Production strategy involves decisions that shape the long term capabilities of a producing company, in order to be competitive in the marketplace, by linking market requirements and production resources.
What is Production Strategy?
Production strategy is the high level guidance concerning how much of what products to produce, the selling price and the cost of production.
It is often called production policy. It does not deal with specific production techniques and direct production control. It leaves these decisions to the manufacturing managers.
A business makes a decision about its production strategy when:
- it decides how much of each product it will make over a period of time.
- the strategy tries to ensure that customers can buy the company’s products at a price which allows the company to make a profit.
- the strategy is designed to allow the company to operate effectively and cheaply.
Production Strategy and Product Life Cycle
In the product life cycle stage of a product, customer demand is small but growing. A company is seeking to establish itself in the market, and they will probably try to cut production costs as much as possible.
After the product has established itself in the market, customer demand is greater and it levels off. The company can then raise its prices. Going forward, it is likely to spend more on advertising to gain more market share.
Product Life Cycle
If a company to stick with the same strategy throughout the product life cycle, it will run into two problems. First, the average cost of production will be high because the company is cutting costs when customer is small. Second, the company must remain ahead of the competition, thus it must spend more on research and development.
In this situation, it is better for the company to consider a short term strategy when demand is small and a long-term strategy when demand rises.
Production Strategy and Production System
Production strategy often involves changes in plants capacity. They will produces a product at a lower capacity with low costs.
Companies needs to factor in inventory costs when planning production. To reduce inventory costs, companies will produce enough to to meet anticipated demand. If demand is small, the company will order less raw material and parts to make products.
Factors Affecting Production Strategy
The four factors below will determine a company’s production strategy:
- Competitive Strategy
- Business conditions
- Government regulations
- The company’s ability to be flexible in its production system
Production Strategy and Competitive Strategy
It is difficult for a company to develop a production strategy while ignoring its competition. This is especially true when the companies are direct competitors.
A company must determine its strategy within the broad range of its own strengths and weaknesses. Should the company:
Focus on existing strengths and avoid positions in which the company is weak.
Take advantage of opportunities where it is strong and avoid those areas where it is weak.
Expand into new areas where it is neither strong nor weak.
Production Strategy and Business Conditions
At the heart of a company’s production strategy should be the production’s system. The company should examine the impact of changing economic conditions on its business. Is the being affected by exchange rates, inflation, economic policy, taxation and labour relations, should they change?
- Production Strategy and Government Regulations
- Government regulation could change due to:
- Product safety and emission standards changes.
- Product Liability laws enacted.
- Health and safety regulations changes.
- Minimum wage laws.
Government regulations also includes competition laws. For example, in the United States, the federal government statute which prohibits companies from colluding with competitors to raise the prices of a product. This statute is administered by the U.S. Department of Justice.
Strategic Production System
Strategic production systems are designed to meet the needs of customers in the face of competition and uncertainty. The company attempts to acquire and use production resources in such a way, that it can compete successfully.
First, the company must know its current ability to meet the needs of the customer. The company analyzes its assets, limitations, opportunities and the threats of its competitors. The company’s analysis will lead to a strategic plan which executes in many operational plans.
Second, the company must be able to assess alternatives. It must be prepared to exploit opportunities that arise. The key to this success lies in flexibility of the production system.
Third, all company departments and activities must support the production system. The company must view the production system as an entity which meets the needs of the company and its customer.
Methods to meet customer needs can be subdivided into two groups:
Expansion methods – buying more raw materials or hiring more people to produce greater quantities.
– buying more raw materials or hiring more people to produce greater quantities. Improvement methods – reduce costs, shorten lead time, improve quality and so on.
Six Keys to Strategic Production System
In order to build a strategic production system, a company must do six things. They are:
Focus on the development and improvement of designing methods in order to aid decision making. Decide carefully what a good service really is. Recognize that it is essential to look at the production system as a whole. Know that production planning and control of operations are fundamental in achieving success. Work to build up the resources of your business, including what you have and what you know. Maintain close relationships with its customers, suppliers and competitors.
Strategic Production Planning
Strategic production planning focuses on the period of time which runs from the present to the future. The considerations of a strategic planning are the growth of market, the anticipated competitor behaviour and the company’s resources.
The two major execution plans are the strategic marketing plan and the strategic production plan.
Market growth can be estimated by looking at several factors. These include industry growth, absolute size of market and the proportion of market controlled by other companies.
Comparable Company Analysis
Creativity in production planning must include plans for the market expansion of current products.
In order to boost sales, the company can reposition or upgrade its current product. Altering the current product’s brand image, may improve the image of the product, resulting in higher sales.
The wholesale and retail of products can be expanded. For example, General Mills sells oatmeal through grocery stores, all-night drug stores and mass merchandisers.
Increasing the product line of a business is another growth strategy. To induce customers to try new products, the company can cross-promote the new product with its old product.
Another strategy for market growth is to expand into international business. Economies of scale may be obtained by selling the product in new areas.
The company can sell directly to retailers overseas, avoiding the cost of selling through an import agency or distributor.
It is shortsighted for a company to ignore the probable behaviour of its competitors. The company must continually monitor the actions of its competitors.
A move by a competitor that raises the competitive environment must be taken into consideration by the company. The company must plan to seize the opportunity for an increase in market share.
When a new competitor enters the market, it will determine whether it is a significant threat. The company may choose to:
- Stay with the original plan and fortify its position in the market.
- Change the original plan and compete with the new competitor.
- Create an opportunity to get rid of the new competitor.
If the company decides to compete with the new competitor, it must consider the new competitor’s strengths and weaknesses. The company must also consider the strengths and weaknesses of its current product line.
The company must not neglect its own resources in the planning process. This includes its production capacity, distribution and marketing system and the company’s finances.
The company must continually review its resources. This will allow the company’s management to make determinations, which result in the best use of its resources.
The company must plan the use of its resources effectively. One way to do this is to study the production process options.
The company can:
- Change the method and order of the production process.
- Investigate the different process methods to achieve the best solution.
- Select the process method, which produces the lowest cost per unit.
The company must also take into consideration the production process alternatives for meeting the production objectives. Planning the production process can assist the company to save money. The company might be able to save money:
- By insourcing or outsourcing to a lower cost company.
- By producing component parts-in-house and sub-assembling the final product.
- By establishing a new entering joint venture.
- By transferring a part of the production process to a lower cost subsidiary.
The distributor may be eliminated in order to reduce costs. The company may then choose to absorb the expensive task of storing, picking, packing, and delivering the product. The company may choose this alternative if it sells a product that does not hold up well in cold storage.
The company may choose to handle distribution itself. For example, Deere & Co. sells half the world’s lawn mowers. It designs and manufactures the product in-house. It delivers the product to the dealer, installs the product if necessary and provides service.
The company, in eliminating the distributor may be violating an agreement or a contract. The company may face a lawsuit.
If the company retains the distributor, it may:
Make improvements to the distributor’s facilities. These improvements will lower the distribution costs.
- Negotiate a new distribution agreement.
- Reduce the duration of the agreement.
- Transfer some of the tasks to the distributor.
Another production development procedure is to use incentives to motivate employees. They can increase the productivity of some employees and decrease the productivity of others.
The use of incentives is an expensive policy. If there is overproduction, the company must absorb the cost of the unsold goods. If there is under production, the company must bear the cost of lost sales.
Before using incentives, the company must evaluate its alternatives. The company must consider if the use of incentives is:
- Profitable both short term and long term.
- Better than the use of quotas or standards.
- Cheaper than raising wages.
- Turnaround Time
The time required to produce a product can be reduced by reducing the number of operations andusing flexible specialization.
By reducing the cycle times for the production process, the company can improve its productivity. The firm can increase its output with shorter production runs or reduce its labor costs by maintaining a high labor force utilization.
The production schedule should reflect the time frames for the production process. The time frame for the production process involves six steps. These include the setup time and the production time. We will do a further analysis of each of the steps below.
Organization of the Analysis
Setup time refers to the change over time from one product to the next.
Setup time can be reduced by reducing the time required to change from one product to the next product.
One way this can be done is by using jigs. Jigs are made from assemblies of parts. Jigs represent the detailed design. The machine operates on the jig and does not require adjustment for each new operation. The jig is used to locate, mark or bore holes in the product. The jig is also used to hold the production raw material.
Another way to reduce setup time is to set up the processing equipment in a permanent position. Once the equipment is set up, its location doesn’t change.
The second step in production planning is to determine the processing time.
Processing time refers to the actual time the part is processed.
Processing time consists of three elements. These include:
The time required to set up the machine for a part The time required to load the part and remove the part from the machine The time required for the machine operator to place the product in its final location
The processing time can be reduced by reducing the time required for the machining operations.
These steps include:
- Utilizing the correct cutting data to achieve the correct metal removal rate.
- Utilizing the correct tooling to achieve the correct metal removal rate.
- Preforming the setup of the machine to eliminate the need for manual adjustments.
- Calibrating the machine.
- Using the right electric and hydraulic power to generate the right operating force.
- Pre-setting the machine motion.
- Applying the right cutting force
Many of the above activities can be automated. This reduces the effort or work input. The automation can be done through:
- Automated programmable machinery.
- Automated control systems.
- Automated material handling systems.
- Automated inspection equipment.
Processing of the material may be done using CAD/CAM (computer-aided design/computer-aided manufacturing).
The third step in determining the time required for production of a product is to add the setup and process time. The total of these two times represents the total time required to produce the product.
The solution to the problem of over or under production requires the company to study the following information:
- The production time from the previous product.
- The setup time required for the next product.
- The processing time of the previous product
- The setup time of the next production.
- The current and future demand.
- Total production time to meet a future demand.
If the company learns that the sales are less than projected, the company will have to add more raw materials or work hands.
The solution to the problem of overproduction requires a study of the following information:
- The company’s current market share.
- The impact of the decrease in production on the company’s market share.
- The sales forecast for the next year.
- The production plan for the next year.
- The time required to carry inventory.
- The profit that will be generated by the inventory.
- The net profit that will result from the production of the products.
The company must study the above information carefully. This will meet the company’s goal of maximizing profit.
The solution to the problem of under production requires a study of the following information:
The current market and the future market share.
How to pick the right Production Strategy?
Companies try to eliminate the problem of over-production by applying the following policies:
- Reducing the number of operations.
- Reducing the number of equipment.
- Reducing the number of parts.
- Reducing the cycle time.
- Using flexible specialization.
We will study how flexible specialization can control overproduction.
The answer for both types of production control is to use flexible specialization.
Flexible specialization is a production system that is built around each worker performing a number of related tasks. They work a variety of different machines. They do so by using a limited repertoire of skills. Each worker makes several products. Each worker makes a different product at each station. This means that there is some variety to the worker’s work.
The use of flexible specialization reduces cycle time. This cuts costs because it eliminates the need for fast running machines. These machines would have to be replaced every time a product is changed.
Flexible specialization is based on the assembly line to continuously improve productivity by building each assembly line to produce one product.
Flexible specialization is based on the time and motion studies.
Flexible specialization is a flexible and efficient method that eliminates over-production. This is due to the small number of products get. The reduced number of parts reduces the time and cost of control. It also cuts inventory costs.
Superior Use of Material
To improve production, the company must effectively utilize its materials. To be able to eliminate the waste and inefficiencies in the use of materials, the company must use the following:
Make certain that the production parts for a particular assembly can be installed. Make sure that all of the needed parts are available.
Keep the material that may be used in the production process.
Make sure that there is a positive correlation between the kind of material needed for production and the production process.
Use the material appropriate to the production system. Use the material appropriate to the production equipment.
Make sure that all of the material is identified by a positive identification tag, lot number, batch number, or part number.
Keep a record of all of the incoming material. Maintain a control file identifying the parts in the product.
The above are some of the ways to control the material. We must understand that these methods must be used in conjunction with each other.
3 steps in material control to reduce the cost of production and to increase the bottom-line
Material control can be accomplished by performing the following three tasks:
- Inventory control.
- Process control.
- Inspection control.
The job of inventory control is to eliminate the material-related cost resulting from inventory.
The company should concentrate on:
- Reducing the level of inventory.
- Reducing the value of inventory.
- Reducing the cost of inventory.
- We must reduce the inventory levels to the bare minimum.
To reduce inventory level, we must:
- Capacity planning, we should build the right capacity to meet the demand with no waste.
- We should establish standards. We should reduce the tolerance.
- We should inspect the work-in-process in order to detect defects.
These efforts will result in a single piece flow in the factory.
We can use this method of detecting defects during inspection:
Statistical Quality Control. Make use of the control chart. Statistical process control.
- Process control is used to prevent the quality problems within the system. To do this, the company must do a periodic inspection of the production process.
- The activity is aimed at analyzing work-in-process to detect quality problems.
- Asemble the material.
- Inspect the material that is being prepared for production.
- Control the assembly process.
- Inspection control is used to detect defects within the products themselves.
Regardless, of the system used, the goal of materials control is to reduce costs, increase profits and eliminate waste.
The needed information for the materials control can be reduced to three areas. These include:
- Cost of the wasted or spoiled material.
- Time-related cost of the wasted or spoiled material.
- Amount that is wasted or spoiled.
The above information provides the key to reducing or eliminating the waste and inefficiencies in the use of materials.
The cost of the wasted and spoiled material can be determined by the following:
- Determining the amount of material wasted or spoiled.
- Determining the cost of the wasted or spoiled material.
- Determining the losing from processing the material that is spoiled or wasted.
We must evaluate these activities in order to reduce or eliminate the waste and inefficiencies in the use of materials.
- The company should concentrate on:
- Reducing the level of inventory.
- Reducing the value of inventory.
- Reducing the cost of inventory.