1. PROCESS DESIGN & CAPACITY PLANNING Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

2. OUTLINE Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

3. Product vs. Process Design – Design of process or – Design of product? Which decision comes first?

4. Product Strategy Once a company decides to produce a given product or offer a particular service, company should decide if product or service is to be – Made-to-order – Assemble-to-order (or Built-to- Order) – Made-to-stock

5. Make-to-order Products/services that are made to customer’s specs but only after an order is received. Examples Custom built home or office building Tailor made suit Commercial airplane Wedding cake Hair styling

6. Assemble-to-order (built-to-order) Standard components are produced in anticipation of demand. Once an order is received, components can be combined in different ways to accommodate different customer specs. Examples Computers (Dell) Cars built to customer’s specs Omelet

7. Make-to-stock Products produced for immediate sale or delivery in anticipation of demand. Product is standardized. Produced in large volumes. Examples Cars TV sets Toothpaste

8. Overview of Product Strategy Bake

9. Product Strategy Options to Gain a Competitive Advantage ► Differentiation ► Low cost ► Rapid response

10. Types of Processes Next decision is to select the best process type to implement each product strategy. Types of Processes can be classified as: Project Batch Line Continuous

11. Product-Process Matrix Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

12. 7 - 12© 2014 Pearson Education Batch Process L L L L L L L L L L M M M M D D D D D D D D G G G G G G A AA Receiving and Shipping Assembly Painting Department Lathe Department Milling Department Drilling Department Grinding Department P P

13. 7 - 13© 2014 Pearson Education Raw materials or customer Finished item Station 2 Station 2 Station 3 Station 3 Station 4 Station 4 Material and/or labor Station 1 Material and/or labor Material and/or labor Material and/or labor Repetitive Manufacturing Line Process

14. Intermittent vs. Repetitive Processes Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

15. Process Design Selection Process types can be: Project process – make a one-at-a-time product exactly to customer specifications Batch process – small quantities of product in groups or batches based on customer orders or specifications Line process – large quantities of a standard product Continuous process – very high volumes of a fully standard product Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

16. Types of Processes vs. Product Strategy Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

17. Work Cells (Cellular manufacturing) Cellular manufacturing is a LEAN manufacturing process that produces families of parts within a single work cell (Derived from the word Cell). Cellular manufacturing is application of group technology Cellular manufacturing is a hybrid system that links the advantages of a job shop with the product layout of the continuous flow line. While the machinery may be functionally dissimilar, the family of parts produced contains similar processing requirements or has geometric similarities. Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

18. Work Cells (Cellular manufacturing) Thus, all parts basically follow the same routing with some minor variations (e.g., skipping an operation). The cell design provides for quick and efficient flow, and the high productivity associated with assembly lines. However, it also provides the flexibility of the job shop, allowing both similar and diverse products to be added to the line without slowing the process. Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

19. Part families Part families with similarity in shape Part families with similarity in manufacturing process

20. Original Process Layout CABRaw materials Assembly 1 2 3 4 5 6 7 8 9 10 11 12

21. 9 - 21 Part Routing Matrix Machines Parts123456789101112 Axxxxx Bxxxx Cxxx Dxxxxx Exxx Fxxx Gxxxx Hxxx Figure 5.8

22. 9 - 22 Reordered Routing Matrix Machines Parts124810369571112 Axxxxx Dxxxxx Fxxx Cxxx Gxxxx Bxxxx Hxxx Exxx

23. Revised Cellular Layout 3 6 9 Assembly 12 4 810 5 7 11 12 A B C Raw materials Cell 1 Cell 2 Cell 3

24. Product Life Cycle Negative cash flow IntroductionGrowthMaturityDecline Sales, cost, and cash flow Cost of development and production Cash flow Net revenue (profit) Sales revenue Loss Figure 5.2

25. Discussion Consider the life cycle of a product from introduction to maturity to decline. What kind of process strategy (job shop, batch process, or line flow) would be appropriate at each stage and why? (Note: Consider product-process matrix) Under what circumstances the movement down the diagonal of the product-process matrix over the life cycle of the product may not occur? Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

26. Process Selection & Break-Even Analysis Breakeven analysis can be used to choose between two or more processes or between an internal process and buying those services or materials. The solution finds the point at which the total costs of each of the two alternatives are equal. The forecast volume is then applied to see which alternative has the lowest cost for that volume.

27. Process Selection Using Break-Even Analysis Break-even point is the volume at which total revenues equal total costs. Variable costs (c) are costs that vary directly with the volume of output. Fixed costs (F) are those costs that remain constant with changes in output level.

28. “Q” is the volume of customers or units, “c” is the unit variable cost, F is fixed costs and p is the revenue per unit cQ is the total variable cost. Total cost = F + cQ Total revenue = pQ Break-even is where pQ = F + cQ (Total revenue = Total cost) Break-Even Analysis

29. Break-Even Analysis can tell you… If a forecast sales volume is sufficient to break even (no profit or no loss) How low the variable cost per unit must be to break even given current prices and sales forecast. How low the fixed cost need to be to break even. How price levels affect the break-even volume.

30. Process Selection Using Break-Even Analysis Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

31. Crossover Charts Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

32. 7 - 32© 2014 Pearson Education Crossover Charts to Compare Three Alternatives Fixed costs Variable costs $ High volume, low variety Process C Fixed costs Variable costs $ Repetitive Process B Fixed costs Variable costs $ Low volume, high variety Process A Fixed cost Process A Fixed cost Process B Fixed cost Process C Total process A costs Total process B costs Total process C costs V1V1 (2,857) V2V2 (6,666) 400,000 300,000 200,000 Volume $

33. 7 - 33© 2014 Pearson Education Make or Buy Decisions ▶ The nature of demand. When demand for an item is high and steady, the organization is often better off doing the work itself. However, wide fluctuations in demand or small orders may necessitate outsourcing. ▶ Cost. If there are high fixed costs associated with making an item that cannot be justified with the expected sales volume, outsourcing may help a firm avoid incurring fixed costs. ▶ Risk. Howerver, outsourcing may involve certain risks. One is loss of control over operations. Another is the need to disclose proprietary information.

34. 7 - 34© 2014 Pearson Education Example 1 ▶ A large international computer manufacturer is designing a new model of personal computer and must decide whether to produce the keyboards internally or to purchase them from an outside supplier. ▶ The supplier is willing to sell the keyboards for $50 each, but the manufacturer estimates that his firm can produce the keyboards for $35 each. ▶ Management estimates that expanding the current plant and purchasing the necessary equipment to make the keyboards would cost $8 million. Should they undertake the expansion?

35. 7 - 35© 2014 Pearson Education Example 1 The break-even quantity is: X=8000 000/(50-35)= 533333 So the company would have to sell at least 533333 keyboards in order to justify the $8 million investment required for expansion.

36. 7 - 36© 2014 Pearson Education Example 2 ▶ The Giant Food Manufacturing Company has just completed its annual board meeting, and its directors all agreed that a new factory must be built to meet the growing demand for its products in the northeast United States. ▶ The company must decide between two production processing alternatives: conventional cooking and canning (CCC) and irradiation and poly-vac packaging (IVP).

37. 7 - 37© 2014 Pearson Education Example 2 ▶ Of particular concern is the uncertainty surrounding the level of demand for its food products. ▶ The company has developed sophisticated forecasting models that estimate levels of annual demand, and yet some uncertainty remains. ▶ The company has developed these demand and cost estimates:

38. 7 - 38© 2014 Pearson Education Example 2

39. 7 - 39© 2014 Pearson Education Questions ▶ 1.If the demand is assumed to be the mean demand, what is the production quantity at which the company would be indifferent between the two alternatives? ▶ 2.If the demand is assumed to be normally distributed, what is the probability that the IVP would be preferred? ▶ 3.What factors other than annual cost should be considered in this decision?

40. 7 - 40© 2014 Pearson Education The normal distribution ▶ A normal curve: Bell shaped ▶ Density is given by ▶ μand σ 2 are two parameters: mean and standard variance of a normal population (σ is the standard deviation)

41. 7 - 41© 2014 Pearson Education Normal curves: (μ=0, σ 2 =1) and (μ=5, σ 2 =1)

42. 7 - 42© 2014 Pearson Education Normal curves: (μ=0, σ 2 =1) and (μ=0, σ 2 =2)

43. 7 - 43© 2014 Pearson Education Probability Analysis of a Project Network Example

44. 7 - 44© 2014 Pearson Education From non-standard normal to standard normal ▶ X is a normal random variable with mean μ, and standard deviation σ ▶ Set Z=(X – μ)/σ Z=standard unit or z-score of X Then Z has a standard normal distribution with mean 0 and standard deviation of 1.

45. 7 - 45© 2014 Pearson Education © 2011 Pearson Education, Inc. publishing as Prentice Hall

46. 7 - 46© 2014 Pearson Education Standard Normal Distribution

47. 7 - 47© 2014 Pearson Education © Wiley 2010 47 Capacity planning ▶ Capacity is the maximum output rate of a facility ▶ Capacity planning is the process of establishing the output rate that can be achieved at a facility: ▶ Tactical issues to Consider for Medium and Short-Term Capacity Planning workforce & inventory levels, & day-to-day use of equipment ▶ Strategic issues to Consider for Long-Term Capacity Planning how much and when to spend capital for additional facility & equipment

48. © 2014 Pearson Education7 - 48 © Wiley 201048 Measuring Available Capacity ▶ There is no one best way to measure capacity ▶ Output measures like units per day are easier to understand ▶ With multiple products, inputs measures work better

49. 7 - 49© 2014 Pearson Education © Wiley 2010 49 Measuring Available Capacity ▶ Design capacity : ▶ Maximum output rate under ideal conditions ▶ Effective capacity: ▶ Maximum output rate under normal (realistic) conditions considering allowances such as personal break time, periodic maintenance, scrap and etc. Actual output ▶ rate of output actually achieved--cannot exceed effective capacity.

50. © 2014 Pearson Education7 - 50 © Wiley 201050 Measuring Effectiveness of Capacity Use ▶ Measures how much of the available capacity is actually being used: ▶ Measures effectiveness ▶ Use either effective or design capacity in denominator

51. 7 - 51© 2014 Pearson Education Example 1 Computing Capacity Utilization ▶ A bakery’s design capacity is 30 custom cakes per day. ▶ On the average this bakery can make 20 custom cakes per day (Effective Capacity) ▶ Currently the bakery is producing 28 cakes per day. ▶ What is the bakery’s capacity utilization relative to both design and effective capacity?

52. © 2014 Pearson Education7 - 52 © Wiley 201052 Example 1 Computing Capacity Utilization ▶ The current utilization is only slightly below its design capacity and considerably above its effective capacity ▶ The bakery can only operate at this level for a short period of time

53. 7 - 53© 2014 Pearson Education Example 2 Computing Capacity Utilization The Crystal Sparkle Co. produces glass tumblers. The plant is designed to produce 400 tumblers per hour, and there is 1 eight-hour shift per working day. However, the plant does not operate for the full 8 hours: the employees take two 15-minute breaks in each shift, one in the first 4 hours and one in the second 4 hours, moreover, the first 30 minutes of the shift are spent raising the kilns to the required temperature for firing glass. The plant usually produces about 10,000 tumblers per five-day workweek. Answer the following questions by adjusting the data to one eight-hour shift.

54. 7 - 54© 2014 Pearson Education Questions a.What is the design capacity in tumblers? b.What is the effective capacity in tumblers? As a percent? c.What is the actual output in tumblers? d.What is the efficiency ratio? e.What is the utilization ratio?

55. © 2014 Pearson Education7 - 55 © Wiley 201055 Best Operating Level and Size ▶ Alternative 1: Purchase one large facility, requiring one large initial investment ▶ Alternative 2: Add capacity incrementally in smaller chunks as needed

56. 7 - 56© 2014 Pearson Education Optimum (Best) Operating Level ▶ The Best Operating Level is the output that results in the lowest average unit cost ▶ Economies of Scale: ▶ Where the cost per unit of output drops as volume of output increases ▶ Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material ▶ Diseconomies of Scale: ▶ Where the cost per unit rises as volume increases ▶ Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity

57. Capacity of a process The capacity of the process is: minimum throughput rate at any of the stages (bottleneck station). Use the capacity at an underutilized process step to increase the capacity at a bottleneck What is the capacity of this process? 3 units/hr5 units/hr2 units/hr

58. What is a bottleneck? Which task is the bottleneck? If a system is not perfectly balanced, there will be potential idle time at the non-bottleneck parts of the process. 3 units/hr5 units/hr2 units/hr Bottleneck is the process stage with the smallest throughput rate (longest cycle time)

65. Batch Size (Lot Size) and Setup Time When a process can be utilized to produce different product types, batch size and setup time become important issues Batch Size: Number of units of a particular product type that will be produced before beginning production of another product type. Setup Time: Time spent arranging and loading tools, setting machine speeds, etc. Before starting to process another type of product. Note that setup time is fixed and independent of the number of units to be produced. Run time is proportional to the batch size. To be efficient, often large batch sizes accompany to larfge setup time. Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

66. Example 1 : hammer production process Description 1.Work begins at the machining center. Here two lines form the heads of the hammers and place them in a buffer. 2.Handles are attached at the assembly step. 3.Finished hammers are sent to the next stage, where they are packed and shipped. assembly pack and ship machining WIP

67. Process Data: machining: Set up 80 min. 4 min per unit processing. Batch size 200. Identical lines. assembly: Manual by two workers (no set up). Each hammer requires 40 min processing. 34 workers available. pack and ship: 30 min set up, 2 min per unit processing. Lot sizes of 100. assembly pack and ship machining WIP Let’s analyze the hammer process…

68. Capacity Analysis Which stage is bottleneck? What is the hourly capacity? Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

69. Example 2 : bicycle production process Suppose a manufacturer makes bicycles composed of a body, a steering wheel and two wheels. Demand for the bicycles is 500 a week. The wheel production capacity is 1200 wheels a week, the steering wheel production capacity is 450 a week, and the final assembly department can produce 550 bicycles a week. Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).

70. Questions a) What is the capacity of the factory? b) What limits the throughput of the factory? c) How many wheels should be produced each week? d) What is the utilization of wheel production operation? e) What happens if the utilization in wheel production department is increased to 100%? Roy D. Shapiro, Core Reading: Process Analysis, HBP No. 8007 (Boston: Harvard Business School Publishing, 2013).