Designing Goods and Services and Process Selection Chapter 3

MGMT 326 Foundations of Operations Introduction Strategy Managing Projects Quality Assurance Capacity and Facilities Planning & Control Products & Processes Product Design Process Design

Strategy and Product Design The core product may be a good or a service Product design should support the business strategy Product design should meet the needs of a target market. Product design should give the company a competitive advantage.

Feasibility Study Purpose is to determine whether the company can make a product that  Meets the needs of customers in a target market  Can be made by the company with the required level of quality and delivery schedule  Can be sold at a price that customers are willing to pay  While allowing the company to meet its profit targets. This depends on costs estimated by Accounting and revenue estimated by Marketing

Operations Issues in Product Design Product design and technology  Product design is a joint responsibility of marketing, operations, engineering (in manufacturing) and Accounting/Finance Process technology (along with engineering) Would we need a new or modified facility? Can the firm make this product with consistent quality? How many workers will we need?  What skills will they need?

Designing Goods Form design: Sensory aspects of the product (aesthetics)  Size, color, shape, sound  "Look and feel"  Form design contributes to customer's impressions of quality Functional design: how the product performs

Form Design: How the Product Looks, Etc. Ipod NanoToyota Camry

Functional Design of Goods What the Product Does

Functional Design of Goods (2) How the Product Performs Fitness for use: product performs as intended Durability: how long the product lasts Reliability: consistent performance Maintainability: ease and cost of repairs

Learning from Other Companies Benchmarking: comparing your operations with those of a "best in class" firm  Product benchmark – compare your product with competing products  Process benchmark  How competing products or services are produced  How other companies perform business functions  Cost benchmark – what your competitors spend to make comparable products

Learning from Other Companies (2) Reverse engineering: taking your competitor's products apart and figuring out how it is made  Physical products  Software Market research on competitor's products: customer needs and satisfaction

Design for Manufacture Value engineering: Eliminate product features that add cost but do not add value to the customer. Reduce the number of parts.  Reduces the cost of ordering, purchasing, and storing parts.  Reduces the space required to hold inventory  Reduces the number of tools and operations required (by eliminating bolts, screws, etc.)  Reduces the time required to make the product

Design for Manufacture (2) Example of reducing the number of parts, operations, and tools.

Design for Manufacture (3) Modular design: Design products to be assembled from standard components.  Example: Dell buys standard video cards, processors, power supplies, hard drives, etc., and assembles computers Use standard parts to reduce design costs and purchasing costs.  Examples: Computer makers often buy standard power supplies.

Design for the Environment: Materials Make the product recyclable. Make the product from recycled materials. Make products from safer materials  Example: lead-free paint Use less material in the product and packaging.

Design for the Environment Recyclable Parts in a BMW

Design for the Environment: Energy Make products that require less energy. Make products that use alternative energy sources  Wind power  Solar power Make products that use renewable energy sources  Example: Ethanol from corn (E85 fuel is 85% ethanol)

Sequential vs. Concurrent Design

Concurrent Engineering Design the product and the process at the same time. Use a design team that includes marketing, operations, engineering, operations, and suppliers.  Stay in touch with customers during the design process. Requires good project management and coordination among all groups involved.

Advantages of Concurrent Engineering Increases the chances of a successful product. Shorter design time  Shortens time to market.  Reduces design costs Supplier expertise can help design a product that meets customer needs at lower cost Reduces the need to make expensive changes in the product and the process later

Intermittent Operations Intermittent operations: processes used to produce a variety of products with different processing requirements at lower volumes  Project processes: used to make one-of-a-kind items to customer specifications  Batch processes: used to make small quantities of products in batches based on customer orders or specifications  Also called job shops

Repetitive Operations Repetitive operations: Processes used to make one product or a few standardized products in high volume  Line process – also called an assembly line or flow shop  May have assemble-to-order options  Continuous process: operates continuously, produces a high volume of a fully standardized product Some firms use more than one type of process

Underlying Process Relationship Between Volume and Standardization High-volume processes are usually more standardized than low-volume processes.

Process Choice and Layout Intermittent operations usually use a process (department) layout: workers & equipment are grouped by function Different products may take different paths through the production process Repetitive operations use a product layout: workers & equipment are grouped in the order in which they will be needed. The product passes from one work station to the next.

Process Choice and Inventory Policy

Fixed and Variable Costs Fixed costs (F) do not change with volume in the short term  Examples: facilities, equipment, staff overhead Variable costs (VC) change with volume in the short term.  Examples: labor, materials  Note: In the United States, labor costs are considered to be variable costs. Total cost of production(TC):  Assume Q = units produced = units sold  TC = F + (VC)Q

Breakeven Analysis The breakeven point (in terms of units) is the volume at which total costs = revenue  SP = selling price  Revenue = (SP)Q  At the breakeven point (Q BE ), F + (VC)Q=(SP)Q 

Interpreting Breakeven Analysis When Q = Q BE, the firm does not make money or lose money When Q < Q BE,  revenue < costs,  the firm loses money When Q > Q BE,  revenue > costs,  the firm makes a profit Q BE will be different for different production technologies

Process Choice and Costs Intermittent processes  Lower capital costs than repetitive processes  Lower breakeven point than repetitive processes  High variable cost per unit  High total cost per unit Repetitive processes  Higher capital costs than intermittent processes  Higher breakeven point than intermittent processes  Low variable cost per unit  Low total cost per unit if volume is high

Process Design Tools Process flow analysis is a tool used to analyze and document the sequence of steps within a total process. Usually first step in process reengineering. Process reengineering is the fundamental rethinking and radical redesign of a process to bring about dramatic improvements in performance  Cost  Quality  Time  Flexibility

Process Design Tools (2) Both operations processes and business processes can be re-engineered. Re-engineer a process before you automate it or computerize it.

Process Flow in a Pizza Restaurant

Designing Services – Service Package Physical elements: facility, equipment and furnishings, inventories Sensory and aesthetic aspects Psychological benefits Quality standards

Approaches to Service Design Design for efficiency:  Compete on consistency, cost, speed  High standardization  Limited variety  Automation may be used  High-volume services purchase at low cost.  Example: fast food

Approaches to Service Design (2) Customer involvement in producing the service  The customer does part of the work  Reduces costs and may allow the customer to do some customization  Example: self-service salad bar Many services use both high efficiency and customer involvement  Examples: ATM's, vending machines, self- checkouts in stores

Approaches to Service Design (3) High customer attention  Highly customized service, provided by highly trained people  Used in professional services (medical care, legal services, high-end tax preparation services)  Also used by luxury retailers, hotels, restaurants