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Process Strategies and Capacity Planning
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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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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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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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 .
Continuum - A continuous extent, succession, or whole, no part of which can be distinguished from neighbouring parts except by arbitrary division
1. Similar processes or equipment grouped together. (Example: All drill presses are together.)
More structured than process-focused, less structured than product focusedEnables quasi-customizationUsing modules, it enjoys economic advantage of continuous process, and custom advantage of low-volume, high-variety model
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.
Is the process designed to achieve competitive advantage in terms of differentiation, response, or low cost?Does the process eliminate steps that do not add value?Does the process maximize customer value as perceived by the customer?Will the process win orders?
1. Flow diagram A drawing used to analyzed movement or materials.2. Process charts using symbols to analyze the movement of people or materials.3. Process mapping, A flow diagram but with time added on the horizontal axis.Process Maps eliminate those processes that are unnecessary and do not add value to the product.
While Process Reengineering has the potential to significantly improve both efficiency and effectiveness of an organization’s processes, its actual implementation often results in failure.Some of the points to be made: - process reengineering, if successful, will result in significant change in process, responsibilities, patterns of communication, and other organization staples. - process reengineering cannot be implemented top down - the workers actually performing the process should be the ones to redesign it. - process reengineering requires that fundamental questions (e.g., “Why are we doing this?” and “Why are we doing this this way?”) must be asked and answered.