standards for environmental management helps organizations ensure that their operations cause minimal harm to the environment and achieve continual improvement of their environmental performance.

Both ISO 9001:2008 and ISO 14001:2004 can be used for certification, which means that the organization's management system (the way it manages its processes) is independently audited by a certification body (also known in North American as a registration body, or registrar) and confirmed as conforming to the requirements of the standard. The organization is then issued an ISO 9001:2008 or an ISO 14001:2004 certificate.

It should be noted that certification is not a requirement of either standard, which can be implemented solely for the benefits it provides the organization and its customers. However, many organizations opt to seek certification because of the perception that an independent audit adds confidence in its abilities. Business partners, customers, suppliers, and consumers may prefer to deal with or buy products from a certified organization. Certifications have to be periodically renewed through accompanying audits.

Though ISO develops standards, it does not itself carry out auditing and certification activities. This is done independently by hundreds of certification bodies around the world. The certificates they issue carry their own logo but not ISO's because the latter does not approve or control their activities.¹¹

NOTES

1. Company Web site, http://www.intel.com, accessed April 9, 2013; Esther Andrews, “What's behind the Products You Love?” Technology@Intel, January 22, 2012, http://blogs.intel.com; Chris Nuttall, “Intel's Chip Plans Bloom in Arizona Desert,” Financial Times, January 22, 2012, http://www.ft.com; Jon Swartz, “Intel Bets Big on Manufacturing,” USA Today, March 29, 2011, pp. 1B, 2B.

2. “How It's Made: Paintballs,” Discovery Channel, http://www.youtube.com, accessed March 22, 2013.

3. Company Web site, “Operations Facilities,” http://corporate.honda.com, accessed March 22, 2013.

4. Company Web site, http://www.shibuidesignsltd.com, accessed March 22, 2013.

5. Company Web site, “Chattanooga Plant,” http://www.volkswagengroupamerica.com, accessed April 9, 2013; Dave Flessner, “VW Contractor Hiring More Workers in Chattanooga,” Chattanooga Times Free Press, April 4, 2012, http://www.timesfreepress.com; “Volkswagen Chattanooga Earns LEED Platinum,” press release, December 1, 2011, http://www.volkswagengroupamerica.com; Mike Ramsey, “VW Chops Labor Costs in U.S.,” Wall Street Journal, May 23, 2011, http://online.wsj.com.

6. Company Web site, http://www.ariba.com, accessed March 22, 2013.

7. Company Web site, http://www.3dsystems.com/about-us, accessed March 21, 2013.

8. Katie Moisse, “Bumble Bee, Chicken of the Sea, Expand Tuna Recall,” ABC News, March 8, 2013, http://www.abcnews.go.com.

9. Organization Web site, “What Is Six Sigma?” http://www.isixsigma.com, accessed March 22, 2013.

10. Organization Web site, http://www.iso.org, accessed March 22, 2013.