1. 2 Chapter 4 Product, Process, and Service Design

1 1 2002 South-Western/Thomson Learning 2002 South-Western/Thomson Learning TMTM

Slides preparedSlides preparedby John Loucksby John Loucks

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Chapter 4Chapter 4Chapter 4Chapter 4

Product, Process, and Service DesignProduct, Process, and Service Design

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OverviewOverviewOverviewOverview

Designing and Developing Products and ServicesDesigning and Developing Products and Services Process Planning and DesignProcess Planning and Design Major Factors Affecting Process Design DecisionsMajor Factors Affecting Process Design Decisions Types of Process DesignsTypes of Process Designs Interrelationships Among Product Design, Process Interrelationships Among Product Design, Process

Design, and Inventory PolicyDesign, and Inventory Policy Process Design in ServicesProcess Design in Services Deciding Among Processing AlternativesDeciding Among Processing Alternatives Wrap-Up: What World-Class Companies DoWrap-Up: What World-Class Companies Do

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Product/Service DesignProduct/Service DesignProduct/Service DesignProduct/Service Design

When a product/service is designed:When a product/service is designed: The detailed characteristics of the product/service are The detailed characteristics of the product/service are

established.established. The characteristics of the product/service directly The characteristics of the product/service directly

affects how the product/service can be produced/ affects how the product/service can be produced/ delivered.delivered.

How the product/service is produced/delivered How the product/service is produced/delivered determines the design of the production/delivery determines the design of the production/delivery system.system.

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Product/Service DesignProduct/Service DesignProduct/Service DesignProduct/Service Design

Product/service design directly affects:Product/service design directly affects: Product/service qualityProduct/service quality Production/delivery costProduction/delivery cost Customer satisfactionCustomer satisfaction

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Product/Service Design and DevelopmentProduct/Service Design and DevelopmentProduct/Service Design and DevelopmentProduct/Service Design and Development

Sources of Product InnovationSources of Product Innovation Developing New Products/ServicesDeveloping New Products/Services Getting Them to Market FasterGetting Them to Market Faster Improving Current Products/ServicesImproving Current Products/Services Designing for Ease of ProductionDesigning for Ease of Production Designing for QualityDesigning for Quality Designing and Developing New ServicesDesigning and Developing New Services

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Sources of Product/Service InnovationSources of Product/Service InnovationSources of Product/Service InnovationSources of Product/Service Innovation

CustomersCustomers ManagersManagers MarketingMarketing OperationsOperations EngineeringEngineering Research and Development (R&D)Research and Development (R&D)

Basic researchBasic research Applied researchApplied research

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Steps in Developing New ProductsSteps in Developing New ProductsSteps in Developing New ProductsSteps in Developing New Products

1.1. Technical and economic feasibility studies Technical and economic feasibility studies

2.2. Prototype design Prototype design

3.3. Performance testing of prototype Performance testing of prototype

4.4. Market sensing/evaluation and economic evaluation Market sensing/evaluation and economic evaluation of the prototypeof the prototype

5.5. Design of production model Design of production model

6.6. Market/performance/process testing and economic Market/performance/process testing and economic evaluation of production modelevaluation of production model

7.7. Continuous modification of production model Continuous modification of production model

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1.1. Technical and Economic Feasibility Studies Technical and Economic Feasibility Studies Determine the advisability of establishing a project Determine the advisability of establishing a project

for developing the productfor developing the product If initial feasibility studies are favorable, engineers If initial feasibility studies are favorable, engineers

prepare an initial prototype designprepare an initial prototype design

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2.2. Prototype Design Prototype Design This design should exhibit the basic form, fit, and This design should exhibit the basic form, fit, and

function of the final productfunction of the final product It will not necessarily be identical to the It will not necessarily be identical to the

production modelproduction model

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3.3. Performance Testing of Prototype Performance Testing of Prototype Performance testing and redesign of the prototype Performance testing and redesign of the prototype

continues until this design-test-redesign process continues until this design-test-redesign process produces a satisfactorily performing prototypeproduces a satisfactorily performing prototype

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4.4. Market Sensing/Evaluation and Economic Market Sensing/Evaluation and Economic Evaluation of the PrototypeEvaluation of the Prototype Accomplished by demonstrations to potential Accomplished by demonstrations to potential

customers, market test, or market surveyscustomers, market test, or market surveys If the response to the prototype is favorable, If the response to the prototype is favorable,

economic evaluation of the prototype is economic evaluation of the prototype is performed to estimate production volume, costs, performed to estimate production volume, costs, and profitsand profits

If the economic evaluation is favorable, the If the economic evaluation is favorable, the project enters the production design phase.project enters the production design phase.

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5.5. Design of Production Model Design of Production Model The initial design of the production model will not The initial design of the production model will not

be the final design; the model will evolvebe the final design; the model will evolve

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6.6. Market/Performance/Process Testing and Economic Market/Performance/Process Testing and Economic Evaluation of Production ModelEvaluation of Production Model The production model should exhibit:The production model should exhibit:

low costlow cost reliable qualityreliable quality superior performancesuperior performance the ability to be produced in the desired the ability to be produced in the desired

quantities on the intended equipmentquantities on the intended equipment

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7.7. Continuous Modification of Production Model Continuous Modification of Production Model Production designs are continuously modified to:Production designs are continuously modified to:

Adapt to changing market conditionsAdapt to changing market conditions Adapt to changing production technologyAdapt to changing production technology Allow for manufacturing improvementsAllow for manufacturing improvements

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Managing Product Development ProjectsManaging Product Development ProjectsManaging Product Development ProjectsManaging Product Development Projects

About 5% of all new-product ideas survive to About 5% of all new-product ideas survive to production, and only about 10% of these are production, and only about 10% of these are successful.successful.

It is best to cancel unpromising new-product/service It is best to cancel unpromising new-product/service development projects early!development projects early!

Employees often become emotionally caught up in Employees often become emotionally caught up in these projects and are overly optimisticthese projects and are overly optimistic

An impartial management review board is needed for An impartial management review board is needed for periodic reviews of the progress of these projects.periodic reviews of the progress of these projects.

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Getting New Products to Market FasterGetting New Products to Market FasterGetting New Products to Market FasterGetting New Products to Market Faster

Speed creates competitive advantagesSpeed creates competitive advantages Speed saves moneySpeed saves money Tools to improve speed:Tools to improve speed:

Autonomous design and development teamsAutonomous design and development teams Computer-aided design/computer-aided Computer-aided design/computer-aided

manufacturing (CAD/CAM)manufacturing (CAD/CAM) Simultaneous (concurrent) engineering Simultaneous (concurrent) engineering

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Tools to Improve Speed to MarketTools to Improve Speed to MarketTools to Improve Speed to MarketTools to Improve Speed to Market

Autonomous Design and Development TeamsAutonomous Design and Development Teams Teams are given decision-making responsibility Teams are given decision-making responsibility

and more freedom to design and introduce new and more freedom to design and introduce new products/servicesproducts/services

Time-to-market has been slashed dramaticallyTime-to-market has been slashed dramatically Enormous sums of money have been savedEnormous sums of money have been saved Teams do not have to deal with the bureaucratic Teams do not have to deal with the bureaucratic

red tape ordinarily required to obtain approvalsred tape ordinarily required to obtain approvals

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Computer-Aided Design/Computer-Aided Computer-Aided Design/Computer-Aided Manufacturing (CAD/CAM)Manufacturing (CAD/CAM) Engineers, using CAD/CAM, can generate many Engineers, using CAD/CAM, can generate many

views of parts, rotate images, magnify views, and views of parts, rotate images, magnify views, and check for interference between partscheck for interference between parts

Part designs can be stored in a data base for use on Part designs can be stored in a data base for use on other productsother products

When it is time for manufacturing, the product When it is time for manufacturing, the product design is retrieved, translated into a language that design is retrieved, translated into a language that production machinery understands, and then the production machinery understands, and then the production system can be automatically set up.production system can be automatically set up.

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SimultaneousSimultaneous(Concurrent)(Concurrent)EngineeringEngineering

Economic and TechnicalEconomic and TechnicalFeasibility StudiesFeasibility Studies

Product/Product/Service IdeasService Ideas

Production Process DesignProduction Process DesignProduct/Service DesignProduct/Service Design

Produce and MarketProduce and MarketNew Product/ServiceNew Product/Service

ContinuousInteraction

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Improving the DesignImproving the Designof Existing Products/Servicesof Existing Products/Services

Focus is improving performance, quality, and costFocus is improving performance, quality, and cost Objective is maintaining or improving market share Objective is maintaining or improving market share

of maturing products/servicesof maturing products/services Little changes can be significantLittle changes can be significant Small, steady (continuous) improvements can add up Small, steady (continuous) improvements can add up

to huge long-term improvementsto huge long-term improvements Value analysisValue analysis is practiced, meaning design features is practiced, meaning design features

are examined in terms of their cost/benefit (value).are examined in terms of their cost/benefit (value).

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Designing for Ease of ProductionDesigning for Ease of Production

Ease of ProductionEase of Production ((ManufacturabilityManufacturability)) SpecificationsSpecifications - Precise information about the - Precise information about the

characteristics of the productcharacteristics of the product TolerancesTolerances - Minimum & maximum limits on a - Minimum & maximum limits on a

dimension that allows the item to function as dimension that allows the item to function as designeddesigned

StandardizationStandardization - Reduce variety among a group of - Reduce variety among a group of products or partsproducts or parts

SimplificationSimplification - Reduce or eliminate the complexity - Reduce or eliminate the complexity of a part or product of a part or product

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Designing for QualityDesigning for QualityDesigning for QualityDesigning for Quality

Crucial element of product design is its impact on Crucial element of product design is its impact on qualityquality

Quality is determined by the customer’s perception of Quality is determined by the customer’s perception of the degree of excellence of the product/service’s the degree of excellence of the product/service’s characteristicscharacteristics

Chapter 7 covers the principles of designing Chapter 7 covers the principles of designing products/services for qualityproducts/services for quality

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Designing and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New Services

Three general dimensions of service design are:Three general dimensions of service design are: Degree of Standardization of the ServiceDegree of Standardization of the Service

Custom-fashioned for particular customers or Custom-fashioned for particular customers or basically the same for all customers?basically the same for all customers?

Degree of Customer Contact in Delivering the ServiceDegree of Customer Contact in Delivering the Service High level of contact (dress boutique) or low level High level of contact (dress boutique) or low level

(fast-food restaurant)?(fast-food restaurant)? Mix of Physical Goods and Intangible ServicesMix of Physical Goods and Intangible Services

Mix dominated by physical goods (tailor’s shop) or Mix dominated by physical goods (tailor’s shop) or by intangible services (university)?by intangible services (university)?

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Designing and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New Services

Differences Between New Service and New Product Differences Between New Service and New Product DevelopmentDevelopment Unless services are dominated by physical goods, Unless services are dominated by physical goods,

their development usually does not require their development usually does not require engineering, testing, and prototype building.engineering, testing, and prototype building.

Because many service businesses involve Because many service businesses involve intangible services, market sensing tends to be intangible services, market sensing tends to be more by surveys rather than by market tests and more by surveys rather than by market tests and demonstrations.demonstrations.

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ProcessProcessPlanning and DesignPlanning and Design

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Inputs:Inputs:• Product/Service InformationProduct/Service Information• Production System InformationProduction System Information• Operations StrategyOperations Strategy

Process Planning & Design:Process Planning & Design:• Process-Type SelectionProcess-Type Selection• Vertical Integration StudiesVertical Integration Studies• Process/Product StudiesProcess/Product Studies• Equipment StudiesEquipment Studies• Production Procedures StudiesProduction Procedures Studies• Facilities StudiesFacilities Studies

Outputs:Outputs:• Process Technology Process Technology • FacilitiesFacilities• Personnel EstimatesPersonnel Estimates

Process Planning and Design System Process Planning and Design System Process Planning and Design System Process Planning and Design System

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Major Factors Affecting Process DesignsMajor Factors Affecting Process DesignsMajor Factors Affecting Process DesignsMajor Factors Affecting Process Designs

Nature of product/service demandNature of product/service demand Degree of vertical integrationDegree of vertical integration Production flexibilityProduction flexibility Degree of automationDegree of automation Product/Service qualityProduct/Service quality

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Nature of Product/Service DemandNature of Product/Service DemandNature of Product/Service DemandNature of Product/Service Demand

Production processes must have adequate capacity to Production processes must have adequate capacity to produce the volume of the products/services that produce the volume of the products/services that customers need.customers need.

Provisions must be made for expanding or Provisions must be made for expanding or contracting capacity to keep pace with demand contracting capacity to keep pace with demand patterns.patterns.

Some types of processes are more easily expanded Some types of processes are more easily expanded and contracted than others.and contracted than others.

Product/service price affects demand, so pricing Product/service price affects demand, so pricing decisions and the choice of processes must be decisions and the choice of processes must be synchronized.synchronized.

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Degree of Vertical IntegrationDegree of Vertical IntegrationDegree of Vertical IntegrationDegree of Vertical Integration

Vertical integrationVertical integration is the amount of the production is the amount of the production and distribution chain that is brought under the and distribution chain that is brought under the ownership of a company.ownership of a company.

This determines how many production processes need This determines how many production processes need to be planned and designed.to be planned and designed.

Decision of integration is based on cost, availability Decision of integration is based on cost, availability of capital, quality, technological capability, and more.of capital, quality, technological capability, and more.

Strategic outsourcingStrategic outsourcing (lower degree of integration) is (lower degree of integration) is the outsourcing of processes in order to react quicker the outsourcing of processes in order to react quicker to changes in customer needs, competitor actions, and to changes in customer needs, competitor actions, and technology.technology.

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Production FlexibilityProduction FlexibilityProduction FlexibilityProduction Flexibility

Product flexibilityProduct flexibility -- ability of the production (or -- ability of the production (or delivery) system to quickly change from producing delivery) system to quickly change from producing (delivering) one product (or service) to another.(delivering) one product (or service) to another.

Volume flexibilityVolume flexibility -- ability to quickly increase or -- ability to quickly increase or reduce the volume of product( or service) produced reduce the volume of product( or service) produced (or delivered).(or delivered).

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Degree of AutomationDegree of AutomationDegree of AutomationDegree of Automation

Advantages of automationAdvantages of automation Improves product qualityImproves product quality Improves product flexibilityImproves product flexibility Reduces labor and related costsReduces labor and related costs

Disadvantages of automationDisadvantages of automation Equipment can be very expensiveEquipment can be very expensive Integration into existing operations can be difficultIntegration into existing operations can be difficult

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Product/Service QualityProduct/Service QualityProduct/Service QualityProduct/Service Quality

Old viewpoint – high-quality products must be made Old viewpoint – high-quality products must be made in small quantities by expert craftsmenin small quantities by expert craftsmen

New viewpoint – high-quality products can be mass-New viewpoint – high-quality products can be mass-produced using automated machineryproduced using automated machinery

Automated machinery can produce products of Automated machinery can produce products of incredible uniformityincredible uniformity

The choice of design of production processes is The choice of design of production processes is affected by the need for superior quality.affected by the need for superior quality.

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Types of Process DesignsTypes of Process DesignsTypes of Process DesignsTypes of Process Designs

Product-FocusedProduct-Focused Process-FocusedProcess-Focused Group Technology/Cellular ManufacturingGroup Technology/Cellular Manufacturing

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Product-FocusedProduct-FocusedProduct-FocusedProduct-Focused

Processes (conversions) are arranged based on the Processes (conversions) are arranged based on the sequence of operations required to produce a product sequence of operations required to produce a product or provide a serviceor provide a service

Also called “Production Line” or “Assembly Line”Also called “Production Line” or “Assembly Line” Two general formsTwo general forms

Discrete unit – automobiles, dishwashersDiscrete unit – automobiles, dishwashers Process (Continuous) – petrochemicals, paperProcess (Continuous) – petrochemicals, paper

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PurchasedPurchased

Components,Components,SubassembliesSubassemblies


2222

3311

44

1

77

66

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ComponentsComponents Subassem.Subassem.

AssembliesAssemblies

Product/Material FlowProduct/Material Flow

Production OperationProduction Operation

Ass

embl

ies

Ass

embl

ies

Raw MaterialRaw Material ComponentsComponents

Compon.

Compon.

Subassem.

Subassem.

Raw MaterialRaw Material

Fin. GoodsFin. Goods

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AdvantagesAdvantages Lower labor-skill requirementsLower labor-skill requirements Reduced worker trainingReduced worker training Reduced supervisionReduced supervision Ease of planning and controlling productionEase of planning and controlling production

DisadvantagesDisadvantages Higher initial investment levelHigher initial investment level Relatively low product flexibilityRelatively low product flexibility

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Process-FocusedProcess-FocusedProcess-FocusedProcess-Focused

Processes (conversions) are arranged based on the Processes (conversions) are arranged based on the type of process, i.e., similar processes are grouped type of process, i.e., similar processes are grouped togethertogether

Products/services (jobs) move from department Products/services (jobs) move from department (process group) to department based on that particular (process group) to department based on that particular job’s processing requirementsjob’s processing requirements

Also called “Job Shop” or “Intermittent Production”Also called “Job Shop” or “Intermittent Production” ExamplesExamples

Auto body repairAuto body repair Custom woodworking shopCustom woodworking shop

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CuttingCutting AssemblyAssembly SandingSanding FinishingFinishingPlaningPlaning

DrillingDrilling

ShapingShaping

TurningTurning

1111 5555 7777

3333

2222

1111 6666

3333

6666

4444

2222Job AJob AJob AJob A

Job BJob B

4444 5555

Custom Woodworking ShopCustom Woodworking Shop

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AdvantagesAdvantages High product flexibilityHigh product flexibility Lower initial investment levelLower initial investment level

DisadvantagesDisadvantages Higher labor-skill requirementsHigher labor-skill requirements More worker trainingMore worker training More supervisionMore supervision More complex production planning and controllingMore complex production planning and controlling

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Group Technology/Cellular ManufacturingGroup Technology/Cellular ManufacturingGroup Technology/Cellular ManufacturingGroup Technology/Cellular Manufacturing

Group TechnologyGroup Technology Each part produced receives a multi-digit code that Each part produced receives a multi-digit code that

describes the physical characteristics of the part.describes the physical characteristics of the part. Parts with similar characteristics are grouped into Parts with similar characteristics are grouped into

part familiespart families Parts in a part family are typically made on the Parts in a part family are typically made on the

same machines with similar toolingsame machines with similar tooling

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Cellular ManufacturingCellular Manufacturing Some part families (those requiring significant Some part families (those requiring significant

batch sizes) can be assigned to manufacturing batch sizes) can be assigned to manufacturing cells.cells.

The organization of the shop floor into cells is The organization of the shop floor into cells is referred to as referred to as cellular manufacturingcellular manufacturing..

Flow of parts within cells tend to be more like Flow of parts within cells tend to be more like product-focused systemsproduct-focused systems

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Advantages (relative to a job shop)Advantages (relative to a job shop) Process changeovers simplifiedProcess changeovers simplified Variability of tasks reduced (less training needed)Variability of tasks reduced (less training needed) More direct routes through the systemMore direct routes through the system Quality control is improvedQuality control is improved Production planning and control simplerProduction planning and control simpler Automation simplerAutomation simpler

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DisadvantagesDisadvantages Duplication of equipmentDuplication of equipment Under-utilization of facilitiesUnder-utilization of facilities Processing of items that do not fit into a family Processing of items that do not fit into a family

may be inefficientmay be inefficient

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Candidates for GT/CM are job shops having:Candidates for GT/CM are job shops having: A degree of parts standardizationA degree of parts standardization Moderate batch sizesModerate batch sizes

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Product/Process Design & Inventory PolicyProduct/Process Design & Inventory PolicyProduct/Process Design & Inventory PolicyProduct/Process Design & Inventory Policy

Standard Products and Produce to StockStandard Products and Produce to Stock Sales forecasts drive production scheduleSales forecasts drive production schedule Maintain pre-determined finished-goods levelsMaintain pre-determined finished-goods levels MRP forecast drives material orderingMRP forecast drives material ordering

Custom Products and Produce to OrderCustom Products and Produce to Order Orders set production schedule and drive material Orders set production schedule and drive material

deliveriesdeliveries Design time (Design time (preproduction planningpreproduction planning) may be ) may be

required before production can be scheduled required before production can be scheduled

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Process Design in ServicesProcess Design in ServicesProcess Design in ServicesProcess Design in Services

Some of the factors important in process design for Some of the factors important in process design for products are also important in services:products are also important in services: Nature (level and pattern) of customer demandNature (level and pattern) of customer demand Degree of vertical integrationDegree of vertical integration Production flexibilityProduction flexibility Degree of automationDegree of automation Service qualityService quality

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Three schemes for producing and delivering servicesThree schemes for producing and delivering services Quasi-Manufacturing Quasi-Manufacturing Customer-as-Participant Customer-as-Participant Customer-as-ProductCustomer-as-Product

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Quasi-ManufacturingQuasi-Manufacturing Physical goods are dominant over intangible Physical goods are dominant over intangible

serviceservice Production of goods takes place along a production Production of goods takes place along a production

lineline Operations can be highly automatedOperations can be highly automated Almost no customer interactionAlmost no customer interaction Little regard for customer relationsLittle regard for customer relations Example – bank’s checking encoding operationExample – bank’s checking encoding operation

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Customer-as-ParticipantCustomer-as-Participant Physical goods may be a significant part of the Physical goods may be a significant part of the

serviceservice Services may be either standardized or customServices may be either standardized or custom High degree of customer involvement in the High degree of customer involvement in the

processprocess Examples: ATM, self-service gas stationExamples: ATM, self-service gas station

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Customer-as-ProductCustomer-as-Product Service is providedService is provided through personal attention to through personal attention to

the customerthe customer Customized service Customized service onon the customer the customer High degree of customer contactHigh degree of customer contact There is a perception of high qualityThere is a perception of high quality Customer becomes the central focus of the process Customer becomes the central focus of the process

designdesign Examples: medical clinic, hair salonExamples: medical clinic, hair salon

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Process ReengineeringProcess ReengineeringProcess ReengineeringProcess Reengineering

The concept of drastically changing an existing The concept of drastically changing an existing process designprocess design

Not merely making marginal improvements to athe Not merely making marginal improvements to athe processprocess

A correctly reengineered process should be more A correctly reengineered process should be more efficientefficient

A smaller labor force is often the resultA smaller labor force is often the result

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Deciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing Alternatives

Batch Size and Product/Service VarietyBatch Size and Product/Service Variety Capital RequirementsCapital Requirements Economic AnalysisEconomic Analysis

Cost Functions of Alternative ProcessesCost Functions of Alternative Processes Break-Even AnalysisBreak-Even Analysis Financial AnalysisFinancial Analysis

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Process Design Depends Process Design Depends on Product Diversity and Batch Sizeon Product Diversity and Batch Size

Process Design Depends Process Design Depends on Product Diversity and Batch Sizeon Product Diversity and Batch Size

Sm

all

B

atch

Siz

e

L

arge

Few Number of Product Designs Many

ProductProductFocused,Focused,DedicatedDedicatedSystemsSystems

ProductProductFocused,Focused,

BatchBatchSystemSystem

Process-Focused,Process-Focused, Job ShopJob Shop

CellularCellularManufacturingManufacturing

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Capital RequirementsCapital RequirementsCapital RequirementsCapital Requirements

The amount of capital required tends to differ for The amount of capital required tends to differ for each type of production processeach type of production process

Generally, the capital required is greatest for product-Generally, the capital required is greatest for product-focused, dedicated systemsfocused, dedicated systems

Generally, the capital required is lowest for process-Generally, the capital required is lowest for process-focused, job shopsfocused, job shops

The amount of capital available and the cost of capital The amount of capital available and the cost of capital are important considerationsare important considerations

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Economic AnalysisEconomic Analysis

Cost Functions of Processing AlternativesCost Functions of Processing Alternatives Fixed CostsFixed Costs

Annual cost when production volume is zeroAnnual cost when production volume is zero Initial cost of buildings, equipment, and other Initial cost of buildings, equipment, and other

fixed assetsfixed assets Variable CostsVariable Costs

Costs that vary with production volumesCosts that vary with production volumes Labor, material, and variable overheadLabor, material, and variable overhead

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Cost Functions of Processing AlternativesCost Functions of Processing AlternativesCost Functions of Processing AlternativesCost Functions of Processing Alternatives

Annual Cost of Production ($000)Annual Cost of Production ($000)

Units Units ProducedProducedPer YearPer Year

100,000100,000 250,000250,000

CellularCellularManufacturingManufacturing

PreferredPreferred

AutomatedAutomatedAssembly LineAssembly Line

PreferredPreferred

JobJobShopShop

PreferredPreferred500500

1,0001,000

2,0002,000

1,5001,500

Job Shop

Job Shop

Cellular Manuf.

Cellular Manuf.

Autom. Assembly LineAutom. Assembly Line

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ExampleExample

Three production processes (A, B, and C) have Three production processes (A, B, and C) have the following cost structure:the following cost structure:

Fixed CostFixed Cost Variable Cost Variable CostProcessProcess Per YearPer Year Per YearPer Year AA $120,000$120,000 $3.00 $3.00 BB 90,000 90,000 4.004.00 CC 80,000 80,000 4.504.50

What is the most economical process for a volume of What is the most economical process for a volume of 8,000 units per year?8,000 units per year?

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ExampleExample

TC = FC + v(Q)TC = FC + v(Q)

A: TC = 120,000 + 3.00(8,000) = $144,000 per yearA: TC = 120,000 + 3.00(8,000) = $144,000 per yearB: TC = 90,000 + 4.00(8,000) = $122,000 per yearB: TC = 90,000 + 4.00(8,000) = $122,000 per yearC: TC = 80,000 + 4.50(8,000) = $116,000 per yearC: TC = 80,000 + 4.50(8,000) = $116,000 per year

The most economical process at 8,000 units is The most economical process at 8,000 units is Process CProcess C, with the lowest annual cost., with the lowest annual cost.

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Economic AnalysisEconomic AnalysisEconomic AnalysisEconomic Analysis

Break-Even AnalysisBreak-Even Analysis Widely used to analyze and compare decision Widely used to analyze and compare decision

alternativesalternatives Can be displayed either algebraically or Can be displayed either algebraically or

graphicallygraphically Disadvantages:Disadvantages:

Cannot incorporate uncertaintyCannot incorporate uncertainty Costs assumed over entire range of valuesCosts assumed over entire range of values Does not take into account time value of moneyDoes not take into account time value of money

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Break-Even AnalysisBreak-Even AnalysisBreak-Even AnalysisBreak-Even Analysis

ExampleExample

Break-Even Points of Processes A, B, and C, Break-Even Points of Processes A, B, and C, assuming a $6.95 selling price per unitassuming a $6.95 selling price per unit

Q = FC / (p-v)Q = FC / (p-v)

A: Q = 120,000 / (6.95 - 3.00) = 30,380 unitsA: Q = 120,000 / (6.95 - 3.00) = 30,380 unitsB: Q = 90,000 / (6.95 - 4.00) = 30,509 unitsB: Q = 90,000 / (6.95 - 4.00) = 30,509 unitsC: Q = 80,000 / (6.95 - 4.50) = 32,654 unitsC: Q = 80,000 / (6.95 - 4.50) = 32,654 units

Process A has the lowest break-even point.Process A has the lowest break-even point.

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Economic AnalysisEconomic AnalysisEconomic AnalysisEconomic Analysis

Financial AnalysisFinancial Analysis A great amount of money is invested in production A great amount of money is invested in production

processes and these assets are expected to last a processes and these assets are expected to last a long timelong time

The time value of money is an important The time value of money is an important considerationconsideration

Payback periodPayback period net present valuenet present value internal rate of returninternal rate of return Profitability indexProfitability index

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Deciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing Alternatives

Assembly ChartsAssembly Charts (Gozinto Charts) (Gozinto Charts) Macro-view of how materials are unitedMacro-view of how materials are united Starting point to understand factory layout needs, Starting point to understand factory layout needs,

equipment needs, training needsequipment needs, training needs Process ChartsProcess Charts

Details of how to build product at each processDetails of how to build product at each process Includes materials needed, types of processes Includes materials needed, types of processes

product flows through, time it takes to process product flows through, time it takes to process product through each step of flowproduct through each step of flow

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Wrap-Up: World Class PracticeWrap-Up: World Class PracticeWrap-Up: World Class PracticeWrap-Up: World Class Practice

Fast new product introduction Fast new product introduction Design products for ease of productionDesign products for ease of production Refine forecastingRefine forecasting Focus on core competencies ... less vertical Focus on core competencies ... less vertical

integrationintegration Lean productionLean production Flexible automationFlexible automation Job shops move toward cellular manufacturingJob shops move toward cellular manufacturing Manage information flow ..... automate and simplify!Manage information flow ..... automate and simplify!

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End of Chapter 4End of Chapter 4

Documents

1. 2 Chapter 4 Product, Process, and Service Design