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Chapter

Web resources for

this chapter include
OM Tools Software
Processes and
6
Internet Exercises
Online Practice Quizzes Technology
Lecture Slides in
PowerPoint In this chapter, you will learn about . . .
Virtual Tours Process Planning
Excel Worksheets
Process Analysis
Excel Exhibits
Company and Resource Process Innovation
Weblinks Technology Decisions
www.wiley.com/college/russell

Processes and Technology FOR

CHOCOLATE MANUFACTURING

C
HOCOLATE IS DERIVED FROM THE CACAO
TREE, native to Central and South America
and transplanted long ago to the equatorial
regions of Africa. The fruit of the cacao tree is a football-
shaped pod which contains 20 to 40 seeds, called cacao beans,
inside. The pods are harvested by hand (usually twice a year) and sliced open
with machetes. The cacao beans and pulp are scooped out, heaped into piles or
specially made boxes, and covered with banana leaves to ferment for three to
nine days. Fermentation is complete when the white beans have turned a rich
brown color. The fermented beans are placed on drying racks or bamboo mats
to dry in the hot sun for approximately a week before being packed in large
burlap sacks for shipment. Cacao beans are typically sold like sugar and coffee
on a commodity exchange or futures market to candy manufacturers,
importers, exporters, and trade companies.
Once transported to their new location, the beans follow a series of
automated processes. They are cleaned and sorted by type and origin, and
either roasted separately or blended in the roasting process to create a special
taste. Cacao beans from different locations have a distinct flavor. Some
chocolates are made from 10 or more different types of beans. Roasting takes
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Chapter 6 • Processes and Technology 227

National Geographic//Getty Images, Inc.

place in large rotating ovens for about one to two hours, after which the beans are
cooled and separated from their shells by a winnowing machine. What remains is
the center of the bean, called nib, which consists of both cocoa solids and cocoa
butter (about 50/50). A heavy milling machine crushes the nibs and converts them
to a thick paste called chocolate liquor. Some of the chocolate liquor is pressed to
separate the cocoa solids from the cocoa butter. The cocoa solids are pulverized
into cocoa powder and are sold as a baking- or beverage-making product. The
cocoa butter is added in varying amounts to dark or milk chocolate products, or
sold to cosmetic or pharmaceutical companies.
Some chocolate manufacturers buy chocolate liquor from suppliers as their
raw material, others start with the cacao beans and make their own liquor. The
liquor is combined with milk, sugar, and cocoa butter to form a coarse brown
powder called chocolate crumb. The crumb travels through a series of steel
rollers that grind the mixture and refine it into a chocolate paste. The chocolate
paste is poured into a large vat where rollers knead and blend it in a process
called conching. Conching can take from one to three days, or for some premium
brands, one to two weeks. Next, the chocolate is tempered (i.e., cooled and
warmed repeatedly) to gain the right consistency and gloss. During this time,
other ingredients can be added, such as nuts or flavorings. Finally, the chocolate
is poured into moulds, vibrated (to get the air out), sent down a long tunnel to be
cooled, and wrapped or packaged. Hershey’s can fill 1,000 molds per minute, but
the entire process of making chocolate from bean to bar takes an average of four
days.
Chocolate manufacturing is a complicated process that requires skill and
precision. Paying attention to processes (both production and service processes)
and selecting technology that can help streamline processes is the topic of this
chapter.

Sources: The Field Museum, http://www.fieldmuseum.org/chocolate/; Hershey’s

Web site, www.hersheys.com
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228 Part 1 • Operations Management

A
Process: process is a group of related tasks with specific inputs and outputs. Processes exist to cre-
a group of related tasks with ate value for the customer, the shareholder, or society. Process design defines what tasks
specific inputs and outputs. need to be done and how they are to be coordinated among functions, people, and organi-
zations. Planning, analyzing, and improving processes is the essence of operations management.
Processes are planned, analyzed, and redesigned as required by changes in strategy and emerging
technology.
Process strategy: Process strategy is an organization’s overall approach for physically producing goods and pro-
an organization’s overall approach viding services. Process decisions should reflect how the firm has chosen to compete in the mar-
for physically producing goods and ketplace, reinforce product decisions, and facilitate the achievement of corporate goals. A firm’s
services. process strategy defines its:
• Vertical integration: The extent to which the firm will produce the inputs and control the
outputs of each stage of the production process.
• Capital intensity: The mix of capital (i.e., equipment, automation) and labor resources used
in the production process.
• Process flexibility: The ease with which resources can be adjusted in response to changes
in demand, technology, products or services, and resource availability.
• Customer involvement: The role of the customer in the production process.
In this chapter we examine the planning, analysis, and innovation of processes, as well as technol-
ogy decisions related to those processes.

PROCESS PLANNING
Process planning: Process planning determines how a product will be produced or a service provided. It decides which
converts designs into workable components will be made in-house and which will be purchased from a supplier, selects processes,
instructions for manufacture or and develops and documents the specifications for manufacture and delivery. In this section, we
delivery. discuss outsourcing decisions, process selection, and process plans.

OUTSOURCING
Vertical Integration: A firm that sells the product, assembles the product, makes all the parts, and extracts the raw ma-
the degree to which a firm produces terial is completely vertically integrated. But most companies cannot or will not make all of the parts
the parts that go into its products. that go into a product. A major strategic decision, then, is how much of the work should be done
outside the firm. The decision involves questions of dependence, competency-building, and pro-
prietary knowledge, as well as cost.
On what basis should particular items be made in-house? When should items be outsourced?
How should suppliers be selected? What type of relationship should be maintained with suppliers—
arm’s length, controlling, partnership, alliance? What is expected from the suppliers? How many
suppliers should be used? How can the quality and dependability of suppliers be ensured? How
can suppliers be encouraged to collaborate?
For process planning, we need to decide which items will be purchased from an outside sup-
plier and which items will be produced in our own factories. More advanced sourcing decisions
on whom to buy from are discussed in Chapter 10.
The outsourcing decision rests on an evaluation of the following factors:
1. Cost. Would it be cheaper to make the item or buy it? to perform the service in-house or out-
source it? The cost of buying the item from a supplier includes the purchase price, transporta-
tion costs, and various tariffs, taxes, and fees. The cost of coordinating production over long
Make-or-buy decisions are distances and increased inventory levels should also be considered. The cost of making the
influenced by many factors. item includes labor, material, and overhead.
In some situations a company may decide to buy an item rather than make it (or vice
versa) when, from a cost standpoint, it would be cheaper to do otherwise. The remaining
factors in this list represent noneconomic factors that can influence or dominate the economic
considerations.
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Chapter 6 • Processes and Technology 229

2. Capacity. Companies that are operating at less than full capacity may elect to make compo-
nents rather than buy them, especially if maintaining a level workforce is important.
Sometimes the available capacity is not sufficient to make all the components, so choices have
to be made. Typically, it is better to produce more customized or volatile products in-house,
and to outsource steady products with high volume/high standardization.
3. Quality. The capability to provide quality parts consistently is an important consideration
in the outsourcing decision. In general, it is easier to control the quality of items produced in
your own factory. However, standardization of parts, supplier certification, and supplier
involvement in design can improve the quality of supplied parts.
4. Speed. The savings from purchasing an item from a far-off vendor can be eaten up by the
lengthy transit time of offshore shipments. At other times, a supplier can provide goods
sooner than the manufacturer. The smaller supplier is often more flexible, too, and can adapt
quickly to design and technology changes. Of course, speed is useful only if it is reliable.
5. Reliability. Suppliers need to be reliable in both the quality and the timing of what they sup-
ply. Unexpected delays in shipments or partially filled orders because of quality rejects can
• Internet
wreak havoc with the manufacturing system. Many companies today are requiring that their
suppliers meet certain quality and delivery standards to be certified as an approved supplier. Exercises
As discussed in Chapter 2, the most common quality certification is ISO 9000. Other compa-
nies assess huge penalties for unreliable supply. Some automakers, for example, fine their
suppliers $30,000 for each hour an order is late.
6. Expertise. Companies that are especially good at making or designing certain items may
want to keep control over their production. Coca-Cola would not want to release its formula
to a supplier, even if there were guarantees of secrecy. Although automakers might outsource
many of their component parts, they need proprietary control over major components such as
engines, transmissions, and electronic guidance systems. Japanese, Taiwanese, and Korean
firms are currently learning U.S. expertise in aircraft design and manufacture by serving as
suppliers of component parts. Chinese markets are often flooded with cheap knockoffs of
goods manufactured by suppliers in that country. The protection of intellectual property is a
major concern in expanded supply chains. Thus, the decision of whether to share your
expertise with a supplier for economic gains is a difficult one.

The outsourcing decision is not a simple one. Rather, choices can be made along a contin-
uum from a single purchasing decision to a joint venture. Figure 6.1 illustrates the sourcing
continuum.

PROCESS SELECTION
The next step in process planning is to select a production process for those items we will produce
in-house. Production processes can be classified into projects, batch production, mass production,
and continuous production. Projects:
Projects take a long time to complete, involve a large investment of funds and resources, and one-at-a-time production of a
produce one item at a time to consumer order. Examples include construction projects, shipbuild- product to customer order.
ing, new-product development, and aircraft manufacturing.
Batch production processes many different jobs through the production system at the same time Batch production:
in groups or batches. Products are typically made to customer order, volume (in terms of customer processing many different jobs
order size) is low, and demand fluctuates. Examples of batch production include printers, bak- at the same time in groups
eries, machine shops, education and furniture making. (or batches).

High Low Figure 6.1

The Sourcing
Joint Venture Strategic Alliance Single Contract
(equity partner) (long-term supplier (short-term contract or
Continuum
contract; collaborative single purchasing
relationship) decision)
Company/Supplier Involvement
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230 Part 1 • Operations Management

Figure 6.2
High Continuous
The Product- Production
Process Matrix

Source: Adapted from Robert

Hayes and Steven Wheelwright, Mass
Production

Volume
Restoring the Competitive Edge
Competing Through Manufacturing
(New York, John Wiley & Sons,
1984), p. 209.

Batch
Production

Projects
Low
Low High
Standardization

Mass production: Mass production produces large volumes of a standard product for a mass market. Product de-
producing large volumes of a mand is stable, and product volume is high. Goods that are mass produced include automobiles,
standard product for a mass televisions, personal computers, fast food, and most consumer goods.
market. Continuous production is used for very high-volume commodity products that are very standardized.
The system is highly automated and is typically in operation continuously 24 hours a day. Refined
Continuous production: oil, treated water, paints, chemicals, and foodstuffs are produced by continuous production.
producing very high-volume The process chosen to create the product or service must be consistent with product and ser-
commodity products. vice characteristics. The most important product characteristics (in terms of process choice) are
degree of standardization and demand volume. Figure 6.2 shows a product-process matrix that
matches product characteristics with process choice.
The best process strategy is found on the diagonal of the matrix. Companies or products that
are off the diagonal have either made poor process choices or have found a means to execute a
competitive advantage. For example, technological advancements in flexible automation allow
Motorola to mass produce customized pagers. Volvo and Rolls Royce occupy a special market
niche by producing cars in a crafted, customized fashion. Examples of poor process choice include
Texas Instruments’ attempt to produce consumer products for mass markets by the same process
that had been successful in the production of scientific products for specialized markets, and Corn-
ing’s production of low-volume consumer items, such as range covers, with the same continuous
process used for other items formed from glass.
Table 6.1 summarizes the characteristics of each type of process. As we move from projects to
continuous production, demand volume increases; products become more standardized; systems be-
come more capital-intensive, more automated, and less flexible; and customers become less involved.

PROCESS SELECTION WITH BREAKEVEN ANALYSIS

Breakeven analysis: Several quantitative techniques are available for selecting a process. One that bases its decision
examines the cost trade-offs on the cost tradeoffs associated with demand volume is breakeven analysis. The components of
associated with demand volume. breakeven analysis are volume, cost, revenue, and profit.
Volume is the level of production, usually expressed as the number of units produced and sold.
We assume that the number of units produced can be sold.
Cost is divided into two categories: fixed and variable. Fixed costs remain constant regardless of
the number of units produced, such as plant and equipment and other elements of overhead. Variable
costs vary with the volume of units produced, such as labor and material. The total cost of a process
is the sum of its fixed cost and its total variable cost (defined as volume times per unit variable cost).
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Chapter 6 • Processes and Technology 231

Joel Benard/Masterfile

Lonnie Duka/Allstock/Getty Images

C.F. Martin & Co., Inc.

Courtesy of Northrop Grumman Newport News.

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232 Part 1 • Operations Management

Batch Mass Continuous

Project Production Production Production
Type of product Unique Made-to-order Made-to-stock Commodity
(customized) (standardized)

Type of customer One-at-a-time Few individual customers Mass market Mass market

Product demand Infrequent Fluctuates Stable Very stable

Demand volume Very low Low to medium High Very high

No. of different Infinite variety Many, varied Few Very few

products

Production system Long-term project Discrete, job shops Repetitive, assembly lines Continuous, process industries

Equipment Varied General-purpose Special-purpose Highly automated

Primary type of work Specialized contracts Fabrication Assembly Mixing, treating, refining

Worker skills Experts, craftspersons Wide range of skills Limited range of skills Equipment monitors

Advantages Custom work, latest Flexibility, quality Efficiency, speed, Highly efficient, large capacity,
technology low cost ease of control

Disadvantages Nonrepetitive, small Costly, slow, difficult Capital investment, Difficult to change, far-reaching
customer base, expensive to manage lack of responsiveness errors, limited variety

Examples Construction, shipbuilding, Machine shops, print shops, Automobiles, televisions, Paint, chemicals, foodstuffs
spacecraft bakeries, education computers, fast food

Table 6.1 Revenue on a per-unit basis is simply the price at which an item is sold. Total revenue is price
Types of times volume sold. Profit is the difference between total revenue and total cost. These components
Processes can be expressed mathematically as follows:

Total cost = fixed cost + total variable cost

TC = cf + vcv

Continuous processes are

used for very-high-volume,
commodity products whose
output is measured rather
than counted. The production
system is capital-intensive
and highly automated (with
Courtesy of Rockwell Automation

workers who monitor the

equipment rather than
perform the work) and is
typically operated 24 hours
a day.
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Chapter 6 • Processes and Technology 233

Total revenue = volume * price

TR = vp

Profit = total revenue - total cost

Z = TR - TC
= vp - (cf + vcv)

where
cf = fixed cost
v = volume (i.e., number of units produced and sold)
cv = variable cost per unit
p = price per unit

In selecting a process, it is useful to know at what volume of sales and production we can ex-
pect to earn a profit. We want to make sure that the cost of producing a product does not exceed
the revenue we will receive from the sale of the product. By equating total revenue with total cost
and solving for v, we can find the volume at which profit is zero. This is called the breakeven
point. At any volume above the breakeven point, we will make a profit. A mathematical formula
for the breakeven point can be determined as follows:

TR = TC
vp = cf + vcv
vp - vcv = cf
v( p - cv) = cf
cf
v =
p - cv

Travis and Jeff own Up Right Paddlers, a new startup company with the goal of designing, mak- Example 6.1
ing, and marketing stand-up paddle boards for streams and rivers. A new fitness craze, stand-up BreakEven
paddle boards are similar to surfboards in appearance, but are used by individuals to navigate
Analysis
down rivers in an upright position with a single long pole (or paddle), instead of sitting in tubes or
rafts and floating down. The boards are constructed from heavy duty raft material that is inflatable,
rather than the fiberglass material used in surfboards. Unlike surfboards that market for $500 to
$1000 each, paddle boards are typically sold for between $100 and $400. Since Travis and Jeff are
just starting out and the demand for paddle boards on the East Coast has not been firmly estab-
lished, they anticipate selling their product for $100 each. Travis estimates the fixed cost for
equipment and space will be $20,000, and the material and labor costs will run $50 per unit. What
volume of demand will be necessary for Travis and Jeff to break even on their new venture?

Solution
Fixed cost = cf = $2,000
Variable cost = cv = $50 per board
Price = p = $100 per board
cf 2000
v = = = 40 units
p - cv 100 - 50

The solution is shown graphically in the following figure. The x-axis represents production or
demand volume, and the y-axis represents dollars of revenue, cost, or profit. The total revenue
line extends from the origin, with a slope equal to the unit price of a board. The total cost line
intersects the y-axis at a level corresponding to the fixed cost of the process and has a slope
equal to the per-unit variable cost. The intersection of these two lines is the breakeven point.
If demand is less than the breakeven point, the company will operate at a loss. But if demand
exceeds the breakeven point, the company will be profitable. The company needs to sell more
than 40 paddle boards to make a profit.
(Continued)
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234 Part 1 • Operations Management

Dollars

Total
cost
line

$2,000

$1,000
Total
revenue
line
40 Units
Breakeven point

Breakeven analysis is especially useful when evaluating different degrees of automation.

More automated processes have higher fixed costs but lower variable costs. The “best” process de-
pends on the anticipated volume of demand for the product and the tradeoffs between fixed and
variable costs. Example 6.2 shows how breakeven analysis can guide the selection of a process
among several alternatives. The example uses this procedure:

1. Formulate a total cost equation for each process considered.

2. Calculate the point of indifference between two alternative processes (i.e., the volume at
which the total cost of manufacturing is the same for the two processes) by setting their total
cost equations equal to each other and solving for v, demand volume.
3. Above the point of indifference, choose the alternative with the lowest variable cost.
4. Below the point of indifference, choose the alternative with the lowest fixed cost.

Example 6.2 Jeff, the more optimistic of the two owners of UpRight Paddlers, believes that demand for
Process paddle boards will exceed the breakeven point of 40 units calculated in Example 6.1. He pro-
poses spending $10,000 in fixed costs to buy more automated equipment that would reduce
Selection
the materials and labor cost to $30 per board. The boards would sell for $100, regardless of
which manufacturing process is chosen. Compare the two processes and determine for what
level of demand each process would be preferred. Label Travis’ proposal as Process A, and
Jeff’s proposal as Process B.

Solution

Process A Process B
$2,000 + $50v = $10,000 + $30v
$20v = $8,000
v = 400 units

If demand is less than or equal to 400 boards, the alternative with the lowest fixed cost,
process A, should be chosen. If demand is greater than or equal to 400 boards, the alternative
with the lowest variable cost, process B, is preferred. Our decision can be confirmed by exam-
ining the next graph. (Because the boards will be sold for $100 apiece regardless of which
process is used to manufacture them, no revenue line is needed.)
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Chapter 6 • Processes and Technology 235

$
Total Cost of
$45,000 process A
$40,000
Process A
Total Cost of
$35,000 Process B process B
$30,000

$25,000

$20,000

$15,000
Choose
$10,000 Process B
Choose
$5,000 Process A

$0
0 200 400 600 800
Point of Indifference = 400 units

PROCESS PLANS
Process plans are a set of documents that detail manufacturing and service delivery specifications. Process plans:
They begin with detailed drawings of product design (usually from a CAD system) and include a set of documents that detail
assembly charts or bills of material (showing the parts and materials needed and how they are to be manufacturing and service delivery
assembled together), operations sheets or routing sheets (listing the operations to be performed specifications.
with details on equipment, tools, skills, etc.), and quality-control checksheets (specifying quality
standards and quality data to be recorded). Assembly charts:
Process plans are used in both manufacturing and service settings. A hospital, for example, a schematic diagram of a product
has a set of process plans (often called protocols) for different types of medical procedures and that shows the relationship of
service plans for each particular patient. Similarly, in manufacturing, some process plans are component parts to parent
standard, and others are created for each customer order. Figure 6.3 shows an assembly chart assemblies.
for a Big Mac. Figure 6.4 shows an operations sheet for a plastic molded vacuum cleaner
attachment.

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 flowcharts, diagrams, and maps. Exhibit 6.1 shows the
various flowcharts available in Microsoft Visio to map out business processes.
These flowcharts come in many different sizes, shapes, and forms; several are depicted in
this chapter. While the format and symbols used may vary, the “process” of building a flowchart
follows these steps:

1. Determine objectives
2. Define process boundaries
3. Define units of flow (i.e., patients, products, data)
4. Choose type of chart
5. Observe process and collect data
6. Map out process
7. Validate chart (with user, expert, or observation)
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236 Part 1 • Operations Management

Figure 6.3
Sesame seed top bun
An Assembly
Chart for a Beef patty
Big Mac SA
Salt
Cheese

Lettuce
First-layer assembly
Sauce
Onions

Middle bun

Beef patty
SA
Salt
Cheese

Lettuce
Second-layer assembly
Sauce
Onions
Pickles

Bottom bun
Wrapper
Completed Big Mac

PROCESS FLOWCHARTS
Process flowchart: The classic process flowchart looks at the manufacture of a product or delivery of a service from a
a document that uses standardized broad perspective. The chart uses five standard symbols, shown in Figure 6.5, to describe a process:
symbols to chart the productive 嘷 for operations, 䡺 for inspections, ⇒ for transportation, D for delay, and 䉮 for storage. The
and nonproductive flow of activities details of each process are not necessary for this chart; however, the time required to perform each
involved in a process. process and the distance between processes are often included. By incorporating nonproductive
activities (inspection, transportation, delay, storage), as well as productive activities (operations),

Figure 6.4
An Operations Part name Crevice Tool
Sheet for a Plastic Part No. 52074
Part Usage Hand-Vac
Assembly No. 520

Oper. No. Description Dept. Machine/Tools Time

10 Pour in plastic bits 041 Injection molding 1 min
20 Insert mold 041 #076 2 min
30 Check settings and 041 113, 67, 650 20 min
start machine
40 Collect parts and lay flat 051 Plastics finishing 10 min
50 Remove and clean mold 042 Parts washer 15 min
60 Break off rough edges 051 Plastics finishing 10 min
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Chapter 6 • Processes and Technology 237

Exhibit 6.1
Flowcharts
Available in
Microsoft Visio

• Excel File

Figure 6.5
Date: 9-30-12 Location: Graves Mountain
Analyst: TLR Process: Applesauce A Process
Flowchart of
Operation

Apple Processing
Transport

Distance

Description
Step

(min)
Storage

(feet)
Time
Inspect

of
Delay

process

1 Unload apples from truck 20

2 Move to inspection station 100 ft • Excel Template
3 Weigh, inspect, sort 30
4 Move to storage 50 ft
5 Wait until needed 360
6 Move to peeler 20 ft
7 Peel and core apples 15
8 Soak in water until needed 20
9 Place on conveyor 5
10 Move to mixing area 20 ft
Page 1 of 3 Total 450 190 ft
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238 Part 1 • Operations Management

process flowcharts may be used to analyze the efficiency of a series of processes and to suggest im-
provements. They also provide a standardized method for documenting the steps in a process and
can be used as a training tool. Automated versions of these charts are available that will superim-
pose the charts on floor plans of facilities. In this fashion, bottlenecks can be identified and layouts
can be adjusted. Process flowcharts are used in both manufacturing and service operations. They
are a basic tool for process innovation, as well as for job design.
Process improvement teams are likely to make a first pass at diagramming a process, with adhe-
sive notes plastered on large sheets of paper connected with hand-drawn arrows. As documentation
of the process becomes more complete, departments or companies may prefer particular symbols
to represent inputs, outputs, decisions, activities, and resources.
Flowcharts can take many forms, from freehand drawings to animated simulations. Exhibit
• Internet 6.2 shows a simple flowchart created in Excel. More sophisticated flowcharting tools are available
Exercises from Microsoft Visio, SmartDraw (www.smartdraw.com), iGrafx (www.igrafx.com), and others.
You may be able to download free trial copies of the software for limited periods of time.
Figure 6.6 shows a process map, or swimlane chart, so called because it maps out the activities
performed by various people in the process. Often process maps will include a time scale as well.
Figure 6.7 shows a simple value chain flowchart from supplier to customer.

These workers at a Dow

Chemical plant are displaying
a process map they
developed to analyze an
existing process. The
flowchart is not neat and tidy,
but it does offer some
obvious candidates for
improvement. U.S. workers
and managers in both
industry and government are
examining their processes in
an attempt to redesign work
for high-quality, less waste,
and speedier operation.

John Chiasson

A L O N G T H E S U P P LY C H A I N

Making Fast Food Faster A Colorado Springs McDonald’s restaurant set the world
Go behind the counter of a fast food restaurant and you’ll find record for drive-thru speed at 349 transactions an hour. True,
a finely tuned operating system—portion-controlled french fry that was part of a special promotion, but even when it’s not
containers, automated drink carousels, optimized kitchen lay- going for the record, the restaurant averages about one
outs, and lights and buzzers to signal action. But “speed” today minute a transaction, compared to the industry average of
means streamlining the order-taking process as well as the de- 3.5 minutes. A reason for the superb efficiency is the use of a
livery process. The drive-thru now accounts for two-thirds of remote call center to take orders, a trend gaining popularity
fast food sales. So, understandably, in a survey of fast food in fast food entities across the country.
mangers last year, 82% were engaged in programs to improve At McDonald’s call center, workers are experts in the
speed at the drive-thru. The initiatives range from walking up menu, and they are trained to be articulate, polite, and fast.
to drivers to take their orders while they wait in line, to rooftop They also urge customers to add items to their order. Each
cameras and artificial intelligence software that predict upcom- worker takes up to 95 orders an hour during peak times.
ing orders based on the number and kind of vehicles entering Customers pulling up to the drive-thru menu are connected
the drive-thru line. (Continued)
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Chapter 6 • Processes and Technology 239

to the computer of a call-center employee using Internet Another improvement in the order-taking process is the
calling technology. When the customer pulls away from inclusion of multilane drive-thrus, where two or more order
the menu to pay for the food and pick it up, it takes around lanes merge into a single payment and pickup lane. A second
10 seconds for another car to pull forward. During that time, lane can increase capacity by 50% by letting cars bypass
call-center workers can be answering a call from a different slower customers who can’t decide what to order. Two lanes
McDonald’s, where someone has already pulled up. In present decisions, such as how much space is needed between
addition to increased speed and sales volume, specialized the cash window and pickup window, say, seven car lengths.
order-takers improve accuracy. Accuracy problems at the It’s at the cash register where the next major leap in speed
drive-thru in a typical restaurant are often the result of too is expected. A cash transaction takes about 30 seconds, so
much multitasking by employees—taking orders, helping to restaurants are pushing credit and debit options, and test-
fill them, accepting cash, and keeping the restaurants clean piloting everything from prepaid cash cards to electronic
and stocked. “fast pass” tags like those used at toll booths. At McDonald’s,
In the fast food industry, time is literally money. Statis- by foregoing signatures on credit transactions, processing
tics show that every six-second improvement in speed of ser- time goals are down to three seconds per transaction. Cash-
vice results in a 1% jump in sales. Managers must precisely less payment at the drive-thru, online ordering, and self-
predict traffic volumes in hourly intervals or less in order to service kiosks are becoming more common throughout the
make staffing and food preparation decisions. Underestimate fast food industry.
demand, and lines form, customers lose patience, and the
restaurant loses business. Overestimate demand, and food is While speed is important for fast food, making a customer
wasted and profit margins tank. feel rushed is deadly to repeat business. McDonalds’s claims
When you enter a drive-thru, everything is timed: how that friendly service increases customer satisfaction by 30%,
long you take to order and to pay, how long it takes to pre- irregardless of service time. Consider Subway, known for
pare the food and hand it out the pickup window, how fresh, made-to-order subs. They recently installed self-service
much time you waste looking for a place to put your drink kiosks to speed the ordering process. Customers no longer
before pulling away. That’s why companies bundle items watch the employee construct their sandwich. Although the
for faster ordering. Ordering a #2 takes less time than or- new process is faster, this disconnect between customer and
dering à la carte. And woe is the customer who takes the service provider upsets some customers. What do you think?
time to check his order for accuracy before proceeding. To
discourage those activities, companies use special order Sources: Adapted from Matt Richtel, “The Long-Distance Journey of a
checkers, see- through bags, and bags with orders written Fast Food Order,” The New York Times, April 11, 2006; Joanna Pachner,
on the outside. “Faster Hotter Sooner,” Financial Post, March 6, 2007.

Exhibit 6.2
Flowcharts
in Excel
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240 Part 1 • Operations Management

Customer Waiter Salad Chef Dinner Chef

Place order

Is order No
complete?

Yes
Give soup or salad Prepare soup or
order to chef salad order

Give dinner Prepare dinner

order to chef order

Get drinks for

Drink
customer

Deliver salad or
Eat salad or Give order
soup order to
soup to waiter
customer

Eat dinner Deliver dinner to Give order

customer to waiter

Deliver check to
Receives check
customer

Gives payment Receive payment

to waiter for meal

Cash or Credit
Credit? Flowchart Legend

Cash Start/End

Collect change, Bring change to

leave tip customer Action

Decision
Run credit card
through Flow Direction

Fill in tip Return credit

amount slip to customer

Collect tip

Figure 6.6
• Excel Template A Process Map or Swimlane
Chart of Restaurant Service
Source: www.SmartDraw.com
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Chapter 6 • Processes and Technology 241

Figure 6.7
A Simple Value
Chain Flowchart
Supplier Manufacturer Customer

Flow of product
(primary flow)
Flow of information
(secondary flow)

PROCESS INNOVATION
Processes are planned in response to new facilities, new products, new technologies, new markets,
or new customer expectations. Processes should be analyzed for improvement on a continuous basis.
When continual improvement efforts have been exhausted and performance expectations still cannot
be reached with an existing process, it is time to completely redesign or innovate the process.
Process innovation1 projects are typically chartered in response to a breakthrough goal for rapid, Process innovation:
dramatic improvement in process performance. Performance improvement of 50 to 100% within the total redesign of a process for
12 months is common. In order to achieve such spectacular results, an innovation team is encour- breakthrough improvements.
aged to start with a clean sheet of paper and rethink all aspects of a process, from its purpose to its
outputs, structure, tasks, and technology. Figure 6.8 shows the relationship between continuous
improvement, breakthrough improvement, and process innovation.
Process innovation is most successful in organizations that can view their system as a set of
processes providing value to the customer, instead of functional areas vying for limited resources.
Figure 6.9 shows this change from a functional to a process orientation. In an environment of
rapid change, the ability to learn faster, reconfigure processes faster, and execute processes faster
is a competitive advantage.

STEPS IN PROCESS INNOVATION

Figure 6.10 outlines the innovation process. Let’s review the process step-by-step. The initial step
establishes the goals for process performance. Data from the existing process are used as a baseline
to which benchmarking data on best industry practices, customer requirements data, and strategic

Continuous improvement Figure 6.8

refines the breakthrough
Continuous
Improvements and
Breakthrough
Breakthroughs
Performance

improvement

Continuous improvement activities

peak; time to innovate

Time

1
Process innovation is also known as business process reengineering (BPR), process redesign, restructuring, and
many other company-specific terms.
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242 Part 1 • Operations Management

Figure 6.9
Product Development

Manufacturing
From Function

Accounting

Purchasing
to Process Order Fulfillment

Sales
Supply Chain Management
Customer Service

Function Process

directives are compared.2 Analyzing the gap between current and desired performance helps to de-
termine whether the process needs to be redesigned. If redesign is necessary, a project team is char-
tered and provided with the preliminary analysis and resulting goals and specifications for process
Establish goals and performance. Although the goals for a process may be specific, the specifications are not (or else
specifications. the creativity of the group is hampered). It is important that the project team be convinced that total
redesign of the process is absolutely necessary to achieve the performance objectives.
Process maps work backward A useful tool in beginning the redesign of a process is a high-level process map. Pared to its
from a performance goal. simplest form, a high-level map contains only the essential building blocks of a process. As shown

Figure 6.10
Process Strategic
Directives
Innovation

Customer Goals for Baseline Data

Requirements Process Performance Benchmark
Data

High-level Innovative
Process Map Ideas
Design
Principles

Detailed Model
Process Map Validation
• Internet Key
Performance
Exercises Measures
Pilot Study
of New Design

No Goals
Met?

Yes

Full-scale
Implementation

2
Although process innovation means redesigning the process from scratch, it does not mean that the existing process
should be ignored. The existing process should be studied long enough to understand “what” the process is and “why”
it is performed. Exactly “how” it is performed is less relevant because the how will change dramatically during the
course of the project.
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Chapter 6 • Processes and Technology 243

(a) Generic Figure 6.11

A High-Level
Process Map
Subprocess Subprocess
Input Output Performance
goal

Subprocess Subprocess

(b) Online Order Processing

Verify Process
Stock Order Order Fill customer
Customer Filled order
places 0.5 min. 1 min.
1.5 min. within
order
Verify Process 2 mins.
Financials Payment
0.5 min. 1 min.

in Figure 6.11, it is prepared by focusing on the performance goal—stated in customer terms—

and working backward through the desired output, subprocesses, and initial input requirements.
Design principles, such as performing subprocesses in parallel whenever possible, help to struc-
ture the map efficiently. Table 6.2 lists several additional design principles recommended for
process innovation. Innovative ideas can challenge the conventional ordering of subprocesses, or
the need for a subprocess. Table 6.3 presents various techniques to prompt innovative thinking.
After the general concept of redesign is agreed on, a detailed map is prepared for each subprocess
or block in the high-level map. Blocks are added only if an activity can contribute to the output goal.
The existence of each block or activity is challenged: Does it add value for the customer? Does it have
to be done? Could it be done more quickly, more easily, or sooner? Could someone else do it better?
A detailed map guides decisions on allocation of resources and work methods. To guarantee
that the detailed map will produce the desired results, key performance measures are determined
and set in place. The model is also validated through simulation, interviewing, and partial testing.
When the team is satisfied that the performance objective can be reached with the new design, a
pilot study is conducted.
Process innovation is not like other projects, which can be carefully planned and flawlessly Use pilot studies for rapid
executed. Innovation is by definition something new and untested. Milestones, costs, and benefits prototyping.

1. Remove waste, simplify, and consolidate similar activities. Table 6.2

2. Link processes to create value.
Principles for
3. Let the swiftest and most capable enterprise execute the process. Redesigning
4. Flex the process for any time, any place, any way. Processes
5. Capture information digitally at the source and propagate it through the process.
6. Provide visibility through fresher and richer information about process status.
7. Fit the process with sensors and feedback loops that can prompt action.
8. Add analytic capabilities to the process.
9. Connect, collect, and create knowledge around the process through all who touch it.
10. Personalize the process with the preference and habits of participants.
Source: Omar El Savvy, Redesigning Enterprise Processes for e-Business (New York: McGraw-Hill, 2001), pp. 57–75.
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244 Part 1 • Operations Management

Table 6.3 • Vary the entry point to a problem. (In trying to untangle fishing lines, it’ best to start from the fish, not
the poles!)
Techniques • Draw analogies. (A previous solution to an old problem might work.)
for Generating
• Change your perspective. (Think like a customer; bring in persons who have no knowledge of the process.)
Innovative Ideas
• Try inverse brainstorming. (What would increase cost? 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?)
Source: Adapted from AT&T Quality Steering Committee, Reengineering Handbook (Indianapolis: AT&T Technical Publications
Center, 1991).

are guesses at best. A pilot study allows the team to try something, see if it works, modify it, and
try again.
After a successful pilot study, full-scale implementation can begin. Since process innovation
involves radical change, the transition period between introducing the changed process and the in-
corporation of the new process into day-to-day operations can be difficult. The redesigned process
may involve changing the way executives manage, the way employees think about their work, or
how workers interact. The transition needs to be managed with a special concern for the “people”
aspects of change. The innovation process is complete when the transition has been weathered
and the new process consistently reaches its objective.
The concept of process innovation emerged in response to rapid changes in technology that
rendered existing processes obsolete. In the next section, we discuss the impact of technology
decisions and provide resources for a more in-depth study of technology.

A N A S TA S I A T H AT C H E R , the providers are happier because they receive their pay-

Senior Business Process Manager for ments more quickly, which ultimately ensures that mem-
bers get access to the best care possible.
a Public Sector Health-Care Company
Like a lot of manufacturing firms, we have more data
I’m a process manager for the than we can process efficiently, and it seems that people
public sector division of one of are always looking for the same information. I remem-
the largest and best performing ber one situation in particular with case management of
health-care corporations in the high-risk pregnancies. There was a two-month backlog,
United States. My region is the which meant that by the time the case manager got
Northeast where the processes I oversee are responsi- around to contacting the patient, the pregnancy was too
ble for the health care of over 400,000 lives. far along for treatment to make much of a difference. I
I began my work auditing claims processing, and then analyzed the process and found that if we developed a
became interested in how a claim works its way through shared database between the applicants, the case man-
the system. I noticed all sorts of inefficiencies. For exam- agers, and the nurses, we could eliminate the manual
ple, high dollar claims were manually handled with 10 dif- data entry of cases. That one change reduced the back-
ferent touch points. The Claims Processor would identify log to zero, saved the company millions, and most
high dollar claims and then forward it to the Special Mat- importantly reduced the number of detained babies
ters Expert, who would work with the Claims Liaison, who (those that need to stay in the hospital after the mother
would need approval from the Executive Director of the had been released) by 50%. In this job, you can make a
plan, who would consult the Claims Analyst, who would real difference. You can save lives.
ask Contracting to get back to them so that they could in- I was amazed when I took the operations manage-
form the Executive Director, who would make a decision ment class at NYU that there’s a field of study for what I
and send it to the Liaison, who would notify the Special do. I live by flowcharts and Pareto analysis. We’re always
Matters Expert, who would lastly pass along the decision configuring and reconfiguring systems. If it doesn’t
to the Claims Processor, who would pay the claim. After work, we try something else. It’s important to take a step
redesign, the approval goes from Claims Processor to Spe- back and look at the broader picture. Then you have to
cial Matters Expert to Executive Director, period. The take risks and make decisions, and always look for ways
process flows more efficiently using fewer resources, and of improving the process.
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Chapter 6 • Processes and Technology 245

TECHNOLOGY DECISIONS
Technology decisions involve large sums of money and can have a tremendous impact on the cost,
speed, quality, and flexibility of operations. More importantly, they define the future capabilities of
a firm and set the stage for competitive interactions. Thus, it is dangerous to delegate technology
decisions to technical experts or financial analysts. A manager’s ability to ask questions and under-
stand the basic thrust of proposed technology is invaluable in making wise technology choices.
In this section we discuss the financial justification of new technology, followed by a brief
technology primer.

FINANCIAL JUSTIFICATION OF TECHNOLOGY

After it is decided that a part will be produced or service provided in-house, specific technology
decisions can be made. Alternatives include using, replacing, or upgrading existing equipment,
adding additional capacity, or purchasing new equipment. Any alternative that involves an outlay
of funds is considered a capital investment. Capital investments involve the commitment of funds
in the present with an expectation of returns over some future time period. The expenditures are
usually large and can have a significant effect on the future profitability of a firm. These decisions
are analyzed carefully and typically require top management approval.
The most effective quantitative techniques for capital investment consider the time value of
money as well as the risks associated with benefits that will not accrue until the future. These
techniques, known collectively as capital budgeting techniques, include payback period, net pre- Capital budgeting techniques
sent value, and internal rate of return. Detailed descriptions can be found in any basic finance text. are used to evaluate new
Although capital budgeting techniques are beyond the scope of this text, we do need to comment technology.
on several factors that are often overlooked in the financial analysis of technology.
Purchase Cost The initial investment in equipment consists of more than its basic purchase Purchasing cost includes the
price. The cost of special tools and fixtures, installation, training, maintenance, and engineering or add-ons necessary to make
programming adjustments can represent a significant additional investment. Operating costs are the technology work.
often underestimated as well.
Operating Costs To assess more accurately the requirements of the new technology, it is useful to Visualize how the technology
consider, step-by-step, how the equipment will be operated, started, stopped, loaded, unloaded, will be used.
changed over, upgraded, networked, maintained, repaired, cleaned up, speeded up, and slowed down.
Annual Savings Most new technology is justified based on direct labor savings. However, other New technology can save
savings can actually be more important. For example, a more efficient process may be able to use money through better quality
less material and require less machine time or fewer repairs, so that downtime is reduced. A process and more efficient operation.
that produces a better-quality product can result in fewer inspections and less scrap and rework. New
processes (especially those that are automated) may significantly reduce safety costs, in terms of
compliance with required regulations, as well as fines or compensation for safety violations.
Revenue Enhancement Increases in revenue due to technology upgrades or new-equipment New technology can enhance
purchases are often ignored in financial analysis because they are difficult to predict. Improve- revenue.
ments in product quality, price reductions due to decreased costs, and more rapid or dependable
delivery can increase market share and, thus, revenue. Flexibility of equipment can also be impor-
tant in adapting to the changing needs of the customer.
Replacement Analysis As existing equipment ages, it may become slower, less reliable, and Deciding when to upgrade to
obsolete. The decision to replace old equipment with state-of-the-art equipment depends in large a new technology often
measure on the competitive environment. If a major competitor upgrades to a newer technology that depends on the competitive
improves quality, cost, or flexibility and you do not, your ability to compete will be severely dam- environment.
aged. In some industries, technology changes so rapidly that a replacement decision also involves
determining whether this generation of equipment should be purchased or if it would be better to
wait for the next generation. Replacement analysis maps out different schedules for equipment pur-
chases over a two to five year period and selects a replacement cycle that will minimize cost.
Risk and Uncertainty Investment in new technology can be risky. Estimates of equipment capa- It is risky to invest in new
bilities, length of life, and operating cost may be uncertain. Because of the risk involved, financial technology, and it’s risky
analysts tend to assign higher hurdle rates (i.e., required rates of return) to technology invest- not to.
ments, making it difficult to gain approval for them.
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246 Part 1 • Operations Management

Make sure new and existing Piecemeal Analysis Investment in equipment and new technology is also expensive. Rarely can
technology are compatible. a company afford to automate an entire facility all at once. This has led to the proposal and evalu-
ation of equipment purchases in a piecemeal fashion, resulting in pieces of technology that don’t
fit into the existing system and fail to deliver the expected returns.

A TECHNOLOGY PRIMER
• Virtual Tour Technology is important in both manufacturing and service operations. Cars now have hundreds
of embedded systems performing thousands of computerized functions. Pacemakers, vending ma-
chines, Xerox copiers, and store shelves notify the manufacturer when repairs or restocking are
needed. Coming soon are clothes that measure the wearer’s vital statistics and notify a physician
or change medication regimes when necessary, and refrigerators that pre-order ingredients to
match weekly menus or order milk when the supply is low. We discuss many of the information
technology advances that support these systems in more detail in Chapter 10. In this section, we
present a brief overview of technology advances in manufacturing systems.
Technology in manufacturing includes computer aided design, robots, automated guided vehi-
cles, computer numerically controlled machines, automated storage and retrieval systems, and
flexible manufacturing systems. Automated manufacturing systems integrated through computer
technology are aptly called computer-integrated manufacturing (CIM). With the advent of the In-
ternet and the increased globalization of both markets and production, CIM has evolved into a
Web-centric collaborative venture known as e-manufacturing (eM).
E-manufacturing involves sharing real-time data with trading partners and customers and mak-
ing collaborative decisions about production based on that data. In order to collaborate, information
must be converted into electronic form, protocols for communication must be established, and in-
frastructure must be in place for connectivity with customers, suppliers, and partners. Rather than
making huge volumes of standard products in anticipation of demand, e-manufacturing uses real-
time information on customer orders and productive capacity across the supply chain to speed cus-
tomized products directly to the customer. Figure 6.12 shows the components of e-manufacturing
Figure 6.12 categorized by product, process, manufacturing, and information technologies. Table 6.4 serves as
Components of a technology primer, briefly defining the terms listed in the figure.
e-Manufacturing

CAD GT CAE CPC PDM PLM Product

configuration

B2B, B2C

Products
Bar codes,
RFID, EDI, XML STEP

ERP CAD/CAM
Information
Technology eM Processes
SCM, CRM CAPP

Sourcing and
DSS/ES/AI e-procurement
Manufacture
Internet, intranet,
extranet

Conveyors, Multiple factory

CNC Process Cells
AGV, FMS Robotics sites and
machines control and centers suppliers
ASRS
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Chapter 6 • Processes and Technology 247

Table 6.4
Product Technology
A Technology
CAD Computer-aided design Creates and communicates designs electronically Primer
GT Group technology Classifies designs into families for easy retrieval and
modification

CAE Computer-aided engineering Tests the functionality of CAD designs electronically

CPC Collaborative product Facilitates electronic communication and exchange

commerce of information among designers and suppliers

PDM Product data management Keeps track of design specs and revisions for the life
of the product

PLM Product lifecycle Integrates the decisions of those involved in product

management development, manufacturing, sales, customer service,
recycling, and disposal

Product Defines products “configured” by customers who have

configuration selected among various options, usually from a Web site

Process Technology
STEP Standard for exchange of Set standards for communication among different CAD
product model data vendors; translates CAD data into requirements for
(ISO 10303) automated inspection and manufacture

CAD/CAM Computer-aided design The electronic link between automated design (CAD)
and manufacture and automated manufacture (CAM)
CAPP Computer aided process Generates process plans based on a database of similar
planning requirements
E-procurement Electronic purchasing of items from e-marketplaces,
auctions, or company Web sites

Manufacturing Technology
CNC Computer numerically Machines controlled by software code to perform a variety
controlled of operations with the help of automated tool changers;
also collects processing information and quality data

FMS Flexible manufacturing A collection of CNC machines connected by an

system automated material handling system to produce a
wide variety of parts

Robots Manipulators that can be programmed to perform repetitive

tasks; more consistent than workers but less flexible
• Internet
Conveyors Fixed-path material handling; moves items along a belt Exercises
or overhead chain; “reads” packages and diverts them to
different directions; can be very fast

AGV Automatic guided A driverless truck that moves material along a specified
vechicle path; directed by wire or tape embedded in the floor or
by radio frequencies; very flexible

ASRS Automated storage An automated warehouse—some 26 stories high—in

and retrieval system which items are placed in a carousel-type storage
system and retrieved by fast-moving stacker cranes;
controlled by computer
(Continued )
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248 Part 1 • Operations Management

Process Control Continuous monitoring of automated equipment; makes

real-time decisions on ongoing operation, maintenance,
and quality

CIM Computer-integrated Automated manufacturing systems integrated through

manufacturing computer technology; also called e-manufacturing

Information Technology
B2B Business-to-business Electronic transactions between businesses usually
over the Internet

B2C Business-to-consumer Electronic transactions between businesses and their

customers usually over the Internet

Internet A global information system of computer networks that

facilitates communication and data transfer

Intranet Communication networks internal to an organization; can

be password (i.e., firewall) protected sites on the Internet

Extranet Intranets connected to the Internet for shared access

with select suppliers, customers, and trading partners

Bar codes A series of vertical lines printed on most packages that

identifies the item and other information when read by
a scanner

RFID Radio frequency An integrated circuit embedded in a tag that can send
identification tags and receive information; a twenty-first century bar code
with read/write capabilities

EDI Electronic data A computer-to-computer exchange of business

interchange documents over a proprietary network; very expensive
and inflexible

XML Extensible markup A programming language that enables computer-to-

language computer communication over the internet by tagging
data before its is sent

ERP Enterprise resource Software for managing the basic requirements of an

planning enterprise. Including sales & marketing, finance
& accounting, production & materials management, and
human resources

SCM Supply chain Software for managing the flow of goods and
management information among a network of suppliers,
manufacturers, and distributors

CRM Customer relationship Software for managing interactions with customers and
management compiling and analyzing customer data

DSS Decision support An information system that helps managers make

systems decisions; includes a quantitative modeling component
and an interactive component for what-if? analysis

ES Expert systems A computer system that uses an expert knowledge base

to diagnose or solve a problem

Al Artificial intelligence A field of study that attempts to replicate elements of

human thought in computer processes; includes expert
systems, genetic algorithms, neural networks, and fuzzy
logic (see Chapter 17)
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Chapter 6 • Processes and Technology 249

SUMMARY • Practice Quizzes

Important issues in process design are types of processes, Process planning consists of converting product designs
process planning, analysis and innovation, and technology into workable instructions for manufacture. They often appear
decisions. The type of production process selected depends in the form of assembly charts, process flowcharts, operations
primarily on demand volume and degree of product standard- sheets, and manufacturing or delivery specifications. On a
ization. Projects are produced one at a time to customer order. broader scale, process planning involves process selection,
Batch production is used to process a variety of low-volume technology decisions, and decisions on outsourcing. Process
jobs. Mass production produces large volumes of a standard analysis drives the continuous improvement of operations;
product for a mass market. Continuous production is used for process innovation drives breakthrough improvements.
very-high-volume commodity products.

SUMMARY OF KEY TERMS

assembly chart a schematic diagram of a product that shows the involved in a process; it may be used to document current
relationship of component parts to parent assemblies, the processes or as a vehicle for process improvement.
groupings of parts that make up a subassembly, and the process innovation the total redesign of a process.
overall sequence of assembly. process planning the conversion of designs into workable in-
batch production the low-volume production of customized structions for manufacture, along with associated decisions
products. on component purchase or fabrication, and process and
breakeven analysis a technique that determines the volume of equipment selection.
demand needed to be profitable; it takes into account the process plans a set of documents that detail manufacturing or
trade-off between fixed and variable costs. service delivery specifications.
continuous production the production of a very-high-volume process strategy an organization’s overall approach for physi-
commodity product with highly automated equipment. cally producing goods and services.
mass production the high-volume production of a standard project the one-of-a-kind production of a product to customer
product for a mass market. order that requires a long time to complete and a large in-
operations sheet a document that shows the series of operations vestment of funds and resources.
necessary to make each item listed on the assembly chart. vertical integration the degree to which a firm produces the parts
process a group of related tasks with specific inputs and outputs. that go into its products
process flowchart a document that uses standardized symbols to
chart the productive and nonproductive flow of activities

SUMMARY OF KEY FORMULAS

Breakeven point Point of indifference

cf cf 2 - cf 1
v = 2 2
p - cv cv1 - cv2

SOLVED PROBLEMS

Texloy Manufacturing Company must select a process for its new For what volume of demand would each process be desirable?
product, TX2, from among three different alternatives. The fol-
lowing cost data have been gathered:
SOLUTION
If v represents the number of TX2s demanded (and, we assume,
PROCESS A PROCESS B PROCESS C produced), then
Fixed cost $10,000 $40,000 $70,000
Total cost for process A ⫽ $10,000 ⫹ $5v
Variable cost $5/unit $2/unit $1/unit Total cost for process B ⫽ $40,000 ⫹ $2v
Total cost for process C ⫽ $70,000 ⫹ $1v
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250 Part 1 • Operations Management

Next, we calculate the points of indifference between each pair of Comparison 2: Process B versus Process C
processes by equating their total costs and solving for demand Process B Process C
volume, v. Always begin with the process that has the lowest $40,000 ⫹ $2v ⫽ $70,000 ⫹ $1v
fixed cost and compare it to the process with the next lowest fixed v ⫽ 30,000 units
cost, and so on. For this example, we’ll compare process A to
process B and process B to process C. If demand is greater than 30,000 units, we should choose process
C. If demand is less than 30,000 but greater than 10,000 (see com-
Comparison 1: Process A versus Process B parison 1), we should choose process B. At 30,000, we can choose
Process A Process B either B or C.
$10,000 ⫹ $5v ⫽ $40,000 ⫹ $2v The Excel solution to this problem is shown in Exhibit 6.3.
v ⫽ 10,000 units To summarize, from the graph in Exhibit 6.3 and our decision
rules, we can recommend the following process selection:
If demand is less than or equal to 10,000, we should choose the • Below 10,000 units, choose process A.
alternative with the lowest fixed cost, process A. Conversely, if • Between 10,000 and 30,000 units, choose process B.
demand is greater than 10,000, we should choose the aternative • Above 30,000 units, choose process C.
with the lowest variable cost, process B. At 10,000 units we can
actually choose either A or B.

Exhibit 6.3
Using Excel
for the Point
of Indifference

• Animated Demo Problem

• Excel File

QUESTIONS

6-1. Discuss the types of decisions that are involved in creating a a. Assembly chart
process strategy. Apply the four elements of process strat- b. Operations sheet
egy to the process of completing a project or paper for one c. Process flowchart
of your classes. Does the process differ from class to class? 6-6. What does process planning entail? How would process
6-2. List and explain six factors that affect the decision to out- planning differ for batch and continuous processes?
source. Explain the sourcing continuum. 6-7. Explain the basic steps involved in process innovation.
6-3. Describe the four basic types of production processes. 6-8. Our thinking process, limited by the paradigms under
What are the advantages and disadvantages of each? When which we operate, can become very rigid. Try these out-of-
should each be used? box thinking exercises:
6-4. What are the major cost factors considered in process selec- a. Where does the letter Z belong in this pattern, above or
tion? How is breakeven analysis used for process selection? below the line? Why?
6-5. What kind of information do the following documents BCD G J OPQRS U
communicate? A EF HI KLMN T VWXY
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Chapter 6 • Processes and Technology 251

b. What letter comes next in the following pattern? Why? 6-10. Briefly discuss the components of e-manufacturing. In
OTTFF what ways can companies collaborate in producing goods
c. Connect the nine dots below with four straight lines. and services? Report on at least one Web source on collab-
Do not lift your pencil. orative manufacturing or e-manufacturing.
6.11. Read about issues in outsourcing from a search on the
● ● ●
Web. Then, look at the Web site of a company that you buy
● ● ●
from to see where their products are made.
● ● ●
6.12. Create a flowchart for the process of building flowcharts
d. Circle the three errors in the following sentence: There described on page 235.
is three misstakes in this sentence. 6.13. Explore the sustainability requirements of production
6-9. Describe the factors often overlooked in the financial justi- outsourced to different parts of the world.
fication of new technology.

• GO Tutorial
PROBLEMS

6-1. Construct a process flowchart of a process with which you press, he could recognize a substantial increase in profits.
are familiar. Identify bottlenecks, potential failure points, The new press costs $15,400 to purchase and install and can
and opportunities for improvement. press 40 shirts an hour (or 320 per day). David estimates
6-2. Create an operations chart for making pancakes. that with the new press, it will cost $0.25 to launder and
6-3. Mikey W. Smitty, an emerging rapper, is getting ready to press each shirt. Customers are charged $1.10 per shirt.
cut his first CD, called “Western Rap.” The cost of record- a. How many shirts will David have to press to break even?
ing the CD is $5000 but copies are $5 apiece. If the CDs b. So far, David’s workload has varied from 50 to 200
can be sold for $15 each, how many CDs must be sold to shirts a day. How long would it take to break even on
break even? What is the breakeven point in dollars? the new press at the low-demand estimate? at the high-
6-4. Mikey W. Smitty is confident that demand for his “Western demand estimate?
Rap” CD will substantially exceed the break-even point c. If David cuts his price to $0.99 a shirt, he expects to be
computed in Problem 6-3. So, Mikey is contemplating hav- able to stabilize his customer base at 250 shirts per day.
ing his CD cut at a classier (and pricier) studio. The cost to How long would it take to break even at the reduced
record the CD would rise to $9000. However, since this price of $0.99? Should David cut his price and buy the
new studio works with very high volume, production costs new press?
would fall to $2 per CD. 6-8. The school cafeteria can make pizza for approximately
a. What is the breakeven point for this new process? $0.30 a slice. The cost of kitchen use and cafeteria staff
b. Compare this process to the process proposed in the runs about $200 per day. The Pizza Den nearby will deliver
previous problem. For what volume of demand should whole pizzas for $9.00 each. The cafeteria staff cuts the
Mikey choose the classier studio? pizza into eight pieces and serves them in the usual cafete-
6-5. Patricia Zell, a dollmaker from Olney, Maryland, is inter- ria line. With no cooking duties, the staff can be reduced
ested in the mass marketing and production of a ceramic doll by half, for a fixed cost of $75 per day. Should the school
of her own design called Tiny Trisha. The initial investment cafeteria make or buy its pizzas?
required for plant and equipment is estimated at $25,000. 6-9. Soft Key is trying to determine how best to produce its
Labor and material costs are approximately $10 per doll. If newest product, DVORK keyboards. The keyboards could
the dolls can be sold for $50 each, what volume of demand be produced in-house using either Process A or Process B,
is necessary for the Tiny Trisha doll to break even? or purchased from a supplier. Cost data are given below.
6-6. Although it will fulfill her lifelong dream, Patricia is not For what levels of demand should each process be chosen?
confident that demand for her Tiny Trisha doll will exceed
the breakeven point computed in Problem 6-5. If she
chooses a less appealing site and does more of the work by Fixed Cost Variable Cost
hand, her initial investment cost can be reduced to $5000, Process A $ 8,000 $10
but her per-unit cost of manufacture will rise to $15 per doll. Process B $20,000 $4
a. What is the breakeven point for this new process? Supplier $ 0 $20
b. Compare this process to the process proposed in the
previous problem. For what volume of demand should
Patricia choose this process? 6-10. NanoTech is ready to begin production of its exciting new
6-7. David Austin recently purchased a chain of dry cleaners in technology. The company is evaluating three methods of
northern Wisconsin. Although the business is making a production: (A) a small production facility with older
modest profit now, David suspects that if he invests in a new equipment, (B) a larger production facility that is more
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252 Part 1 • Operations Management

automated, and (C) subcontracting to an electronics manu- Prydain join? How would the average number of claims
facturer in Singapore. The costs of each alternative are filed per employee per month affect your decision?
shown below. Determine for what level of demand each 6-14. Gemstone Quarry is trying to decide whether to invest in a
production process should be chosen. new material-handling system. The current system (which
is old and completely paid for) has an annual maintenance
cost of $10,000 and costs approximately $25 to transport
Process Fixed Cost Variable Cost each load of material. The two new systems that are being
A $200,000 $40 considered vary both in sophistication and cost. System 1
B $600,000 $20 has a fixed cost of $40,000 and a cost per load estimated at
C $ 0 $60 $10. System 2 has a fixed cost of $100,000 but a per-load
cost of $5. At what volume of demand (i.e., number of
loads) should Gemstone purchase System 1? System 2?
6-11. Alma has decided to purchase a cell phone with Internet 6-15. Tribal Systems, Inc., is opening a new plant and has yet to
access and must choose a rate plan. The “occasional-user” decide on the type of process to employ. A labor-intensive
plan is $0.50/minute, regardless of how many minutes of process would cost $10,000 for tools and equipment and
air time are used. The “frequent-user” plan charges a flat $14 for labor and materials per item produced. A more au-
rate of $55/month for 70 minutes of air time plus tomated process costs $50,000 in plant and equipment but
$0.33/minute for any time over 70 minutes. The “execu- has a labor/material cost of $8 per item produced. A fully
tive” plan charges a flat fee of $75 per month for 100 automated process costs $300,000 for plant and equipment
minutes of air time plus $0.25/minute over 100 minutes. In and $2 per item produced. If process selection were based
the interest of simplicity, Alma has decided to go with the solely on lowest cost, for what range of production would
occasional-user plan to start with and then upgrade as she each process be chosen?
sees fit at a later date. 6-16. Lydia and Jon order their holiday gifts through the mail.
a. How much air time per month would Alma need to They have spent many evenings at home comparison-
use before she upgrades from the occasional-user plan shopping through gift catalogues and have found all the
to the frequent-user plan? things they need from three mail-order houses, B.B. Lean,
b. At what usage rate should she switch from the Spoogle’s, and Sea’s End. The purchase price for their
frequent-user plan to the executive plan? selections from each catalogue is given here. The shipping
6-12. Merrimac Manufacturing Company has always purchased a and handling charge per item is also given. If Lydia and
certain component part from a supplier on the East Coast for Jon want to order all their gifts from the same source,
$50 per part. The supplier is reliable and has maintained the which catalogue should they choose? How does the num-
same price structure for years. Recently, improvements in op- ber of items ordered affect your recommendation?
erations and reduced product demand have cleared up some
capacity in Merrimac’s own plant for producing component
parts. The particular part in question could be produced at B.B. Lean Spoogle’s Sea’s End
$40 per part, with an annual fixed investment of $25,000. Purchase price $400 $500 $460
Currently, Merrimac needs 300 of these parts per year. Shipping/handling per item $ 6 $ 3 $ 4
a. Should Merrimac make or buy the component part?
b. As another alternative, a new supplier located nearby is
offering volume discounts for new customers of $50 6-17. Sandra Saunders and her design team are analyzing the
per part for the first 100 parts ordered and $45 per part production costs for three alternative monitor designs.
for each additional unit ordered. Should Merrimac Given the cost information below, and assuming form and
make the component in-house, buy it from the new function are similar for each design, which monitor design
supplier, or stick with the old supplier? would you recommend?
c. Would your decision change if Merrimac’s annual de-
mand increased to 2000 parts? increased to 5000 parts?
d. Develop a set of rules that Merrimac can use to decide Monitor Fixed Cost Variable Cost
when to make this component, when to buy it from the A $ 700,000 $250
old supplier, or when to buy it from the new supplier. B $1,000,000 $125
6-13. Prydain Pharmaceuticals is reviewing its employee health- C $1,500,000 $100
care program. Currently, the company pays a fixed fee of
$300 per month for each employee, regardless of the num-
ber or dollar amount of medical claims filed. Another 6-18. Three Bags Full is a small grocery store chain in the
health-care provider has offered to charge the company Lehigh Valley. The company is trying to decide whether to
$100 per month per employee and $30 per claim filed. A include a bakery section in its stores. You have been asked
third insurer charges $200 per month per employee and to run the numbers using pies as an example. Baking the
$10 per claim filed. Which health-care program should pies in-house would cost $80 per day and $1 per pie. Pies
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Chapter 6 • Processes and Technology 253

can be purchased for $4 each from a local bakery, or $3 b. Pete is considering selling the shirts for $8 each.
each from a large regional bakery. The regional bakery What is the breakeven point for packages 1 and 2 with
requires a minimum purchase of 25 pies per day. Which an $8 price?
alternative would you recommend? (Hint: graph the c. Which logo package would you recommend if Pete
problem.) expects to sell 75 shirts? 200 shirts?
6-19. Keisha has been inundated with product-of-the-month d. Assuming the shirts would be sold at the same price
offers from various marketing companies. She is consider- regardless of the logo package, create a decision rule
ing joining a club that allows DVDs to be downloaded for Pete to use based on anticipated sales volume.
from a members-only Web site, but can’t decide which
membership offers the best deal. Given the cost informa-
tion below, which club would you recommend for Keisha? Package Cost of Logo Cost per Shirt
1 $300 $4
2 $100 $6
Club Membership fee Cost per DVD 3 $ 0 $8
Almost Free Flicks $ 40 $5
Best Movies $ 65 $4
Choice Cinema $100 $3 6-21. Sized Rite is trying to determine how best to produce its
new line of shoes for expanded feet. Demand for its w-i-d-e
products is uncertain. Given the alternative processes and
6-20. Pete Patel is the sports liaison for the student government costs below, determine at what level of demand you would
association. During the fall semester, the group promotes choose each process.
school spirit with “orange effect” t-shirts. The shirts fea-
ture a special screen-printed logo that can be expensive to
make. Pete’s supplier, Classic Tees, has quoted three Fixed Cost Variable Cost
prices for the shirts with differing logo packages, as Process A $20,000 $ 5
shown below. Process B $10,000 $10
a. If the t-shirts are sold for $6 each, how many shirts Supplier C $ 0 $20
would have to be sold to break even with Package l ?

CASE PROBLEM 6.1

A Manager’s Woes spend his afternoon. There’s got to be a logical way to

Kyle Peschken has been a manager for the discount solve this, thought Kyle. He walked back to his office and
store, Zelmart, for the past two years. It’s time for his an- wrote down the facts as he knew them.
nual performance review, and Kyle would like to make a 1. Customer service managers (CSMs) must approve
big impression on the corporate staff. Walking through all checks over $100, and over 50% of purchases in
the store, he makes a mental note of which departments electronics exceed $100.
need to be straightened, which ones need to be reorga- 2. It’s more efficient to stage CSMs at the front of the
nized, and which employees he’d like to schedule during store by the 12 checkout lines.
the week of his review. And then he sees it—blocking 3. It takes an average of 10 minutes for the CSM to
the aisles, creating commotion, and looking very reach electronics after being paged.
unprofessional—the long line in the electronics depart- 4. Because of cost controls, the number of CSMs is
ment. It’s time to confront Chris, the sales clerk. limited to two per shift, and there is no room in the
“Chris what’s the holdup here?” budget for additional hires of any type.
“I’m waiting for a manager to approve this $120 check. 5. Electronics must be purchased in the electronics
And then I have to show this lady a digital camera from department (to prevent theft).
the display cabinet. She’s been waiting half an hour, and 6. Store policy allows customers to check out other
then. . . .” items at the electronics counter if they are making
“Alright Chris . . . I can help out for a little while . . . “ purchases in that department. (This makes sense
Two hours later, Kyle exited the electronics depart- especially if the customer wants to write a check for
ment disheartened. That’s no way for a store manager to the entire purchase.)
(Continued)
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254 Part 1 • Operations Management

7. Store clerks must monitor the locked cabinets and 10. The average time a customer spends in electronics
stay with a customer who wants to view an item during peak periods is an unacceptable 40 minutes.
from the cabinet.
8. Because of the size of the enclosed department, Help Kyle come up with a solution to his inefficient de-
only two checkout counters will fit in partment. Draw a flowchart of the current process from
electronics. the customer’s point of view and try to identify areas for
9. Moving the electronics department to the front of improvement. If small improvements will not fix the
the store would not be wise because shoppers tend problem, try a more innovative approach. Chart out your
to pick up impulse items on their way to the center suggestions and bring them to class. (It may help to visit
of the store where electronics are located. a similar store and watch their checkout process.)

CASE PROBLEM 6.2

Wrong Meds, Again! After a long night at the hospital, I woke up the next
“It was horrible,” said the distraught client. “No matter morning to see my dad hallucinating. I knew immediately
how many times I provided the information, no one listened what had happened—there’s a certain drug that he has
to me. And they obviously didn’t listen to each other ei- this reaction to. I ran down to the nurse’s station and had
ther, because they used the wrong meds . . . again.” her look up the medications he had been given. Sure
“Okay, calm down. Now tell me what happened from enough, it was there, along with several other medica-
the beginning,” urged Melanie Torrent, the Quality Assur- tions he should no longer be taking. Turns out, the list
ance Manager for Hope Memorial Hospital. was from two years ago when he had last been admitted
“I got a call at work saying my father was being taken to the hospital! How could they have made that kind of
to the hospital from the nursing home. The nursing home mistake—using data from two years ago?”
always sends a list of medications with the ambulance, “That is something we’ll look into. More importantly,
but when I got to the emergency room, they were asking has your father been taken off the drug?”
my dad what medications he was taking. Of course my “Yes.”
dad told them he wasn’t taking any medications and they “And has the medication list been corrected?”
believed him! He’s sent to the emergency room from a “Yes.”
nursing home and they decide it’s reasonable for him not “And how is he doing today?”
to be on any medications . . . so of course I corrected him “Fine today, but it could have been more serious and I
and told them to find the medication list. I don’t know think you should look into changing your procedures so
whether the ambulance driver forgot to bring in the list, this doesn’t happen again . . .”
or gave it to the wrong person, or what, but they couldn’t “I appreciate you bringing this to my attention. I will
find it. My dad must be on 12 different medications so I speak to the persons involved and I assure you this will
wasn’t sure I could remember them correctly. I called the not happen again. Hope Memorial prides itself on being a
nursing home and we went over the list with them, and caring and responsible health care provider. Now if you’ll
then I gave the handwritten list to the nursing station. excuse me, I have another client to see . . .”
In the meantime, my dad was admitted to the hospital 1. Trace the path of the medication list and denote
and moved to a hospital room. Again, a nurse came in possible failure points. Construct a process flowchart
with a computer and asked me to tell them what meds he of the existing process and create a new chart of an
was talking. I tried to tell them that the emergency room improved process.
had the list, but she said it would be the next morning be- 2. Was the medication error a failure of individuals or
fore the list got updated online. Nevertheless, the nurse a failure of the process? Explain.
called down to the emergency room and was faxed up the 3. Think about the different settings, the ambulance, the
list of medications. Only the fax was unreadable, so they emergency room, the hospital room, and the nurse’s
came back to me. It was a few hours before his next meds station. How is data handled in each scenario? Can
were due, so I drove over to the nursing home, had them the process of recording information be changed so
make several legible copies of the meds list and drove that every one is using the same data? How can the
back to the hospital. I gave the nurse the list, kept one for accuracy of the data be assured?
myself and posted the other on the bulletin board in my 4. Given Melanie’s reaction, do you think this error will
dad’s room. The nurse thanked me and said she’d take happen again? Why or why not?
care of it at the end of her shift.
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Chapter 6 • Processes and Technology 255

CASE PROBLEM 6.3

The DPA Protocol • Naomi submits programs to Dr. Salvatore for final
Blake is an intern in the Department of Performing Arts approval.
(DPA) at State University. One of his duties is to schedule • Interns print, fold, and distribute programs.
end-of-term recitals for the department's graduating
Please refer any questions to Ingrid or Naomi.
seniors and to create and distribute programs for those
recitals. The recitals for each student include several
performance pieces and often feature classical pieces
with foreign titles and composers. The students submit a Sent: March 5, 2011
request for recital online and are sent an email confir- To: Ingrid and Naomi
mation of their recital schedule (from Blake). With that From: Blake
confirmation is a reminder that the material for the pro-
gram needs to be submitted by a certain time. Generally, I am a little confused about the sequence of the programs. Do
these are emailed to Blake, who puts them in standard the students send their programs to their program directors
program format and prints, folds, and distributes them before they send it to Ingrid, or do we send it to their program
to the recital venue on the evening of the performance. directors after we format it?
The department has recently been-embarrassed by mis- Thanks,
takes in the programs, and after verifying that the source Blake
of the error is usually with the student, not Blake, the
department has created a new protocol to improve the
process.
Below are copies of emails about the new protocol. Sent: March 6, 2011
Create a flowchart of the old and new protocols and iden- To: Blake
tify where problems or delays might occur. What would From: Ingrid, Head Secretary, DPA
you do to improve the process?
I know this is a bit confusing so let me clarify as best as
I can. When the students send me their programs, I inform
them that their programs should be edited and approved by
Sent: March 1, 2011 their program directors before they send it to me. I then for-
To: DPA Faculty, Staff and Interns ward it to you for proper formatting, then you send it to
From: Dr. Salvatore, Chair, DPA Naomi for editing, and then she sends it back to you for
printing.
To ensure that the Department is putting out the best quality
recital programs a new protocol has been established.

New Protocol for Recital Programs

Sent: March 7, 2011
• Students submit programs to their Program
To: Blake
Directors.
From: Naomi, Administrative Assistant, DPA
• Program Directors edit and submit programs to Ingrid.
• Ingrid submits programs to Interns. They send it to Ingrid, she sends it to you for formatting, and
• Interns format programs and submit to Naomi for final then you send it to the program director. Ingrid or I will keep
edits. you posted if there are any changes to the protocol.

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