1. Chapter 3 – Product Design & Process Selection
Operations Management by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
© 2007 Wiley

2. Learning Objectives
Define product design and its strategic impact on organization
Describe steps to develop a product design
Using break-even analysis as a tool in selecting between product alternatives
Identity production process differences and their characteristics
Understand how to use a process flowchart
Understand how to use process performance metrics
Understand current technology advancements and how they impact process design
Understand issues impacting the design of service operations
© 2007 Wiley

3. Product & Service Design
Product design – the process of deciding the companies product/service unique characteristics and features
Product design must support the business strategy
Product design defines a product’s characteristics
- Appearance, materials, dimensions, tolerances, performance standards
Service industries must define both the service and concept
- Physical elements, aesthetic & psychological benefits e.g. promptness, friendliness, ambiance
Product and service design must match the needs and preferences of the targeted customer group
© 2007 Wiley

4. Product & Service Design Steps
Step 1 - Idea Development
- Someone thinks of a need and a product/service design to satisfy it
e.g. customers, marketing, engineering, competitors,
benchmarking, reverse engineering
Step 2 - Product Screening
- Every business needs a formal/structured evaluation process
e.g. fit with facility and labor skills, size of market, contribution margin,
break-even analysis, return on sales
Step 3 – Preliminary Design and Testing
- Technical specifications are developed, prototypes built, testing starts
Step 4 – Final Design
- Final design based on test results, facility, equipment, material, & labor
skills defined, suppliers identified
© 2007 Wiley

5. Break-Even Analysis: Graphical Approach
Compute quantity of goods that must be sold to break-even
Compute total revenue at an assumed selling price
Compute fixed cost and variable cost for several quantities
Plot the total revenue line and the total cost line
Intersection is break-even
Sensitivity analysis can be done to examine changes in all of the assumptions made
© 2007 Wiley

6. Break-Even Analysis
Total cost = fixed costs + variable costs (quantity):
Revenue = selling price (quantity)
Break-even point is where total costs = revenue:
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7. Example
A firm estimates that the fixed cost of producing a line of footwear is $52,000 with a $9 variable cost for each pair produced. They want to know:
If each pair sells for $25, how many pairs must they sell to break-even?
If they sell 4000 pairs at $25 each, how much money will they make?
© 2007 Wiley

8. Example Solved Break-even point: Profit = total revenue – total costs
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9. Total revenues = Total costs @ break-even point Q
Break-even calculation: A company is planning to establish a chain of movie theaters. It estimates that each new theater will cost approximately $1 Million. The theaters will hold 500 people and will have 4 showings each day with average ticket prices at $8. They estimate that concession sales will average $2 per patron. The variable costs in labor and material are estimated to be $6 per patron. They will be open 300 days each year. What must average occupancy be to break even?
Break Even Point
Total revenues = Total break-even point Q
Selling price*Q = Fixed cost + variable cost*Q
($8+$2)Q= $1,000,000 + $6*Q
Q = 166,667 patrons (28% occupancy)
What is the gross profit if they sell 300,000 tickets
Profit = Total Revenue – Total Costs
P = $10*300,000 – (1,000,000 + $6*300,000)
P = $200,000
If concessions average $.50/patron, what is break-even Q now? (sensitivity analysis)
($8.50)Q = 1,000,000 - $6*Q
Q = 400,000 patrons (67% occupancy)
© 2007 Wiley

10. Other Product Design Factors
Need to Design for Manufacturing – DFM
Minimize parts
Design parts for multiply applications
Use modular design
Avoid tools
Simplify operations
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11. Other Design Factors Consider product life cycle stages
Introduction
Growth
Maturity
Decline
Facility & process investment depends on life cycle
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12. Other Design factors
Old “over-the –wall” sequential design process should not be used
Each function did its work and passed it to the next function
Replace with a Concurrent Engineering process
All functions form a design team working together to develop specifications, involve customers early, solve potential problems, reduce costs, & shorten time to market
© 2007 Wiley

13. Process Selection Process selection is based on five considerations
Type of process; range from intermittent to continuous
Degree of vertical integration
Flexibility of resources
Mix between capital & human resources
Degree of customer contact
Process types can be:
Project Process
Batch Process
Line Process
Continuous Process
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14. Underlying Process Relationship Between Volume and Standardization
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15. Volume and Process Choice
Low Volume typically means
Project or Batch processes
Less vertical integration
More resource flexibility
Less capital intensity
Higher skilled labor
More customer involvement
More customized products
Make or assemble to order strategy
High Volume typically means
Line/continuous processes
More vertical integration
Less resource flexibility
More capital intensity
More specialized labor
Little to no customer involvement
Standardized products
Make to stock strategy
© 2007 Wiley

16. Differences between Intermittent and Continuous Operations
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17. Facility Layouts and Process Choice
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18. Process Performance Metrics
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19. Linking Design & Process Selection
Organizational Decisions appropriate for different types of operations
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20. 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 Re-engineering is a structured approach used when major business changes are required as a result of:
Major new products
Quality improvement needed
Better competitors
Inadequate performance
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21. Intermittent VS. Repetitive Layouts
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22. Product and Service Strategy Options
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23. Process Decisions-Vertical Integration & Make or Buy
Vertical integration refers to the degree a firm chooses to do processes itself- raw material to sales
Backward Integration means moving closer to primary operations
Forward Integration means moving closer to customers
A firm’s Make-or-Buy choices should be based on the following considerations:
Strategic impact
Available capacity
Expertise
Quality considerations
Speed
Cost (fixed cost + variable cost)make = (fixed cost + Variable cost)buy
Business are trending toward less backward integration, more outsourcing
© 2007 Wiley

24. Manufacturing Technology Decisions
Simplify first then apply appropriate technology
Automation
Automated Material Handling:
Automated guided vehicles (AGV)
Automated storage & retrieval systems (AS/RS)
Computer-Aided Design (CAD) software
Robotics & Numerically-Controlled (NC) equipment
Flexible Manufacturing Systems (FMS)
Computer-Integrated Manufacturing (CIM)
© 2007 Wiley

25. Designing Services Service Characteristics Pure services
Quasi-Manufacturing
Mixed services
Service Package
The physical goods
The sensual benefits
The psychological benefits
Differing designs
Substitute technology for people
Get customer involved
High customer attention
© 2007 Wiley

26. Chapter 3 Highlights
Product and process design must support business and operation strategy
Product steps include idea generation, product screening, preliminary design and testing, and final design
Break-even analysis is a tool used to screen processes
Process designs range from project to batch to line to continuous
Product design and process selection decisions are linked
Process flow charts can be a useful tool in process re-design
Product and process design can be significantly enhanced by proper application of new technology
Designing service processes produce intangible products with more customer contact
© 2007 Wiley

27. Chapter 3 Homework Hints
4.a. Calculate break-even point.
b. Primarily decisions at the company’s plant(s).
8.a. Calculate/graph break-even point.
b. Calculate profit given revenue and cost data.
c. Compare profits given sales estimate differences based on the 2 prices.
d. Primarily factors at the company’s plant(s).
© 2007 Wiley