Process Selection

Overview In economics the phrase efficient market is used. The idea is that through markets consumers get the goods they want and the goods are made the least expensive way. This chapter reminds me of how this market efficiency is carried out. So, how should we make the products we make? The decisions made have long term implications because modern production tends to be capital intensive (which can be expensive) and has an impact on how other functions in the business operate.

Product Flow The author suggests there are 3 ways we go about making goods and services. We have 1) Line flow, 2) batch flow, and 3) projects. When in a manufacturing setting product flow = material flow in a conversion process. In a service setting product flow = flow of customers or information.

Line flow Line flow production is a linear sequences of events in production. Do A, then B, and so on. Mass production is line flow where discrete parts are assembled. Continuous production for products like beer and electricity are line flow were the product can be pumped or flows from one operation to another. Line flow is efficient in the sense that high volume of output leads to low average cost. But, the process is inflexible because once the process is set up about the only thing that can be changed is the amount of time you use the system (the number of shifts you operate).

Line flow Since line flow production often takes a large amount of capital investment, high volume of output (and thus sales) must be present to economically justify the operation. Cars, consumer durables and mass produced consumer goods follow this pattern.

Batch Production of this type utilizes work centers – a group of similar machines (general purpose equipment) or processes used to make a product. A batch of the product flows from one work center to another. Examples: furniture and dishware. This type of production often uses skilled labor and may be characterized by a jumbled work flow. This means one work center can be getting backed-up before product moves on to another center. Low volume output occurs with many variations in the product. So, if you need high volume this is not the method to use.

Batch Throughput ratio = (total processing time for the job divided by total time in operations) times 100. In this ratio the numerator is the actual time spent working on the product, while the denominator is the total time the product was in operations, even during down time due to back-ups and other problems. Batch product throughput ratios are in the neighborhood of 10 to 40%, while line flow production is in the 90+% area.

Project A project is the production method used for custom and unique products such as concerts, construction and making large airplanes. Basically production occurs at one site and materials and labor are brought to the site. The labor is usually highly skilled. General purpose equipment is used. Table 4.1 page 59 lists several characteristics of these production methods.

Customer Orders A different way to think about production is by focusing on the customer method of order. Here we have 1) Made to stock (MTS), 2) made to order (MTO), and assemble to order (ATO). MTO The cycle of production in MTO is customer orders product, product is designed, material acquired, labor puts product together, deliver to customer, customer pays. Measures of performance with the method are lead time ( the time it takes to design and make the product) and % of orders completed on time (where on time could be when customer requested date of delivery or when producer promised).

Customer Orders MTS Here production follows a forecast of demand and production is placed in inventory so that there is product on hand when the consumer wants it. Measures of performance here are service level (the % of orders filled from inventory and is targeted at 90+%), time it takes to replenish inventory, inventory turnover, among others. A big objective here is to meet desired service level at minimum cost.

Customer Orders ATO This method is a combination of MTO and MTS. Subassemblies are made in advance and stocked and then the final product is MTO. Because carrying inventory is costly in terms of space needed and having material tied up in unsold product, ATO can reduce some of these costs. Tables 4.2 and 4.3 pages 62-64 summarizes these processes.

Process selection influences The author suggest that 1) market conditions, 2) capital requirements, 3) type of labor needed and 4) Technology risk (risk that innovation may come along that will make a process obsolete before its costs are recovered) are important factors in determining what type of production process should be used. Line production will be better suited to high volume demand that can cover the costs of large capital intensive production. Plus the labor needed is relatively less skilled. A draw back here is that technology risk could be high since there is a large investment. Batch and projects tend to have lower volume production with less capital required. Labor is more skilled and there is low technology risk.

Product Process Matrix Figure 4.5 page 66 is a product process matrix. Across the top of the matrix we see a product life-cycle. Some products start out being built in a low volume way and then later the product becomes mass produced. The auto would be an example of this. Before Henry Ford, cars were made in more of a batch mode. The author suggests that the product structure needs to match the appropriate process structure for the firm to be successful. If the firm moves along the main diagonal it will be okay. If the firm moves above the diagonal production cost may be too high for the product structure, and if below the customer may not like the more standardized high volume product.

Focused Operations Economies of scale in an economics book means reduction in the average total cost of producing a product as the firm expands the size of its plant in the long run. It is the economy of mass production. The author suggests some firms may actually produce more than one product in a plant and as it looks to benefit from economies of scale it may actually cause one of the products being made to be made in a less than desirable fashion. The drive to get economies has the firm lose its “focus” on each product. The solution may be to separate out each product and produce it with the “plant within a plant” mentality so that proper focus can be given to each product.

Mass Customization The words mass customization probably have not been used together very often until the last decade or so. Words used together that do not seem like they should be used together is called an oxymoron. The reason for the oxymoron is that production used to be either mass production with its focus on economies of scale, or more customization catering to specific desires consumers have. But in recent times with better production technologies and working with economies of scope (not the big bottle of scope, but the benefits of a single process being able to produce a wide variety of products) firms have been able to cater to consumer demand with significant cost savings.

Mass Customization Mass customization has several forms: 1) Mass customized services, 2) Modular production and ATO, 3) Fast changeover, and 4) Postponement of options.