Process Choice
Zac Ricketts
Operations Management 345
Copyright 2003 Zachary Ricketts
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This Microsoft Power Point presentation and all material contained with in
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Copyright 2003 Zachary Ricketts
What We Will Cover
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What is a Process
Why is process choice important
How can this be a benefit
What are the components
How to choose a Process
Example and Exercise
Conclusion
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What is a Process
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“Process” is defined as all
operations or activities that
consume significant resources.
Resources include: The
utilization of materials, labor,
energy, and facility or plant
capacity.
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Types of Processes
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Project
Batch Production
Mass Production
Continuous Production
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Process Choice
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Now that you understand what a
process and what kind are
available, you can understand
the need to choose a process
that will utilize your resources in
the most efficient and profitable
manner possible.
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Process Choice Steps
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Know your product
Know your customer
Know your competition
Compare the needs of the
product and customer
• Decide on your desired revenues
and what the market will support
• Layout all of the data together
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Know Your Product
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• Understand the physical space
requirements
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Area needed for manufacture
Receiving area for raw materials
Shipping area for finished products
Special handling or storage
requirements for the raw materials
– Need for flexibility
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Know Your Product
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• Understand the manufacturing
needs
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Materials
Time
Equipment
Labor
Flexibility
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Know Your Customer
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• Understand your customer’s
needs
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Quantity
Time requirements
Quality tolerances
Buying habits
Product usage
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Know Your Competition
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• Understand your competition’s
processes
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Speed of output
Quality of product
Price of product
Company Revenues
Identify strengths & weaknesses
Try to find out why they have
succeeded or failed
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Compare the Needs of
the Product & Customer
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• Understand the correlations
between customer and product
needs
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Time
Quantity
Quality
Resources
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Decide on Your Desired Revenues
and what the Market will Support
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• Understand your financial
requirements and where the
product market is
– Price / Margin
– Quantity
– Quality
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Layout All of the Data
Together
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• Bring all of the gathered data
together for Break Even Analysis
– Establish Total costs
• Fixed costs – plant, property,
equipment necessary
• Variable costs – time, materials
– Establish Total Revenue
• Volume – quantity that is able to be
produced that consumers will buy
• Price – the price that can be charged
and consumers will pay
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Using Break Even
Analysis
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• Break Even is where Total
Revenues equal Total Costs
– Total Revenues are equal to
Volume times Price
– Total Costs are equal to Fixed
Costs plus Total Variable Costs
TR = TC
V x P = FC + TVC
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Understanding the
Results
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Dollars
• The break even point
$15,000
Total Revenue
Line
$12,500
$10,000
$7,500
Total Cost
Line
$5,000
$2,500
$0
250
Break-even point
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500
Units
Processes and Costs
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• The process type chosen will
impact fixed and variable costs
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Variable
Costs
Project
High
Batch Production
Mass Production
Continuous Production
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Fixed
Costs
Low
Comparison of Process
Options
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• Understanding the differences in
costs at varying output
– Use the processes total cost
– Identify the Indifference point
– Evaluate the results compared to
projected unit sales
– Decide on the most effective
process
– Re-evaluate Break Even Analysis if
necessary
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Understanding the
Results
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• The Indifference Point
TC Process A = TC Process B
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Example and Exercise
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• Manufacturing custom luxury
boats
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Know Your Product
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• Materials –
Fiberglass, wood, engine, out-drive,
glass, accessories
• Time – 20 working days, 75 days fully assembled
• Equipment – Molds, fabrication, layout &
assembly, hand tools, heavy lift equipment
• Labor – 8 employees
• Flexibility – Minor in hull and main structure,
major flexibility in appearance and accessories
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Know Your Customer
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• Quantity – potential sales 25 per year
• Time Requirements – 6 months from
order to delivery
• Quality Tolerances – Very High
• Buying Habits – Luxury, one time
purchase
• Product Usage –
status symbol
Recreation and
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Know Your Competition
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Speed of Output – one boat every 14 days
Quality of Product – High
Price of Product - $500,000 to $750,000
Company Total Sales – $75,625,000
Strengths – Customer satisfaction, low
employee turnover
• Weaknesses –
older style
High price, decreasing sales,
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Product & Customer
Needs
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• Time –
Manufacturing: 75 Days
Customer: 6 months
• Quantity –
Estimated 25 evenly spread over
the year
• Quality – both very high
• Resources – Must be specialized to meet
product and customer demands
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Decide on Your Desired Revenues
and what the Market will Support
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• Price - $400,000 to $650,000
• Quantity – 25
• Quality – High
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Bring it All Together
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• Fixed Costs –
$1,500,000 Batch Production
$10,000,000 Mass Production
• Variable Costs –
$350,000 to $550,000 Batch Production
$275,000 to $425,000 Mass Production
• Volume – 25 units annually
• Price - $400,000 to $650,000
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Break Even Point
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• Batch Production –
TR = TC
V x 525,000 = 1,500,000 + 450,000 x V
V = 20 Units
• Mass Production –
TR = TC
V x 525,000 = 10,000,000 + 350,000 x V
V = 57.14 or 58 Units
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Break Even Point
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Millions
• Batch Production
35
30
Dollars
25
20
15
10
5
0
0
40
Break20Even
20 Units
Units
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60
Break Even Point
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Millions
• Mass Production
35
30
Dollars
25
20
15
10
5
0
0
20
40
Units
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60
Break Even
58 Units
Comparison of Process
Options
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Millions
Dollars
• The Indifference Point
70
Batch Production
Total Costs
65
60
55
50
45
40
Mass production
Total Costs
35
30
25
20
15
10
Choose Batch Production
Choose Mass Production
5
0
0
50
85 units 100
Point of Indifference
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150
Units
Conclusion
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• To choose a successful process for
your company it is necessary to
understand, quantify, and analyze
your product, customer, and
competition.
• Utilizing break even analysis and an
indifference calculation you will be
able to determine the best process
for your operations for ultimate
efficiency and success.
Copyright 2003 Zachary Ricketts
References
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•
Glen Knight, Knight Associates. Project
Management Boot Camp, Seminar. June 2001.
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Leadership Intensive, E-Myth Woldwide, Flamingo
Hotel, Santa Rosa CA. February 2001.
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Russell/Taylor III. Operations Management 4th
Edition. Prentice Hall, Inc. New Jersey, 2003.
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Walter P Smith Jr. CEM Principal, Energy
Technology Services International, Inc. Working
Relationship, IDACORP Solutions. Boise, Candler
NC. August 2001 to December 2001.
Copyright 2003 Zachary Ricketts