BA 339 – OM – Chapters 7&8

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • Process (Transformation) Strategy – • “Organization’s 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 > repetitive > product

BA 339 – OM – Chapters 7&8 • 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)

BA 339 – OM – Chapters 7&8 • 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)

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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.

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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 provider’s interaction with the customer; helps identify potential failure points and quality improvement opportunities

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • Implications of Capacity Changes • Changes in: • Sales • Cash flow • Quality • Supply chain • Human resources • Maintenance

BA 339 – OM – Chapters 7&8 • Requirements for Making Good Capacity Decisions • Forecast demand accurately • Understanding technology and capacity increments • Finding the optimal operating level (volume) • Build for change (plan)

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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)

BA 339 – OM – Chapters 7&8 • Economies of Scale • Vary by industry > 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 > avg. unit cost drops • Reducing construction costs > 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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)

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8 • 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

BA 339 – OM – Chapters 7&8