Learning Modules Introduction to POM Chapters, 1, 2, & 3 Design of Goods and Services Chapter 5 Quality Management Chapter 6; Supplement 6 Process and Capacity Design Chapter 7; Supplement 7 Supply Chain Management Chapter 11; Supplement 11 Inventory, MRP, JIT Chapters 12, 14, & 16

Outline Four Process Strategies Capacity Process Focus Repetitive Focus Product Focus Mass Customization Focus Capacity Break-Even Analysis

Process Strategies The objective of a process strategy is to build a production process that meets customer requirements and product specifications within cost and other managerial constraints

Process, Volume, and Variety Low Volume Repetitive Process High Volume Volume High Variety one or few units per run, (allows customization) Process Focus projects, job shops (machine, print, hospitals, restaurants) Arnold Palmer Hospital Mass Customization (difficult to achieve, but huge rewards) Dell Computer Changes in Modules modest runs, standardized modules Variety Repetitive (autos, motorcycles, home appliances) Harley-Davidson Changes in Attributes (such as grade, quality, size, thickness, etc.) long runs only Product Focus (commercial baked goods, steel, glass, beer) Frito-Lay Poor Strategy (Both fixed and variable costs are high)

Process Strategies How to produce a product or provide a service that Meets or exceeds customer requirements Meets cost and managerial goals Has long term effects on Efficiency and production flexibility Costs and quality

Process Strategies Four basic strategies Process focus Repetitive focus Product focus Mass customization Within these basic strategies there are many ways they may be implemented

Process Focus Facilities are organized around specific activities or processes General purpose equipment and skilled personnel High degree of product flexibility Typically high costs and low equipment utilization Product flows may vary considerably making planning and scheduling a challenge

Process Focus (low volume, high variety, intermittent processes) Many inputs (surgeries, sick patients, baby deliveries, emergencies) Many different outputs (uniquely treated patients) Many departments and many routings (low volume, high variety, intermittent processes) Arnold Palmer Hospital

Repetitive Focus Facilities often organized as assembly lines Characterized by modules with parts and assemblies made previously Modules may be combined for many output options Less flexibility than process-focused facilities but more efficient

Repetitive Focus (modular) Harley Davidson Raw materials and module inputs Modules combined for many Output options (many combinations of motorcycles) Few modules (multiple engine models, wheel modules) (modular) Harley Davidson

Product Focus Facilities are organized by product High volume but low variety of products Long, continuous production runs enable efficient processes Typically high fixed cost but low variable cost Generally less skilled labor

Product Focus (high-volume, low variety, continuous process) Frito-Lay Few Inputs (corn, potatoes, water, seasoning) Output variations in size, shape, and packaging (3-oz, 5-oz, 24-oz package labeled for each material) (high-volume, low variety, continuous process) Frito-Lay

Hot mill for finishing, cooling, and coiling Product Focus Scrap steel Ladle of molten steel Electric furnace A B C Continuous caster Continuous cast steel sheared into 24-ton slabs Hot tunnel furnace - 300 ft Hot mill for finishing, cooling, and coiling D E F G H I Nucor Steel Plant

Mass Customization The rapid, low-cost production of goods and service to satisfy increasingly unique customer desires Combines the flexibility of a process focus with the efficiency of a product focus

Mass Customization Number of Choices Item 1970s 21st Century Vehicle models 140 286 Vehicle types 18 1,212 Bicycle types 8 211,000 Software titles 0 400,000 Web sites 0 162,000,000 Movie releases per year 267 765 New book titles 40,530 300,000 Houston TV channels 5 185 Breakfast cereals 160 340 Items (SKUs) in 14,000 150,000 supermarkets LCD TVs 0 102 Number of Choices Item 1970s 21st Century

Mass Customization (high-volume, high-variety) Dell Computer Many parts and component inputs Many output versions (custom PCs and notebooks) Many modules (chips, hard drives, software, cases) (high-volume, high-variety) Dell Computer

Mass Customization Repetitive Focus Mass Customization Process-Focused Flexible people and equipment Modular techniques Accommodating Product and Process Design Responsive Supply Chains Mass Customization Rapid throughput techniques Effective scheduling techniques Process-Focused High variety, low volume Low utilization (5% to 25%) General-purpose equipment Product-Focused Low variety, high volume High utilization (70% to 90%) Specialized equipment

Mass Customization Imaginative and fast product design Rapid process design Tightly controlled inventory management Tight schedules Responsive supply chain partners

Capacity The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time Determines fixed costs Determines if demand will be satisfied Three time horizons

Planning Over a Time Horizon Modify capacity Use capacity Intermediate-range planning Subcontract Add personnel Add equipment Build or use inventory Add shifts Short-range planning Schedule jobs Schedule personnel Allocate machinery * Long-range planning Add facilities Add long lead time equipment * Difficult to adjust capacity as limited options exist Options for Adjusting Capacity Figure S7.1

Design and Effective Capacity Design capacity is the maximum theoretical output of a system Normally expressed as a rate Effective capacity is the capacity a firm expects to achieve given current operating constraints Often lower than design capacity

Economies and Diseconomies of Scale Number of Rooms 25 50 75 (dollars per room per night) Average unit cost 25 - room roadside motel 75 - room roadside motel 50 - room roadside motel Economies of scale Diseconomies of scale Figure S7.2

Break-Even Analysis Technique for evaluating process and equipment alternatives Objective is to find the point in dollars and units at which cost equals revenue Requires estimation of fixed costs, variable costs, and revenue

Break-Even Analysis Fixed costs are costs that continue even if no units are produced Depreciation, taxes, debt, mortgage payments Variable costs are costs that vary with the volume of units produced Labor, materials, portion of utilities Contribution is the difference between selling price and variable cost

Break-Even Analysis Assumptions Costs and revenue are linear functions Generally not the case in the real world We actually know these costs Very difficult to verify Time value of money is often ignored

Total cost = Total revenue Break-Even Analysis – 900 – 800 – 700 – 600 – 500 – 400 – 300 – 200 – 100 – | | | | | | | | | | | | 0 100 200 300 400 500 600 700 800 900 1000 1100 Cost in dollars Volume (units per period) Total revenue line Profit corridor Loss corridor Total cost line Break-even point Total cost = Total revenue Variable cost Fixed cost Figure S7.5

Break-Even Analysis TR = TC F or BEPx = P - V Px = F + Vx BEPx = break-even point in units BEP$ = break-even point in dollars P = price per unit (after all discounts) x = number of units produced TR = total revenue = Px F = fixed costs V = variable cost per unit TC = total costs = F + Vx Break-even point occurs when TR = TC or Px = F + Vx BEPx = F P - V

Break-Even Analysis BEP$ = BEPx P = P = Profit = TR - TC P - V BEPx = break-even point in units BEP$ = break-even point in dollars P = price per unit (after all discounts) x = number of units produced TR = total revenue = Px F = fixed costs V = variable cost per unit TC = total costs = F + Vx BEP$ = BEPx P = P = F (P - V)/P P - V 1 - V/P Profit = TR - TC = Px - (F + Vx) = Px - F - Vx = (P - V)x - F

Break-Even Example Fixed costs = $10,000 Material = $.75/unit Direct labor = $1.50/unit Selling price = $4.00 per unit BEP$ = = F 1 - (V/P) $10,000 1 - [(1.50 + .75)/(4.00)]

Break-Even Example Fixed costs = $10,000 Material = $.75/unit Direct labor = $1.50/unit Selling price = $4.00 per unit BEP$ = = F 1 - (V/P) $10,000 1 - [(1.50 + .75)/(4.00)] = = $22,857.14 $10,000 .4375 BEPx = = = 5,714 F P - V $10,000 4.00 - (1.50 + .75)

Break-Even Example Revenue Break-even point Total costs Fixed costs 50,000 – 40,000 – 30,000 – 20,000 – 10,000 – – | | | | | | 0 2,000 4,000 6,000 8,000 10,000 Dollars Units Revenue Break-even point Total costs Fixed costs

DIY (Handout)