1. Productions and Operations
Management
Process Strategy and
Capacity Planning
December 11, 2010
Jaisa Dacanay Gapuz, CPA

2. Learning Objectives:
 Identify or Define:
A. What is Process Strategy
B. The Four Process Strategy
◦ Process focus
◦ Repetitive focus
◦ Product focus
◦ Mass customization focus
C. Service Process Design and Issues
D. Capacity and Capacity Planning
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3. Outline:
 Process Strategy
 Four Process Strategies
◦ Process Focus.
◦ Repetitive Focus.
◦ Product Focus.
◦ Mass Customization Focus.
 Service Process Design
 Process Reengineering
 Facility Planning
 Capacity Planning
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4. Process Strategy
 An organization’s approach to transform resources
into goods and services.
•Process strategy is the pattern of decisions made
in managing processes so that they will achieve their
competitive priorities. It involves the use of an
organization’s resources to provide something of
value.
•Major process decisions include:
Process Structure
Customer Involvement
Resource Flexibility
Capital Intensity
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5. Types of Process Strategies
Process strategies follow a continuum
Within a given facility, several strategies
may be used
These strategies are often classified as:
Process-Focused Repetitive-Focused Product-Focused
Continuum
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6. Process-Focused Strategy
Facilities organized by process.
Low volume, high variety
products.
Products follow many different
paths.
Other names:
Intermittent process.
1 2
Job shop.
3 4
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7. Examples
Bank
Hospital
Machine
Shop
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8. Process Focused-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%).
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9. Repetitive Focused Strategy
 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
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10. Considerations in Repetitive
Focused Strategy
 More structured than process-focused, less
structured than product focused
 Enables quasi-customization
 Using modules, it enjoys economic
advantage of continuous process, and
custom advantage of low-volume, high-
variety model
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11. Examples
Fast
Clothes Food
Dryer
McDonald’s
over 95 billion served
Truck
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12. jdgapuz 12.11.10

13. Product Focused Strategy
Facilities are organized by product
High volume, low variety products
Where found
Discrete unit manufacturing
Continuous process manufacturing
Other names
Line flow production Product A
Operation
Continuous production
1 2 3
Product B
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14. Examples
Soft Drinks
(Continuous,
then
Discrete)
Light Bulbs
(Discrete)
.
Paper
(Continuous)
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15. Product Focused-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.
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16. Summary
Process Focus Repetitive Focus Product Focus
1. Product: Small 1. Product: Long runs, 1. Product: Large
quantity, large usually standardized quantities, small
variety variety
2. Equipment: 2. Equipment: Special; 2. Equipment:
General purpose assembly line Special-purpose
3. Operators broadly 3. Employees modestly 3. Operators less
skilled trained broadly skilled
4. Many job 4. Repetitive operations 4. Few work orders and
instructions job instructions;
standardization
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17. 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.
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18. 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.
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19. 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 he
custom
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20. Tools for Process Design
 Flow Diagrams
 Process Charts
 Time-Function/Process Mapping
 Service Blueprinting
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21. Process Chart Example
SUBJECT: Request tool purchase
Dist (ft) Time (min) Symbol Description
 D Write order
 w On desk
75   D To buyer
 D Examine
 = Operation;  = Transport;  = Inspect;
D = Delay; = Storage
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22. Time Function Map
Order Receive
Customer Product product
Process
Sales Order
Order
Production
Wait
control
Order
Product
Plant A Print
WIP
Product
Warehouse Wait Wait Wait
WIP
Product
Plant B Extrude
WIP
WIP
Transport Move Move
12 days 13 days 1 day 4 days 1 day 10 days 1 day 9 days 1 day
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23. 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.
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24. Process Design for Services
Degree of Customization
Low High
Degree of Labor Intensity
Mass Service Professional Service
Commercial Personal
banking
High
Banking
General purpose
law firms
Boutiques
Retailing
Service Law clinics
Service Shop
Factory
Fine dining
Warehouse and restaurants
Low
catalog stores
Fast food
restaurants
Vending
machines
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25. Improving Service Productivity
 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.
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26. Process Reengineering
 The fundamental rethinking and radical
redesign of business processes to bring about
dramatic improvements in performance
 Relies on reevaluating the purpose of the
process and questioning both the purpose and
the underlying assumptions
 Requires reexamination of the basic process
and its objectives
 Focuses on activities that cross boundaries
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27. Facility Planning
 How much long-range capacity is needed?
 When more capacity is needed?
 Where facilities should be located?
 How facilities should be arranged?
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28. Definition and Measures of Capacity
Capacity: The maximum output of a system in a
given period.
Design The maximum capacity that can be
Capacity: achieved under ideal conditions.
Example: 200/day
Effective The expected capacity given the current
capacity: operating environment and constraints;
may be viewed as a percentage of design
capacity.
Example: 180/day or 90%
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29. Utilization and Efficiency
 Utilization = Percent of design capacity achieved.
Actual output
Utilization =
Design capacity
 Efficiency = Percent of effective capacity achieved.
Actual output
Efficiency =
Effective capacity
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30. Utilization & Efficiency Example
 Design capacity = 120/day.
 Effective capacity = 100/day.
 Actual output = 80/day.
Utilization = Actual output = 80/120 = 67%
Design capacity
Efficiency = Actual output = 80/100 = 80%
Effective capacity
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31. 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
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32. Capacity Planning Process
Forecast Demand.
Compute Needed Capacity.
Develop Alternative Plans.
Evaluate Capacity Plans.
Quantitative & Quantitative factors.
Select Best Capacity Plan.
Implement Best Plan.
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33. Managing Existing Capacity
To make capacity match
demand, either:
Adjust demand = Demand management.
Adjust capacity = Capacity management.
Demand Management Capacity Management
Vary prices.  Vary staffing.
Vary promotion.  Change equipment
Backorder. & processes.
Offer complementary  Change methods.
products.  Redesign the
product/service for faster
processing.
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34. Capacity Expansion Options –
Capacity Leads Demand
Add new capacity in New Capacity
Expected Demand
Demand
advance of increasing
demand.
Advantages:
Time in Years
Can capture market. Small expansions
Discourage competition.
Disadvantages: Expected Demand
New Capacity
Demand
Expensive and risky.
Demand may not
materialize.
Size of needed expansion Time in Years
relies on forecast. Large expansion
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35. Capacity Expansion Options –
Capacity Lags Demand
Add new capacity after
demand materializes.
Advantages: Expected Demand
Demand
Lower cost. New Capacity
Less risk.
Size of expansion known.
Disadvantages:
Time in Years
May be too late to market. Small expansions
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36. 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.
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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.
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38. Break-even Chart
Total revenue line
Dollars
Profit
Total cost line
Variable cost
Loss Fixed cost
Volume (units/period)
Breakeven point
Total cost = Total revenue
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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
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40. Break-even Example 1
A firm produces radios with a fixed cost of P7,000 per
month and a variable cost of P5 per radio. If radios
sell for P8 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
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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)
= P-500 per month
($500 loss per month)
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42. 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.
N F
F P(1 i ) P
(1 i ) N
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43. 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.
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44. END
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