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Operations Management - 5th EditionRoberta Russell & Bernard W. Taylor, IIIAnd Chapter 8: Operations Management Krajewski and Ritzman 6/e

Chapter 6Process, Technology and Capacity1

Process PlanningProcessa group of related tasks with specific inputs and outputsProcess designDefines what tasks need to be done and how they are coordinated among functions, people, and organizationsProcess planningconverts designs into workable instructions for manufacture or deliveryProcess strategyan organizations overall approach for physically producing goods and services

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Process StrategyCapital intensitymix of capital (i.e., equipment, automation) and labor resources used in production processProcess flexibilityease with which resources can be adjusted in response to changes in demand, technology, products or services, and resource availabilityVertical integrationextent to which firm will produce inputs and control outputs of each stage of production processCustomer involvementrole of customer in production process3

Process PlanningProcess planning determines how a product will be produced or a service provided. It decides which components will be made in-house and which will be purchased from a supplier, select processes and develops and documents the specifications for manufacture and delivery.Make-or-buy decisionsProcess selectionProcess plans4

Make or Buy DecisionsCostCapacityQuality SpeedReliabilityExpertise5

Sourcing Continuum

Source: Adapted from Robert Hayes, Gary Pisano, David Upton, and Steven Wheelwright, Operations Strategy and Technology: Pursuing the Competitive Edge (Hoboken, NJ: 2005), p. 120Arms-Length Relationship(short-term contract orsingle purchasingdecision)Vertical Integration(100% ownership)Joint Venture(equity partner)Strategic Alliance(long-term supplier contract; collaborative relationship)

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Process SelectionProjectsone-of-a-kind production of a product to customer orderBatch productionsystems process many different jobs through the system in groups or batchesMass productionproduces large volumes of a standard product for a mass marketContinuous productionused for very-high volume commodity products7

Types of ProcessesType of productUniquePROJECTBATCHMade-to- order(customized)Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210

Type of customerOne-at-a-time

Few individualcustomersMASSMade-to- stock(standardized )MassmarketCONT.Commodity MassmarketProduct demandInfrequentFluctuatesStableVery stable8

Types of Processes (cont.)Demand volumeVery lowPROJECTBATCHLow to mediumSource: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210

No. of different productsInfinite varietyMany, variedMASSHighFewCONT.Very highVery fewProduction systemLong-term projectDiscrete, job shopsRepetitive, assembly linesContinuous, process industries9

Types of Processes (cont.)EquipmentVariedPROJECTBATCHGeneral-purposeSource: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210

Primary type of workSpecialized contractsFabricationMASSSpecial-purposeAssemblyCONT.Highly automatedMixing, treating, refiningWorker skillsExperts, crafts-personsWide range of skillsLimited range of skillsEquipment monitors10

Types of Processes (cont.)AdvantagesCustom work, latest technologyPROJECTBATCHFlexibility, qualitySource: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210

Dis-advantagesNon-repetitive, small customer base, expensiveCostly, slow,difficult tomanageMASSEfficiency,speed, low costCapitalinvestment;lack of responsiveness CONT.Highly efficient, large capacity,ease of controlDifficult to change,far-reaching errors,limited varietyExamplesConstruction, shipbuilding, spacecraftMachine shops,print shops, bakeries, educationAutomobiles,televisions,computers,fast foodPaint, chemicals, foodstuffs11

Process Selection with Break-Even AnalysisCostFixed costsconstant regardless of the number of units producedVariable costsvary with the volume of units producedRevenueprice at which an item is soldTotal revenueis price times volume soldProfitdifference between total revenue and total cost12

Process Selection with Break-Even Analysis (cont.)Total cost = fixed cost + total variable costTC = cf + vcvTotal revenue = volume x priceTR = vpProfit = total revenue - total costZ = TR TC = vp - (cf + vcv)13

Process Selection with Break-Even Analysis (cont.)

Solving for Break-Even VolumeTR= TCvp= cf + vcvvp - vcv= cfv(p - cv)= cf

v=cfp - cv

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ExampleTavis and Jeff own an adventure company called Whitewater Rafting. Because of quality and availability problems, the two entrepreneurs have decided to produce their own rubber rafts. The initial investment in equipment is estimated to be $2000. Labour and material cost is approximately $5 per raft. If the rafts can be sold at a price of $10 each, what volume of demand will be necessary to break even?15

Break-Even Analysis: ExampleFixed cost= cf = $2,000Variable cost= cv = $5 per raftPrice= p = $10 per raft

Break-even point isv = = = 400 raftscfp - cv

200010 - 5

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Break-Even Analysis: Graph

Total cost lineTotal revenue lineBreak-even point400Units$3,000 $2,000 $1,000

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Alternative Process SelectionThe owners of Whitewater Rafting believe demand for their product will far exceed the break-even point. They are now contemplating a larger initial investment of $10,000 for more automated equipment that would reduce the variable cost of manufacture to $2 per raft.Compare the old manufacturing process with the new process proposed here. For what volume of demand each process be chosen?18

Process SelectionBelow 2,667, choose AAbove 2,667, choose B$2,000 + $5v= $10,000 + $2v$3v= $8,000v= 2,667 raftsProcess AProcess B19

Process Selection: GraphExample 4.2

||||1000200030004000Units$20,000 $15,000 $10,000 $5,000 Total cost of process ATotal cost of process BChoose process AChoose process BPoint of indifference = 2,667 Units

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Process PlansSet of documents that detail manufacturing and service delivery specificationsThey begin with detailed drawings of product design and includesassembly charts or bills of materials: parts and materials needed and how they are to be assembledoperations sheets or routing sheets: listing of operations to be performed with details on equipment, tools, skills, etc.quality-control check-sheets: specify quality standards and quality data to be recorded.

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Sesame seed top bun

Beef pattySaltCheese

LettuceSauceOnions

Middle bun

Beef pattySaltCheese

LettuceSauceOnionsPickles

Bottom bun

Wrapper

SASAFirst-layer assemblySecond-layer assemblyCompleted Big MacAssembly Chartfor a Big Mac

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Part nameCrevice ToolPart No.52074UsageHand-VacAssembly No.520Oper. No.DescriptionDept.Machine/ToolsTime10Pour in plastic bits041Injection molding2 min20Insert mold041#0762 min30Check settings041113, 67, 65020 min& start machine40Collect parts & lay flat051Plastics finishing10 min50Remove & clean mold042Parts washer15 min60Break off rough edges051Plastics finishing10 min

An Operations Sheet for a Plastic Part23

Process AnalysisProcess analysis is the systematic examination of all aspects of a process to improve its operation to make it faster, more efficient, less costly, or more responsive to the customer.The basic tools of process analysis are:Process flowchartProcess diagramsProcess maps24

Process flowchartsSymbolic representation of processesIncorporatenonproductive activities (inspection, transportation, delay, storage)productive activities (operations)25

Process Flowchart Symbols

OperationsInspectionTransportationDelayStorage

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Step

OperationTransportInspectDelayStorageDistance(feet)

Time(min)Descriptionofprocess

1234567891011

Unload apples from truckMove to inspection stationWeigh, inspect, sortMove to storageWait until neededMove to peelerApples peeled and coredSoak in water until neededPlace in conveyorMove to mixing areaWeigh, inspect, sortTotalPage 1 0f 3

48030520153603020190 ft20 ft20 ft50 ft100 ftDate: 9-30-02Analyst: TLRLocation: Graves MountainProcess: Apple Sauce

Process Flowchartof Apple Processing27

Place orderDrinkEat salad or soupEat dinnerReceives checkGives payment to waiterCollect change, leave tipFill in tip amount

Give order to waiterPrepare dinner orderPrepare soup or salad orderGive order to waiter

Is order complete?Give soup or salad order to chefGive dinner order to chefGet drinks for customerDeliver salad or soup order to customerDeliver dinner to customerDeliver check to customerReceive payment for meal

Cash or Credit?Bring change to customerRun credit card through Return credit slip to customer

Collect tipYNCreditCashCustomerWaiter Salad Chef Dinner Chef

A Process Map ofRestaurant Service28

Service Blueprintfor an InstallmentLending OperationSource: Lynn Shostack, Service Positioning through Structural Change, Journal of Marketing 51 (January 1987), p. 36. Reprinted with permission by the American Marketing Association29

Process InnovationProcess are planned in response to new facilities, new products, new technologies, new markets, or new customer expectations.Process should be analysed for improvement on a continuous basis.When continual improvement efforts have been exhausted and performance expectation still cannot be reached with an existing process, it is time to complete redesign or innovate the process.30

Process InnovationProcess innovation projects are typically chartered in response to a breakthrough goal for rapid, dramatic improvement in process performance.Process innovation is most successful in organisations that can view their system as a set of process providing value to customer, instead of functional areas vying for limited resources.In environment of rapid change, the ability to learn faster, reconfigure processes faster, and execute processes faster is a competitive advantage.31

Process Innovation

Breakthrough ImprovementContinuous improvement refines the breakthroughContinuous improvement activities peak; time to reengineer process

Total redesign of a process for breakthrough improvements32

From Function to Process

ManufacturingAccountingSalesPurchasing

Product DevelopmentOrder FulfillmentSupply Chain ManagementCustomer ServiceFunctionProcess33

StrategicDirectives

Goals for Process Performance

Pilot Studyof New Design

DetailedProcess Map

High - levelProcess map

GoalsMet?InnovativeIdeasDesignPrinciplesModelValidationCustomerRequirementsKeyPerformanceMeasures

Full Scale Implementation

Baseline DataBenchmarkData

NoYesProcess Innovation34

Principles for Redesigning ProcessesRemove waste, simplify, and consolidate similar activitiesLink processes to create valueLet the swiftest and most capable enterprise execute the processFlex process for any time, any place, any wayCapture information digitally at the source and propagate it through process35

Principles for Redesigning Processes (cont.)Provide visibility through fresher and richer information about process statusFit process with sensors and feedback loops that can prompt actionAdd analytic capabilities to processConnect, collect, and create knowledge around process through all who touch itPersonalize process with preferences and habits of participants36

Techniques for Generating Innovative IdeasVary the entry point to a problemin trying to untangle fishing lines, its best to start from the fish, not the polesDraw analogiesa previous solution to an old problem might workChange your perspectivethink like a customerbring in persons who have no knowledge of process37

Techniques for Generating Innovative Ideas (cont.)Try inverse brainstormingwhat would increase costwhat would displease the customerChain forward as far as possibleif I solve this problem, what is the next problemUse attribute brainstorminghow would this process operate if. . . our workers were mobile and flexiblethere were no monetary constraintswe had perfect knowledge

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Technology DecisionsTechnology decisions involve large sums of money and can have a tremendous impact on the cost, speed, quality, and flexibility of operations.Technology defines future capabilities of a firm and set the stage for competitive interactions.39

Financial justification of technologyTechnology decisions associated with capital investment. Capital budgeting is the tool for analysing financial justification of technology.Purchase costOperating CostsAnnual SavingsRevenue EnhancementReplacement AnalysisRisk and UncertaintyPiecemeal Analysis40

Capacity DecisionsCapacity: maximum capability to produceCapacity is the maximum rate of output for a process. The operations manager must provide the capacity to meet the current and future demand. Otherwise, the organisation will miss opportunities for growth and profits. Capacity planning is central to the long-term success of an organisation. Capacity plans are made at two levels:Long-term capacity plans deal with investments in new facilities and equipment.Short-term capacity plans focus on workforce size, overtime budgets, inventories, and other types of decisions.rated capacity is theoreticaleffective capacity includes efficiency and utilization41

Measures of Capacity(How should the maximum rate of output be measured?)

Capacity can be measured in one of two ways: output measures or input measures.Output Measures:Units per year; customers per hour etcOutput measures are best utilised when the firm provides a small number of standardised products and services, or when applied to individual processes within the firm.As the amount of customisation and variety in the product mix becomes excessive, output-based capacity measures become less useful.Input Measures:Machine hours available; floor space for storage etc.Input measure are the usual choice for low volume, flexible processes.42

Different concepts of capacityPeak Capacity: The maximum output that a process or facility can achieve under ideal conditions is called peak capacity. Peak capacity can be sustained for only a short time. Peak capacity may drive up costs and quality drops.Rated Capacity: An engineering assessment of maximum annual output, assuming continuous operation except for an allowance for normal maintenance and repair overtime.Effective Capacity: The maximum output that a process or firm can economically sustain under normal conditions is its effective capacity. 43

Effective CapacityEffective Daily Capacity =(no of machines or workers) X(hours per shift) X(no of shifts) X(utilisation) X(efficiency)44

Capacity TermsCapacity utilization: percent of available time spend workingCapacity efficiency: how well a machine or worker performs compared to a standard output levelCapacity load: standard hours of work assigned to a facilityCapacity load percent: ratio of load to capacity

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Measurement

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Load Percent

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Capacity PlanningCapacity planning is the long-term strategic decision that establishes a firms overall level of resources.It extends over a time horizon long enough to obtain those resources usually a year or more.Capacity decisions affect product lead times, customer responsiveness, operating costs, and a firms ability to compete.Inadequate capacity can lose customers and limit growth.Excess capacity can drain companys resources.48

Capacity StrategiesCapacity lead strategyCapacity is expended in anticipation of demand growth. It is aggressive strategy. Average Capacity StrategyCapacity is expanded to coincide with average expected demand.Capacity Lag StrategyCapacity is increased after an increase in demand has been documented.49

Capacity Expansion Strategies50

Capacity Decisions (cont.)Capacity increase depends onvolume and certainty of anticipated demandstrategic objectivescosts of expansion and operationBest operating level% of capacity utilization that minimizes unit costsCapacity cushion% of capacity held in reserve for unexpected occurrences51

Best Operating Level for a Hotel

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Capacity Cushions(How much capacity cushion is best for various processes?)53The amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production capacity; it measures the amount by which the average utilisation falls below of 100 percent (uses effective capacity). Capacity cushion = 100% - utilisation rate (%)

Large or Small Cushions54Large cushions are appropriate when:Demand variesFuture demand is uncertain and resource flexibility is lowProduct mix changes due to varying demandsThere is supply uncertaintySmall cushions are expected when unused capacity costs money

Economies of Scaleit costs less per unit to produce high levels of outputfixed costs can be spread over a larger number of unitsproduction or operating costs do not increase linearly with output levelsquantity discounts are available for material purchasesoperating efficiency increases as workers gain experience55

Diseconomies of ScaleOccur above a certain level of outputDiseconomies of DistributionDiseconomies of BureaucracyDiseconomies of ConfusionDiseconomies of Vulnerability56

Diseconomies of Confusion

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Estimate Capacity RequirementsThe foundation for estimating long-term capacity needs is forecasts of demand, productivity, competition, and technological changes that extend well into future.The demand forecast has to be converted to a number that can be compared directly with the capacity measure being used.

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Capacity Requirements If multiple product or services involved, extra time is needed to change over from one product or service to the next.Setup time is the time required to change a machine from making one product or service to making another.The total setup time is found by dividing the number of units forecast per year (D) by the number of units made in each lot (Q).

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Problem 6-9Soft Key is trying to determine how best to produce its newest product, DVORK keyboards. The keyboards could be produced in-house using either Process A or Process B, or purchased from a supplier. Cost data are given below. For what levels of demand should each process be chosen?ProcessFixed CostVariable CostProcess A$ 8,000$ 10Process B$ 20,000$ 4Supplier$ 0$ 20

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6-22The Best Wheels Bicycle Company has scheduled the production of the bicycles given below. The two critical work centres for producing these bikes are welding and assembly. Welding has an efficiency of 95% and utilisation of 90%. Assembly has an efficiency of 90% and utilisation of 92%. The time required (in hours) by each bike in the two work centres is given in the table. Assume 40 hours is available per week for each work center. Calculate the capacity and load percent per work center per week.ModelWeek1234(B2610)10 speed50100195150(B2003)3 speed15306545(B2001)1 speed20408060

ModelWeldingAssemblyB26100.200.18B20030.150.15B20010.070.10

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Example A copy center in an office building prepares bound reports for two clients. The center makes multiple copies (the lot size) of each report. The processing time run, collate, and bind each copy depends on, among other factors, the number of pages. The center operates 250 days per year, with one 8 hour shift. Management believes that capacity cushion of 15 percent is best. It currently has three copy machines. Based on the following table of information, determine how many machines are needed at copy center.

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