Productions and Operations Management

Process Strategy andCapacity Planning

December 11, 2010

Jaisa Dacanay Gapuz, CPA

Learning Objectives: Identify or Define:

A. What is Process StrategyB. The Four Process Strategy

◦ Process focus◦ Repetitive focus◦ Product focus◦ Mass customization focus

C. Service Process Design and Issues

D. Capacity and Capacity Planning

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Outline:Process StrategyFour Process Strategies

◦ Process Focus.◦ Repetitive Focus.◦ Product Focus.◦ Mass Customization Focus.

Service Process DesignProcess ReengineeringFacility PlanningCapacity Planning

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Process StrategyAn organization’s approach to transform

resources into goods and services. •Process strategy is the pattern of decisions made in managing processes so that they will achieve their competitive priorities. It involves the use of an organization’s resources to provide something of value.•Major process decisions include:

Process StructureCustomer InvolvementResource FlexibilityCapital Intensity

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Types of Process Strategies¨ Process strategies follow a continuum

¨ Within a given facility, several strategies may be used

¨ These strategies are often classified as:

Continuum

Product-Focused

Process-Focused Repetitive-Focused

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Process-Focused Strategy¨ Facilities organized by

process.¨ Low volume, high variety

products.¨ Products follow many

different paths.¨ Other names:

¨ Intermittent process.¨ Job shop.

1

3 4

2

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Examples

Bank

Machine Shop

Hospital

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Process Focused-Pros & ConsAdvantages:

◦ Greater product flexibility.◦ More general purpose equipment.◦ Lower initial capital investment.

Disadvantages:◦ High variable cost per unit.◦ More highly trained personnel.◦ More difficult production planning &

control.◦ Low equipment utilization (5% to

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Repetitive Focused StrategyFacilities often organized by

assembly linesCharacterized by modules

◦ Parts & assemblies made previouslyModules combined for many

output optionsOther names

◦ Assembly line ◦ Production line

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Considerations in Repetitive Focused Strategy

More structured than process-focused, less structured than product focused

Enables quasi-customization

Using modules, it enjoys economic advantage of continuous process, and custom advantage of low-volume, high-variety model

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Examples

Truck

Clothes Dryer

Fast Food

McDonald’sover 95 billion served

McDonald’sover 95 billion served

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¨ Facilities are organized by product

¨ High volume, low variety products

¨ Where found¨ Discrete unit manufacturing¨ Continuous process manufacturing

¨ Other names¨ Line flow production¨ Continuous production

Product Focused Strategy

Operation

Product A

Product B

11 22 33

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Examples

Light Bulbs (Discrete)

Paper (Continuous)

.

Soft Drinks (Continuous, then Discrete)

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Product Focused-Pros & ConsAdvantages:

◦ Lower variable cost per unit.◦ Lower but more specialized labor skills.◦ Easier production planning and control.◦ Higher equipment utilization (70% to

90%).Disadvantages:

◦ Lower product flexibility.◦ More specialized equipment.◦ Higher capital investment.

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Process Focus Repetitive Focus Product Focus

1. Product: Smallquantity, largevariety

1. Product: Long runs,usually standardized

1. Product: Largequantities, smallvariety

2. Equipment:General purpose

2. Equipment: Special;assembly line

2. Equipment:Special-purpose

3. Operators broadlyskilled

3. Employees modestlytrained

3. Operators lessbroadly skilled

4. Many jobinstructions

4. Repetitive operations4. Few work orders andjob instructions;standardization

Summary

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Mass CustomizationRapid, low-cost production to

fulfill unique customer desires.

Distinctions between process, repetitive and product focus blur, making variety and volume issues less significant.

Very hard to achieve.

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Mass Customization at Dell Computer Company

Sells custom-built PCs directly to consumer.

Builds computers rapidly, at low cost, and only when ordered.

Integrates the Web into every aspect of business.

Operates with six days inventory.

Research focus on software to make installation and configuration of PCs fast and simple.

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Process Analysis and DesignProcess should:

◦Be designed to achieve competitive advantage - differentiation, response, or low cost.

◦Eliminate steps that do not add value.

◦Maximize customer value, as perceived by he custom

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Tools for Process DesignFlow DiagramsProcess ChartsTime-Function/Process MappingService Blueprinting

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SUBJECT: Request tool purchase

Dist (ft) Time (min) Symbol Description

lðo DÑ Write order

¡ðo wÑ On desk

75 ¡ è oDÑ To buyer

¡ðn DÑ Examine

¡ = Operation; ð = Transport; o = Inspect; D = Delay; Ñ = Storage

Process Chart Example

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Customer

Sales

Production control

Plant A

Warehouse

Plant B

Transport

Order Product

Process Order

Print

Extrude

Receive

product

Wait

Move

Wait Wait Wait

Move

Ord

er

Ord

er

WIP

WIP

WIP W

IP

Pro

du

ct

Pro

du

ct

Pro

du

ct

12 days 1 day 1 day 1 day 1 day13 days 4 days 10 days 9 days

Time Function Map

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Process Design for Services

Consider customization and labor intensity. Degree of customization.

◦ High: Focus on specialization and uniqueness (equipment, training, etc.).

◦ Low: Focus on standardization and automation.

Degree of labor intensity. ◦ High: Focus on personalization & human

resources (selection, training, etc.)◦ Low: Use technology and automation.

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Process Design for Services

Mass Service

Professional Service

Service Factory

Service Shop

Commercial Banking

General purpose law

firms

Fine dining

restaurants

Retailing

Personal banking

Boutiques

Degree of CustomizationD

eg

ree o

f Lab

or

Inte

nsit

y

Low

Law clinics

Warehouse and catalog stores Fast food

restaurants

Vending machines

Hig

h

Low High

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Separation: Different services in different places.

Self-service: Customers serve themselves.Postponement: Customize at delivery.Focus: Restrict offerings.Automation: Automate where appropriate.Scheduling: Precise personnel scheduling.

Improving Service Productivity

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Process Reengineering

The fundamental rethinking and radical redesign of business processes to bring about dramatic improvements in performance

Relies on reevaluating the purpose of the process and questioning both the purpose and the underlying assumptions

Requires reexamination of the basic process and its objectives

Focuses on activities that cross boundaries

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Facility Planning

How much long-range capacity is needed?

When more capacity is needed?Where facilities should be located?How facilities should be arranged?

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Definition and Measures of Capacity

Capacity:

Design Capacity:

Effective capacity:

The maximum output of a system in a given period.

The maximum capacity that can be achieved under ideal conditions.Example: 200/day

The expected capacity given the current operating environment and constraints;may be viewed as a percentage of design capacity.Example: 180/day or 90%

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Utilization and Efficiency

Utilization = Percent of design capacity achieved.

Efficiency = Percent of effective capacity achieved.

Utilization = Actual output Design capacity

Efficiency = Actual output

Effective capacity

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Design capacity = 120/day.

Effective capacity = 100/day.

Actual output = 80/day.Utilization = Actual output

Design capacity

Utilization & Efficiency Example

Efficiency = Actual output Effective capacity

= 80/120 = 67%

= 80/100 = 80%

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Anticipated output = Design Capacity x Effective Capacity % x Efficiency

Example: ◦ Design capacity = 150 units per day◦ Effective capacity = 80%◦ Efficiency = 90%

Anticipated output = 150 x 0.80 x 0.90 = 108 per day.

Efficiency = 90%; Utilization = 108/150=72%

Anticipated Output

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Capacity Planning Process¨ Forecast Demand.¨ Compute Needed Capacity.¨ Develop Alternative Plans.¨ Evaluate Capacity Plans.

¨ Quantitative & Quantitative factors.

¨ Select Best Capacity Plan.¨ Implement Best Plan.

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Vary staffing. Change equipment

& processes. Change methods. Redesign the

product/service for faster processing.

Capacity Management¨ Vary prices.

¨ Vary promotion.¨ Backorder.¨ Offer complementary

products.

Demand Management

Managing Existing Capacity

¨ To make capacity match demand, either:¨ Adjust demand = Demand

management.¨ Adjust capacity = Capacity

management.

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Capacity Expansion Options – Capacity Leads Demand

Expected Demand

Expected Demand

Time in Years

Time in YearsD

em

an

dD

em

an

d

New Capacity

New Capacity

Small expansions

Large expansion

¨ Add new capacity in advance of increasing demand.¨ Advantages:

¨ Can capture market.¨ Discourage

competition.¨ Disadvantages:

¨ Expensive and risky. ¨ Demand may not

materialize.¨ Size of needed

expansion relies on forecast.

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Capacity Expansion Options – Capacity Lags Demand

¨ Add new capacity after demand materializes.¨ Advantages:

¨ Lower cost.¨ Less risk.¨ Size of expansion

known. ¨ Disadvantages:

¨ May be too late to market.

Expected Demand

Time in Years

Dem

an

d New Capacity

Small expansions

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Break-even Analysis¨ To evaluate process &

equipment alternatives.¨ Objective:

¨ Find the point ($ or units) at which total cost equals total revenue, -or-

¨ Find the range of output over which different alternatives are preferred.

¨ Assumptions:¨ Revenue & costs are related linearly to volume.¨ All information is known with certainty.¨ No time value of money.

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Break-even Analysis - Costs

Fixed costs: Costs independent of the volume of units produced. ◦Depreciation, taxes, debt, mortgage

payments, etc.

Variable costs: Costs that vary with the volume of units produced. ◦Labor, materials, portion of utilities, etc.

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Break-even Chart

Volume (units/period)

Dollars

Profit

Loss Fixed cost

Variable costTotal cost line

Total revenue line

Breakeven pointTotal cost = Total revenue

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Break-even EquationsF = Fixed cost per unit time.V = Variable cost per unit produced.x = Number of units produced per unit time.P = Revenue (price) per unit

TC = Total costs per unit time = F + VxTR = Total revenue per unit time = PxProfit = TR - TCAt break-even point: Total Cost = Total

Revenue

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Break-even Example 1A firm produces radios with a fixed cost of

P7,000 per month and a variable cost of P5 per radio. If radios sell for P8 each:

1a) What is the break-even point?TR = TC so 8x = 7000 + 5xx = 7000/3 = 2,333.333 radios per month

1b) What output is needed to produce a profit of $2,000/month?Profit = 2000/month so TR - TC = 8x - (7000 + 5x) = 2000

x = 9000/3 = 3,000 radios per month

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Break-even Example 1 - continued

1c) What is the profit or loss if 500 radios are produced each week?First, get monthly production:

50052/12 = 2,166.6667 radios per month

Then calculate profit or loss TR - TC = 82166.6667 - (7000 +

52166.6667) = P-500 per month

($500 loss per month)

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Time Value of Money - Net Present Value

Future cash receipt of amount F is worth less than F today.F = Future value N years in the future.P = Present value today.i = Interest rate.

NN

i

FPiPF

)1()1(

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Limitations of Net Present Value

Investments with the same NPV will differ:◦ Different lengths.

◦ Different salvage values.

◦ Different cash flows.

Assumes we know future interest rates!

Assumes payments are always made at the end of the period.

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END

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