BUSINESS MANAGEMENT 3230:

INTRODUCTION TO OPERATIONS MANAGEMENT

Session 2 : Process Design and Analysis

Professor Gökçe Esenduran
Spring 2013
 What have we learned so far?
2

 Alignment of decisions through time, across and

through different levels of the organization impact
competitive performance.

 Operations strategy should be aligned with other

functional strategies and the competitive priorites.

 Strategy, competitive priorities and core competencies

influence the processes firms use to satisfy customers.

BM 3230 - Process Design and Analysis

 Process Choice
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 Process choice involves numerous decisions

regarding the relationships among
workers, technology, inputs, and job
assignments.

BM 3230 - Process Design and Analysis

 Major process decisions that impact the
selection of process alternatives
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 Process Structure: how processes are designed, technology

used, resources needed, and their key characteristics.
 Customer Involvement: the extent of customer participation
in design and delivery.
 Resource Flexibility: the ability to handle a wide variety of
products, output levels, duties, and functions.
 Capital and Labor Intensity: It is the mix of equipment and
human skills in a process.

BM 3230 - Process Design and Analysis

 Process Strategy Decisions
5 Process Structure
• Customer-contract position
(services)
• Product-process position
(manufacturing)
Customer Involvement • Layout Resource Flexibility
• Low involvement • Specialized
• High involvement • Enlarged

Capital Intensity
• Low automation
• High automation

Strategy for Change

• Process reengineering
• Process improvement

Effective
Process Design
Bus Mgt 3230: Intro to Operations
 Continuum of Characteristics
6
More like More like
manufacturing services
Pure Goods Core Goods Core Services Pure Services

• Tangible, durable product • Intangible, perishable product

• Output that can be inventoried • Output that cannot be inventoried
• Time lag between production and • Simultaneous ‘production’ and
consumption consumption
• Low customer contact • High customer contact/involvement
• Long response time • Short response time
• Regional, national or int’l mkts • Local markets
• Large facilities • Small facilities
• Capital intensive • Labor intensive
• Quality easily measured • Quality not easily measured

BM 3230 - Process Design and Analysis

7 I. Service Delivery Systems

BM 3230 - Process Design and Analysis

 Service Package
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 Supporting facilities: the physical resources that must be in

place to provide the service
 Facilitating goods: Material purchased or consumed by the
customer while receiving the service
 Explicit services: Benefits readily observable by customer and
an essential feature of the service
 Implicit services: Psychological benefits that the customer may
vaguely sense or are nonessential features of the service
 Information: data needed to provide the service

BM 3230 - Process Design and Analysis

8
 A Well Designed Service System is…
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1. Consistent with competitive priorities

2. User friendly
3. Robust
4. Consistent performance is possible
5. Links ‘front’ and ‘back’ office processes
6. Evidence of quality (value) is visible to customers
7. Cost effective
BM 3230 - Process Design and Analysis
 ‘Moment of Truth’
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Point of customer and provider interaction that allows

a customer to form (or change) their impression of the
provider
 Moment of Magic: exceed expectations

 Moment of Mediocrity: meet expectations

 Moment of Misery: below expectations

BM 3230 - Process Design and Analysis

 Service Triangle
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Strategy

Customers

Systems Staff

BM 3230 - Process Design and Analysis

 Process Structures in Services
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 A good process strategy in services depends on the type and

amount of customer contact and involvement
 Need to create the appropriate service ‘moment of truth’
High contact Customer Dimension Low contact
Present Customer presence Absent

People What is processed Objects

Active, visible Contact intensity Passive, out of sight

Personal Attention Impersonal

In person Delivery mode

BM 3230 - Process Design and Analysis
Electronic, remote
 Customer Involvement – Pros & Cons
13

 PROS: More customer contact will impact quality,

delivery, flexibility and cost.
 Face-to-face contact allows customers to ask questions, provide
clarification, and make special requests.
 Can also be self-service
 CONS: Customer involvement can be disruptive and make
processing inefficient
 requires higher skilled and flexible workers
 more difficult to measure quality
 Technology can change the way customers and providers
interact http://www.youtube.com/watch?v=gQBFaVfBi9w

BM 3230 - Process Design and Analysis

 Three Service Designs
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 Production-Line approach
 Delivery is more like manufacturing than service
 McDonald’s, course registration
 Self-Service approach
 Customer does more of the service for themselves
 On-line banking, buffet restaurant
 Personal-Attention approach
 More face-to-face, customized and individual
 Up scale salon, tailor/seamstress

BM 3230 - Process Design and Analysis

 Service-Process Matrix
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Low
Service Factory . Service Shop .

• Movie theatres • Hospitals - Medical

• Airlines • Auto Repair

Intensity
• Hotels • Gourmet restaurants
• Fast Food

Low Customer Involvement High

Mass Service
Labor
.
Professional Service
• Retail Stores • Physicians
• Wholesalers • Lawyers
• Schools • Accountants
• Hospitals - Surgical

High
From Operations & Supply Chain Management for the 21st Century, 1st ed., Boyer & Verma
BM 3230 - Process Design and Analysis
 Customer Interaction:
17
Process HIGH Interaction LOW Interaction
Characteristics HIGH customization HIGH standardization
High
Higher variability,
flexibility,
complexity, and
customer
involvement, visible
Complexity

Hybrid office

Higher
standardization,
more routine,
simplification, out
of sight
Low
Customization
High Low
 Customer Interaction:
Major Process Decisions
18

High customer-contact processes

• More complexity, more divergence,
more flexible flows
• More customer contact
• More resource flexibility
• Capital intensity varies with volume
Hybrid office

Low customer-contact processes

• Less complexity, less divergence, more
fixed or line flows
• Less customer involvement
• Less resource flexibility
• Capital intensity varies with volume

from Operations Management: Processes & Value Chains, 8th Ed., Krajewski, Ritzman, & Malhotra

BM 3230 - Process Design and Analysis

Front Office Back Office
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BM 3230 - Process Design and Analysis

 Group Activity I:
Service Process Examples
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 Front office

 Back office

BM 3230 - Process Design and Analysis

 How to improve the customer experience?
Using Behavioral Science
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 Front end of encounter ≠ back end of encounter

 Preference for improvement, end on a high note
 Segment the pleasure; combine the pain
 Segments seem longer; combinations seem shorter
 Let the customer control the process
 Control enhances satisfaction
 Pay attention to norms and rituals
 Deviations can lead to failures
 People are easier to blame than systems/procedures
 Let the punishment fit the crime
 Task errors = monetary compensation;
 Interpersonal treatment errors = apology

BM 3230 - Process Design and Analysis

22 II. Product Delivery Systems

BM 3230 - Process Design and Analysis

 Strategies for Production
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Engineer to order (ETO): No processing begins until the design is

completed.

Make to order (MTO): Begin processing only after receiving a

customer order.

Assemble to order (ATO): Begin processing prior to receiving

customer order; complete after receiving
customer order.
Make to stock (MTS): Complete processing prior to, and hold
until, receipt of customer order.
BM 3230 - Process Design and Analysis
 ETO
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BM 3230 - Process Design and Analysis

 MTO
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Tailored suit Custom cake

Prescription lens

Specialized equipment
Airplane
BM 3230 - Process Design and Analysis
 ATO and MC
BM 3230 -
Process Design
and Analysis

‘blank’ cake
Serve yourself salad bar Custom Nikes

Monogrammed bags
Michael Dell watching production
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 MTS
BM 3230 -
Process Design
and Analysis

27
 Strategies for Production
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Engineer To Make To Assemble Make To

Order Order To Order Stock
Longer Delivery Time Shorter
Raw Finished
Inventory
Materials Goods

High/Flexible Labor Skill Level Low

General Type of Equipment Specialized

Low Volumes High

High Customization Low

BM 3230 - Process Design and Analysis
 Product-Process Matrix
29 More customized Equipment intensive and
low volume/ high variety highly specialized,
Process (ETO, MTO) high volume/low variety
High Characteristics (MTS)

Less connected Project

Flexibility, unit cost, customer involvement

processes, workers
are more skilled and
flexible Job Shop.
Wk Cntr
Mass
Batch, Customization (MC)
Mfg cell (ATO)

Line flow
Highly connected
processes,
standardized, Continuous
volume driven
Low flow
Volume, capital investment
Low High
 Product-Process Matrix:
Major Process Decisions
30

Low-volume, make-to-order processes

• More complexity, more divergence, more Project
flexible flows
• More customer involvement Job Shop.
• More resource flexibility Wk Cntr
• Less capital intensity
Batch, Mass
Mfg cell Customization
High-volume, make-to-stock processes
• Less complexity, less divergence, more
fixed flows Line flow
• Less customer involvement
• Less resource flexibility
• More capital intensity Continuous
flow

Adapted from Operations Management: Processes & Value Chains, 8th Ed., Krajewski, Ritzman, & Malhotra

BM 3230 - Process Design and Analysis

 Product-Process Matrix:
How do these link together?
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 Cost
 Low cost (price), High cost (price) Project
 Quality
 Consistent quality, Superior quality Job Shop.
 Time Wk Cntr
 On-time/reliable delivery
 Delivery speed Batch, Mass
 New products/services Mfg cell Customization
 Flexibility
 Customization Line flow
 Variety/Mix
 Volume flexibility
 Others? Continuous
 Service (before/after sale) flow
 Social & Environmental Concerns
 Returns/Reverse Supply Chains, Certifications/Registrations
BM 3230 - Process Design and Analysis
 Group Activity II:
Identify the following
32

 Orange juice production

 Formula 1 or ‘Indy’ race car
 Kitchen appliances
 Shoes (designer vs. ‘Croc’)
 OSU’s BusMgt 630 class
 Come up with your own examples of each…
 Project
 Job shop
 Batch
 Line
 Continuous
 Mass Customization

BM 3230 - Process Design and Analysis

 King Sooper Layout

33

BM 3230 - Process Design and Analysis Operations Management: Processes and

Value Chains 8th ed., (2007), Krajewski,
Ritzman & Malhotra
 Group Activity III:
King Sooper video
34

Bread Pastry Cakes

Volume
Product diversity
Capital intensity
Capacity changes
Flexibility
Set up costs
Labor costs
Employee skills
Ability to stop flow
Order winners
Process choice
BM 3230 - Process Design and Analysis
35 Process Decision Making
Break-Even Analysis

BM 3230 - Process Design and Analysis

 A process analysis technique:
Break-Even Analysis
36

 Break-even analysis: a mathematical technique that

allows a comparison of total costs for different
processes
 This technique takes the fixed costs of buying or
developing a process or technology, adds the
variable costs for producing each unit, and finds the
break-even point at which the cost of two or more
processes is equal.

BM 3230 - Process Design and Analysis

 Break-Even Analysis
37

Total Revenue = Total Cost

 Q is the volume of customers or units
 V is the unit variable cost
 F is fixed costs
 R is the revenue per unit
 V*Q is the total variable cost
 Total cost = F + V*Q
 Total revenue = R*Q
 Break-even is when: R*Q = F + V*Q or Q = F / (R-V)

BM 3230 - Process Design and Analysis

 Break-Even Analysis can tell you…
38

 If a forecasted sales volume is sufficient to break

even (no profit or no loss).
 How low 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.

BM 3230 - Process Design and Analysis

 Hospital Example
39

 A hospital is considering a new procedure to be

offered at $200 per patient. The fixed cost per
year would be $100,000, with total variable costs
of $100 per patient.
 What is the break-even quantity for this service?

Q = F / (R - V) = 100,000 / (200-100) = 1,000 patients

BM 3230 - Process Design and Analysis

 Quantity Total Annual Total Annual
(patients) Cost ($) Revenue ($)
Hospital Example (Q) (100,000 + 100Q) (200Q)
0 100,000 0
40 2000 300,000 400,000

400 – (2000, 400)

Total annual revenues

300 –
(2000, 300)
Dollars (in thousands)

Total annual costs

200 –

100 –
Fixed costs

0– | | | |
500 1000 1500 2000
Patients (Q)
BM 3230 - Process Design and Analysis
 Quantity Total Annual Total Annual
(patients) Cost ($) Revenue ($)
Hospital Example (Q) (100,000 + 100Q) (200Q)
0 100,000 0
41 2000 300,000 400,000

400 – (2000, 400)

Total annual revenue Profit

300 –
(2000, 300)
Dollars (in thousands)

Total annual cost

200 –
Break-even quantity

100 –
Loss Fixed costs

0– | | | |
500 1000 1500 2000
Patients (Q)
BM 3230 - Process Design and Analysis
 What did we in this Chapter?
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 What is the right process for your operations?

 Depends on customer involvement, resource flexibility and
capital/labor intensity
 Service Delivery Systems
 Service Package
 Customer Interaction: Front office vs. Back office
 Service Process Matrix
 Labor Intensity and Customer Involvement
 Product Delivery Systems
 Product Process Matrix
 MTO, MTS , ATO and ETO strategies
 Break Even Analysis
BM 3230 - Process Design and Analysis
 For the next class…
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 Capacity Planning
 Read KRM Ch 6; p.201-213
 Practice examples 6.1, 6.2

BM 3230 - Process Design and Analysis