Chapter 3 –
Product Design & Process Selection
Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
© 2007 Wiley
Learning Objectives
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Define product design and its strategic impact on organization
Describe steps to develop a product design
Using break-even analysis as a tool in selecting between product
alternatives
Identity production process differences and their characteristics
Understand how to use a process flowchart
Understand how to use process performance metrics
Understand current technology advancements and how they impact
process design
Understand issues impacting the design of service operations
© 2007 Wiley
Product & Service Design
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Product design – the process of deciding the companies
product/service unique characteristics and features
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Product design must support the business strategy
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Product design defines a product’s characteristics
- Appearance, materials, dimensions, tolerances,
performance standards
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Service industries must define both the service and concept
- Physical elements, aesthetic & psychological
benefits e.g. promptness, friendliness, ambiance
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Product and service design must match the needs and
preferences of the targeted customer group
© 2007 Wiley
Product & Service Design Steps
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Step 1 - Idea Development
- Someone thinks of a need and a product/service design to satisfy it
e.g. customers, marketing, engineering, competitors,
benchmarking, reverse engineering
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Step 2 - Product Screening
- Every business needs a formal/structured evaluation process
e.g. fit with facility and labor skills, size of market, contribution margin,
break-even analysis, return on sales
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Step 3 – Preliminary Design and Testing
- Technical specifications are developed, prototypes built, testing starts
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Step 4 – Final Design
- Final design based on test results, facility, equipment, material, & labor
skills defined, suppliers identified
© 2007 Wiley
Break-Even Analysis: Graphical Approach
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Compute quantity of goods
that must be sold to breakeven
Compute total revenue at
an assumed selling price
Compute fixed cost and
variable cost for several
quantities
Plot the total revenue line
and the total cost line
Intersection is break-even
Sensitivity analysis can be
done to examine changes in
all of the assumptions made
© 2007 Wiley
Break-Even Analysis
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Total cost = fixed costs + variable costs (quantity):
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Revenue = selling price (quantity)
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Break-even point is where total costs = revenue:
TC  F  VC Q
R  SPQ
TC  R or F  VC Q  SP Q
F
or Q 
SP  VC
© 2007 Wiley
Example
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A firm estimates that the fixed cost of
producing a line of footwear is $52,000
with a $9 variable cost for each pair
produced. They want to know:
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If each pair sells for $25, how many pairs
must they sell to break-even?
If they sell 4000 pairs at $25 each, how much
money will they make?
© 2007 Wiley
Example Solved
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Break-even point:
F
$52,000
Q
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 3,250 pairs
SP  VC $25  $9
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Profit = total revenue – total costs
P  SP Q  F  VC Q 
 $254,000  $52,000  $94,000
 $12,000
© 2007 Wiley
Break-even calculation: A company is planning to establish a chain of movie
theaters. It estimates that each new theater will cost approximately $1 Million. The
theaters will hold 500 people and will have 4 showings each day with average ticket
prices at $8. They estimate that concession sales will average $2 per patron. The
variable costs in labor and material are estimated to be $6 per patron. They will be
open 300 days each year. What must average occupancy be to break even?
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Break Even Point
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Total revenues = Total costs @ break-even point Q
Selling price*Q = Fixed cost + variable cost*Q
($8+$2)Q= $1,000,000 + $6*Q
Q = 166,667 patrons (28% occupancy)
What is the gross profit if they sell 300,000 tickets
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Profit = Total Revenue – Total Costs
P = $10*300,000 – (1,000,000 + $6*300,000)
P = $200,000
If concessions average $.50/patron, what is break-even Q
now? (sensitivity analysis)
($8.50)Q = 1,000,000 - $6*Q
Q = 400,000 patrons (67% occupancy)
© 2007 Wiley
Other Product Design Factors
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Need to Design for
Manufacturing –
DFM
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Minimize parts
Design parts for
multiply
applications
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Use modular design
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Avoid tools
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Simplify operations
© 2007 Wiley
Other Design Factors
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Consider product
life cycle stages
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Introduction
Growth
Maturity
Decline
Facility & process
investment
depends on life
cycle
© 2007 Wiley
Other Design factors
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Old “over-the –wall”
sequential design process
should not be used
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Each function did its work and
passed it to the next function
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Replace with a Concurrent
Engineering process
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All functions form a design
team working together to
develop specifications, involve
customers early, solve potential
problems, reduce costs, &
shorten time to market
© 2007 Wiley
Process Selection
Process selection is based on five considerations
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Type of process; range from intermittent to continuous
Degree of vertical integration
Flexibility of resources
Mix between capital & human resources
Degree of customer contact
Process types can be:
Project Process
Batch Process
Line Process
Continuous Process
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Underlying Process Relationship
Between Volume and Standardization
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Volume and Process Choice
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Low Volume typically
means
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Project or Batch processes
Less vertical integration
More resource flexibility
Less capital intensity
Higher skilled labor
More customer involvement
More customized products
Make or assemble to order
strategy
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High Volume typically
means
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© 2007 Wiley
Line/continuous processes
More vertical integration
Less resource flexibility
More capital intensity
More specialized labor
Little to no customer
involvement
Standardized products
Make to stock strategy
Differences between Intermittent
and Continuous Operations
Decision
Intermittent Operation
Continuous Operation
Product variety
Great
Small
Degree of standardization
Low
High
Organization of resources
Grouped by Function
Line flow
Path of products
Varied, depends on product
Line flow
Factor driving production
Customer orders
Forecast of demand
Critical resource
Labor
Capital
Type of equipment
General purpose
Specialized
Degree of automation
Low
High
Throughput time
Longer
Shorter
Work-in-process inventory
More
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Less
Facility Layouts and Process Choice
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Process Performance Metrics
© 2007 Wiley
Linking Design & Process Selection
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Organizational Decisions appropriate for different types of operations
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Process Design Tools
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Process flow analysis is a
tool used to analyze and
document the sequence of
steps within a total process.
Usually first step in Process
Reengineering.
Process Re-engineering
is a structured approach
used when major business
changes are required as a
result of:
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Major new products
Quality improvement
needed
Better competitors
Inadequate performance
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Intermittent VS. Repetitive Layouts
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Product and Service Strategy Options
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Process Decisions-Vertical Integration
& Make or Buy
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Vertical integration refers to the degree a firm chooses to
do processes itself- raw material to sales
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Backward Integration means moving closer to primary operations
Forward Integration means moving closer to customers
A firm’s Make-or-Buy choices should be based on the
following considerations:
Strategic impact
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Available capacity
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Expertise
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Quality considerations
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Speed
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Cost (fixed cost + variable cost)make = (fixed cost + Variable cost)buy
Business are trending toward less backward integration, more
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outsourcing
© 2007 Wiley
Manufacturing Technology Decisions
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Simplify first then apply appropriate technology
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Automation
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Automated Material Handling:
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Automated guided vehicles (AGV)
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Automated storage & retrieval systems (AS/RS)
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Computer-Aided Design (CAD) software
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Robotics & Numerically-Controlled (NC) equipment
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Flexible Manufacturing Systems (FMS)
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Computer-Integrated Manufacturing (CIM)
© 2007 Wiley
Designing Services
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Service Characteristics
 Pure services
 Quasi-Manufacturing
 Mixed services
Service Package
 The physical goods
 The sensual benefits
 The psychological benefits
Differing designs
 Substitute technology for
people
 Get customer involved
 High customer attention
© 2007 Wiley
Chapter 3 Highlights
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Product and process design must support business and operation
strategy
Product steps include idea generation, product screening,
preliminary design and testing, and final design
Break-even analysis is a tool used to screen processes
Process designs range from project to batch to line to continuous
Product design and process selection decisions are linked
Process flow charts can be a useful tool in process re-design
Product and process design can be significantly enhanced by
proper application of new technology
Designing service processes produce intangible products with
more customer contact
© 2007 Wiley
Chapter 3 Homework Hints
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4.a. Calculate break-even point.
 b. Primarily decisions at the company’s
plant(s).
8.a. Calculate/graph break-even point.
 b. Calculate profit given revenue and cost
data.
 c. Compare profits given sales estimate
differences based on the 2 prices.
 d. Primarily factors at the company’s plant(s).
© 2007 Wiley