Operations
Management
Process Strategy and
Capacity Planning
Chapter 7
7-1
Outline
Four Process Strategies.

Process Focus.

Repetitive Focus.

Product Focus.

Mass Customization Focus.
Service Process Design.
Process Reengineering.
Capacity.
Break-Even Analysis.
Net Present Value. 7-2
Process Strategy
 How to produce a product or provide a
service.
 Objective:

Meet or exceed customer requirements.

Achieve competitive advantage.
 Has long-run effects:

Product & volume flexibility.

Costs & quality .
7-3
Four Process Strategies
 Four process strategies:




1. Process focused.
2. Product focused.
3. Repetitive focused.
4. Mass customization.
 Several strategies may be used within one facility.
 Process strategies follow a continuum.
7-4
Fit of Process, Volume, and Variety
High Volume
Low Volume
PROCESS FOCUS
Small production runs (job shops, printing)
High Variety
MASS
CUSTOMIZATION
(Dell Computer)
(allows customization)
REPETITIVE FOCUS
(autos, motorcycles)
Low Variety
Long production runs
(standardization)
PRODUCT FOCUS
(steel, chemicals)
POOR STRATEGY
7-5
1. Process Focus
 Facilities organized by process.

Similar processes or equipment grouped
together. (Example: All drill presses are together.)
 Low volume, high variety products.

75% of all global products.
 Products follow many different paths.
 Other names:

Intermittent process.

Job shop.
7-6
1
2
3
4
Process Focus Examples
Hospital
Machine
Shop
7-7
Bank
Process Focus - Pros & Cons
 Advantages:
Greater product flexibility.
 More general purpose equipment.
 Lower initial capital investment.

 Disadvantages:




High variable cost per unit.
More highly trained personnel.
More difficult production planning & control.
Low equipment utilization (5% to 25%).
7-8
2. Product Focus
 Facilities organized by product.
 High volume, low variety products.
 Long, continuous production runs.

Discrete unit manufacturing.

Continuous process manufacturing.
 Other names:

Line flow production.

Continuous production.
1
7-9
2
3
4
Product Focus Examples
Soft Drinks
(Continuous,
then Discrete)
Light Bulbs
(Discrete)
.
Paper (Continuous)
7-10
Product Focus: Steel Plant
7-11
Product Focus - Pros & Cons
 Advantages:

Lower variable cost per unit.

Lower but more specialized labor skills.

Easier production planning and control.

Higher equipment utilization (70% to 90%).
 Disadvantages:

Lower product flexibility.

More specialized equipment.

Higher capital investment.
7-12
3. Repetitive Focus
 Facilities often organized by assembly lines.
 Characterized by modules.

Parts & assemblies made previously.
 Modules combined for many output options.
 Other names:

Assembly line.

Production line.
7-13
Repetitive Focus - Examples
Fast
Food
Clothes
Dryer
McDonald’s
over 95 billion served
Truck
7-14
Repetitive Focus - Harley Davidson
7-15
Repetitive Focus - Considerations
More structured than process focus, less
structured than product focus.
Enables quasi-customization.
Has advantages and disadvantages of
process focus and product focus.
7-16
Process Continuum
Process Focused
(intermittent process)
Repetitive
Focus
(assembly line)
Product Focused
(continuous
process)
Continuum
High variety, low volume
Low utilization (5% - 25%)
General-purpose equipment
Modular
Flexible
equipment
7-17
Low variety, high volume
High utilization (70% - 90%)
Specialized equipment
Increasing Product Variety
Early
1970s
Item
Vehicle models
Vehicle styles
Bicycle types
Software titles
Web sites
Movie releases
New book titles
TV channels
Breakfast cereals
Items in supermarkets
140
18
8
0
0
267
40,530
5
160
14,000
7-18
Late
1990s
260
1,212
19
380,000
9,865,982
458
77,446
851
340
20,000
4. Mass Customization
Rapid, low-cost production to fulfill unique
customer desires.
Distinctions between process, repetitive and
product focus blur, making variety and
volume issues less significant.
Very hard to achieve!
7-19
Mass Customization at Dell
Computer Company
Sells custom-built PCs directly to consumer.
Builds computers rapidly, at low cost, and only
when ordered.
Integrates the Web into every aspect of business.
Operates with six days inventory.
Research focus on software to make installation
and configuration of PCs fast and simple.
7-20
Process Analysis and Design
Process should:
 Be designed to achieve competitive advantage
- differentiation, response, or low cost.
 Eliminate steps that do not add value.
 Maximize customer value, as perceived by the
customer.
7-21
Tools for Process Design
Flow Diagrams - Figures 7.2, 7.3, 7.4
Process Charts - Figure 7.7
Time-Function/Process Mapping - Figure 7.6
Service Blueprint - Figure 7.8
7-22
Process Design for Services
 Consider customization and labor intensity.
 Degree of customization.

High: Focus on specialization and uniqueness
(equipment, training, etc.).

Low: Focus on standardization and automation.
 Degree of labor intensity.

High: Focus on personalization & human resources
(selection, training, etc.)

Low: Use technology and automation.
7-23
Process Design for Services
Low
Degree of Customization
Degree of Labor Intensity
High
Low
Mass Service
High
Professional Service
Personal
banking
Commercial
Banking
General purpose
law firms
Boutiques
Retailing
Service Factory
Warehouse and
catalog stores
Law clinics
Service Shop
Fine dining
restaurants
Fast food
restaurants
Vending
machines
7-24
Improving Service Productivity Table 7.3
 Separation: Different services in different places.
 Self-service: Customers serve themselves.
 Postponement: Customize at delivery.
 Focus: Restrict offerings.
 Automation: Automate where appropriate.
 Scheduling: Precise personnel scheduling.
7-25
Process Reengineering
Fundamental rethinking and radical redesign
of business processes.

To produce dramatic improvements in performance.
Re-examine the basic process and its
objectives:

Re-evaluate the purpose of the process.

Question underlying assumptions.
Focus on activities that cross boundaries.
7-26
Facility Planning
Facility planning answers:
 How much long-range capacity is needed?
 When more capacity is needed?
 Where facilities should be located?

Location - Chapter 8.
 How facilities should be arranged?

Layout - Chapter 9.
7-27
Definition and Measures of Capacity
Capacity:
The maximum output of a system in a given
period.
Design Capacity:
The maximum capacity that can be achieved
under ideal conditions.
Example: 200/day
Effective capacity:
The expected capacity given the current
operating environment and constraints;
may be viewed as a percentage of design
capacity.
Example: 180/day or 90%
7-28
Utilization & Efficiency
 Utilization = Percent of design capacity achieved.
Utilization =
Actual output
Design capacity
 Efficiency = Percent of effective capacity achieved.
Actual output
Efficiency =
Effective capacity
7-29
Utilization & Efficiency Example
 Design capacity = 120/day.
 Effective capacity = 100/day.
 Actual output = 80/day.
Utilization =
Actual output
= 80/120 = 67%
Design capacity
Actual output
= 80/100 = 80%
Efficiency =
Effective capacity
7-30
Anticipated Output
 Anticipated output
= Design Capacity x Effective Capacity % x Efficiency
 Example:



Design capacity = 150 units per day
Effective capacity = 80%
Efficiency = 90%
 Anticipated output = 150 x 0.80 x 0.90 = 108 per day.
 Efficiency = 90%; Utilization = 108/150=72%
7-31
Capacity Planning Process
 Forecast Demand.
 Compute Needed Capacity.
 Develop Alternative Plans.
 Evaluate Capacity Plans.

Quantitative & Quantitative factors.
 Select Best Capacity Plan.
 Implement Best Plan.
7-32
Managing Existing Capacity
 To make capacity match demand, either:


Adjust demand = Demand management.
Adjust capacity = Capacity management.
Demand Management
Capacity Management
 Vary prices.
 Vary promotion.
 Backorder.
 Offer complementary
products.
 Vary staffing.
 Change equipment
& processes.
 Change methods.
 Redesign the product/service
for faster processing.
7-33
Complementary Products
Sales (Units)
5,000
4,000
3,000
2,000
1,000
0
Total
Snowmobiles
Jet Skis
J M M J S N J M M J S N J
Time (Months)
7-34
Capacity Expansion Options –
Capacity Leads Demand

Advantages:
Expected Demand
Demand
 Add new capacity in advance
of increasing demand.
Can capture market.
 Discourage competition.

Time in Years
Small expansions
Disadvantages:
Expensive and risky.
 Demand may not materialize.
 Size of needed expansion
relies on forecast.

Demand

New Capacity
New Capacity
Time in Years
Large expansion
7-35
Expected Demand
Capacity Expansion Options –
Capacity Lags Demand
 Add new capacity after
demand materializes.
Expected Demand
Advantages:
Lower cost.
 Less risk.
 Size of expansion known.


Disadvantages:

Demand

New Capacity
Time in Years
May be too late to market.
7-36
Small expansions
Break-even Analysis
 To evaluate process & equipment alternatives.
 Objective:
Find the point ($ or units) at which total cost equals
total revenue, -or Find the range of output over which different
alternatives are preferred.

 Assumptions:
Revenue & costs are related linearly to volume.
 All information is known with certainty.
 No time value of money.

7-37
Break-even Analysis - Costs
Fixed costs: Costs independent of the
volume of units produced.

Depreciation, taxes, debt, mortgage payments, etc.
Variable costs: Costs that vary with the
volume of units produced.

Labor, materials, portion of utilities, etc.
7-38
Break-even Chart
Dollars
Total revenue line
Profit
Variable cost
Loss
Total cost line
Fixed cost
Volume (units/period)
Breakeven point
Total cost = Total revenue
7-39
Break-even Equations
F = Fixed cost per unit time.
V = Variable cost per unit produced.
x = Number of units produced per unit time.
P = Revenue (price) per unit
TC = Total costs per unit time = F + Vx
TR = Total revenue per unit time = Px
Profit = TR - TC
At break-even point: Total Cost = Total Revenue
7-40
Break-even Example 1
A firm produces radios with a fixed cost of $7,000 per
month and a variable cost of $5 per radio. If radios sell
for $8 each:
1a) What is the break-even point?
TR = TC so 8x = 7000 + 5x
x = 7000/3 = 2,333.333 radios per month
1b) What output is needed to produce a profit of
$2,000/month?
Profit = 2000/month so
TR - TC = 8x - (7000 + 5x) = 2000
x = 9000/3 = 3,000 radios per month
7-41
Break-even Example 1 - continued
1c) What is the profit or loss if 500 radios are produced each
week?
First, get monthly production:
50052/12 = 2,166.6667 radios per month
Then calculate profit or loss
TR - TC = 82166.6667 - (7000 + 52166.6667)
= $-500 per month
($500 loss per month)
7-42
Break-even Example 2
A firm produces radios with a fixed cost of $7,000 per month and
a variable cost of $5 per radio for the first 3,000 radios
produced per month. For all radios produced each month after
the first 3,000 the variable cost is $10 per radio (for added
overtime and maintenance costs). If radios sell for $8 each:
2a) What are the break-even point(s)?
Now TC has two parts depending on the level of production:
For x  3000/month: TC = 7000 + 5x
For x > 3000/month: TC = 7000 + 5(3000) + 10(x-3000)
= -8000 + 10x
For any x: TR = 8x
7-43
Break-even Example 2 - continued
For x  3000/month: TC = 7000 + 5x
For x > 3000/month: TC = -8000 + 10x
For any x: TR = 8x
For x  3000/month: 7000 + 5x = 8x so x = 2,333.33/month
This is < 3000/month, so it is a valid break-even point.
For x > 3000/month: -8000 + 10x = 8x so x = 4000/month
This is > 3000/month, so it is also a valid break-even point.
7-44
Dollars (Thousands)
Break-even Example 2
40
Total revenue line
32
24
Total cost line
16
Break-even
points
8
1000
2000
3000
4000
Volume (units/month)
7-45
Break-even Example 3
A firm produces radios with a fixed cost of $7,000 per month and
a variable cost of $5 per radio for the first 2,000 radios
produced per month. For all radios produced each month after
the first 2,000 the variable cost is $10 per radio (for added
overtime and maintenance costs). If radios sell for $8 each:
3a) What are the break-even point(s)?
Again TC has two parts depending on the level of production:
For x  2000/month: TC = 7000 + 5x
For x > 2000/month: TC = 7000 + 5(2000) + 10(x-2000)
= -3000 + 10x
For any x: TR = 8x
7-46
Break-even Example 3 - continued
For x  2000/month: TC = 7000 + 5x
For x > 2000/month: TC = -3000 + 10x
For any x: TR = 8x
For x  2000/month: 7000 + 5x = 8x so x = 2,333.33/month
This is not < 2000/month, so it is not a break-even point!!
For x > 2000/month: -3000 + 10x = 8x so x = 1500/month
This is not > 2000/month, so it is not a break-even point!!
THERE ARE NO BREAK-EVEN POINTS!
7-47
Dollars (Thousands)
Break-even Example 3
40
32
24
Total cost line
Total revenue line
16
8
1000
2000
3000
4000
Volume (units/month)
7-48
Dollars (Thousands)
Other Break-even Possibilities
40
32
24
Total cost line
Total revenue line
16
8
1000
2000
3000
4000
Volume (units/month)
7-49
Crossover Chart
Process A: Low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Process A
Process B
Process C
7-50
Lowest cost
process
Crossover Example
Process A: FA = $5000/week
VA = $10/unit
Process B: FB = $8000/week
VB = $4/unit
Process C: FC = $10000/week VC = $3/unit
Over which range of output is each process best?
1. At x = 0 A is best (FA is smallest fixed cost).
2. As x gets larger, either B or C may become better than A:
B < A for x > 3000/6 or x > 500/week
C < A for x > 5000/7 or x > 714.28/week
so B is best for x > 500/week
3. Eventually, C will become better than B (VC< VB).
C < B for x > 2000/week
7-51
Crossover Example
Summary:
A is best for output of 0-500 units per week.
B is best for output of 500-2000 units per week.
C is best for output greater than 2000 units per week.
0
2000
500 714
A<B
A<C
B<C
A<B
B<A
A<C
A<C
B<C
B<C
A<B<C B<A<C
B<A
C<A
B<C
B<C<A
7-52
B<A
C<A
C<B
C<B<A
Time Value of Money - Net Present
Value
 Future cash receipt of amount F is worth less than F
today.
F = Future value N years in the future.
P = Present value today.
i = Interest rate.
F  P(1  i )
N
F
P
(1  i ) N
7-53
Annuities
 An annuity is a annual series of equal payments.
R = Amount received every year for N years.
S = Present value today.
S = RX
where X is from Table 7.5 (page 264).
Example: What is present value of $1,000,000 paid in 20
equal annual installments?
For i=6%/year, S = 5000011.47 = $573,500
For i=14%/year, S = 500006.623 = $331,150
7-54
Limitations of Net Present Value
 Investments with the same NPV will differ:

Different lengths.

Different salvage values.

Different cash flows.
 Assumes we know future interest rates!
 Assumes payments are always made at the
end of the period.
7-55