OM 1: NEW PRODUCT DEVELOPMENT PROCESS INTRODUCTION Goods: physical items Services: activities that provide some combination of time, location, form, or psychological value - The ideal situation is to achieve an economic match of supply and demand Having excess supply is wasteful and costly, having too little supply means lost opportunity and possible customer dissatisfaction Operations management: the management of systems or processes that create goods/services - Variability decreases as you move from left to right At each stage, you need to decide to keep going or not, because cost increases from left to right. 50% of resources spent on NPD fail commercially This offers a structured process to manage innovation Supply chain: the sequence of organizations that are involved in producing and delivering a product - Supply chains are both internal and external - The external parts provide raw materials and other inputs to the organization - The internal parts are parts of the operations function itself - Various inputs are used to create goods/services using transformation processes To ensure that the desired outputs are obtained, the organization takes measurements (feedback) and compares them with previously established standards to determine whether corrective action is needed (control) - The essence of operations is to add value during the transformation process - Value-added: the term used to describe the difference between cost of inputs and value/price of outputs PRODUCTION OF GOODS VERSUS PROVIDING SERVICES - Production of goods results in a tangible output - Delivery of service implies an act - Degree of customer contact: many services require a higher degree of customer contact Uniformity of inputs: service operations are often subject to a higher degree of variability of inputs Measurement of productivity: measurement of productivity can be more difficult for service jobs because of the high variation of inputs Quality assurance: quality assurance is more challenging for service jobs because of the high variation of input and because delivery and consumption occur at the same time Inventory: services involve less inventory and cannot be stored Wages: greater wage variation in services Ability to patent: product designs are easier to patent than service designs Similarities: - Forecasting and capacity planning to match supply and demand - Process management - Managing variations - Monitoring and controlling costs and productivity - Supply chain management - Location planning, inventory management, quality control, and scheduling WHY LEARN ABOUT OPERATIONS MANAGEMENT? Finance and operations overlap on: - Budgeting - Economic analysis of investment proposals - Provision of funds - Marketing needs the lead time from operations (the time between ordering a good and receiving it) in order to help customers PROCESS MANAGEMENT Process: 1+ actions that transform inputs into outputs Upper management processes: govern the operation of the entire organization Operational processes: core processes that make up the value stream Supporting processes: support the core processes Process Variation 4 basic sources of variation: - Variety of goods/services offered - Structural variation in demand is predictable changes - Random variation is not influenced by managers - Assignable variation can be reduced through corrective action THE SCOPE OF OPERATIONS MANAGEMENT - System design: involves strategic decisions - System operation: tactical and operational decisions - System design essentially determines many of the parameters of system operation Other areas part of the operations function: - Purchasing - Industrial engineering - Distribution - Maintenance OPERATIONS MANAGEMENT AND DECISION MAKING - Operation manager’s daily concerns are cost, quality, and schedules - Model: an abstraction of reality, a simplified version of something - Physical models: look like their real-life counterparts - Schematic models: more abstract than their physical counterparts - Mathematical models: most abstract Models are beneficial because: - Easy to use and less expensive - Require users to organize and quantify info - Increase understanding of the problem Enable managers to analyze what-if questions Serve as a consistent tool for evaluation and provide a standardized format for analysis Enable users to bring the power of math Limitations of models: - Quantitative info emphasized at the expense of qualitative info - Can be incorrectly applied and misinterpreted - Use of models doesn’t guarantee good decisions - Quantitative approaches: obtain mathematically optimal solutions Managers use metrics to manage and control operations Operations personnel frequently encounter trade-off decisions where they list pros and cons and assign weights Customized processes have a lower volume of output and higher price System: a set of interrelated parts that work together, whole is greater than sum of individual parts Pareto phenomenon: relatively few issues are important, so dealing with those factors will have a disproportionately large impact on the results achieved, you need to establish priorities WHAT DOES PRODUCT AND SERVICE DESIGN DO? Primary consideration: customer satisfaction Secondary consideration: cost/profit, quality, ability to produce, ethics/safety, sustainability The key questions are: 1) Is there demand for it? 2) Can we do it? 3) What level of quality is appropriate? 4) Does it make sense from an economic standpoint? The factors that give rise to market opportunities or threats: - Economic - Social and demographic - Political, liability, legal - Competitive - cost/availability - Technological IDEA GENERATION Reverse engineering: dismantling and inspecting a competitor’s product to discover product improvements Research & development (R&D): refers to organized efforts that are directed toward increasing scientific knowledge and product/process innovation - Basic research: the objective of advancing the state of knowledge about a subject - Applied research: the objective of achieving commercial applications - Development: converts the results of applied research into useful commercial applications - Companies are shifting from a focus on products to a more balanced approach that focuses on product and process R&D LEGAL & ETHICAL CONSIDERATIONS Product liability: the responsibility of a manufacturer for any injuries or damages caused by a faulty product Uniform Commercial Code: products carry an implication of merchantability and fitness, a product must be usable for its intended purposes Organizations want designers to adhere to: - Produce designs that are consistent with the goals of organization - Give customers the value they expect - Make health and safety a primary concern HUMAN FACTORS - Human factor issues: safety and liability - Another issue is adding new features for competitive edge which can lead to less ease of use PHASES IN PRODUCT DESIGN & DEVELOPMENT 1) Feasibility analysis: market analysis, economic analysis, and technical analysis 2) Product specifications: detailed description of what is needed to meet customer wants 3) Process specifications: process needed to make the product. Collaboration between accounting and operations 4) Prototype development: one or few units are made to see if there are any problems 5) Design review: any necessary changes are made or the project is abandoned 6) Market test: determine extent of consumer acceptance 7) Product introduction: new product is promoted by marketing 8) Follow-up evaluation: based on user feedback, changes may be made or forecasts refined by marketing OM = the science of getting things done - - Creating goods and services - Manufacturing operations - Service operations Transforming input to output (the process focus) - Most efficiently - - Most effectively Maximizing “value added” (the value focus) - Productivity - Quality The 5 M’s of Operations - Mind & muscles: people; internal workers and consultants, advisors, etc. - Materials: inventory; raw materials, work-in-process, finished goods - Machinery: equipment; machines and tools - Methods: processes and policies; how work is done - Money: capital; budgets Why do companies develop new products? - Unmet customer needs - Opportunities from technological innovation - Regulatory requirements 4 critical questions for successful NPD 1) Is it needed by customers? 2) Can we make it? 3) What level of quality and performance? 4) Can we make profit? - Funnel, stages, and gates offer a structured process to manage innovation - Only 1 out of 4 NPD projects is a winner - 50% of resources spent on NPD are commercial failures OM 2: BRAUN CASE Rule of thumb: target cost should be ~25% of retail price Braun Case Design decision: polypropylene vs. polycarbonate Strategic decision: mass market vs. opinion leaders, U.S. vs. E.U. Conflicting cultures: design vs. marketing How to Assess NPD Performance? - Product / service cost What is good design? - Functionality – a good design fulfills the primary function - Aesthetics - Manufacturability - Profitability - Strategic fit Must link design to strategy – the design should help meet target costs The surface design was an early conflict Cross functional interaction is key Challenge people to be more creative in problem solving Target costing is used to accomplish the problem here, start with the ideal retail price OM 3: TARGET COSTING & SUSTAINABLE DESIGN NOTE ON TARGET COSTING FOR STARTUP COMPANIES Determinants of product cost: - The target markets in which the organization needs to compete - The wants and needs of the target consumer in terms of quality and price - The target profit and returns required by investors Principles of target costing: - Price-led costing: market prices are used to determine target costs (market price required profit margin - other costs = target cost) - Focus on customers: customer requirements are incorporated into product. The value of any features built into the product must be greater than the cost of providing these features - Focus on design: engineering changes must occur before production begins, resulting in lower costs and reduced “time to market” for new products - Cross-functional involvement: cross-functional teams are responsible for the entire product from initial concept through final production - Value-chain involvement: all members of the value chain are included in the target costing process - Life-cycle orientation: total life-cycle costs are minimized for both the producer and the customer. Life-cycle costs include purchase price, operating costs, maintenance, and distribution costs 1) 2) 3) 4) Estimate the retail price for your product Estimate the channel margin for your channels of distribution Estimate the gross margin required for your product to be profitable Compute the target cost by subtracting the channel margin and gross margin from the retail price 5) Begin the process of identifying the actual COGS 6) Compare your actual costs with the target cost 7) Conduct research on markets, customers, competition, and channels of distribution ENVIRONMENTAL FACTORS: SUSTAINABILITY Cradle-to-grave assessment / life cycle assessment: the assessment of the environmental impact of a product through its useful life End of life (EOL) programs: deal with products that have reached the end of their useful lives Value analysis: refers to an examination of the function of parts and materials in an effort to reduce the cost and/or improve the performance of a product Remanufacturing: refurbishing used products by replacing defective components, and reselling the products Design for disassembly (DFD): designing products so they can be more easily taken apart Recycling: recovering materials for future use - Cost savings - Environmental concerns - Environmental regulations Design for recycling (DFR): referring to product design that takes into account the ability to disassemble a used product to recover the recyclable parts 1) 2) 3) 4) Efficient use of resources Reduction of waste by-products Control of emissions Reduced use of resources for logistics OM 4: THE HOUSE OF QUALITY (QUALITY FUNCTION DEPLOYMENT) QUALITY FUNCTION DEPLOYMENT Quality function deployment: structured approach integrating the “voice of the customer” into both the product and service development process THE KANO MODEL Kano model: a theory of product and service which offers a perspective on customer perceptions of quality different from the traditional view that “more is better” - Basic quality: requirements that have a limited effect on customer satisfaction, but lead to dissatisfaction if not present Performance quality: customer requirements that generate satisfaction or dissatisfaction in proportion to their level of functionality and appeal Excitement quality: a feature that was unexpected by the customer and causes excitement Once basic needs have been met, additional effort in those areas should not be pursued - As time passes, excitement factors become performance factors and performance factors become basic factors OM 5: DESIGN FOR OPERATIONS OTHER DESIGN CONSIDERATIONS Strategies for Product or Service Life Stages - In every phase, forecasts of demand and cash flow are key inputs for strategy - Introduction: treated as a curiosity item - Growth: design improvements and increasing demand yield higher reliability and lower cots - Maturity: demand levels off. Few design changes are needed. Costs are low and productivity is high - Decline: decision has to be made whether to discontinue the product and replace it with new ones or abandon the market, or attempt to find new users for the existing product - Some pass through stages quickly, others take longer. It depends on the basic need for the item and the rate of technological change Product Life Cycle Management - Product life cycle management (PLM): a systematic approach to managing the changes a product goes through - 3 phases of PLM application: - Beginning of life (design and development) - Middle of life (working w suppliers, managing product info and warranties) - End of life (product discontinuance, disposal, recycling) Degree of Standardization - Degree of standardization: the extent to which there is absence of variety in a product - Lack of standardization can lead to difficulty Designing for Mass Customization - Mass customization: a strategy of producing standardized goods, but incorporating some degree of customization in the final product - Delayed differentiation: postponement tactic - the process of producing, but not quite completing a product. Postponing completion until customer preferences are known - Modular design: a form of standardization. Modules represent groupings of component parts into subassemblies - Failures are often easier to diagnose and remedy bc there are fewer pieces Reliability - Reliability: a measure of the ability of a product or an entire system to perform its intended function under a prescribed set of conditions - Failure: used to describe a situation in which an item doesn’t perform as intended - Normal operating conditions - Improving reliability: - Improve component design Improve production/assembly techniques Improve testing Use backups Improve preventive maintenance procedures Improve user education Improve system design Robust Design - Robust design: perform as designed over a much broader range of conditions - Parameter design: involves determining the specification settings for bot the product and the process that will result in robust design (Taguchi’s Approach) Degree of Newness - Modification of an existing product - Expansion of an existing product line - Clone of a competitor’s product - New product PHASES IN PRODUCT DESIGN AND DEVELOPMENT - Feasibility analysis - Product specifications - Process specifications - Prototype development - Design review - Market test - Product introduction - Follow-up evaluation DESIGNING FOR PRODUCTION Concurrent Engineering - Concurrent engineering: bringing design and manufacturing engineering people together early in the design phase to simultaneously develop the product and the processes for creating the product CAD - Computer-aided design (CAD): uses computer graphics for product design Production Requirements - Design for manufacturing (DFM): used to indicate the designing of products that are compatible with an organization’s capabilities - Design for assembly (DFA): focuses on reducing the number of parts in an assembly, as well as on the assembly methods and sequence that will be employed - Manufacturability: referring to the ease with which products can be fabricated/assembled SERVICE DESIGN - Service: refers to an act. Provided by a service delivery system - Product bundle: the combo of goods and services - Service package: - The physical resources needed - The accompanying goods that are purchased by the customer - Explicit services - Implicit services Phases in the Service Design Process 1) Conceptualize 2) Identify service package components needed 3) Determine performance specifications 4) Translate performance specs into design specs 5) Translate design specs into delivery specs Service Blueprinting - Service blueprint: a method for describing and analyzing a service process - Establish boundaries for the service and decide on the level of detail needed - Identify and determine the sequence of customer and service actions and interactions. A flowchart can be a useful tool for this - Develop time estimates for each phase of the process, as well as time variability - Identify potential failure points and develop a plan to prevent or minimize them, as well as a plan to respond to service errors Product design requires contributions from all functions, but especially Marketing, Design, Manufacturing Assessing NPD performance: - Product/service quality - Product/service cost - Development time - Development cost - Development capability – can you keep doing it?/expand Development involves tradeoffs, usually you get 2 of the following: - Time - Cost - Quality You can produce more of simple goods with less people and lower costs and time to market must faster. However complex goods will require lots of people, money and time. (i.e a screwdriver vs. an airplane) Sustainability in Operations: - efficient use of resources (energy, water) - reduction of waste by-products (VOCs, chemicals) - control of emissions (CO2, mercury) - Reduced use of resources for logistics (transportation) ISO 9000 - What organization’s do to ensure products/services conform to customer requirements - Quality management principles: - Customer focus - Leadership - Involvement of people - Process approach - System approach to management - Continual improvements - Factual approach to decision making - Mutually beneficial supplier relationships ISO 14000 - Voluntary set of worldwide standards on environmental management - Objective: “global consensus on good environmental practice in the international context that can be applied pragmatically by organizations” - Compatible with ISO 9000 - Requires periodic inspection by outside auditors to maintain this certification - Bears upon 3 major areas: - Management systems- systems development and integration of environmental responsibilities into business planning - Operations-consumption of natural resources and energy - Environmental systems- measuring, assessing and managing emissions ISO 24700 - Applies to products containing remanufactured components - Requires specs and performance to be equivalent to new - Allows companies to demonstrate to buyers that they’re just as good because they get certified by independent auditors. How Sustainability Fuels Design Innovation – Eppinger - Moves from “sustainability costs more” to “sustainability saves money” - It’s a materials problem- companies realize the wastefulness is designed in - It’s not how much you use, its what you use – cradle to cradle thinking - You don’t need the whole life cycle assessment- you’ll know where your biggest problems are Don’t need to fix everything at once, improve with each new design OM 6: SUPPLY CHAIN & LOGISTICS INTRODUCTION Supply chain: sequence of organizations that are involved in producing and delivering a product Supply chain management: strategic coordination of business functions within a business and throughout its supply chain for the purpose of integrating supply and demand management Logistics: part of a supply chain involved with the forward and reverse flow of goods, services, cash, and info Flow management: managing product-service flow, information flow, and financial flow - Product-service flow: movement of goods or services from suppliers to customers - Information flow: sharing forecast and sales data, transmitting orders, tracking shipments, and updating order status - Financial flow: credit terms, payments, and consignment and title ownership arrangements TRENDS IN SUPPLY CHAIN MANAGEMENT - Measuring supply chain ROI - “Greening” the supply chain - Reevaluating outsourcing - Integrating IT - Managing risks - Adopting lean principles - Being agile - Adopting blockchain technology - Establishing transparency - Adopting new delivery modes Resiliency: the ability of a business to recover from an event that negatively impacts the supply chain Key elements of successful risk management: - Knowing your suppliers - Providing supply chain visibility: a major trading partner can connect to any part of its supply chain to access data in real time - Developing event-response capability: the ability to detect and respond to unplanned events GLOBAL SUPPLY CHAINS - As businesses increasingly make use of outsourcing and pursue opportunities beyond their domestic markets, their supply chains are becoming increasingly global ERP AND SUPPLY CHAIN MANAGEMENT Integrated system that provides: - Supplier relationship management - Performance management Sales and order fulfillment Customer relationship management ETHICS AND THE SUPPLY CHAIN - Every company should develop an ethical supply chain chode to guide behavior SMALL BUSINESSES Three aspects of supply chain management that are often of concern to small businesses: - Inventory management - Reducing risks - International trade Risk management for small businesses include: - Use only reliable suppliers - Determine which suppliers are critical, get to know them, and any challenges they have - Measure supplier performance - Recognize warning signs of supplier issues - Have plans in place to manage supply chain problems Importing for small businesses: - Work with someone who has expertise to help oversee foreign suppliers - Describe your buying patterns and schedules to set expectations for demand and timing - Don’t rely on a single supplier - Building goodwill can have benefits in negotiations and resolving problems when they arise - Consider using domestic suppliers MANAGEMENT RESPONSIBILITIES Strategic responsibilities: - Supply chain strategy alignment - Network configuration - Information technology - Products and services - Capacity planning - Strategic partnerships - Distribution strategy - Uncertainty and risk reduction Tactical responsibilities: - Forecasting - Sourcing - Operations planning - Managing inventory - Transportation planning Collaborating Operational responsibilities: - Scheduling - Receiving - Transforming - Order fulfilling - Managing inventory - Shipping - Information sharing - Controlling PROCUREMENT Purchasing interfaces: - Operations - Accounting - Design and engineering - Receiving - Suppliers Purchasing cycle: begins with request from within the organization to purchase materials and the cycle ends when the purchasing department is notified that a shipment has been received in satisfactory condition 1) Purchasing receives the requisition 2) Purchasing selects a supplier 3) Purchasing places the order with a vendor 4) Monitoring orders 5) Receiving orders Centralized purchasing: purchasing is handled by one special department Decentralized purchasing: individual departments or separate locations handle their own purchasing requirements Ethics in purchasing: - Perceived impropriety - Conflicts of interest - Issues of influence - Responsbilities to your employer - Supplier and customer relationships - Sustainability and social responsibility - Confidential and proprietary information - Reciprocity - Applicable laws, regulations, and trade agreements - Professional competence E-BUSINESS E-business: the use of technology to facilitate business transactions Two features: - The website/app - Order fulfillment SUPPLIER MANAGEMENT - Quality and quality assurance - Flexibility - Location - Price - product/service changes - Reputation and financial stability - Lead times and on-time delivery - Other accounts Vendor analysis: evaluating sources of supply in terms of price, quality, reputation, and service Strategic partnering: occurs when 2+ businesses have complementary products that would strategically benefit the others agree to join so that each may realize a strategic benefit - Collaborative planning, forecasting, and replenishment (CPFR): contractual agreement used to achieve supply chain integration by cooperative management of inventory in the supply chain by major supply chain partners INVENTORY MANAGEMENT Inventory velocity: the rate at which material moves through a supply chain - The greater the velocity, the lower the inventory holding costs and the faster orders are filled and goods are turned into cash Bullwhip effect: inventory oscillations become progressively large looking backward through the supply chain - Good supply chain management can overcome the bullwhip effect by strategic buffering Vendor-managed inventory (VMI): vendors monitor goods and replenish retail inventories when supplies are low ORDER FULFILLMENT Order fulfillment: the processes involved in responding to customer orders - Engineer-to-order (ETO): products are designed and built according to customer specs - Make-to-order (MTO): standard product design is used, but production is linked to the final customer’s specs - Assemble-to-order (ATO): products are assembled to customer specs from a stock of standard and modular components - Make-to-stock (MTS): production is based on forecast and products are sold to the customer from finished goods stock LOGISTICS Logistics: the movement of materials, services, cash, and info in a supply chain Traffic management: overseeing the shipment of incoming and outgoing goods Radio frequency identification (RFID): technology that uses radio waves to identify objects Incremental holding cost = H(d) / 365 - H= annual earning potential of shipped item - d= difference (in days) between shipping alternatives Third-party logistics (3-PL): the term used to describe the outsourcing of logistics management CREATING AN EFFECTIVE SUPPLY CHAIN Strategic sourcing: systematic process for analyzing the purchase of products to reduce costs by reducing waste and non-value-added activities SCOR steps: 1) Plan 2) Source 3) Make 4) Deliver 5) Manage returns Achieving an effective supply chain: - Effective communication - Information velocity - Performance metrics Reverse logistics: the process of physically transporting returned items Gatekeeping: oversees the acceptance of returned goods with the intent of reducing the cost of returns by screening returns at the point of entry into the system and refusing to accept goods that should not be returned, or goods that are returned to the wrong destination Avoidance: refers to finding ways to minimize the number of items returned Closed-loop supply chain: describe a situation where a manufacturer controls both the forward and reverse logistics Challenges: - Barriers to integration of separate organizations - Gettings CEOs, boards of directors, managers, and employees “onboard” - Making the supply chain more efficient - Large vs. small lot sizes - - Saving cost and time by using cross-docking (goods arriving at a warehouse from a supplier are unloaded from the truck and immediately loaded on outbound trucks, avoiding storage) - Increase the perception of variety while taking advantage of the benefits of low variety by using delayed differentiation (producing standard components and subassemblies, and delaying until late in the process to add differentiating features - Ship directly to the consumer to reduce waiting time - Disintermediation: when one or more steps in a supply chain are eliminated Small businesses Variability and uncertainty Response time OM 7: LOCATION THE NATURE OF LOCATION DECISIONS - Location choices can impact capacity and flexibility - For-profit organizations base location on profit potential Non-profit organizations base location on balance between cost and level of customer service Location options: - Expand an existing facility - Add new locations while retaining existing ones - Shut down at one location and move to another - Do nothing Consider having a centralized or decentralized distribution: - Centralized is better for economies of scale - Decentralized is better to respond to local needs GLOBAL LOCATIONS Facilitating factors: - Trade agreements - Technology Benefits: - Markets - Cost savings - Legal and regulatory - Financial - Other Disadvantages: - Transportation costs - Security costs - Unskilled labor - Import restrictions - Criticisms - Productivity Risks: - Protecting intellectual property rights Political Terrorism Economic - Legal Ethical Cultural Quality GENERAL PROCEDURE FOR MAKING LOCATION DECISIONS 1) Decide on the criteria to use for evaluating location alternatives 2) Identify important factors 3) Develop location alternatives 4) Evaluate the alternatives and make a selection IDENTIFYING A COUNTRY, REGION, COMMUNITY, AND SITE Identifying a country: - Government - Cultural differences - Customer preferences - Labor - Resources - Financial - Technological - Market - Safety Identifying a region: - Location of raw materials - Location of markets - Labor factors - Other factors (climate, taxes) Identifying a community: - Ethical issues Identifying a site: - Land, transportation, zoning, or other restrictions Multiple plant manufacturing strategies: - Product plant strategy - Market area plant strategy - Process plant strategy - General-purpose plant strategy Geographic information systems (GIS): computer-based tool for collecting, storing, retrieving, and displaying demographic data on maps SERVICE AND RETAIL LOCATIONS Clustering: when businesses locate near similar businesses EVALUATING LOCATION ALTERNATIVES Locational cost-volume-profit analysis: 1) Determine the fixed and variable costs associated with each location alternative 2) Plot the total-cost lines for all location alternatives on the same graph 3) Determine which location will have the lowest total cost for the expected level of output. Alternatively, determine which location will have the highest profit Assumptions: - Fixed costs are constant for the range of probable output - Variable costs are linear for the range of probable output - The required level of output can be closely estimated - Only one product is involved Total cost = FC + v * Q FC = fixed cost v = variable cost per unit Q = quantity or volume of output Total profit = Q(R - v) - FC R = revenue per unit Transportation model: special purpose algorithm used to determine the minimum transportation cost that would result if a potential new location were to be added to an existing system Factor rating: a general approach that is useful for evaluating a given alternative and comparing alternatives. Allows decision makers to incorporate their personal opinions and quantitative information in the decision process 1) Determine which factors are relevant 2) Assign a weight to each factor by relative importance 3) Decide on a common scale for all factors, and set a minimum acceptable score if necessary 4) Score each location alternative 5) Multiply the factor weight by the score of each factor, and sum the results for each location alternative 6) Choose the alternative that has the highest composite score, unless it fails to meet the minimum acceptable score Center-of-gravity method: method to determine the location of the facility that will minimize shipping costs or travel time to various destinations - If the quantities to be shipped to each location are equal, the coordinates of the center of gravity is: - If the quantities to be shipped to each location are not the same, the coordinates of the center of gravity is: OM 8: CAPACITY PLANNING Capacity: an upper limit on the load that an operating unit can handle - Overcapacity causes operating costs that are too high - Undercapacity causes strained resources and a possible loss of customers Key questions in capacity planning: 1) What kind of capacity is needed? 2) How much is needed to match demand? 3) When is it needed? CAPACITY DECISIONS ARE STRATEGIC 1) Capacity decisions have a real impact on the ability of the organization to meet future demands for products/services. Capacity limits the rate of output possible. Having capacity to satisfy demand can often allow a company to take advantage of tremendous benefits 2) Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched which will minimize operating costs 3) Capacity is usually a major determinant of initial cost. The greater the capacity of a productive unit, the greater its costs. Not a 1-to-1 relationship; larger units tend to cost proportionately less than smaller units 4) Capacity decisions often involve a long-term commitment of resources, and once they’re implemented those decisions may be difficult or impossible to modify without incurring major costs 5) Capacity decisions can affect competitiveness. Can affect delivery speed, which can be a competitive advantage 6) Capacity affects the ease of management 7) Globalization has increased the importance and complexity of capacity decisions 8) Because capacity decisions often involve substantial financial and other resources, it is necessary to plan in advance DEFINING AND MEASURING CAPACITY Design capacity: the maximum output rate or service capacity an operation, process, or facility is designed for Effective capacity: design capacity minus allowances such as personal time and preventative maintenance (always less than design capacity) - Actual output cannot exceed effective capacity DETERMINANTS OF EFFECTIVE CAPACITY - Facilities - Design of the facility including size and provisions for expanding - Locational factors like transport costs, distance to market - Layout of work area - Environmental factors - Product/service factors - Product/service design - Similar items are easier to produce - More uniform outputs, the more opportunity for standardization - Process factors - Quantity capability of the process - Output quality - Productivity - Human factors - Look at the tasks that make up a job - The variety of items involved - Training, skill and expertise involved - Employee motivation - Policy factors - If you don’t allow capacity options like overtime or second shifts - Operational factors - Scheduling - Inventory shortages - Supply chain - How does capacity impact suppliers and distributors? - External factors - Product standards to abide by - Inadequate planning STRATEGY FORMULATION - 3 primary strategies: leading, following, tracking - Leading: builds capacity in anticipation of future demand increases Following: builds capacity when demand exceeds current capacity Tracking: adds capacity in relatively small increments to keep pace with increasing demand Capacity cushion: an amount of capacity in excess of expected demand when there is some uncertainty about demand Steps in the capacity planning process: 1) Estimate future capacity requirements 2) Evaluate existing capacity and facilities and identify gaps 3) Identify alternatives for meeting requirements 4) Conduct financial analyses of each alternative 5) Assess key qualitative issues for each alternative 6) Select the alternative to pursue that will be best in the long term 7) Implement the selected alternative 8) Monitor results FORECASTING CAPACITY REQUIREMENTS - Long-term considerations relate to overall level of capacity - Short-term considerations relate to probable variations in capacity requirements Units of capacity needed = processing time needed / processing time capacity per unit ADDITIONAL CHALLENGES OF PLANNING SERVICE CAPACITY Important factors in planning service capacity: - May be a need to be near customers - Inabilitiy to store services - Degree of volatility of demand - Capacity must also be matched with the timing of demand DO IT IN-HOUSE OR OUTSOURCE IT? Factors: - Available capacity - Expertise - Quality considerations - The nature of demand - Cost - Risks DEVELOPING CAPACITY STRATEGIES 1) Design flexibility into systems 2) Take stage of life cycle into account 3) Take a “big-picture” approach to capacity changes a) Bottleneck operation: the operation in a sequence whose capacity is lower than the capacities of other operations in the sequence 4) Prepare to deal with capacity “chunks” 5) Attempt to smooth out capacity requirements 6) Identify the optimal operating level a) Economies of scale: if the output rate is less than the optimal level, increasing the output rate will result in decreasing average unit costs i) Fixed costs spread over more units ii) Construction costs increase at a decreasing rate with respect to the size of the facility to be built iii) Processing costs decrease as output rates increase because operations become more standardized, which reduces input costs b) Diseconomies of scale: if output is increased beyond the optimal level, average unit costs will become increasingly larger i) Distribution costs increase due to traffic congestion and shopping from a large centralized facility ii) Complexity increases costs iii) Inflexibility can be an issue iv) Additional levels of bureaucracy 7) Choose a strategy if expansion is involved CONSTRAINT MANAGEMENT Constraint: something that limits the performance of a process or system in achieving its goals 1) Identify the most pressing constraint 2) Change the operation to achieve the maximum benefit, given the constraint. May be a short-term solution. 3) Make sure other portions of the process are supportive of the constraint 4) Explore and evaluate ways to overcome the constraint 5) Repeat the process until the level of constraints is acceptable EVALUATING ALTERNATIVES Cost-Volume Analysis TC = FC + VC VC = Q * v Indifference point: the quantity at which a decision maker would be indifferent between two competing alternatives Financial Analysis Cash flow: refers to the difference between the cash received from sales and other sources and the cash outflow for labor, materials, overhead, and taxes Present value: expresses in current value the sum of all future cash flows of an investment proposal Decision Theory - Financial comparison of alternatives under conditions of risk or uncertainty Waiting-Line Analysis - Useful for designing or modifying service systems Simulation - What-if scenarios OPERATIONS STRATEGY Strategies for determining the timing a degree of capacity expansion: - Expand-early strategy: before demand materializes - Wait-and-see strategy: expand capacity only after demand materializes, perhaps incrementally OM 10: PROCESS FLOW ANALYSIS PROCESS ANALYSIS NOTE Process Analysis: 1) Creating a process flow diagram 2) Analyzing the operating unit structure 3) Analyzing the work flow 4) Evaluating the overall process 4 components: - Tasks (operations) - Flows - Decision points - Storages (queues) Operating unit: the focus of analysis Work center: particular kinds of transformation operations performed by people or pieces of equipment Machine constrained: the pace of the machine determines how much output can be produced Labor constrained: the worker’s capacity to feed the machines determines how much output can be produced Throughput time / elapsed time: time for a unit of output to pass through an operating unit (including waiting time between operations) Cycle time: the interval between completion of successive units in a process (=bottleneck) (time available) / (cycle time) = capacity in units Capacity utilization: a measure of how much of the available capacity is being used (capacity required) / (capacity available) = capacity utilization 3 ways to affect the relationship between capacity supply and demand (capacity utilization): - Change the resources available - Change the cycle time - Change capacity required (demand) Bandwidth: the ability of an operating unit to tolerate wide variances in work order requirements Balance: the relationship between cycle times in a process Bottleneck: the task with the longest task time. Defines the cycle time for the process Work measurement: a field of study encompassing analytical methods for studying work to find improvements, maximum efficiency, and good time estimates for various tasks Job shop: uses general purpose equipment and personnel to deal with small batch sizes Flow shop: an operating unit such as a refinery or chemical plant where the process is turned on at some point and runs continuously; neither individual units nor batches of units are produced Yield: percent of good items in a batch (output quantity / input quantity) Scrap rate: measures the losses per period (1 - yield)
