The Production and Distribution Process
This book deals with the management of risks through the life cycle of a process plant. We will address the question of why we do maintenance, what tasks we actually need to do, and when we should do them, so as to reduce these risks to a tolerable level and an acceptable cost. We will examine the role of maintenance in obtaining the desired level of system effectiveness, and begin this chapter with a discussion of the production and distribution process. After going through this chapter, the reader should have a better appreciation of the following:
•The production and distribution process and its role in creating value as goods and services;
•Difficulties in measuring efficiency and costs; understanding why distortions occur;
•Determination of value and sources of error in measuring
•Reasons for the rapid growth in both manufacturing and
•Understanding the systems approach; similarities in the manufacturing and service industries;
•Impact of efficiency on the use of resources;
•Maintenance and the efficient use of resources;
•Maintenance—the questions to address.
We need goods and services for our existence and comfort; this is, therefore, the focus of our efforts. We change raw materials into products that are more useful. We make, for example, furniture from wood or process data to obtain useful information. By doing so, we add value to the raw materials, thereby creating products that others need. We can also add value without any physical material being used. Thus, when a nurse takes a patient’s temperature, this information helps in the diagnosis of the illness, or in monitoring the line of treatment.
Another instance of adding value is by bringing a product to the market at the right time. Supermarkets serve their customers by stocking their shelves adequately with food (and other goods). They will not be willing to carry excessive stocks as there will be wastage of perishable goods. Overstocking will also cost the supermarket in terms of working capital, and therefore reduce profit margins. By moving goods to the shelves in time, supermarkets and their customers benefit, so we conclude that their actions have added value. The term distribution describes this process of movement of goods. It adds value by increasing consumer access.
Production processes include the extraction of raw materials by mining, and their conversion into useful products by manufacturing.If the main resource used is physical or intellectual energy,with a minimum of raw materials, we call it a service. The word process describes the flow of work, which enables production of goods or provision of services. In every commercial or industrial venture there is a flow of work, or Business Process. The business can vary widely; from a firm of accountants to a manufacturer of chemicals to a courier service.
In the case of many service industries, the output is information.Lawyers and financial analysts apply their knowledge, intellect, and specialized experience to process data and advise their clients. Management consultants advise businesses, and travel agents provide itinerary information, tickets, and hotel reservations. In all these cases, the output is information that is of value to the customer.
1.1.1 Criteria for assessing efficiency
In any process, we can obtain the end result in one or more ways. When one method needs less energy or raw materials than another, we say it is more efficient. For a given output of a specified quality, the process that needs the least inputs is the most efficient. The process can be efficient in respect of energy usage, materials usage, human effort, or other selected criteria. Potential damage to the environment is a matter of increasing concern, so this is an additional criterion to consider.
If we try to include all these criteria in defining efficiency, we face some practical difficulties. We can measure the cost of inputs such as materials or labor, but measuring environmental cost is not easy. The agency responsible for producing some of the waste products will not always bear the cost of minimizing their effects. In practical terms, efficiency improvements relate to those elements of cost that we can measure and record. It follows that such incomplete records are the basis of some efficiency improvement claims.
1.1.2 Improving efficiency
Businesses try to become more efficient by technological innovation,business process re-engineering, or restructuring. Efficiency improvements that are achieved by reducing energy inputs can impact both the costs and undesirable by-products. In this case, the visible inputs and the undesirable outputs decrease,so the outcome is an overall gain. A similar situation arises when it comes to reducing the input volume of the raw materials or the level of rejections.
When businesses make efficiency improvements through workforce reductions, complex secondary effects can take place. If the economy is buoyant, there may be no adverse effect, as those laid-off are likely to find work elsewhere. When the economy is not healthy, prevailing high unemployment levels will rise further. This could perhaps result in social problems, such as an increase in crime levels. The fact that workforce reductions may sometimes be essential for the survival of the business complicates this further. There may be social legislation in place preventing job losses,and as a result, the firm itself may go out of business.
1.1.3 Cost measurement and pitfalls
There are some difficulties in identifying the true cost of inputs. What is the cost of an uncut piece of diamond or a barrel of crude oil? The cost of mining the product is all that is visible, so this is what we usually understand as the cost of the item. We can add the cost of restoring the mine or reservoir to its original state, after extracting the ores that are of interest, and recalculate the cost of the item. We do not calculate the cost of replenishing the ore itself, which we consider as free.
Let us turn to the way in which errors can occur in recording costs. With direct or activity-based costing, we require the cost of all the inputs. This could be a time-consuming task, and can result in delays in decision making. In order to control costs, we have to make