Summit Business - Reaching the Top

Chapter 1: The Fundamentals of Production

Production refers to the process of creating goods and services to satisfy human wants. It involves a series of steps, which you will learn about in the first part of the course, including planning, assembly, quality control, and distribution. In the production process, goods are transformed into products for resale or further processing.

1. Types of production in the international economy

There are several types of production: Mass production, single-item production, and mass customization.

Mass production creates identical goods and services in large quantities to meet widespread demand. This method is used for consumer goods, automobiles, electronics, and more, for example, when Apple churns out a million identical iPhones. On the other hand, mass production is also the service of American Airlines offering flights from one city to another. Every customer gets the same service at the same time.

Single-item production, or job/custom production, involves creating one product at a time, often tailored to specific customer requirements. This type of production emphasizes high customization, craftsmanship, and quality. It is typically labor-intensive and less automated than mass production, which makes the product more cost-intensive. Tailor-made clothing, for example, is created uniquely to meet the needs of one individual buyer.

Mass customization is a production approach that combines the efficiency of mass production with the flexibility to offer customized products tailored to individual customer preferences. For example, IKEA, which offers modular furniture systems like the PAX wardrobe, which can be tailored to individual needs, or the appearance brand Adidas, which offers personalized options for shoes and sportswear through online platforms. With design and production technologies getting ever more flexible, the opportunities for customization grow. (Boveé & Thill, 2020, p. 256)

The Advantages and Disadvantages of the Production Types

2. Production Layouts

In the production process, the layout of workspaces, equipment, and resources plays a critical role in determining operational efficiency, product quality, and overall cost-effectiveness. A production layout refers to the strategic arrangement of equipment, materials, and workstations within a factory or production facility. The choice of layout impacts how products are made, how workers interact with equipment, and how resources are managed.

Possible production layouts are product layout, process layout, cellular layout and fixed-position layout:

Product Layout

Product layouts, commonly used for assembly lines, are production systems designed for manufacturing standardized products, typically in mass production. In this layout, activities are arranged in line, following the sequence of operations required to assemble the product. Each workstation performs a specific operation, and the product moves along the line in a streamlined, step-by-step process. The layout ensures an orderly and efficient, continuous flow of materials.

In soft drink bottling plants product layout is applied: bottles are cleaned, filled with the drink, sealed with caps, labeled, and packed—all arranged along an assembly line for efficient, high-volume production.

Process Layout

Process layout is a production layout where similar activities or processes are grouped together in departments based on their function. This layout offers more flexibility during production since equipment and workstations can handle a variety of tasks. It is commonly used in environments where custom or low-volume products are made, as it allows for easy adjustments in the flow of materials and labor. Compared to product layouts, process layouts are typically less automated and require skilled labor.

A process layout can be found in a machine shop. In this type of workshop, similar machines (e.g., milling and assembly machines) are grouped in separate places. The milling department will house machines that perform milling processes, whereas the assembly department will have stations for workers to assemble parts.

Fixed-Position Layout

A fixed-position layout is a type of production layout in which the product remains stationary during the manufacturing or assembly process. In this layout, the production resources - such as labor, equipment, and materials - are brought to the location of the product instead of moving the product to different workstations. This layout is commonly used for large, complex products that are difficult to move due to their size, weight, or specific handling requirements.

A typical example for fixed-position layouts is the assembly of an aircraft. Aircrafts are large structures that cannot be easily moved throughout a factory, so workers and equipment are brought to the aircraft to assemble it.

The cellular layout combines the benefits of both process and product layouts: It is a type of production layout where machines, equipment, or workstations are arranged into "cells" that are dedicated to producing a specific set of similar products or components. These cells are designed to work like mini production lines, with all the necessary resources grouped closely to efficiently complete a specific task. The cellular layout improves efficiency by minimizing the movement of materials while maintaining the flexibility of a process layout. A cellular layout can be found in a textile manufacturing factory, for example. The factory might set up cells for different types of fabric production, such as one cell for producing cotton fabrics and another for wool fabrics. Each cell contains all the necessary machines and skilled workers for that particular type of fabric. (Nickels, McHugh & McHugh, 2009, pp.247)

Understanding the advantages and challenges of each layout type is essential for manufacturers to make informed decisions that drive efficiency, reduce operational costs, and improve product output.

Considering the following aspects helps choose the layout that optimizes efficiency, reduces costs, and meets the production goals:

Product Type: complex or standardized product?
Volume: High-volume, repetitive tasks or low-volume, varied tasks?
Flexibility: Need for adaptability in handling different products or changing production needs?
Space and Resources: Requirement of larger spaces for product assembly or more space for equipment and movement?

Exercise: A small company manufactures custom furniture pieces, such as tables, chairs, and cabinets, based on customer specifications. Each product is unique with a wide variety of styles and designs. Which layout would be most suitable for this scenario and why?

3. Production logistics

Production logistics refers to the operations that store and handle the inventories and products needed during the production process.

Material flow:

Material flow is the movement and transformation of materials through various stages of the manufacturing process: from the initial receipt of raw materials to the final production of goods ready for shipment. It involves efficient management and coordination of material handling, storage, processing, and distribution to ensure that materials are available at the right time, in the right quantity, and in the correct sequence to support uninterrupted production.

Continuing this course will teach you tools and techniques that ensure smooth material flow. Watch this simulation of an illustrative material flow at the Bosch company.

Warehousing:

Products held in inventory are physically stored in warehouses (= facilities for storing inventory). In some warehouses, goods are stored for relatively long periods, whereas other warehouses, known as distribution centers, serve as command posts for moving products to customers. Distribution centers collect, sort, and redistribute produced goods to the customer by using advanced technologies.

As you will learn later on in the course, inventory holding is a cost that managers like to avoid. However, warehousing is a necessity in the production process. Therefore, it has two key objectives: minimize costs and add value to the supply chain to ensure efficiency.

Value-adding activities are practices that enhance products and therefore increase the customer's perception of them. This can be done through a product's quality during storage (e.g. maturing whiskey), by reducing the costs of a product (e.g. reducing its packaging), or the service associated with it (e.g. delivery information). This can be achieved through warehouse operations, by creating or breaking bulk, combining goods, and smoothing to meet the demand.

Cross-docking is a logistic strategy where incoming goods bypass the storage and packing stations minimizing or eliminating storage time in the warehouse, which minimizes costs and eliminates non-value-adding activities. (Mangan & Lalwani, 2016, pp.191)

Transportation:

Rail transport is effective for carrying heavy and large quantities of goods over long distances. However, its limitation is that it requires a rail network, meaning the goods cannot be delivered directly to customers without further transportation.

Trucks, on the other hand, provide the advantage of door-to-door delivery and can travel easily on public roads, but trucks struggle with handling large, heavy shipments, and moving goods by truck generally takes more time than by rail.

Shipping via boats and barges is the most cost-effective option for transporting bulk goods such as oil, coal, and cotton. Although it is inexpensive, water transportation is slower and often needs to be combined with other transport methods to complete delivery.

Air transport is known for its speed, especially for long distances, but it comes with the limitation of size, shape, and weight restrictions on the goods being transported, and it is typically more expensive.

For products like gasoline or natural gas, pipelines are the most efficient mode of transport. However, pipelines are slow and have rigid routes, making them less flexible.

Digital products, such as e-books or music, can be easily transferred over digital networks like the Internet, revolutionizing industries like publishing and entertainment.

The integration of multiple transportation methods is known as intermodal transportation, commonly used in international trade and long-distance shipments. This approach helps optimize cost and sustainability. For example, goods are first shipped in containers by cargo ships across the ocean. Upon arrival at the port, the containers are transferred onto trains for further transport inland. Finally, the goods are delivered from rail terminals to warehouses or fulfillment centers by trucks, and smaller vehicles are used for the last-mile delivery to customers, ensuring goods arrive on time. (Boveé & Thill, 2020, p.411)

The importance of efficient logistics for the competitiveness of companies:

1. Cost Reduction through optimized transportation and reducing waste and inefficiencies

2. Enhanced Customer Satisfaction by meeting delivery deadlines and ensuring product availability

3. Sustainability goals can be achieved through efficient logistics and minimizing carbon emissions which can lead to good corporate image and brand perception

4. Competitive Differentiation: Logistics efficiency can enable companies to offer faster, cheaper, or more reliable services than competitors.

4. Production Planning and Control

Production planning and control (“PPC”) is an essential step in the production process, organizing materials and resources and ensuring workflow. Commonly used tools for PPC are the kanban systems and the digital program MRP.

The Kanban system is a visual workflow management method used in production. The word Kanban is Japanese, meaning “card” or “signals”. It uses visual signals (e.g. containers, bins, cards, et cetera) to control the production of goods. These visuals trigger the replenishment of inventory or the production of goods.

Each Kanban signal represents a specific quantity of materials or products, and when it is consumed, the signal prompts the production or orders of more, enforcing a pull system, pulling the materials into production when needed, rather than pushing them in the process, leading to overproduction. Kanban optimizes work processes, limits waste, and enhances productivity. (Slack, Brandon-Jones, 2019, p.530)

Example use of a Kanban System in Practice:

Material Requirements Planning:

MPR is a computer-based production planning tool that which materials are used when and where. It uses sales forecasts and customer orders for its calculations. It helps companies keep track of their inventory levels and forecast future demand for their product. It considers the time required to receive materials from suppliers and the time it takes to produce a certain product (the lead time). Based on this data, MRP creates a production schedule and ensures that there are sufficient materials to meet the production schedule. It helps reduce inventory costs by optimizing the use of materials and minimizing the amount of unused inventory. It identifies the most efficient production schedule and therefore reduces the amount of time spent waiting for the delivery of materials, which makes the MRP software a crucial tool to conduct lean production, which you will get to know in the upcoming chapter. (Slack, Brandon-Jones, 2019, p.508-515)

5. Lean Production and Kaizen

A company determines its competitiveness and profitability through productivity. Productivity is an economic term concerning the efficiency with which goods and services are produced, typically measured as the output per unit of input.

Therefore, companies aim to increase their productivity to increase their economic growth and competitiveness in the market. In this chapter, you will get to know two common approaches that increase productivity. (Bovée and Thill, 2020)

The Philosophy of Lean Production:

Originating from the pioneering Toyota Production Systems (TPS), Lean is nowadays found not only in production but also in many other industries as a basic philosophy. Lean Production is a systematic approach focused on eliminating waste and delivering value to the customers, at the right time needed, in the right place, and meeting the perfect quality at the lowest possible cost.

The main focus of Lean Production is eliminating waste. Any activity that does not add value to the production process is considered wasteful. There are 8 types of waste according to Lean, that need to be eliminated:

Inventory, for example, is to be minimized, because the storage of more raw materials or finished goods than required leads to higher costs, such as warehouse rent, utility and equipment costs, obsolescence, etc. Instead of stockpiling, Lean aims for continuous flow, where products are directly passed on to the next stage in the production process, just in time (“JIT”) to be further processed. Just-in-time inventory management is a tool used by Lean Production, to ensure the perfect match of material delivery and immediate usage in the production process. Besides JIT, Kanban and MRP (see previous chapter) are powerful tools to conduct Lean Manufacturing.

Not only does this approach eliminate waste, but it also exposes problems in the production process quickly, for example, if a quality issue is discovered in stage A of the production process, it can be resolved before the product is reprocessed in stage B. This ensures continuous workflow, without wasting any resources in any stage of the production process.

A smooth flow of materials, information, and labor is another central idea of Lean. Long processes add no value and may even cause delays or slow down the lead time. Companies may reconsider their production layout if it is likely to cause issues or has a high throughput time. Value stream mapping (“VSM”) is a simple, yet effective visual tool used by Lean Production. A value stream is the entire sequence of processes required to deliver a product or service to a customer - from raw material sourcing and production to delivery and customer support. By mapping out the process, non-value-adding activities and inefficiencies along the value stream can be discovered and eliminated, leading to increased efficiency, decreased amounts of waste, and enhanced customer satisfaction. (Slack, Brandon-Jones, 2019, p.515-528)

Learn more about Lean Production by exploring the Toyota Production Systems Website and reading the attached case study.

Learn more about the Toyota Production Systems

Case Study: Toyota Production Systems

The Philosophy of Kaizen:

Kaizen has its origin in the Japanese words Kai (change) and Zen (good), meaning change for the better, which is commonly translated to “continuous improvement”. Kaizen focuses on quality and is based on the belief that everything can always be improved. Any small but ongoing improvement will drive large and significant improvements. Businesses all over the world have embraced the Japanese philosophy.

Kaizen has five core principles:

Know your customers: Customer-centered, identification of customers values and using feedback to drive improvement
Let it flow: Standardize work processes, smooth operations, and consistent workflow
Go to Gemba: (Gemba is Japanese for “actual place”) Observation of actual processes on-site, and identify problems in the production line firsthand
Empower People: Kaizen recognizes employees as the key drivers for improvement, involves employees in problem-solving, and encourages workers
Be transparent: use of visual tools such as Kanban (Kaizen Institute, 2025)

Kaizen has implemented the plan–do–act–check cycle (PDCA Cycle) as an effective tool for continuous improvement:

If a problem was identified, firstly, “Plan”: This implies setting goals and developing a strategy for problem-solving. Then “Do”, which means the implementation of the plan. It includes the training of employees and collecting data to evaluate the results. Evaluate the results to “check” if the plan works and the goals are met. Identify areas for further improvement, if necessary. Then “Act”: Standardize the solution or if the plan was unsuccessful, analyze the failures, refine the approach, and restart the cycle. The new status quo has resolved the initial problem; however, according to Kaizen, it is not the final outcome but the starting point of a continuous cycle of planning, doing, checking, and acting, empowering continuous improvement. The PDCA Cycle implements a structured and repeatable problem-solving process and encourages continuous improvement. (Helmold, M 2020, pp.27) By striving for continuous improvement, Kaizen is an effective methodology for improving quality as well as customer satisfaction, enhancing workflow and efficiency, and reducing costs and waste.

Lean production and Kaizen are complementary. Lean focuses on waste elimination and creating efficient workflows, while Kaizen ensures continuous improvement by engaging employees and refining processes over time. Together, they form a powerful framework for operational excellence.

6. Production Factors

The production process consists of taking the production factors land, labor, capital, and entrepreneurship and using those so-called “inputs” to produce goods and services (“outputs”).

Fundamental in economics is the impact of scarcity, meaning that every resource has a finite supply. This leads to competition for resources and forces trade-offs. Every participant in the economy must make trade-offs by giving up one thing to get another, for example, deciding how many employees to have in sales versus customer support.

(Boveé & Thill, 2020, pp.73)

Land

“Land” includes all natural resources used in production including minerals, forests, water, agricultural land, and energy resources like oil or sunlight. Land provides raw materials as well as space for production activities and determines the availability of essential resources.

Labor

“Labor” or “human resources” refers to the human effort, both physical and intellectual, involved in producing goods and services, such as the skills and knowledge of factory workers, engineers, and all the other people who work on behalf of an organization. Labor transforms raw materials into finished goods, and its quality is influenced by education, training, and experience.

Capital

“Capital” includes human-made resources like money, factories, machinery, equipment (e.g., computers), and infrastructure needed to produce goods and services.

Entrepreneurship

“Entrepreneurship” refers to the initiative and ability to organize the other factors of production to create goods and services. Entrepreneurs, for example, business founders and managers take risks and innovate to generate profit. Entrepreneurship is the essential factor to combine land, labor, and capital in creative and efficient ways.

7. Scheduling and Capacity Planning

Capacity Planning:

Capacity is a firm's maximum capability to produce certain goods or services. Capacity planning is the process of determining the production capacity needed by an organization to meet the changing demand for its products or services. It ensures that the business has the right number of resources—such as labor, machinery, and facilities—to produce goods or services effectively and efficiently.

By using customer feedback, current and past sales figures, market research, and industry analysis operations managers make estimates of the future demand for the company’s products. These estimates must be balanced with the company’s capacity to produce the goods or services. Therefore, factors like staff, factory spaces, material flow, tools and equipment, and many other factors need to be considered, which makes capacity planning one of the most difficult decisions made by a company.

Capacity Lead Strategy: This approach involves increasing capacity in anticipation of future demand growth. It is often employed to attract customers from competitors, establish a presence in a growing market, or handle sudden increases in demand.
Capacity Lag Strategy: In this strategy, capacity is expanded only after a rise in demand has been confirmed. While this can yield high returns, it may result in the loss of customers due to delayed response. This strategy is typically used in industries with standardized products and competitors focused on cost or with weaker market positions. (Russell&Taylor, 2009, p.252)

Scheduling:

Scheduling is a crucial part of any production process. Proper scheduling can optimize the use of resources and reduce costs. Managers must determine how long an operation takes and decide the appropriate order of tasks. Therefore, they use various techniques, from a simple calendar to digital monitoring tools, like the Gantt Chart or the PERT diagram.

Gantt Chart: a visual project management tool that provides a clear, timeline-based representation of tasks, activities, and milestones within a project. It organizes these elements into a bar chart format, where each task is a horizontal bar spanning across a timeline. The length of each bar shows the duration of the task, and its position indicates when the estimated start and end of a task. Gantt charts are used to plan, schedule, and monitor progress. (Bovée & Thill, 2020, p.257)

PERT Diagram: For more complex projects, the program evaluation and review technique (PERT) is useful. Through PERT, managers map out all tasks and identify the expected time for the completion of the sub-tasks of a project. The longest sequence of tasks is called the “critical path”. It determines the minimum project duration, and a delay along this path may cause the production to run late. (Nickels, McHugh & McHugh, 2009, p.252)

Exercise: Identify the critical path on the following PERT chart.

8. Quality Concept and Dimensions:

The Concept of Quality

Exercise: Imagine you are buying a product. A) What are the most important aspects for you as a customer regarding the product's quality? Define your individual understanding of quality. B) Would you rather buy a cheaper product of less quality or a more expensive product knowing it will satisfy your understanding of quality

As we differ as individuals, we might have different perceptions of quality. The American Society for Quality has defined two perspectives of quality:

The Value Perspective: “The characteristics of a product or service that bear on its ability to satisfy stated or implied needs”
The Conformance Perspective: “A product or service that is free of deficiencies” (American Society for Quality, 2015)

The value perspective on quality implies that quality is judged on how well the product aligns with the needs of its user, whereas the conformance perspective focuses on whether or not a product was made as intended, typically measured in defects.

Quality Dimensions

In 1987, David Garvin, a Harvard Business professor, defined eight dimensions of product quality: performance, features, reliability, conformance, durability, serviceability, aesthetics, and perceived quality.

Performance: the primary basic operating characteristics of a product, e.g. acceleration, speed, and comfort of a car
Features: secondary aspects of performance; characteristics that supplement the basic function, e.g. free drinks on planes
Reliability: the likelihood of a product malfunctioning or failing within a time frame
Conformance: the degree to which the design or characteristics of a product meet established standards
Durability: the use received from a product before it becomes irreparable or inefficient to repair
Serviceability: speed, courtesy, competence, and ease of repair
Aesthetics: the looks, sound, feeling, taste, or smell of a product, a matter of personal preference
Perceived quality: oftentimes influenced by the reputation of a product or firm, because consumers are not aware of the exact attributes of a product

(Harvard Business Review, 2025)

9. Quality Management Systems

ISO 9001

The International Organization for Standardization (“ISO”) is an international, non-governmental organization that develops standards to ensure quality, safety, efficiency, and consistency across different industries and practices all over the world.

Watch the ISO introductory video:

ISO 9001 is the international standard for Quality Management Systems (QMS) and outlines requirements that organizations must meet to ensure consistent quality in products and services. These requirements are structured into seven principles that must be met to receive the ISO 9001 certification.

The Seven Quality Management Principles:

Customer Focus: Prioritizing customer needs is essential for any organization. Understanding and exceeding customer expectations not only ensures satisfaction but also builds trust and loyalty.
Leadership: Strong leadership sets the tone for success. When top management leads with clarity and purpose, aligning the organization’s vision and values with quality objectives, it creates a unified and committed workforce.
Engagement of People: Success comes from involving everyone in the organization. Providing employees with the tools, training, and support they need to foster a culture where quality thrives, and every individual contributes to achieving goals.
Process Approach: Viewing activities as interconnected processes helps organizations achieve reliable and efficient results. This structured approach ensures resources are used effectively and outputs are consistent.
Improvement: Continuous improvement is essential for growth. Regularly evaluating performance and processes allows organizations to adapt, innovate, and enhance their systems over time.
Evidence-Based Decision Making: Decisions backed by data lead to better outcomes. Organizations can make informed choices that drive success and minimize risks by analyzing accurate and relevant information.
Relationship Management: Building and maintaining strong relationships with suppliers, partners, and stakeholders is key to long-term success. Collaborative and mutually beneficial partnerships enhance performance and create shared value. (ISO, Quality Management Principles, 2015)

Advantages of the ISO Certification:

ISO 9001 certification offers several advantages to organizations. It enhances customer satisfaction by ensuring consistent quality in products and services. Additionally, it improves operational efficiency and helps reduce waste, leading to cost savings. The certification also supports better risk management and increases market competitiveness by showcasing the organization's commitment to quality. As a globally recognized standard, ISO 9001 certification demonstrates a company's dedication to maintaining high-quality standards, boosting its credibility in the marketplace. (International Organization for Standardization, 2015)

10. The Phases of Quality Management

Quality Planning

An important aspect of quality planning is determining which quality dimensions are most important to a service's clients or product users. A company must conduct market research, find out their target customers' most important criteria, and develop products or services that meet these requirements. This depends on the industry: In the automobile industry, for example, reliability is essential for safety reasons. Customers demand a safe, durable, low-maintenance, and dependable vehicle, whereas customers in the clothing industry value aesthetics.

Quality Control

In the past, organizations used to test the quality of a product at the end of the product line when the production of a product was finished, which led to multiple problems: It required extra people and resources; if an error was found, it had to be fixed or scrapped, which is cost-intensive; and if the customer finds a mistake, they might be dissatisfied, which harms the firm’s reputation. These days, new ways of quality control have been developed, in which quality is not considered the outcome but a never-ending process of continually improving a product during its production. (Nickels, McHugh & McHugh, 2009, p.250)

The DMAIC Cycle is a methodology used for quality control, designed to systematically improve processes and reduce defects.

Define: Identify the problem, project goals, and customer requirements.
Measure: Collect data to establish baselines and measure current performance.
Analyze: Evaluation of the process to identify root causes of defects or inefficiencies.
Improve: Develop and implement solutions to address the root causes.
Control: Establish controls to sustain improvements and prevent regression.

By following the DMAIC cycle, organizations can enhance their quality control efforts, reduce variability, and achieve higher levels of customer satisfaction.

Continuous Improvement

The DMAIC Cycle is an ongoing process of quality control, ensuring products or services evolve over time to meet customer expectations. This complements the Kaizen philosophy (chapter 5), which perceives improvement as an ongoing, never-ending process.

Why is continuous improvement important for quality assurance?

Continuous improvement is essential for quality assurance because it maintains high standards in the production process. It encourages organizations to meet or exceed their customers' expectations, which increases their satisfaction and loyalty. By addressing defects and enhancing processes, continuous improvement contributes to better product quality while lowering costs associated with rework and errors. It helps identify inefficiencies and reduce waste, which ultimately is beneficial for the organization and the customer. In the long run, continuous improvement secures success in the market and competitiveness resilience.

You have reached the end of the first chapter covering the Fundamentals of Production. You have learned all about the production process - from the production types, over the layouts, to production logistics. You discovered the philosophies of Lean Manufacturing and Kaizen and their practices. You are now able to define quality and know, why quality assurance is important for production organizations. As you proceed through the Summit Business Module, the knowledge you acquired in the first chapter will be useful.

continue with the next chapter: Procurement