Capacity

Operations Management
School of Engineering
The University of the Thai
Chamber of Commerce
UTCC
Product and Service Design

The University of the Thai Chamber of Commerce
UTCC
UTCC
Agenda
The need for product and service design or
redesign
Sources of ideas for design or redesign
Design elements for both manufacturing and
service.
UTCC
Product and Service Design

Major factors in design strategy
Cost
Quality
Time-to-market
Customer satisfaction
Competitive advantage
Product and service design or redesign should be
clo se ly tie d to a n o rg a n iza tio n s stra te g y
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Product or Service Design Activities

Translate customer wants and needs into product
and service requirements (Hospital, Toyota)
Refine existing products and services
Develop new products and services
Formulate quality goals
Formulate cost targets
Construct and test prototypes
Document specifications
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Refine existing products and services
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Develop new products and services

Understanding the customer
Economic change: low or high demand, excessive warranty
claims, the need to reduce costs
Social and demographic: aging baby boomers, population
shifts
Political, liability, or legal: government changes, safety issues,

new regulations
Competitive: new or changes products or services, new
advertising/promotions
Technological: in product components example, mobile
phone, artificial organs
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Objectives of Product and Service Design

Main focus
Customer satisfaction
Secondary focus
Function of product/service
Cost/profit
Quality
Appearance
Ease of production/assembly
Ease of maintenance/service
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Legal, Ethical, and Environmental Issues

Legal
Food and Drug Administration (FDA), Occupational Health
and Safety Administration (OSHA), (automotive pollution
standard and safety feature, air bags, seat belts)
Product liability (tire, battery)
Uniform commercial code
Ethical
Releasing products with defects (software)
Environmental is a new different strategy

Environmental Protection Agency (EPA) , body shop
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Regulations & Legal Considerations

Product Liability - A manufacturer is liable for any
injuries or damages caused by a faulty product.
Uniform Commercial Code - Products carry an
implication of merchantability and fitness.
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Designers Adhere to Guidelines

Produce designs that are consistent with the
goals of the company
Give customers the value they expect
Make health and safety a primary concern:
employees, workers, customers
Consider potential harm to the environment
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Other Issues in Product and Service Design
Product / service life cycles (newspaper, fashion )

How much standardization
Product / service reliability
Range of operating conditions
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Life Cycles of Products or Services

Figure 4.1
Saturation
Demand
Maturity
Decline
Growth
Introduction
Time
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Product / service life cycles

Introduction Phase (R&D, product development,
process modification and enhancement, sale man
development)
Growth Phase (forecast need of customers,
increase manufacturing)
Maturity Phase (added innovation, control cost )
Decline Phase
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Standardization
Standardization
Extent to which there is an absence of variety in a
product, service or process
Standardized products are immediately available

to customers
Standardized products are made in large
quantities of identical items; calculators, automatic
car wash, GM car models.
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Advantages of Standardization
Fewer parts to deal with in inventory & manufacturing
Design costs are generally lower
Reduced time to train employee and reduced time to

design job.
More routine purchasing, handling, and inspection
procedures
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Advantages of Standardization (C ontd)

Orders fillable from inventory
Opportunities for long production runs and
automation
Need for fewer parts justifies increased
expenditures on perfecting designs and
improving quality control procedures.
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Disadvantages of Standardization
Designs may be frozen with too many
imperfections remaining.
High cost of design changes increases

resistance to improvements.
Decreased variety results in less consumer
appeal.
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Mass Customization
Mass customization:
A strategy of producing standardized
goods or services, but incorporating
some degree of customization in the
final product or service
Delayed differentiation (speed internet)
Modular design
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Delayed Differentiation
Delayed differentiation is a postponement
tactic
Producing but not quite completing a product or
service until customer preferences or
specifications are known
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Modular Design
Modular design is a form of standardization in
which component parts are subdivided into
modules that are easily replaced or interchanged.
It allows:
easier diagnosis and remedy of failures
easier repair and replacement
simplification of manufacturing and assembly
Flexibility for customers
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Reliability
Reliability: The ability of a product, part, or system to
perform its intended function under a prescribed set of
conditions
Failure: Situation in which a product, part, or system

does not perform as intended
Normal operating conditions: The set of conditions

under w hich an item s reliability is specified
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Improving Reliability
Component design
Production/assembly techniques
Testing
Redundancy/backup
Preventive maintenance procedures
User education
System design
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Issues of Product Design
Robust Design
Concurrent Engineering
Computer-Aided Design
Computer-Aided Manufacturing
Modular Design
Virtual reality technology
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Robust Design
Robust Design: Design that results in
products or services that can function over
a broad range of conditions
The more robust a product or service, the

less likely it will fail due to a change in the
environment in which it is used or in which it
is performed.
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Degree of Newness
1. Modification of an existing product/service
2. Expansion of an existing product/service
3. C lone of a com petitors product/service
4. New product/service
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Degree of Design Change

Table 4.3
Type of Design
Change
Newness of the
organization
Newness to the
market
Modification
Low
Low
Expansion
Low
Low
Clone
High
Low
New
High
High
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Phases in Product Development Process

1. Idea generation
2. Feasibility analysis: market analysis, economic analysis,
technical analysis
3. Product specifications: descriptions of what is needed to
meet or exceed customer wants
4. Process specifications
5. Prototype development
6. Design review
7. Market test
8. Product introduction
9. Follow-up evaluation
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Idea Generation
Supply chain based
Ideas
Competitor based
Research based
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Reverse Engineering
Reverse engineering is the
dismantling and inspecting
o f a co m p etito rs p ro d u ct to d isco ver
product improvements.
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Research & Development (R&D)

Organized efforts to increase scientific knowledge
or product innovation & may involve:
Basic Research advances knowledge about a subject

without near-term expectations of commercial
applications.
Applied Research achieves commercial applications.
Development converts results of applied research into
commercial applications.
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Manufacturability and Value Engineer

Manufacturability is the ease of fabrication
and/or assembly which is important for:
Decreased Cost and decreased complexity parts
Increased Productivity
Quality
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Designing for Manufacturing

Beyond the overall objective to achieve customer
satisfaction while making a reasonable profit is:
Design for Manufacturing(DFM)
T he designers consideration of the organizations
manufacturing capabilities when designing a
product.
The more general term design for operations
encompasses services as well as manufacturing
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Concurrent engineering
is the bringing together
of engineering design and
manufacturing personnel
early in the design phase.
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Manufacturing personnel are able to identify
production capabilities and capacities.
Early opportunities for design or procurement of
critical tooling, some of which might have long lead
times.
Early consideration of the technical feasibility of a
particular design or a portion of a design.
The emphasis can be on problem resolution instead
of conflict resolution.
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Computer-Aided Design
Computer-Aided Design (CAD) is product
design using computer graphics.
increases productivity of designers, 3 to 10 times
creates a database for manufacturing information

on product specifications
provides possibility of engineering and cost

analysis on proposed designs
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Computer-Aided Manufacturing
Product Quality
Production cost reductions
Shorter design time
Database availability
New range of capabilities
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Service Design
Service is an act
Service delivery system
Facilities
Processes
Skills
Many services are bundled with products
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Differences Between Product

and Service Design
Tangible intangible
Services are created and delivered at the same
time (haircut, car wash)
Services cannot be inventoried
Services highly visible to customers
Services have low barrier to entry exit
Location important to service
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Phases in Service Design

1. Conceptualize
2. Identify service package components
3. Determine performance specifications
4. Translate performance specifications into design
specifications
5. Translate design specifications into delivery
specifications
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Challenges of Service Design
Variable requirements
Difficult to describe
High customer contact
Service customer encounter
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Strategic Capacity Planning

for Products and Services
The University of the Thai Chamber of Commerce
UTCC
Agenda
The importance of capacity decisions

The measurement of capacity
How capacity requirements are determined
The development and evaluation of capacity
alternatives
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Capacity Planning
Capacity is the upper limit or ceiling on the load that an
operating unit can handle.
The operating unit might be a plant, department,
machine, store, or worker.
The goal of strategic capacity planning is to achieve a
match between the long term supply capabilities of an
organization
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?
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Importance of Capacity Decisions

1.
2.
3.
4.
5.
6.
7.
8.
Impacts ability to meet future demands

Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning
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Capacity
Design capacity
maximum output rate or service capacity an operation, process,

or facility is designed for
Maximum rate of output achieved under ideal conditions
Effective capacity
Design capacity minus allowances such as personal time,

maintenance, and scrap
Less than design capacity owing to realities.
Actual output
rate of output actually achieved--cannot exceed effective

capacity.
is often less because of machine breakdowns, absenteeism,
shortages of materials, and quality problems, as well as factors
that are outside the control of operation managers
Cannot exceed effective capacity
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Efficiency and Utilization

Efficiency =
Utilization =
Actual output
X 100
Effective capacity
Actual output
X 100
Design capacity
Both measures expressed as percentages

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Determinants of Effective Capacity

Facilities: size, provision for expansion, locational factors, labor
supply, energy sources, layout, environmental factors, lighting, heat
Product and service factors: the more uniform the output, the more
opportunities there are for standardization of methods and materials,
which leads to greater capacity.
P rocess factors; if quality of output doesnt m eet standards, the rate
of output will be slowed by the need for inspection and rework
activities
Human factors; training, skill, experience, motivation
Operational factors: inventory stocking decisions, late deliveries,
purchasing requirements, acceptability of purchased materials and
parts, and quality inspection and control procedures
Supply chain factors
External factors: Product standards
UTCC
Strategy Formulation
Capacity strategy for long-term demand

Demand patterns
Growth rate and variability
Facilities
Cost of building and operating
Technological changes
Rate and direction of technology changes
Behavior of competitors
Availability of capital and other inputs
UTCC
Key Decisions of Capacity Planning

1. Amount of capacity needed
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
Capacity cushion extra demand intended to offset uncertainty

UTCC
Steps for Capacity Planning

1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
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Determining capacity requirements
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Make or Buy
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
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Developing Capacity Alternatives

1. Design flexibility into systems
2. Take stage of life cycle into account
3. T ake a big picture approach to capacity changes
4. P repare to deal w ith capacity chunks
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
UTCC
Life Cycles of Products or Services

Figure 4.1
Saturation
Demand
Maturity
Decline
Growth
Introduction
Time
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Economies of Scale
Economies of scale
Cost per unit is the lowest for that production unit.
If the output rate is less than the optimal level, increasing
output rate results in decreasing average unit costs
Diseconomies of scale
If the output rate is more than the optimal level,
increasing the output rate results in increasing average
unit costs
UTCC
Evaluating Alternatives
Figure 5.3
Average cost per unit
Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
Minimum
cost
0
Rate of output
UTCC
Evaluating Alternatives
Figure 5.4
Average cost per unit
Minimum cost & optimal operating rate are

functions of size of production unit.
Small
plant
Medium
plant
Large
plant
Output rate
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Planning Service Capacity

Need to be near customers
Capacity and location are closely tied
Inability to store services

Capacity must be matched with timing of demand
Degree of volatility of demand

Peak demand periods
UTCC
Evaluating alternatives
Cost volume analysis
Financial analysis
Waiting line analysis
UTCC
Cost volume analysis

Focuses on relationships between cost, revenue,
and volume of output
The purpose is to estimate the income of an
organization under different operating conditions.
It is particularly useful as a tool for comparing
capacity alternatives.
UTCC
Cost-Volume Relationships
Fixed costs: tend to remain constant regardless of
volume of output
Rental costs, property taxes, equipment costs, certain
administrative costs
Variable cots: vary directly with volume of output

The major components of variable costs are generally
materials and labor costs.
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Amount ($)
Figure 5.5a
Fixed cost (FC)
0
Q (volume in units)
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Amount ($)
Figure 5.5b
Q (volume in units)
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Amount ($)
Figure 5.5c
0
BEP units
Q (volume in units)
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Example 1:
The company is contemplating adding a new line of pies,

which will require leasing new equipment for a monthly
payment of $6,000. variable costs would be $2.00 per
pie, and pies would retail for $7.00 each.
a)
b)
c)
d)
How many pies must be sold in order to break even?

What would the profit/loss be if 1,000 pies are made and sold
in a month?
How many pies must be sold to realize a profit of $4,000?
If 2,000 can be sold, and a profit target is $5,000, what price
should be charged per pie?
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Solution a.
Fixed cost = $6,000, Variable cost = $2 per pie,
Revenue = $7 per pie
Revenue = Fixed cost + Variable cost
7Q
= 6,000 + 2Q
5Q
= 6,000
Q
= 1,200 pies/month
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Solution b-c.
b.
Revenue cost
= profit/loss
7(1,000) - (6,000 + 2(1,000))
= -1,000
c
7Q (6,000 + 2Q)
=
4,000
5Q
=
10,000
Q
=
2,000 pies
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Solution d.
Revenue cost
=
profit/loss
price(2,000) (6,000 + 2(2,000)) =
5,000
Price (2,000) =
5,000 + 10,000
Price
=
$7.5
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Example 2:
A manager has the option of purchasing one, two or three
machines. Fixed costs and potential volumes are as
follows:
Number of
machines
Total annual fixed cost
Corresponding range
of output
$9,600
0 to 300
$15,000
301 to 600
$20,000
601 to 900
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Example 2:
a. Determine the break-even point for each range.
b. If projected annual demand is between 580 and
660 units, how many machines should the
manager purchase?
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Break-Even Problem with Step Fixed Costs

Figure 5.6a
3 machines
2 machines
1 machine
Quantity
Step fixed costs and variable costs.

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Solution
a. Revenue
=
40 (quantity) =
cost
9,600 + 10(quantity)
Ans. 320 (not in range, so there is no BEP, 500,

666.67 units)
b. Two machines
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Break-Even Problem with Step Fixed Costs

Figure 5.6b
$
BEP
TC
BEP2
TC
3
TC
2
1
Quantity
Multiple break-even points
UTCC
Assumptions of Cost-Volume Analysis

1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same regardless
of volume
4. Fixed costs do not change with volume, or
they are step changes
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per
unit
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Financial Analysis
Cash Flow - the difference between cash
received from sales and other sources, and cash
outflow for labor, material, overhead, and taxes.
Present Value - the sum, in current value, of all
future cash flows of an investment proposal.
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Problem 1:
A firm s m anager m ust decide w hether to m ake or buy a
certain item used in the production of vending machines.
Making would involve annual lease cost of $150,000. Cost
and volume estimates are as follows:
Make
Buy
Annual fixed costs
$150,000
None
Variable cost/unit
$60
$80
Annual volume (units)
12,000
12,000
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Problem 1
a. Give these numbers, should the firm buy or make
this item?
b. There is a possibility that volume could change in
the future. At what volume would the manager be
indifferent between making and buying?
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Solution 1:
a. Determine the annual cost of each alternatives
total cost = fixed cost + volume x variable cost
Make: 150,000 + 12,000 (60) =
$870,000
Buy: 0 + 12,000 (80)
=
$960,000
The manager would reasonably choose to make

the item.
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Solution 1:
b. Total cost (make)
150,000 + Q(60)
20Q
Q
=
=
=
=
total cost (buy)

0 + Q(80)
150,000
7,500 units
therefore, at a volume of 7500 units a year, the

manager would be indifferent between making
and buying. The lower volumes, the choice would
be to buy, and for higher volumes, the choice
would be to make.
UTCC
Problem 2:
A small firm produces and sells automotive items in
a five state area. The firm expects to consolidate
assembly of its battery charges line at a single
location. Currently, operations are in three widely
scattered locations. The leading candidate for
location will have monthly fixed cost of $42,000 and
variable costs of $3 per charger. Chargers sell for
$7 each.
What is break-even point?
Determine profit when volume equals 22,000 units?
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Solution 2:
a. 10,500 units per month.
b. $46,000
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Problem 3:
A manager must decide which type of equipment to buy,
Type A or Type B. Type A equipment costs $15,000 each,
and Type B costs $11,000 each. The equipment can be
operated 8 hrs a day, 250 days a year.
Either machine can be used to perform two types of
chemical analysis, C1 and C2. Annual service requirements
and processing times are shown in the following table.
UTCC
Problem 3:
Analysis Type
Annual volume
Processing time per analysis (HR)

A
C1
1,200
C2
900
Which type of equipment should be purchased, and

How many of that type will be needed? The goal is to
minimize total purchase cost.
UTCC
Solution 3:
Analysis Type
C1
1,200
2,400
C2
2,700
1,800
Total
3,900
4,200
Total processing time available per piece of equipment is 8 hrs/day x 250

days/year = 2,000. Hence, one piece can handle 2,000 hrs of analysis, two
pieces of equipment can handle 4,000 hrs, and so on.
Given the total processing requirements, two of Type A would be needed, for a
total cost 2 x $15,000 = $30,000, or three of Type B, for a total cost of 3 x
$11,000 = $33,000. Thus, two pieces of Type A would have sufficient capacity
to handle the load at a lower cost than three of Type B.
UTCC

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Operations Management

Product and Service Design

Product and Service Design

Product or Service Design Activities

Refine existing products and services

Develop new products and services

Political, liability, or legal: government changes, safety issues,

Objectives of Product and Service Design

Legal, Ethical, and Environmental Issues

Environmental is a new different strategy

Regulations & Legal Considerations

Designers Adhere to Guidelines

Other Issues in Product and Service Design

Product / service life cycles (newspaper, fashion )

Life Cycles of Products or Services

Product / service life cycles

Standardized products are immediately available

Reduced time to train employee and reduced time to

Advantages of Standardization (C ontd)

High cost of design changes increases

easier diagnosis and remedy of failures

easier repair and replacement

simplification of manufacturing and assembly

Flexibility for customers

Failure: Situation in which a product, part, or system

Normal operating conditions: The set of conditions

Issues of Product Design

Virtual reality technology

The more robust a product or service, the

Degree of Design Change

Phases in Product Development Process

Research & Development (R&D)

Basic Research advances knowledge about a subject

Manufacturability and Value Engineer

Decreased Cost and decreased complexity parts

Designing for Manufacturing

increases productivity of designers, 3 to 10 times

creates a database for manufacturing information

provides possibility of engineering and cost

Many services are bundled with products

Differences Between Product

Phases in Service Design

Challenges of Service Design

Strategic Capacity Planning

The importance of capacity decisions

Importance of Capacity Decisions

Impacts ability to meet future demands

maximum output rate or service capacity an operation, process,

Design capacity minus allowances such as personal time,

rate of output actually achieved--cannot exceed effective

Efficiency and Utilization

Both measures expressed as percentages

Determinants of Effective Capacity

Capacity strategy for long-term demand

Key Decisions of Capacity Planning

Capacity cushion extra demand intended to offset uncertainty

Steps for Capacity Planning

Determining capacity requirements

Developing Capacity Alternatives

Life Cycles of Products or Services

Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit

Average cost per unit

Minimum cost & optimal operating rate are