Chapter 6
Process, Technology and
Capacity
Operations Management - 5th Edition
Roberta Russell & Bernard W. Taylor, III
And
Chapter 8: Operations Management Krajewski and
Ritzman 6/e
Process Planning
Process
a group of related tasks with specific
inputs and outputs
Process design
Defines what tasks need to be done and
how they are coordinated among
functions, people, and organizations
Process planning
converts designs into workable
instructions for manufacture or delivery
Process strategy
an organizations overall approach for
physically producing goods and services
2
Process Strategy
Capital intensity
mix of capital (i.e., equipment, automation) and
labor resources used in production process
Process flexibility
ease with which resources can be adjusted in
response to changes in demand, technology,
products or services, and resource availability
Vertical integration
extent to which firm will produce inputs and
control outputs of each stage of production
process
Customer involvement
role of customer in production process
3
Process Planning
Process planning determines how a
product will be produced or a service
provided.
It decides which components will be
made in-house and which will be
purchased from a supplier, select
processes and develops and documents
the specifications for manufacture and
delivery.
Make-or-buy decisions
Process selection
4
Process plans
Make or Buy Decisions
Cost
Speed
Capacity
Reliability
Quality
Expertise
Sourcing Continuum
Vertical
Integration
(100%
ownership)
Joint
Venture
(equity
partner)
Strategic
Alliance
(long-term
supplier
contract;
collaborative
relationship)
Arms-Length
Relationship
(short-term contract
or
single purchasing
decision)
Source: Adapted from Robert Hayes, Gary Pisano, David Upton,
and Steven Wheelwright, Operations Strategy and Technology:
Pursuing the Competitive Edge (Hoboken, NJ: 2005), p. 120
Process Selection
Projects
one-of-a-kind production of a product to
customer order
Batch production
systems process many different jobs through
the system in groups or batches
Mass production
produces large volumes of a standard product
for a mass market
Continuous production
used for very-high volume commodity
products
7
Types of Processes
PROJECT
Type of
product
Type of
customer
Product
demand
Unique
One-at-atime
Infrequent
BATCH
Made-toorder
(customized
)
Few
individual
customers
Fluctuates
MASS
CONT.
Made-tostock
Commodity
Mass
market
Mass
market
Stable
Very stable
(standardized )
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210
Types of Processes
(cont.)
PROJECT
Demand
volume
Very low
BATCH
MASS
CONT.
Low to
medium
High
Very high
No. of
different
products
Infinite
variety
Many, varied Few
Very few
Production
system
Long-term
project
Repetitive,
Discrete, job
assembly
shops
lines
Continuous,
process
industries
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210
Types of Processes
(cont.)
PROJECT
Equipment
Varied
BATCH
MASS
CONT.
Generalpurpose
Specialpurpose
Highly
automated
Assembly
Mixing,
treating,
refining
Limited
range of
skills
Equipment
monitors
Specialized
Primary
Fabrication
type of work contracts
Worker
skills
10
Experts,
craftspersons
Wide range
of skills
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210
Types of Processes
(cont.)
BATCH
MASS
CONT.
Flexibility,
quality
Efficiency,
speed,
low cost
Highly efficient,
large capacity,
ease of control
Non-repetitive,
small customer
base, expensive
Costly, slow,
difficult to
manage
Capital
investment;
lack of
responsiveness
Difficult to change,
far-reaching errors,
limited variety
Construction,
shipbuilding,
spacecraft
Machine shops,
print shops,
bakeries,
education
Automobiles,
televisions,
computers,
fast food
Paint, chemicals,
foodstuffs
PROJECT
Advantage
s
Disadvantages
Examples
Custom work,
latest
technology
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New
York:McGraw-Hill, 2001), p. 210
11
Process Selection with
Break-Even Analysis
Cost
Fixed costs
constant regardless of the number of units
produced
Variable costs
vary with the volume of units produced
12
Revenue
price at which an item is sold
Total revenue
is price times volume sold
Profit
difference between total revenue and total
cost
Process Selection with
Break-Even Analysis (cont.)
Total cost = fixed cost + total variable
cost
TC = cf + vcv
Total revenue = volume x price
TR = vp
Profit = total revenue - total cost
Z = TR TC = vp - (cf + vcv)
13
Process Selection with
Break-Even Analysis
(cont.)
TR = TC
vp = cf + vcv
vp - vcv = cf
v(p - cv) = cf
cf
v = p - cv
Solving for Break-Even Volume
14
Example
Tavis and Jeff own an adventure
15
company called Whitewater Rafting.
Because of quality and availability
problems, the two entrepreneurs have
decided to produce their own rubber
rafts. The initial investment in
equipment is estimated to be $2000.
Labour and material cost is
approximately $5 per raft. If the rafts
can be sold at a price of $10 each, what
volume of demand will be necessary to
break even?
Break-Even Analysis:
Example
Fixed cost = cf = $2,000
Variable cost = cv = $5 per raft
Price = p = $10 per raft
Break-even point is
cf
2000
v= p-c =
= 400 rafts
10 - 5
v
16
Break-Even Analysis: Graph
$3,000
Total
cost
line
$2,000
$1,000
Total
revenue
line
400
Break-even point
17
Units
Alternative Process Selection
The owners of Whitewater Rafting
18
believe demand for their product will far
exceed the break-even point. They are
now contemplating a larger initial
investment of $10,000 for more
automated equipment that would
reduce the variable cost of manufacture
to $2 per raft.
Compare the old manufacturing process
with the new process proposed here. For
what volume of demand each process
be chosen?
Process Selection
Process A
Process B
$2,000 + $5v = $10,000 + $2v
$3v = $8,000
v = 2,667 rafts
Below 2,667, choose A
Above 2,667, choose B
19
$20,000
Total cost of
process A
$15,000
Process
Selectio
n:
Graph
Total cost of
process B
$10,000
$5,000
Choose
process A
|
1000
|
2000
Choose
process B
|
3000
|
4000 Units
Point of indifference = 2,667 Units
Example 4.2
20
Process Plans
Set of documents that detail
manufacturing and service delivery
specifications
They begin with detailed drawings of
product design and includes
assembly charts or bills of materials: parts
21
and materials needed and how they are to be
assembled
operations sheets or routing sheets: listing
of operations to be performed with details on
equipment, tools, skills, etc.
quality-control check-sheets: specify quality
standards and quality data to be recorded.
Sesame seed top bun
Beef patty
Salt
Cheese
SA
Lettuce
Sauce
Onions
Assembly
AssemblyChart
Chart
for
foraaBig
BigMac
Mac
First-layer assembly
Middle bun
Beef patty
Salt
Cheese
Lettuce
Sauce
Onions
Pickles
SA
Second-layer assembly
Bottom bun
Wrapper
Completed Big Mac
6-22
An Operations Sheet for a Plastic Part
Part name
Crevice Tool
Part No.
52074
Usage
Hand-Vac
Assembly No. 520
Oper. No.
23
Description
Dept.
Machine/Tools
Time
10
Pour in plastic bits
041
Injection molding
2 min
20
Insert mold
041
#076
2 min
30
Check settings
& start machine
041
113, 67, 650
20 min
40
Collect parts & lay flat
051
Plastics finishing
10 min
50
Remove & clean mold
042
Parts washer
15 min
60
Break off rough edges
051
Plastics finishing
10 min
Process Analysis
Process analysis is the systematic
examination of all aspects of a process
to improve its operation to make it
faster, more efficient, less costly, or
more responsive to the customer.
The basic tools of process analysis are:
Process flowchart
Process diagrams
Process maps
24
Process flowcharts
Symbolic representation of
processes
Incorporate
nonproductive activities
(inspection, transportation,
delay, storage)
productive activities
(operations)
25
Process Flowchart
Symbols
Operations
Inspection
Transportation
Delay
Storage
26
Description
of
process
Unload apples from truck
Move to inspection station
Weigh, inspect, sort
Move to storage
Wait until needed
Move to peeler
Apples peeled and cored
15
Soak in water until needed
20
Place in conveyor
10
Move to mixing area
11
Weigh, inspect, sort
Page 1 0f 3
27
Location: Graves Mountain
Process: Apple Sauce
Distance
(feet)
Operation
Transport
Inspect
Delay
Storage
Step
Date: 9-30-02
Analyst: TLR
Time
(min)
Process
Flowchart
of Apple
Processing
20
100 ft
30
50 ft
360
20 ft
Total
20 ft
30
480
190 ft
Customer
Place order
Waiter
Salad Chef
Dinner Chef
Is order
complete?
Y
Give soup or salad order to chef
Prepare soup or
salad order
Prepare dinner
order
Give dinner order to chef
Drink
Eat salad or
soup
Get drinks for customer
Deliver salad or soup order to customer
Eat dinner
Deliver dinner to customer
Receives check
Deliver check to customer
Gives payment
to waiter
Receive payment for meal
Cash or
Credit?
Bring change to customer
Run credit card through
Fill in tip
amount
Return credit slip to customer
Collect tip
28
Give order
to waiter
Credit
Cash
Collect change,
leave tip
Give order
to waiter
A Process
Map of
Restaurant
Service
Service
Blueprint
for an
Installment
Lending
Operation
29
Source: Lynn Shostack, Service Positioning through Structural Change, Journal of Marketing 51 (January
1987), p. 36. Reprinted with permission by the American Marketing Association
Process Innovation
Process are planned in response to new
30
facilities, new products, new
technologies, new markets, or new
customer expectations.
Process should be analysed for
improvement on a continuous basis.
When continual improvement efforts
have been exhausted and performance
expectation still cannot be reached with
an existing process, it is time to
complete redesign or innovate the
process.
Process Innovation
Process innovation projects are typically
31
chartered in response to a breakthrough
goal for rapid, dramatic improvement in
process performance.
Process innovation is most successful in
organisations that can view their system
as a set of process providing value to
customer, instead of functional areas
vying for limited resources.
In environment of rapid change, the
ability to learn faster, reconfigure
processes faster, and execute processes
Process Innovation
Continuous improvement
refines the breakthrough
Breakthrough
Improvement
Total redesign
of a process for
breakthrough
improvements
32
Continuous improvement activities
peak; time to reengineer process
From Function to
Process
Sales
Manufacturing
Purchasing
Accounting
Product Development
Order Fulfillment
Supply Chain Management
Customer Service
Function
33
Process
Process Innovation
Customer
Customer
Requirements
Requirements
Strategic
Directives
Goals for Process
Performance
Baseline
Baseline Data
Data
Benchmark
Benchmark
Data
Data
High - level
Process map
Innovative
Innovative
Ideas
Ideas
Detailed
Process Map
Model
Model
Validation
Validation
Pilot Study
of New Design
No
34
Goals
Goals
Met?
Met?
Yes
Design
Design
Principles
Principles
Key
Key
Performance
Performance
Measures
Measures
Full Scale
Implementation
Principles for Redesigning
Processes
Remove waste, simplify, and consolidate
similar activities
Link processes to create value
Let the swiftest and most capable
enterprise execute the process
Flex process for any time, any place,
any way
Capture information digitally at the
source and propagate it through
process
35
Principles for Redesigning
Processes (cont.)
Provide visibility through fresher and
richer information about process status
Fit process with sensors and feedback
loops that can prompt action
Add analytic capabilities to process
Connect, collect, and create knowledge
around process through all who touch it
Personalize process with preferences
and habits of participants
36
Techniques for Generating
Innovative Ideas
Vary the entry point to a problem
in trying to untangle fishing lines, its best to
start from the fish, not the poles
Draw analogies
a previous solution to an old problem might
work
Change your perspective
think like a customer
bring in persons who have no knowledge of
process
37
Techniques for Generating
Innovative Ideas (cont.)
Try inverse brainstorming
what would increase cost
what would displease the customer
Chain forward as far as possible
if I solve this problem, what is the next
problem
Use attribute brainstorming
how would this process operate if. . .
our workers were mobile and flexible
there were no monetary constraints
we had perfect knowledge
38
Technology Decisions
Technology decisions involve large sums of
money and can have a tremendous impact
on the cost, speed, quality, and flexibility of
operations.
Technology defines future capabilities of a
firm and set the stage for competitive
interactions.
39
Financial justification of
technology
Technology decisions associated with
capital investment. Capital budgeting is the
tool for analysing financial justification of
technology.
Purchase cost
Operating Costs
Annual Savings
Revenue Enhancement
Replacement Analysis
Risk and Uncertainty
Piecemeal Analysis
40
Capacity Decisions
Capacity: maximum capability to produce
Capacity is the maximum rate of output for a
process. The operations manager must provide
the capacity to meet the current and future
demand. Otherwise, the organisation will miss
opportunities for growth and profits. Capacity
planning is central to the long-term success of
an organisation. Capacity plans are made at
two levels:
Long-term capacity plans deal with
investments in new facilities and equipment.
Short-term capacity plans focus on workforce
size, overtime budgets, inventories, and other
types of decisions.
41
rated capacity is theoretical
effective capacity includes efficiency and utilization
Measures of Capacity
(How should the maximum rate of output be measured?)
Capacity can be measured in one of two ways: output
measures or input measures.
Output Measures:
Units per year; customers per hour etc
Output measures are best utilised when the firm
provides a small number of standardised products
and services, or when applied to individual
processes within the firm.
As the amount of customisation and variety in the
product mix becomes excessive, output-based
capacity measures become less useful.
Input Measures:
Machine hours available; floor space for storage etc.
Input measure are the usual choice for low volume,
flexible processes.
42
Different concepts of
capacity
Peak Capacity: The maximum output
that a process or facility can achieve
under ideal conditions is called peak
capacity. Peak capacity can be
sustained for only a short time. Peak
capacity may drive up costs and
quality drops.
Rated Capacity: An engineering
assessment of maximum annual
output, assuming continuous
operation except for an allowance for
normal maintenance and repair
overtime.
Effective Capacity: The maximum
output that a process or firm can
43
Effective Capacity
Effective Daily Capacity =
(no of machines or workers) X
(hours per shift) X
(no of shifts) X
(utilisation) X
(efficiency)
44
Capacity Terms
Capacity utilization: percent of
available time spend working
Capacity efficiency: how well a
machine or worker performs compared
to a standard output level
Capacity load: standard hours of work
assigned to a facility
Capacity load percent: ratio of load
to capacity
45
Measurement
Average output rate
Utilisationpeak =
100
Peak capacity
Average output rate
Utilisationeffective =
100
Effective capacity
46
Load Percent
Load Percent =
47
Load
100%
Capacity
Capacity Planning
Capacity planning is the long-term
strategic decision that establishes a
firms overall level of resources.
It extends over a time horizon long enough to
48
obtain those resources usually a year or
more.
Capacity decisions affect product lead times,
customer responsiveness, operating costs,
and a firms ability to compete.
Inadequate capacity can lose customers and
limit growth.
Excess capacity can drain companys
resources.
Capacity Strategies
Capacity lead strategy
Capacity is expended in anticipation of
demand growth. It is aggressive strategy.
Average Capacity Strategy
Capacity is expanded to coincide with average
expected demand.
Capacity Lag Strategy
Capacity is increased after an increase in
demand has been documented.
49
Capacity Expansion Strategies
50
Capacity Decisions (cont.)
Capacity increase depends on
volume and certainty of anticipated demand
strategic objectives
costs of expansion and operation
Best operating level
% of capacity utilization that minimizes unit
costs
Capacity cushion
% of capacity held in reserve for unexpected
occurrences
51
Best Operating Level for a Hotel
52
Capacity Cushions
(How much capacity cushion is best for various
processes?)
The amount of reserve capacity that a
firm maintains to handle sudden
increases in demand or temporary
losses of production capacity; it
measures the amount by which the
average utilisation falls below of 100
percent (uses effective capacity).
Capacity cushion = 100% utilisation rate (%)
53
Large or Small Cushions
Large cushions are appropriate when:
Demand varies
Future demand is uncertain and resource
flexibility is low
Product mix changes due to varying
demands
There is supply uncertainty
Small cushions are expected when
unused capacity costs money
54
Economies of Scale
it costs less per unit to produce high
levels of output
fixed costs can be spread over a larger
number of units
production or operating costs do not increase
linearly with output levels
quantity discounts are available for material
purchases
operating efficiency increases as workers
gain experience
55
Diseconomies of Scale
Occur above a certain level of output
Diseconomies of Distribution
Diseconomies of Bureaucracy
Diseconomies of Confusion
Diseconomies of Vulnerability
56
Diseconomies of
Confusion
57
Estimate Capacity
Requirements
The foundation for estimating long-term capacity
needs is forecasts of demand, productivity,
competition, and technological changes that extend
well into future.
The demand forecast has to be converted to a
number that can be compared directly with the
capacity measure being used.
Dp
N [1 (C / 100)]
Where
M=
M = number of machines / units
D = number of units forecast per year
p = processing time per unit
N = total number of hours per year during which the process operates
C = desired capacity cushion
58
Capacity Requirements
If multiple product or services involved, extra
time is needed to change over from one
product or service to the next.
Setup time is the time required to change a
machine from making one product or service to
making another.
The total setup time is found by dividing the
number of units forecast per year (D) by the
number
units
made in each lot (Q).
[ Dp + ( D / Q)of
s ] product
1 + [ Dp + ( D / Q ) s ] product 2 + ............ + [ Dp + ( D / Q ) s ] product n
M=
Q = number of units in each lot
s = setup time (in hours) per lot
59
N [1 (C / 100)]
Problem 6-9
Soft Key is trying to determine how best to
produce its newest product, DVORK keyboards.
The keyboards could be produced in-house using
either Process A or Process B, or purchased from a
supplier. Cost data are given below. For what
levels of demand should each process be chosen?
60
Process
Fixed Cost
Variable Cost
Process A
$ 8,000
$ 10
Process B
$ 20,000
$4
Supplier
$0
$ 20
6-22
Model
The Best Wheels Bicycle
61
Company has scheduled the
production of the bicycles
given below. The two critical
work centres for producing
these bikes are welding and
assembly. Welding has an
efficiency of 95% and
utilisation of 90%. Assembly
has an efficiency of 90%
and utilisation of 92%. The
time required (in hours) by
each bike in the two work
centres is given in the table.
Assume 40 hours is
available per week for each
work center. Calculate the
capacity and load percent
per work center per week.
Week
1
(B261
0)
10
speed
50
10
0
19
5
1
5
0
(B200
3)
3 speed 15
30
65
4
5
(B200
1)
1 speed 20
40
80
6
0
Model
Welding
Assembly
B2610
0.20
0.18
B2003
0.15
0.15
B2001
0.07
0.10
Example
A copy center in an office building prepares bound
reports for two clients. The center makes multiple
copies (the lot size) of each report. The processing
time run, collate, and bind each copy depends on,
among other factors, the number of pages. The
center operates 250 days per year, with one 8 hour
shift. Management believes that capacity cushion of
15 percent is best. It currently has three copy
machines. Based on the following table of
information, determine how many machines are
needed at copy center.
62
