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**Operations Management Process Strategy and Capacity Planning Chapter 7**

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**Outline Four Process Strategies. Service Process Design.**

Process Focus. Repetitive Focus. Product Focus. Mass Customization Focus. Service Process Design. Process Reengineering. Capacity. Break-Even Analysis. Net Present Value.

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**Process Strategy How to produce a product or provide a service.**

Objective: Meet or exceed customer requirements. Achieve competitive advantage. Has long-run effects: Product & volume flexibility. Costs & quality . This slide can be used to introduce the concept of trade-off in process design.

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**Four Process Strategies**

1. Process focused. 2. Product focused. 3. Repetitive focused. 4. Mass customization. Several strategies may be used within one facility. Process strategies follow a continuum. This slide can be used to begin discussion of two points: - one seldom employs a pure process strategy (process, repetitive, or product) - but rather a strategy which has elements of each of the pure strategies - i.e., practical strategies lie along a continuum. - one seldom employs only a single strategy.

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**Fit of Process, Volume, and Variety**

Low Volume High Volume High Variety Small production runs (allows customization) PROCESS FOCUS (job shops, printing) MASS CUSTOMIZATION (Dell Computer) REPETITIVE FOCUS (autos, motorcycles) It may be most useful to begin discussion of this slide with the repetitive process since most student seem to have a concept of an assembly line. Once the repetitive process is introduced, one can then view changing one of the parameters, volume or length of run, and argue the need for process- or product-focus systems. Once the three types of processes have been introduced, it is probably useful to discuss precisely why the low-volume/long run, and high-volume/short run options are poor choices. Low Variety Long production runs (standardization) PRODUCT FOCUS (steel, chemicals) POOR STRATEGY

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**1. Process Focus Facilities organized by process.**

Similar processes or equipment grouped together. (Example: All drill presses are together.) Low volume, high variety products. 75% of all global products. Products follow many different paths. Other names: Intermittent process. Job shop. 1 3 4 2 You can use this slide to introduce a discussion of process-focused strategy. Examples are suggested in the following slide or may be requested of students.

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**Process Focus Examples**

Hospital Machine Shop Bank

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**Process Focus - Pros & Cons**

Advantages: 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 25%). Select one of the examples you have presented of process-focused strategy, and ask students to identify the sources of advantage and disadvantage.

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**2. Product Focus Facilities organized by product.**

High volume, low variety products. Long, continuous production runs. Discrete unit manufacturing. Continuous process manufacturing. Other names: Line flow production. Continuous production. You can use this slide to begin a discussion of product-focused strategy. The following slide outlines some advantages/disadvantages of this approach. 1 2 3 4

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**Product Focus Examples**

Soft Drinks (Continuous, then Discrete) Paper (Continuous) . Light Bulbs (Discrete) Some examples of products produced using a product-focused strategy.

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**Product Focus: Steel Plant**

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**Product Focus - Pros & Cons**

Advantages: 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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**3. Repetitive Focus Facilities often organized by assembly lines.**

Characterized by modules. Parts & assemblies made previously. Modules combined for many output options. Other names: Assembly line. Production line. You can use this slide to begin your discussion of repetitive strategies; the next suggests additional characteristics; the slide following that, some examples.

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**Repetitive Focus - Examples**

Fast Food McDonald’s over 95 billion served Clothes Dryer Truck At this point, you might compare in more detail, McDonalds (which uses a batch system) with Wendy’s (which, at least at high volumes, perhaps more closely resembles a simple assembly line).

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**Repetitive Focus - Harley Davidson**

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**Repetitive Focus - Considerations**

More structured than process focus, less structured than product focus. Enables quasi-customization. Has advantages and disadvantages of process focus and product focus.

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**Process Continuum Product Focused (continuous process) Process Focused**

(intermittent process) Repetitive Focus (assembly line) Product Focused (continuous process) Continuum High variety, low volume Low utilization (5% - 25%) General-purpose equipment Low variety, high volume High utilization (70% - 90%) Specialized equipment Another slide which may be used to summarize differences between the process strategies. Modular Flexible equipment

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**Increasing Product Variety**

Early Late Item 1970s 1990s Vehicle models 140 260 Vehicle styles 18 1,212 Bicycle types 8 19 Software titles 380,000 Web sites 9,865,982 Movie releases 267 458 New book titles 40,530 77,446 TV channels 5 851 Breakfast cereals 160 340 Items in supermarkets 14,000 20,000

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4. Mass Customization Rapid, 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! Once students understand what mass customization is, they should be asked to consider whether such an approach will move from an “option” at present, to a “necessity” in the future.

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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. Discussion of NUCOR should center around the difference between their product-oriented process and an integrated facility. The next slide highlights some of the differences.

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**Process Analysis and Design**

Process 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 the customer. You might use this slide to frame a discussion on process evaluation. Once you have discussed the questions posed on the slide, you might ask students to suggest additional questions or “tests” by which one might evaluate the “quality” of a process.

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**Tools for Process Design**

Flow Diagrams - Figures 7.2, 7.3, 7.4 Process Charts - Figure 7.7 Time-Function/Process Mapping - Figure 7.6 Service Blueprint - Figure 7.8 This slide introduces tools for process design. While examples of flow diagrams and process charts have arisen earlier in the presentation, they are repeated in the next two slides.

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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. This slide introduces tools for process design. While examples of flow diagrams and process charts have arisen earlier in the presentation, they are repeated in the next two slides.

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**Process Design for Services**

Degree of Customization Low High Mass Service Professional Service Commercial Banking Personal banking General purpose law firms Boutiques Retailing Low High Degree of Labor Intensity Service Factory Service Shop Law clinics Fine dining restaurants Warehouse and catalog stores This slide can be used to introduce the design of service processes, or to frame a discussion of the impact of customer interaction on the design of process in general. Here it is probably useful to ask that students define the nature of the customer interaction represented in each quadrant, and identify ways in which the process must be modified in light of these interactions. Fast food restaurants Vending machines

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**Improving Service Productivity - Table 7.3**

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. Students should be asked to suggest examples of companies/products employing the techniques listed on this and the next two slides.

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**Process Reengineering**

Fundamental rethinking and radical redesign of business processes. To produce dramatic improvements in performance. Re-examine the basic process and its objectives: Re-evaluate the purpose of the process. Question underlying assumptions. Focus on activities that cross boundaries. This slide merits discussion. While Process Reengineering has the potential to significantly improve both efficiency and effectiveness of an organization’s processes, its actual implementation often results in failure. Some of the points to be made: - process reengineering, if successful, will result in significant change in process, responsibilities, patterns of communication, and other organization staples. - process reengineering cannot be implemented top down - the workers actually performing the process should be the ones to redesign it. - process reengineering requires that fundamental questions (e.g., “Why are we doing this?” and “Why are we doing this this way?”) must be asked and answered.

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**Facility Planning Facility planning answers:**

How much long-range capacity is needed? When more capacity is needed? Where facilities should be located? Location - Chapter 8. How facilities should be arranged? Layout - Chapter 9. This slide provides some reasons that capacity is an issue. The following slides guide a discussion of capacity.

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**Definition and Measures of 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% Design Capacity: Effective capacity: This slide can be used to frame a discussion of capacity. Points to be made might include: - capacity definition and measurement is necessary if we are to develop a production schedule - while a process may have “maximum” capacity, many factors prevent us from achieving that capacity on a continuous basis. Students should be asked to suggest factors which might prevent one from achieving maximum capacity.

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**Utilization & Efficiency**

Utilization = Percent of design capacity achieved. Efficiency = Percent of effective capacity achieved. Actual output Utilization = Design capacity Actual output It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before. Efficiency = Effective capacity

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**Utilization & Efficiency Example**

Design capacity = 120/day. Effective capacity = 100/day. Actual output = 80/day. Actual output Utilization = = 80/120 = 67% Design capacity It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before. Actual output Efficiency = = 80/100 = 80% Effective capacity

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**Anticipated Output 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% It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.

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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. This slide outlines the capacity planning process. It is probably useful to discuss, at least briefly, each step in the process. If time permits, the boxes representing Quantitative factors, Qualitative factors, Evaluation of Capacity Plans, and Selecting the Best Capacity Plan, merit the most attention.

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**Managing Existing Capacity**

To make capacity match demand, either: Adjust demand = Demand management. Adjust capacity = Capacity management. Demand Management Capacity Management Vary prices. Vary promotion. Backorder. Offer complementary products. Vary staffing. Change equipment & processes. Change methods. Redesign the product/service for faster processing. You might begin by reminding students that the real issue is matching capacity to demand, and that we can do that by varying either capacity or demand. It might also be helpful to have students consider the magnitude of variation we can achieve for each of the alternatives listed above - and the consequences of using the alternative.

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**Complementary Products**

Sales (Units) 5,000 Total 4,000 Snow-mobiles 3,000 2,000 1,000 Jet Skis Ask students to suggest difficulties one might encounter when attempting to balance capacity through the use of complementary products. J M M J S N J M M J S N J Time (Months)

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**Capacity Expansion Options – Capacity Leads Demand**

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. Expected Demand Time in Years Demand New Capacity Small expansions Large expansion This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.

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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 Demand New Capacity Small expansions This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.

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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. This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?

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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) Total revenue line Dollars**

Profit Loss Total revenue line Dollars Fixed cost Variable cost Total cost line Breakeven point Total cost = Total revenue Volume (units/period)

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**Break-even Equations F = 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 + Vx TR = Total revenue per unit time = Px Profit = TR - TC At break-even point: Total Cost = Total Revenue

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Break-even Example 1 A firm produces radios with a fixed cost of $7,000 per month and a variable cost of $5 per radio. If radios sell for $8 each: 1a) What is the break-even point? TR = TC so 8x = x x = 7000/3 = 2, radios per month 1b) What output is needed to produce a profit of $2,000/month? Profit = 2000/month so TR - TC = 8x - ( x) = 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, radios per month Then calculate profit or loss TR - TC = 8 ( ) = $-500 per month ($500 loss per month)

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Break-even Example 2 A firm produces radios with a fixed cost of $7,000 per month and a variable cost of $5 per radio for the first 3,000 radios produced per month. For all radios produced each month after the first 3,000 the variable cost is $10 per radio (for added overtime and maintenance costs). If radios sell for $8 each: 2a) What are the break-even point(s)? Now TC has two parts depending on the level of production: For x 3000/month: TC = x For x > 3000/month: TC = (3000) + 10(x-3000) = x For any x: TR = 8x

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**Break-even Example 2 - continued**

For x 3000/month: TC = x For x > 3000/month: TC = x For any x: TR = 8x For x 3000/month: x = 8x so x = 2,333.33/month This is < 3000/month, so it is a valid break-even point. For x > 3000/month: x = 8x so x = 4000/month This is > 3000/month, so it is also a valid break-even point.

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**Break-even Example 2 Volume (units/month) 40 Dollars (Thousands)**

Total revenue line 32 24 Total cost line 16 Break-even points 8 1000 2000 3000 4000 Volume (units/month)

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Break-even Example 3 A firm produces radios with a fixed cost of $7,000 per month and a variable cost of $5 per radio for the first 2,000 radios produced per month. For all radios produced each month after the first 2,000 the variable cost is $10 per radio (for added overtime and maintenance costs). If radios sell for $8 each: 3a) What are the break-even point(s)? Again TC has two parts depending on the level of production: For x 2000/month: TC = x For x > 2000/month: TC = (2000) + 10(x-2000) = x For any x: TR = 8x

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**Break-even Example 3 - continued**

For x 2000/month: TC = x For x > 2000/month: TC = x For any x: TR = 8x For x 2000/month: x = 8x so x = 2,333.33/month This is not < 2000/month, so it is not a break-even point!! For x > 2000/month: x = 8x so x = 1500/month This is not > 2000/month, so it is not a break-even point!! THERE ARE NO BREAK-EVEN POINTS!

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**Break-even Example 3 Volume (units/month) 40 Dollars (Thousands) 32 24**

Total cost line Total revenue line 16 8 1000 2000 3000 4000 Volume (units/month)

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**Other Break-even Possibilities**

40 Dollars (Thousands) 32 24 Total cost line Total revenue line 16 8 1000 2000 3000 4000 Volume (units/month)

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**Crossover Chart Process A: Low volume, high variety**

Process B: Repetitive Process C: High volume, low variety Total cost - Process A Total cost - Process B Total cost - Process C This slide can be used to introduce the role of breakeven analysis in the process selection decision. Process A Process B Process C Lowest cost process

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**Crossover Example Process A: FA = $5000/week VA = $10/unit**

Process B: FB = $8000/week VB = $4/unit Process C: FC = $10000/week VC = $3/unit Over which range of output is each process best? 1. At x = 0 A is best (FA is smallest fixed cost). 2. As x gets larger, either B or C may become better than A: B < A for x > 3000/6 or x > 500/week C < A for x > 5000/7 or x > /week so B is best for x > 500/week 3. Eventually, C will become better than B (VC< VB). C < B for x > 2000/week

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**Crossover Example Summary:**

A is best for output of units per week. B is best for output of units per week. C is best for output greater than 2000 units per week. 500 714 2000 A<B A<C B<C A<B<C B<A C<A B<C<A B<A<C C<B C<B<A

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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. This slide suggests that the process selection decision should be considered in light of the larger strategic initiative

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**Annuities An annuity is a annual series of equal payments.**

R = Amount received every year for N years. S = Present value today. S = RX where X is from Table 7.5 (page 264). Example: What is present value of $1,000,000 paid in 20 equal annual installments? For i=6%/year, S = 5000011.47 = $573,500 For i=14%/year, S = 500006.623 = $331,150 This slide suggests that the process selection decision should be considered in light of the larger strategic initiative

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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. A commentary on Net Present Value, and the larger issues of models in general.

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