CHAPTER 4 Product and Service Design. -2 Major factors in design strategy Cost Quality Time-to-market Customer satisfaction Competitive advantage Product.

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CHAPTER4

Product and Service Design

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Major factors in design strategy Cost Quality Time-to-market Customer satisfaction Competitive advantage

Product and Service DesignProduct and Service Design

Product and service design – or redesign – should be closely tied to an organization’s strategy

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Translate customer wants and needs into product and service requirements

Refine existing products and services Develop new products and services Formulate quality goals Formulate cost targets Construct and test prototypes Document specifications

Product or Service Design ActivitiesProduct or Service Design Activities

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Reasons for Product or Service DesignReasons for Product or Service Design

Economic

Social and demographic

Political, liability, or legal

Competitive

Technological

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Objectives of Product and Service DesignObjectives of Product and Service Design

Main focus Customer satisfaction

Secondary focus Function of product/service Cost/profit Quality Appearance Ease of production/assembly Ease of maintenance/service

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Taking into account the capabilities of the organization in designing goods and services

Designing For OperationsDesigning For Operations

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Legal FDA, OSHA, IRS Product liability Uniform commercial code

Ethical Releasing products with defects

Environmental EPA

Legal, Ethical, and Environmental IssuesLegal, Ethical, and Environmental Issues

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Regulations & Legal ConsiderationsRegulations & Legal Considerations

Product Liability - A manufacturer is liable for any injuries or damages caused by a faulty product.

Uniform Commercial Code - Products carry an implication of merchantability and fitness.

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Designers Adhere to GuidelinesDesigners Adhere to Guidelines

Produce designs that are consistant with the goals of the company

Give customers the value they expect Make health and safety a primary concern Consider potential harm to the environment

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Other Issues in Product and Service DesignOther Issues in Product and Service Design

Product/service life cycles How much standardization Product/service reliability Range of operating conditions

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Life Cycles of Products or ServicesLife Cycles of Products or Services

Time

Introduction

Growth

Maturity

Saturation

Decline

Dem

and

Figure 4.1

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CHAPTER5

Capacity PlanningFor Products and Services

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Capacity PlanningCapacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?

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1. Impacts ability to meet future demands2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning

Importance of Capacity DecisionsImportance of Capacity Decisions

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CapacityCapacity

Design capacity maximum output rate or service capacity an

operation, process, or facility is designed for Effective capacity

Design capacity minus allowances such as personal time, maintenance, and scrap

Actual output rate of output actually achieved--cannot

exceed effective capacity.

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Efficiency and UtilizationEfficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages

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Actual output = 36 units/day Efficiency = =

90% Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day =

72% Design capacity 50 units/day

Efficiency/Utilization ExampleEfficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

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Determinants of Effective CapacityDeterminants of Effective Capacity

Facilities Product and service factors Process factors Human factors Operational factors Supply chain factors External factors

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Strategy FormulationStrategy Formulation

Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities

Cost of building and operating Technological changes

Rate and direction of technology changes Behavior of competitors Availability of capital and other inputs

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Key Decisions of Capacity PlanningKey Decisions of Capacity Planning

1. Amount of capacity needed

2. Timing of changes

3. Need to maintain balance

4. Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

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Steps for Capacity PlanningSteps for Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity

3. Identify alternatives

4. Conduct financial analysis

5. Assess key qualitative issues

6. Select one alternative

7. Implement alternative chosen

8. Monitor results

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Make or BuyMake or Buy

1. Available capacity

2. Expertise

3. Quality considerations

4. Nature of demand

5. Cost

6. Risk

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Developing Capacity AlternativesDeveloping Capacity Alternatives

1. Design flexibility into systems

2. Take stage of life cycle into account

3. Take a “big picture” approach to capacity changes

4. Prepare to deal with capacity “chunks”

5. Attempt to smooth out capacity requirements

6. Identify the optimal operating level

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Economies of ScaleEconomies of Scale

Economies of scale If the output rate is less than the optimal level,

increasing output rate results in decreasing average unit costs

Diseconomies of scale If the output rate is more than the optimal level,

increasing the output rate results in increasing average unit costs

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Evaluating AlternativesEvaluating Alternatives

Minimumcost

Av

era

ge

co

st

per

un

it

0 Rate of output

Production units have an optimal rate of output for minimal cost.

Figure 5.3

Minimum average cost per unit

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Evaluating AlternativesEvaluating Alternatives

Minimum cost & optimal operating rate are functions of size of production unit.

Av

era

ge

co

st

per

un

it

0

Smallplant Medium

plant Largeplant

Output rate

Figure 5.4

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Need to be near customers Capacity and location are closely tied

Inability to store services Capacity must be matched with timing of

demand Degree of volatility of demand

Peak demand periods

Planning Service CapacityPlanning Service Capacity

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Figure 5.5a

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0

Total r

evenue

Figure 5.5b

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Total r

even

ue

Total cost

Figure 5.5c

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Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

Quantity

FC + VC = TC

FC + VC = TC

FC + VC =

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5.6a

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Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

$

TC

TC

TCBEP2

BEP3

TR

Quantity

1

2

3

Multiple break-even points

Figure 5.6b

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1. One product is involved2. Everything produced can be sold3. Variable cost per unit is the same regardless

of volume4. Fixed costs do not change with volume5. Revenue per unit constant with volume6. Revenue per unit exceeds variable cost per

unit

Assumptions of Cost-Volume AnalysisAssumptions of Cost-Volume Analysis

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Financial AnalysisFinancial Analysis

Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes.

Present Value - the sum, in current value, of all future cash flows of an investment proposal.

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Calculating Processing RequirementsCalculating Processing Requirements

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

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Location/CriteriaLocation/Criteria

PS11

Guitar site location

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Capacity/DesignCapacity/Design

STA11

Demand/ patients/ staffing/ variation at St. Alexius Hospital

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Process Flow ImprovementProcess Flow Improvement

SU6

Redesign of layout at Toyota