BA 339

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BA 339 OM Chapters 78

• Process Strategy Capacity Planning
• Definition Importance
• Process Strategies (see page 242, text)
• Process Analysis Design (tools)
• Service Process Design
• Equipment Technology
• Capacity Planning Approaches Tools
• Economies Diseconomies of Scale
• Break-Even Analysis
• ERP Systems

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BA 339 OM Chapters 78

• Process (Transformation) Strategy
• Organizations approach to transforming
  resources into products services
• Objective is to find a way to produce
  goods/services that
• Meet customer requirements
• Meet product specifications
• Do so within cost, managerial, and market
  constraints
• Has long-term effect on efficiency/production,
  flexibility, cost, and quality
• Process decision drives strategy
• Exist on a continuum process gt repetitive gt
  product

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• Strategies
• Process focus
• 75 of global production devoted to low-volume,
  high variety products in job shops (organized
  around processes).
• Examples Restaurant bar, grill, bakery
• Advantages Greater product flexibility, more
  general purpose equipment, lower capital
  investment
• Disadvantages Higher variable costs, more
  highly trained personnel, more difficult
  production planning/control, low equipment
  utilization (5-25)
• Process design provides high degree of product
  flexibility each process designed to perform a
  wide variety of activities and handle frequent
  changes
• Standard Register example (text, page 235-6)

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• Strategies
• Repetitive
• Use modules/nodes/cells (parts/components
  previously prepared, often in continuous
  process) modules combined for many
  product/output options
• Falls in between product process classic
  assembly line (automobiles, appliances)
• Examples
• Fast-food firms (quasi-custom product)
• Harley-Davidson final assembly of multiple
  cells, nodes, or modules
• Economic advantages of continuous model and
  custom advantages of low-volume, high-variety
  (quasi-customization)

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• Strategies
• Product (aka continuous or line flow production)
• High-volume, low-variety organized around
  products Can be discrete (discrete unit
  manufacturing) or nondiscrete (continuous process
  manufacturing)
• Examples Glass, light bulbs, beer, rolls of
  paper
• Inherent advantage in establishing standards or
  maintaining a given quality level
• Advantages Lower variable cost/unit, lower but
  more specialized labor skills, easier production
  planning control higher equipment utilization
  (70-90)
• Disadvantages Lower product flexibility, more
  specialized equipment, usually higher capital
  investment

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BA 339 OM Chapters 78

• Strategies
• Mass Customization
• Rapid, low-cost production of goods/services,
  driven by increasingly unique demand/desires
  (technology and imagination driven to meet
  demand)
• Provides large variety/quantity of products
  traditionally provided by low-volume manufacture
  (process focus) at the cost of standardized
  high-volume (product focus) production
• Blurring of lines between 3 process models
  characterized by higher fixed costs, dynamic
  variable cost
• Examples
• Automobiles 140 260 models (1970s-1990s),
  product to market in 2-3 years vs. 7-8 years,
  increasing number of options
• Phone services many more options (caller ID,
  voice mail, forwarding, data, cellular vs. land
  line, etc.

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BA 339 OM Chapters 78

• Comparison of Process Strategies (p. 242)
• Process focus equipment utilization ranges from
  5 - 25 Utilization above 15 suggests moving
  toward repetitive, product or mass customization
  focus
• Low utilization often driven by need for excess
  capacity needed for peak loads often driven by
  inefficient scheduling and resulting imbalance in
  facility usage
• Cross-over charts examines comparative costs of
  different processes illustrates lowest cost
  alternative at any given volume
• Difficult/expensive to change production system
  from process to other type
• Example McDonalds shift to charbroiling
• See figure 7.1, page 234 in text

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• Attaining Lean Production
• Focus on inventory reduction
• Build systems that help employees
• Reduce space requirements
• Develop close relationships with suppliers
• Educate suppliers
• Eliminate all but value-added activities
• Develop the workforce
• Make jobs more challenging
• Set sights on perfection

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BA 339 OM Chapters 78

• Process Analysis Design
• Is process designed to achieve competitive
  advantage in terms of differentiation,
  responsiveness, or cost
• Each step of process must add value as perceived
  by customer
• 4 Major tools
• Flow diagrams drawing used to analyze movement
  of material or people help understanding,
  analysis communication of a process
• Time-function mapping flow diagram with time
  added on horizontal axis (usually
  cross-functional) used to identify and eliminate
  waste (time, steps, delays)
• Process charts use symbols, time and distance
  to objectively analyze and record process
  activities include operations, transportation,
  inspection, delay information
• Service blueprinting used primarily to focus on
  customer and providers interaction with the
  customer helps identify potential failure
  points and quality improvement opportunities

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BA 339 OM Chapters 78

• Service Process Design
• Driven by degree of customization, labor
  intensity and interaction between them
• High customization and labor intensity
• Focus on HR (selection and training) to satisfy
  customers and win orders (professional services)
• Low customization and labor intensity
• Some degree of standardization (fast-food),
  automation (airline ticket vending machines,
  ATMs)
• Low labor intensity
• Lend themselves to innovation in process
  technology and scheduling
• Low customization
• Characterized by lower customer feedback
  maintaining quality standards is critical

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• Techniques for Improving Service Productivity
• Separation structuring service so customers go
  to where service is offered
• Self-service customers examine, compare and
  evaluate at their own pace
• Postponement customizing at delivery
• Focus restricting the offerings
• Modules modular selection of service and
  modular production
• Scheduling precise personnel scheduling
• Training clarifying service options, explaining
  problems
• Layout, HR Technology

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BA 339 OM Chapters 78

• Equipment Technology
• Machine Technology Increased precision,
  productivity flexibility Decreased pollution,
  size, power requirements
• Automatic identification systems (AIS) improved
  data acquisition, increased scope of process
  automation
• Process control increased process stability and
  precision, real-time info. for process
  evaluation, multi-mode info presentation
• Vision systems aid to inspection, consistently
  accurate, never bored, modest cost, superior to
  individuals performing the same task

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BA 339 OM Chapters 78

• Equipment Technology
• Robots perform monotonous/dangerous tasks or
  requiring significant strength or endurance
• Automated Storage Retrieval Systems (ASRS)
  automated placement and withdrawal of
  parts/products useful in inventory and test
  areas of mfg. firms
• Automated Guided Vehicle (AGV) electronically
  controlled movement of products and/or
  individuals
• Flexible Mfg. Systems (FMS) computer control
  workstation material handling equipment
  computer control enhances flexibility
  economically produce low volume high quality
  reduces changeover costs and low utilization

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BA 339 OM Chapters 78

• Equipment Technology
• Computer Integrated Manufacturing (CIM)
• Extension of flexible mfg. systems
• Backwards to engineering inventory
• Forward to warehousing/shipping
• Can include customer service and financial areas
• Reduces the distinction between low
  volume/high-variety and high volume/low variety
  production
• Heavy reliance on information technology

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BA 339 OM Chapters 78

• Technology in Services
• Financial services debit cards, EFT, ATMs,
  internet stock trading
• Education electronic bulletin boards, on-line
  journals, electronic textbooks
• Utilities/government automated one-man garbage
  trucks, optical mail sorters, flood warning
  systems, e-commerce, vendor managed inventory
• Restaurants/feed wireless orders from waiters
  to kitchens, robot butchering, transponders on
  cars to track drive-thrus
• Communication electronic publishing,
  interactive TV, Wireless internet

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BA 339 OM Chapters 78

• Technology in Services
• Hotels electronic check-in/check-out,
  electronic key/lock systems, electronic
  reservations
• Wholesale/trade point-of-sale terminals
  (inventory management), e-commerce, electronic
  communication between store and supplier, bar
  coded data
• Transportation automatic toll booths,
  satellite-directed navigation systems, route
  planning, progress monitoring
• Health-care on-line patient monitoring
  medical information systems, robotic surgery,
  expert system diagnosis assistance
• Airlines ticketless travel scheduling,
  internet ticket sales, improved navigation
  route planning

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BA 339 OM Chapters 78

• Capacity Planning - Definitions
• Design capacity maximum theoretical output of a
  system in a given period
• Effective capacity output that a firm expects
  to achieve given current operational outputs
  generally lower that design capacity due to
  constraints, changes, etc.
• System performance measures
• Utilization Actual output/design capacity
  expressed as
• Planned hours to be used/total hours available
• Efficiency Actual output/effective capacity
  expressed as
• actual outputs in units/standard outputs in
  units
• average actual time/standard time
• Anticipated production (output or throughput)
• Uses design capacity, effective capacity
  efficiency to determine expected production
• design capacity x effective capacity x
  efficiency

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BA 339 OM Chapters 78

• Capacity Planning Process (similar to PDCA)
• Forecast demand
• Compute rated capacity
• Compute needed capacity
• Develop alternative plans
• Evaluate capacity plans quantitative factors
  (cost) qualitative factors (skills)
• Select best capacity plan
• Implement best plan
• Monitor capacity forecasts

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BA 339 OM Chapters 78

• Capacity Planning over a Time Horizon
• Long-range planning (limited options)
• Add facilities
• Add long lead time equipment
• Intermediate range planning
• Modify capacity subcontract, add equipment, add
  shifts
• Use capacity add people, build/use inventory
• Short range planning
• Use capacity schedule jobs, schedule personnel,
  allocate machinery/resources

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BA 339 OM Chapters 78

• Implications of Capacity Changes
• Changes in
• Sales
• Cash flow
• Quality
• Supply chain
• Human resources
• Maintenance

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BA 339 OM Chapters 78

• Requirements for Making Good Capacity Decisions
• Forecast demand accurately
• Understanding technology and capacity increments
• Finding the optimal operating level (volume)
• Build for change (plan)

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BA 339 OM Chapters 78

• Strategies for Matching Capacity Decisions
• Make staffing changes ( and -, short long term
  implications)
• Adjusting equipment and processes may include
  purchasing new machinery or selling/leasing out
  existing equipment
• Improving methods to increase throughput
• Redesign the product to facilitate more throughput

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BA 339 OM Chapters 78

• Approaches to Capacity Planning (e.g., Managing
  Demand)
• Leading demand w/ incremental expansion
• Adds capacity at beginning of each time period
  when demand is expected to increase (smaller,
  repeated expansions)
• Leading demand w/ one-step expansion
• Adds capacity at the beginning of first time
  period in the sequence of several time periods in
  which demand is expected to increase (larger
  expansion to cover multi-year demand)
• Capacity lags demand with incremental expansion
• Adds capacity at the end of each time period when
  demand is expected to increase
• Attempt to have an average capacity with
  incremental expansions
• Adds capacity based on average demand expansion
  sometimes leads, sometimes lags

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BA 339 OM Chapters 78

• Managing Demand
• Decision trees
• Systematically examines demand forecasts,
  assumption, alternatives, costs, and benefits
• Evaluates range of alternatives assumptions
  based on range of most favorable to least
  favorable
• Applies probabilities to assumption
• Can be relatively simple to highly complex

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BA 339 OM Chapters 78

• Managing Demand Alternatives
• Demand Exceeds Capacity
• Raise prices, schedule long lead times,
  discourage marginally profitable business
• Capacity Exceeds Demand
• Stimulate demand via price reductions, aggressive
  marketing accommodate market through product
  changes
• Adjusting to Seasonal Demand
• Offer products with complimentary demand patterns
  (increase/smooth facility utilization)

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BA 339 OM Chapters 78

• Economies of Scale
• Vary by industry gt affects facility size
• Example Plant ceiling of 300 employees is common
  in metal working Dana corporation (5B steel)
  has a cap of 200 employees at nearly all 120
  plants)
• 4 Reasons why economies drive down costs
• Fixed costs are spread over more units of
  production gt avg. unit cost drops
• Reducing construction costs gt cost of
  constructing additional capacity increases slower
  than capacity increase yield
• Reduced cost of purchased materials better
  pricing based on volume purchases
• Process advantages in efficiency due to faster
  learning, lower inventory, reducing changeovers

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BA 339 OM Chapters 78

• Diseconomies of Scale
• Avg. unit cost increases as facility
  size/capacity increase (sometimes at a faster
  rate)
• Too many layers of bureaucracy
• Losing touch with employees and customers
• Less agile/flexible to demand changes
• Less involvement in innovation greater risk
  avoidance resulting from planning analysis
• Example Incredible Universe Superstores has
  85k products in 185k sf, 4 times the avg. of
  rival Circuit City. Lack of focus and huge size
  makes it impossible to generate enough sales/SF

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BA 339 OM Chapters 78

• Capacity and Other Decisions
• Must be linked to other strategies and
  operations. Examples include
• Competitive priorities
• Quality management
• Capital intensity
• Resource flexibility
• Product lifecycle
• Inventory
• Scheduling

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BA 339 OM Chapters 78

• Breakeven Analysis
• Objective is to find the point (in dollars
  units) at which costs equal revenues
• Includes fixed variable costs
• Assumptions Revenue cost are related linearly
  to volume, all is information is know
  w/certainty, and no time value of money
• Graphed with costs/dollars on the vertical axis
  and volume/units on the horizontal axis
• Basic formulas
• Breakeven point TC TR
• Breakeven in units Total fixed costs/ Price
  variable cost
• Breakeven Total fixed cost/1-(variable
  cost/selling price)

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BA 339 OM Chapters 78

• Strategy-Driven Investment (Guidelines)
• Select investments as part of a coordinated
  strategic plan
• Choose investments yielding a competitive
  advantage
• Consider product lifecycles
• Include relevant operating factors in the
  financial return analysis (Ex. scrap, rework,
  floor space inventory affect ROI)
• Test investments in light of several revenue
  projections to ensure that upside and downside
  risks are considered

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BA 339 OM Chapters 78

• ERP Systems
• Packaged business software system that allows
  companies to
• Automate integrate majority of business
  processes
• Share common data practices across the entire
  enterprise
• Product and access information in a real-time
  environment
• Utilizes a centralized database to assist
  information flow between ordering, project
  management, manufacturing, purchasing, finance,
  logistics, and human resources
• Hitting business when data integration, reduced
  transaction costs, and speed accuracy of
  information are critical strategic issues
• 20,000 firms are paying 10B/Year to ERP firms
• Vendors include PeopleSoft, Oracle, SAP, JD
  Edwards

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BA 339 OM Chapters 78

• ERP Systems
• Advantages
• Provides integration of supply-chain, production
  administrative processes
• Creates commonality of databases
• Can incorporate improve, redesigned, best
  processes
• Increases communication and collaboration
  worldwide
• Helps integrate multiple sites and business units
• Is packages with a SW core that is off-the-shelf
  coding
• May provide a strategic advantage over competitors

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BA 339 OM Chapters 78

• ERP Systems
• Disadvantages
• Very expensive to purchase more costly to
  customize (and maintain)
• Implementation may require major changes in the
  company and its processes
• So complex that many companies cannot adjust to
  it
• Involves ongoing process for implementation,
  which may never be completed
• Limited expertise in ERP systems, with staffing
  an ongoing problem