Productions and Operations Management Process Strategy and Capacity Planning December 11, 2010 Jaisa Dacanay Gapuz, CPA
Aug 20, 2015
Productions and Operations Management
Process Strategy andCapacity Planning
December 11, 2010
Jaisa Dacanay Gapuz, CPA
Learning Objectives: Identify or Define:
A. What is Process StrategyB. The Four Process Strategy
◦ Process focus◦ Repetitive focus◦ Product focus◦ Mass customization focus
C. Service Process Design and Issues
D. Capacity and Capacity Planning
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Outline:Process StrategyFour Process Strategies
◦ Process Focus.◦ Repetitive Focus.◦ Product Focus.◦ Mass Customization Focus.
Service Process DesignProcess ReengineeringFacility PlanningCapacity Planning
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Process StrategyAn organization’s approach to transform
resources into goods and services. •Process strategy is the pattern of decisions made in managing processes so that they will achieve their competitive priorities. It involves the use of an organization’s resources to provide something of value.•Major process decisions include:
Process StructureCustomer InvolvementResource FlexibilityCapital Intensity
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Types of Process Strategies¨ Process strategies follow a continuum
¨ Within a given facility, several strategies may be used
¨ These strategies are often classified as:
Continuum
Product-Focused
Process-Focused Repetitive-Focused
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Process-Focused Strategy¨ Facilities organized by
process.¨ Low volume, high variety
products.¨ Products follow many
different paths.¨ Other names:
¨ Intermittent process.¨ Job shop.
1
3 4
2
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Process Focused-Pros & ConsAdvantages:
◦ 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
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Repetitive Focused StrategyFacilities often organized by
assembly linesCharacterized by modules
◦ Parts & assemblies made previouslyModules combined for many
output optionsOther names
◦ Assembly line ◦ Production line
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Considerations in Repetitive Focused Strategy
More structured than process-focused, less structured than product focused
Enables quasi-customization
Using modules, it enjoys economic advantage of continuous process, and custom advantage of low-volume, high-variety model
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Examples
Truck
Clothes Dryer
Fast Food
McDonald’sover 95 billion served
McDonald’sover 95 billion served
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¨ Facilities are organized by product
¨ High volume, low variety products
¨ Where found¨ Discrete unit manufacturing¨ Continuous process manufacturing
¨ Other names¨ Line flow production¨ Continuous production
Product Focused Strategy
Operation
Product A
Product B
11 22 33
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Examples
Light Bulbs (Discrete)
Paper (Continuous)
.
Soft Drinks (Continuous, then Discrete)
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Product Focused-Pros & ConsAdvantages:
◦ 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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Process Focus Repetitive Focus Product Focus
1. Product: Smallquantity, largevariety
1. Product: Long runs,usually standardized
1. Product: Largequantities, smallvariety
2. Equipment:General purpose
2. Equipment: Special;assembly line
2. Equipment:Special-purpose
3. Operators broadlyskilled
3. Employees modestlytrained
3. Operators lessbroadly skilled
4. Many jobinstructions
4. Repetitive operations4. Few work orders andjob instructions;standardization
Summary
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Mass CustomizationRapid, 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.
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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.
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Process Analysis and DesignProcess 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 he custom
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Tools for Process DesignFlow DiagramsProcess ChartsTime-Function/Process MappingService Blueprinting
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SUBJECT: Request tool purchase
Dist (ft) Time (min) Symbol Description
lðo DÑ Write order
¡ðo wÑ On desk
75 ¡ è oDÑ To buyer
¡ðn DÑ Examine
¡ = Operation; ð = Transport; o = Inspect; D = Delay; Ñ = Storage
Process Chart Example
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Customer
Sales
Production control
Plant A
Warehouse
Plant B
Transport
Order Product
Process Order
Extrude
Receive
product
Wait
Move
Wait Wait Wait
Move
Ord
er
Ord
er
WIP
WIP
WIP W
IP
Pro
du
ct
Pro
du
ct
Pro
du
ct
12 days 1 day 1 day 1 day 1 day13 days 4 days 10 days 9 days
Time Function Map
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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.
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Process Design for Services
Mass Service
Professional Service
Service Factory
Service Shop
Commercial Banking
General purpose law
firms
Fine dining
restaurants
Retailing
Personal banking
Boutiques
Degree of CustomizationD
eg
ree o
f Lab
or
Inte
nsit
y
Low
Law clinics
Warehouse and catalog stores Fast food
restaurants
Vending machines
Hig
h
Low High
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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.
Improving Service Productivity
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Process Reengineering
The fundamental rethinking and radical redesign of business processes to bring about dramatic improvements in performance
Relies on reevaluating the purpose of the process and questioning both the purpose and the underlying assumptions
Requires reexamination of the basic process and its objectives
Focuses on activities that cross boundaries
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Facility Planning
How much long-range capacity is needed?
When more capacity is needed?Where facilities should be located?How facilities should be arranged?
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Definition and Measures of Capacity
Capacity:
Design Capacity:
Effective 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%
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Utilization and Efficiency
Utilization = Percent of design capacity achieved.
Efficiency = Percent of effective capacity achieved.
Utilization = Actual output Design capacity
Efficiency = Actual output
Effective capacity
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Design capacity = 120/day.
Effective capacity = 100/day.
Actual output = 80/day.Utilization = Actual output
Design capacity
Utilization & Efficiency Example
Efficiency = Actual output Effective capacity
= 80/120 = 67%
= 80/100 = 80%
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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%
Anticipated Output
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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.
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Vary staffing. Change equipment
& processes. Change methods. Redesign the
product/service for faster processing.
Capacity Management¨ Vary prices.
¨ Vary promotion.¨ Backorder.¨ Offer complementary
products.
Demand Management
Managing Existing Capacity
¨ To make capacity match demand, either:¨ Adjust demand = Demand
management.¨ Adjust capacity = Capacity
management.
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Capacity Expansion Options – Capacity Leads Demand
Expected Demand
Expected Demand
Time in Years
Time in YearsD
em
an
dD
em
an
d
New Capacity
New Capacity
Small expansions
Large expansion
¨ 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.
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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
Dem
an
d New Capacity
Small expansions
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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.
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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)
Dollars
Profit
Loss Fixed cost
Variable costTotal cost line
Total revenue line
Breakeven pointTotal cost = Total revenue
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Break-even EquationsF = 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 + VxTR = Total revenue per unit time = PxProfit = TR - TCAt break-even point: Total Cost = Total
Revenue
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Break-even Example 1A firm produces radios with a fixed cost of
P7,000 per month and a variable cost of P5 per radio. If radios sell for P8 each:
1a) What is the break-even point?TR = TC so 8x = 7000 + 5xx = 7000/3 = 2,333.333 radios per month
1b) What output is needed to produce a profit of $2,000/month?Profit = 2000/month so TR - TC = 8x - (7000 + 5x) = 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 = 2,166.6667 radios per month
Then calculate profit or loss TR - TC = 82166.6667 - (7000 +
52166.6667) = P-500 per month
($500 loss per month)
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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.
NN
i
FPiPF
)1()1(
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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.
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