Operations Management

Chapter 7
Process Strategy

1
Process, Volume, and Variety
Figure 7.1 Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few Process Focus Mass Customization
units per run, projects, job shops (difficult to achieve,
high variety (machine, print, but huge rewards)
(allows carpentry) Dell Computer Co.
customization) Standard Register
Changes in
Modules
modest runs,
standardized Repetitive
modules (autos, motorcycles)
Harley Davidson
Changes in
Attributes Product Focus
(such as grade, (commercial
quality, size, Poor Strategy baked goods,
thickness, etc.) (Both fixed and steel, glass)
long runs only variable costs Nucor Steel 2
are high)
 Process Flow Diagram
Customer

Customer sales
Purchasing
representative

Vendors

PREPRESS DEPT
Accounting Receiving

PRINTING DEPT
Warehouse

COLLATING GLUING, BINDING,

DEPT STAPLING, LABELING

Information flow POLYWRAP DEPT

Material flow

SHIPPING Figure 7.2

3
 Process Strategies

 How to produce a product or provide

a service that
 ………………………………………………
……………………………………………..
 Meets cost and managerial goals
 Has long term effects on
 ………………………………………………
………………………………………………
 Costs and quality
4
Process Strategies

Four basic strategies

 P………………………………….
 R………………………………….
 P……………………………..…..
 M……………………………..…..
Within these basic strategies there are
many ways they may be implemented
5
Process Focus
 Facilities are organized around …………….
activities or processes
 General purpose equipment and ………......
personnel
 High degree of …………………………………
 Typically ……………………. and …………….
equipment utilization
 Product flows may vary considerably
making planning and scheduling a
challenge 6
Repetitive Focus
 Facilities often organized as
…………………………………………….
 Characterized by …………………
with parts and ………………….......
made previously
 Modules may be ………………….. for
many output options
 Less …………….. than process-
focused facilities but more
………….. 7
 Process Flow Diagram
Frame tube Frame-building Frame Hot-paint
bending work cells machining frame painting
THE ASSEMBLY LINE
TESTING Engines and
Incoming parts transmissions
28 tests
From Milwaukee
on a JIT arrival
Air cleaners Oil tank work cell schedule

Fluids and mufflers Shocks and forks

Fuel tank work cell Handlebars

Wheel work cell Fender work cell

Roller testing
Crating

Figure 7.3 8
Product Focus

 Facilities are organized by ………….

 ………………… volume but …………
variety of products
 Long, continuous production runs
……………….. efficient processes
 Typically high …………….. but low
……………………………
 Generally ……………… skilled labor
9
Mass Customization

 The …………., ……………………..

production of goods and service
to satisfy increasingly
………………………… customer
desires
 Combines the ……………….. of a
process focus with the
………………… of a product focus
10
 Mass Customization
Figure 7.5
Repetitive Focus
Modular design
Flexible equipment

Modular techniques

Mass Customization
Effective Rapid
scheduling throughput
techniques techniques

Process-Focused Product-Focused
High variety, low volume Low variety, high volume
Low utilization (5% to 25%) High utilization (70% to 90%)
General-purpose equipment Specialized equipment
11
 Comparison of Processes Table 7.2

Process Focus Repetitive Focus Product Focus Mass Customization

(Low volume, high (Modular) (High-volume, low- (High-volume, high-
variety) variety) variety)

Small quantity, Long runs, Large quantity, small Large quantity, large
large variety of standardized variety of products variety of products
products product made from
modules

General purpose Special equipment Special purpose Rapid changeover on

equipment aids in use of equipment flexible equipment
assembly line

12
Changing Processes

 ………………… and ………………...

 May mean starting over
 Process strategy determines
transformation strategy for an
extended period
 Important to get it right.

13
Process Analysis and Design
 …………………………. - Shows the
movement of materials
 ……………………………. - Shows flows
and time frame
 …………………………….. - Shows flows
and time and value added beyond the
immediate organization
 ………………………………. - Uses
symbols to show key activities
 ………………………………… - focuses on
customer/provider interaction 14
 Time-Function Mapping
Order Receive
Customer product product

Process
Sales order

Production
control Wait

Plant Print Extrude

Warehouse Wait

Transport Move

1 day 2 days 1 day 1 day 1 day

6 days
Figure 7.7 15
Process Chart Figure 7.8

16
Service Blueprint

 Focuses on the customer and

provider …………………………….
 Defines three levels of ………………
 Each level has different
management issues
 Identifies potential …………………...

17
 Service Blueprint
Personal Greeting Service Diagnosis Perform Service Friendly Close
Level Customer arrives
#1 for service Customer departs

Customer pays bill

Determine Notify
Warm greeting specifics customer
and obtain No and recommend
service request an alternative
Standard provider
request Can
Level service be
#2 done and does No
Direct customer customer
to waiting room approve? Notify
customer the
car is ready

Yes Yes
Perform
Level required work
#3

Potential failure point

Prepare invoice

Figure 7.9 18
Process Analysis Tools
 F……………………… provide a
view of the big picture
 ……………………………… adds
rigor and a time element
 ………………………………. extends
to customers and suppliers
 ………………………… show detail
 ………………………… focuses on
customer interaction 19
Service Process Matrix
Mass Service and Professional Service
 Labor involvement is …………….
 S…………. and t……….. highly important
 Focus on …………………………………
 Personalized services
Service Factory and Service Shop
 Automation of standardized services
 Low labor intensity responds well to
process technology and scheduling
 Tight control required to maintain
……………………………. 20
Improving Service Productivity
Strategy Technique Example

Separation Structure service so Bank customers go to a

customers must go manager to open a new
where service is offered account, to loan officers
for loans, and to tellers
for deposits

Self-service Self-service so customers Supermarkets and

examine, compare, and department stores,
evaluate at their own internet ordering
pace

Table 7.3 21
Improving Service Productivity

Strategy Technique Example

Postponement Customizing at delivery Customizing vans at

delivery rather than at
production

Focus Restricting the offerings Limited-menu restaurant

Modules Modular selection of Investment and insurance

service, modular selection, prepackaged
production food modules in
restaurants

Table 7.3 22
Improving Service Productivity
Table 7.3

Strategy Technique Example

Automation Precise personnel Automatic teller machines

scheduling

Scheduling Precise personnel Scheduling ticket counter

scheduling personnel at 15-minute
intervals at airlines

Training Clarifying the service Investment counselor,

options, explaining how to funeral directors, after-
avoid problems sale maintenance
personnel

23
Equipment and Technology
 Often complex decisions
 Possible competitive advantage
 Flexibility; Stable processes
 May allow enlarging the scope of the processes

Improving Service Processes

 Layout
 Product exposure, customer education, product
enhancement
 Human Resources
 Recruiting and training; Impact of flexibility 24
Process Control

 Increased process ………………..

 Increased process ………………….
 Real-time provision of information
for process evaluation
 Data available in many forms

25
 Technology in Services Table 7.4

Service Industry Example

Financial Services Debit cards, electronic funds transfer, ATMs, Internet

stock trading

Education Electronic bulletin boards, on-line journals

Utilities and Automated one-man garbage trucks, optical mail and

government bomb scanners, flood warning systems

Restaurants and Wireless orders from waiters to kitchen, robot

foods butchering, transponders on cars that track sales at
drive-throughs

Communications Electronic publishing, interactive TV

26
 Technology in Services Table 7.4

Service Industry Example

Hotels Electronic check-in/check-out, electronic key/lock system

Wholesale/retail Point-of-sale terminals, e-commerce, electronic

trade communication between store and supplier, bar coded
data

Transportation Automatic toll booths, satellite-directed navigation

systems

Health care Online patient-monitoring, online medical information

systems, robotic surgery

Airlines Ticketless travel, scheduling, Internet purchases

27
Process Redesign

 The fundamental ……………. of business

processes to bring about dramatic
improvements in ……………………………
 Relies on ……………. the purpose of the
process and …………………….. both the
purpose and the underlying assumptions
 Requires ……………………. of the basic
process and its objectives
 Focuses on ……………………….. that
cross functional lines
 Any process is a candidate for redesign
28
Operations Management

Supplement 7
Capacity Planning

PowerPoint presentation to accompany

Heizer/Render
Operations Management, 8e 29
Capacity

 The throughput, or the

………………… a facility can hold,
receive, store, or produce in a period
of time
 Determines ……………………………
 Determines if ………………….. will be
satisfied
 Three time horizons
30
 Planning Over a Time Horizon

Long-range Add facilities

planning Add long lead time equipment
*
Intermediate- Subcontract Add personnel
range Add equipment Build or use inventory
planning Add shifts

Schedule jobs
Short-range
planning
* Schedule personnel
Allocate machinery

Modify capacity Use capacity

* Limited options exist
Figure S7.1
31
Design and Effective Capacity

 Design capacity is the maximum

theoretical output of a system
 Normally expressed as a …………….
 Effective capacity is the capacity a firm
……………………………………………
……………………………………………
…………………………………………….
 Often lower than design capacity

32
 Utilization and Efficiency

Utilization is the percent of design capacity

achieved

Utilization = ……………………………………….

Efficiency is the percent of effective capacity

achieved

Efficiency = ………………………………………………

33
 Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity =

34
 Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity =

Utilization =

35
 Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity =

Utilization =

Efficiency =
36
Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

37
Capacity and Strategy

 Capacity decisions impact all 10

decisions of operations management as
well as other functional areas of the
organization
 Capacity decisions must be integrated
into the organization’s ……………. and
…………………………..
38
Managing Demand

 Demand exceeds capacity

 Curtail demand by raising prices, scheduling
longer lead time
 Long term solution is to increase capacity
 Capacity exceeds demand
 Stimulate market
 Product changes
 Adjusting to seasonal demands
 Produce products with complimentary demand
patterns 39
Capacity Considerations

 Forecast demand accurately

 Understanding the technology and
capacity increments
 Find the optimal operating level
(volume)
 Build for change

40
Tactics for Matching Capacity to Demand

1. Making staffing changes

2. Adjusting equipment and processes
 …………………………………………………….
 ……………………………………………………..

1. Improving methods to increase ………………

2. Redesigning the product to …………………
more throughput

41
Break-Even Analysis/
Cost Volume Analysis

 Technique for evaluating process and

equipment alternatives
 Objective is to find the point in dollars and
units at which cost equals revenue
 Requires estimation of fixed costs, variable
costs, and revenue

42
 Break-Even Analysis

 Fixed costs are costs that continue even if

no units are produced
 Depreciation, taxes, debt, mortgage
payments
 Variable costs are costs that vary with the
volume of units produced
 Labor, materials, portion of utilities
 Contribution is the difference between
selling price and variable cost

43
Break-Even Analysis

Assumptions
 Costs and revenue are …………………..
 Generally not the case in the real world
 We actually ………………..these costs
 Very difficult to accomplish
 There is …………………………………

44
 Break-Even Analysis
–
Total revenue line
900 –

800 – i dor
Break-even point o rr Total cost line
Total cost = Total revenue i t c
700 – of
P r
Cost in dollars

600 –

500 –
Variable cost
400 –

300 –
o ss or
200 – L rid
r
co
100 – Fixed cost
| | | | | | | | | | | |
–
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5 45
Volume (units per period)
 Break-Even Analysis

BEPx = Break- x= Number of

even point in units units produced
BEP$ = Break- TR = Total
even point in dollars revenue = Px
P = Price F= Fixed costs
per unit (after all V =
discounts) Variable costs
TC = Total
Break-even point costs = F + Vx
occurs when

TR = TC F
or BEPx =
P-V
Px = F + Vx
46
Break-Even Analysis

BEPx = Break- x= Number of

even point in units units produced
BEP$ = Break- TR = Total
even point in dollars revenue = Px
P = Price F= Fixed costs
per unit (after all V =
discounts) Variable costs
TC = Total
BEP$ = BEPx P costs = F + Vx
F Profit = TR - TC
= P-V P
= Px - (F + Vx)
F
= (P - V)/P = Px - F - Vx
F = (P - V)x - F
= 1 - V/P 47
 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]

48
 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F
BEP$ = =
1 - (V/P)

= =

F
BEPx = = =
P-V

49
 Break-Even Example

50,000 –

40,000 – Revenue

Break-even
30,000 – point Total
Dollars

costs
20,000 –

10,000 –
Fixed costs
–

| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units
50
 Break-Even Example

Multiproduct Case
F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)

where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
i = each product

51
Multiproduct Example

Fixed costs = $3,500 per month

Annual Forecasted
Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000
Baked potato 1.55 .47 5,000
Tea .75 .25 5,000
Salad bar 2.85 1.00 3,000

52
 Multiproduct Example

Fixed costs = $3,500 per month

Annual Forecasted
Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000
Baked potato 1.55 .47 Annual 5,000 Weighted
Tea Selling Variable .75 .25Forecasted 5,000
% of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 .117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
53
 Multiproduct Example F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)
Fixed costs = $3,500 per month
$3,500
Annualx Forecasted
12
= = $67,200
Item Price Cost .625
Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 Daily
.30 $67,200
7,000
sales = = $215.38
Baked potato 1.55 .47 312
Annual days
5,000 Weighted
Tea Selling Variable .75 .25Forecasted 5,000
% of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00
.446 x $215.38 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6 ≈ .259
.446 33
$2.95 sandwiches
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 per day
.117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
54