Chapter 6

Process, Technology and

Capacity
Operations Management - 5th Edition
Roberta Russell & Bernard W. Taylor, III
And
Chapter 8: Operations Management Krajewski and
Ritzman 6/e

Process Planning

Process
a group of related tasks with specific
inputs and outputs
Process design
Defines what tasks need to be done and
how they are coordinated among
functions, people, and organizations
Process planning
converts designs into workable
instructions for manufacture or delivery
Process strategy
an organizations overall approach for
physically producing goods and services
2

Process Strategy

Capital intensity
mix of capital (i.e., equipment, automation) and
labor resources used in production process
Process flexibility
ease with which resources can be adjusted in
response to changes in demand, technology,
products or services, and resource availability
Vertical integration
extent to which firm will produce inputs and
control outputs of each stage of production
process
Customer involvement
role of customer in production process
3

Process Planning
Process planning determines how a

product will be produced or a service

provided.
It decides which components will be
made in-house and which will be
purchased from a supplier, select
processes and develops and documents
the specifications for manufacture and
delivery.
Make-or-buy decisions
Process selection
4

Process plans

Make or Buy Decisions

Cost

Speed

Capacity

Reliability

Quality

Expertise

Sourcing Continuum

Vertical
Integration
(100%
ownership)

Joint
Venture
(equity
partner)

Strategic
Alliance
(long-term
supplier
contract;
collaborative
relationship)

Arms-Length
Relationship
(short-term contract
or
single purchasing
decision)

Source: Adapted from Robert Hayes, Gary Pisano, David Upton,

and Steven Wheelwright, Operations Strategy and Technology:
Pursuing the Competitive Edge (Hoboken, NJ: 2005), p. 120

Process Selection
Projects
one-of-a-kind production of a product to
customer order
Batch production
systems process many different jobs through
the system in groups or batches
Mass production
produces large volumes of a standard product
for a mass market
Continuous production
used for very-high volume commodity
products
7

Types of Processes
PROJECT

Type of
product
Type of
customer
Product
demand

Unique
One-at-atime

Infrequent

BATCH

Made-toorder
(customized
)
Few
individual
customers
Fluctuates

MASS

CONT.

Made-tostock

Commodity

Mass
market

Mass
market

Stable

Very stable

(standardized )

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210

Types of Processes
(cont.)
PROJECT

Demand
volume

Very low

BATCH

MASS

CONT.

Low to
medium

High

Very high

No. of
different
products

Infinite
variety

Many, varied Few

Very few

Production
system

Long-term
project

Repetitive,
Discrete, job
assembly
shops
lines

Continuous,
process
industries

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210

Types of Processes
(cont.)
PROJECT

Equipment

Varied

BATCH

MASS

CONT.

Generalpurpose

Specialpurpose

Highly
automated

Assembly

Mixing,
treating,
refining

Limited
range of
skills

Equipment
monitors

Specialized
Primary
Fabrication
type of work contracts
Worker
skills

10

Experts,
craftspersons

Wide range
of skills

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGraw-Hill, 2001), p. 210

Types of Processes
(cont.)
BATCH

MASS

CONT.

Flexibility,
quality

Efficiency,
speed,
low cost

Highly efficient,
large capacity,
ease of control

Non-repetitive,
small customer
base, expensive

Costly, slow,
difficult to
manage

Capital
investment;
lack of
responsiveness

Difficult to change,
far-reaching errors,
limited variety

Construction,
shipbuilding,
spacecraft

Machine shops,
print shops,
bakeries,
education

Automobiles,
televisions,
computers,
fast food

Paint, chemicals,
foodstuffs

PROJECT

Advantage
s
Disadvantages

Examples

Custom work,
latest
technology

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New
York:McGraw-Hill, 2001), p. 210

11

Process Selection with

Break-Even Analysis
Cost
Fixed costs

constant regardless of the number of units

produced

Variable costs
vary with the volume of units produced

12

Revenue
price at which an item is sold
Total revenue
is price times volume sold
Profit
difference between total revenue and total
cost

Process Selection with

Break-Even Analysis (cont.)
Total cost = fixed cost + total variable
cost
TC = cf + vcv
Total revenue = volume x price
TR = vp
Profit = total revenue - total cost
Z = TR TC = vp - (cf + vcv)
13

Process Selection with

Break-Even Analysis
(cont.)
TR = TC
vp = cf + vcv
vp - vcv = cf
v(p - cv) = cf
cf
v = p - cv
Solving for Break-Even Volume
14

Example
Tavis and Jeff own an adventure

15

company called Whitewater Rafting.

Because of quality and availability
problems, the two entrepreneurs have
decided to produce their own rubber
rafts. The initial investment in
equipment is estimated to be $2000.
Labour and material cost is
approximately $5 per raft. If the rafts
can be sold at a price of $10 each, what
volume of demand will be necessary to
break even?

Break-Even Analysis:
Example
Fixed cost = cf = $2,000
Variable cost = cv = $5 per raft
Price = p = $10 per raft
Break-even point is
cf
2000
v= p-c =
= 400 rafts
10 - 5
v
16

Break-Even Analysis: Graph

$3,000
Total
cost
line

$2,000

$1,000

Total
revenue
line
400
Break-even point
17

Units

Alternative Process Selection

The owners of Whitewater Rafting

18

believe demand for their product will far

exceed the break-even point. They are
now contemplating a larger initial
investment of $10,000 for more
automated equipment that would
reduce the variable cost of manufacture
to $2 per raft.
Compare the old manufacturing process
with the new process proposed here. For
what volume of demand each process
be chosen?

Process Selection
Process A
Process B
$2,000 + $5v = $10,000 + $2v
$3v = $8,000
v = 2,667 rafts

Below 2,667, choose A

Above 2,667, choose B
19

$20,000
Total cost of
process A

$15,000

Process
Selectio
n:
Graph

Total cost of
process B

$10,000

$5,000
Choose
process A
|
1000

|
2000

Choose
process B
|
3000

|
4000 Units

Point of indifference = 2,667 Units

Example 4.2
20

Process Plans
Set of documents that detail

manufacturing and service delivery

specifications
They begin with detailed drawings of
product design and includes
assembly charts or bills of materials: parts

21

and materials needed and how they are to be

assembled
operations sheets or routing sheets: listing
of operations to be performed with details on
equipment, tools, skills, etc.
quality-control check-sheets: specify quality
standards and quality data to be recorded.

Sesame seed top bun

Beef patty
Salt
Cheese

SA

Lettuce
Sauce
Onions

Assembly
AssemblyChart
Chart
for
foraaBig
BigMac
Mac

First-layer assembly

Middle bun
Beef patty
Salt
Cheese
Lettuce
Sauce
Onions
Pickles

SA

Second-layer assembly

Bottom bun
Wrapper

Completed Big Mac

6-22

An Operations Sheet for a Plastic Part

Part name

Crevice Tool

Part No.

52074

Usage

Hand-Vac

Assembly No. 520

Oper. No.

23

Description

Dept.

Machine/Tools

Time

10

Pour in plastic bits

041

Injection molding

2 min

20

Insert mold

041

#076

2 min

30

Check settings
& start machine

041

113, 67, 650

20 min

40

Collect parts & lay flat

051

Plastics finishing

10 min

50

Remove & clean mold

042

Parts washer

15 min

60

Break off rough edges

051

Plastics finishing

10 min

Process Analysis
Process analysis is the systematic

examination of all aspects of a process

to improve its operation to make it
faster, more efficient, less costly, or
more responsive to the customer.
The basic tools of process analysis are:
Process flowchart
Process diagrams
Process maps

24

Process flowcharts
Symbolic representation of

processes
Incorporate
nonproductive activities
(inspection, transportation,
delay, storage)
productive activities
(operations)
25

Process Flowchart
Symbols
Operations
Inspection
Transportation
Delay
Storage
26

Description
of
process

Unload apples from truck

Move to inspection station

Weigh, inspect, sort

Move to storage

Wait until needed

Move to peeler

Apples peeled and cored

15

Soak in water until needed

20

Place in conveyor

10

Move to mixing area

11

Weigh, inspect, sort

Page 1 0f 3

27

Location: Graves Mountain

Process: Apple Sauce
Distance
(feet)

Operation
Transport
Inspect
Delay
Storage

Step

Date: 9-30-02
Analyst: TLR

Time
(min)

Process
Flowchart
of Apple
Processing

20
100 ft
30
50 ft
360
20 ft

Total

20 ft
30
480

190 ft

Customer

Place order

Waiter

Salad Chef

Dinner Chef

Is order
complete?
Y

Give soup or salad order to chef

Prepare soup or
salad order
Prepare dinner
order

Give dinner order to chef

Drink
Eat salad or
soup

Get drinks for customer

Deliver salad or soup order to customer

Eat dinner

Deliver dinner to customer

Receives check

Deliver check to customer

Gives payment
to waiter

Receive payment for meal

Cash or
Credit?

Bring change to customer

Run credit card through

Fill in tip
amount

Return credit slip to customer

Collect tip

28

Give order
to waiter

Credit

Cash

Collect change,
leave tip

Give order
to waiter

A Process
Map of
Restaurant
Service

Service
Blueprint
for an
Installment
Lending
Operation

29

Source: Lynn Shostack, Service Positioning through Structural Change, Journal of Marketing 51 (January
1987), p. 36. Reprinted with permission by the American Marketing Association

Process Innovation
Process are planned in response to new

30

facilities, new products, new

technologies, new markets, or new
customer expectations.
Process should be analysed for
improvement on a continuous basis.
When continual improvement efforts
have been exhausted and performance
expectation still cannot be reached with
an existing process, it is time to
complete redesign or innovate the
process.

Process Innovation
Process innovation projects are typically

31

chartered in response to a breakthrough

goal for rapid, dramatic improvement in
process performance.
Process innovation is most successful in
organisations that can view their system
as a set of process providing value to
customer, instead of functional areas
vying for limited resources.
In environment of rapid change, the
ability to learn faster, reconfigure
processes faster, and execute processes

Process Innovation
Continuous improvement
refines the breakthrough

Breakthrough
Improvement

Total redesign
of a process for
breakthrough
improvements
32

Continuous improvement activities

peak; time to reengineer process

From Function to
Process

Sales

Manufacturing

Purchasing

Accounting

Product Development
Order Fulfillment
Supply Chain Management
Customer Service
Function
33

Process

Process Innovation

Customer
Customer
Requirements
Requirements

Strategic
Directives
Goals for Process
Performance

Baseline
Baseline Data
Data
Benchmark
Benchmark
Data
Data

High - level
Process map

Innovative
Innovative
Ideas
Ideas

Detailed
Process Map

Model
Model
Validation
Validation

Pilot Study
of New Design

No
34

Goals
Goals
Met?
Met?

Yes

Design
Design
Principles
Principles
Key
Key
Performance
Performance
Measures
Measures

Full Scale
Implementation

Principles for Redesigning

Processes
Remove waste, simplify, and consolidate

similar activities
Link processes to create value
Let the swiftest and most capable
enterprise execute the process
Flex process for any time, any place,
any way
Capture information digitally at the
source and propagate it through
process
35

Principles for Redesigning

Processes (cont.)
Provide visibility through fresher and

richer information about process status

Fit process with sensors and feedback
loops that can prompt action
Add analytic capabilities to process
Connect, collect, and create knowledge
around process through all who touch it
Personalize process with preferences
and habits of participants

36

Techniques for Generating

Innovative Ideas

Vary the entry point to a problem

in trying to untangle fishing lines, its best to
start from the fish, not the poles
Draw analogies
a previous solution to an old problem might
work
Change your perspective
think like a customer
bring in persons who have no knowledge of
process
37

Techniques for Generating

Innovative Ideas (cont.)
Try inverse brainstorming
what would increase cost
what would displease the customer
Chain forward as far as possible
if I solve this problem, what is the next
problem
Use attribute brainstorming
how would this process operate if. . .
our workers were mobile and flexible
there were no monetary constraints
we had perfect knowledge

38

Technology Decisions
Technology decisions involve large sums of

money and can have a tremendous impact

on the cost, speed, quality, and flexibility of
operations.
Technology defines future capabilities of a
firm and set the stage for competitive
interactions.

39

Financial justification of
technology
Technology decisions associated with

capital investment. Capital budgeting is the

tool for analysing financial justification of
technology.
Purchase cost
Operating Costs
Annual Savings
Revenue Enhancement
Replacement Analysis
Risk and Uncertainty
Piecemeal Analysis
40

Capacity Decisions
Capacity: maximum capability to produce
Capacity is the maximum rate of output for a

process. The operations manager must provide

the capacity to meet the current and future
demand. Otherwise, the organisation will miss
opportunities for growth and profits. Capacity
planning is central to the long-term success of
an organisation. Capacity plans are made at
two levels:
Long-term capacity plans deal with
investments in new facilities and equipment.
Short-term capacity plans focus on workforce
size, overtime budgets, inventories, and other
types of decisions.
41

rated capacity is theoretical

effective capacity includes efficiency and utilization

Measures of Capacity
(How should the maximum rate of output be measured?)

Capacity can be measured in one of two ways: output

measures or input measures.

Output Measures:
Units per year; customers per hour etc
Output measures are best utilised when the firm
provides a small number of standardised products
and services, or when applied to individual
processes within the firm.
As the amount of customisation and variety in the
product mix becomes excessive, output-based
capacity measures become less useful.
Input Measures:
Machine hours available; floor space for storage etc.
Input measure are the usual choice for low volume,
flexible processes.
42

Different concepts of
capacity
Peak Capacity: The maximum output
that a process or facility can achieve
under ideal conditions is called peak
capacity. Peak capacity can be
sustained for only a short time. Peak
capacity may drive up costs and
quality drops.
Rated Capacity: An engineering
assessment of maximum annual
output, assuming continuous
operation except for an allowance for
normal maintenance and repair
overtime.
Effective Capacity: The maximum
output that a process or firm can

43

Effective Capacity
Effective Daily Capacity =

(no of machines or workers) X

(hours per shift) X
(no of shifts) X
(utilisation) X
(efficiency)

44

Capacity Terms
Capacity utilization: percent of

available time spend working

Capacity efficiency: how well a
machine or worker performs compared
to a standard output level
Capacity load: standard hours of work
assigned to a facility
Capacity load percent: ratio of load
to capacity
45

Measurement

Average output rate

Utilisationpeak =
100
Peak capacity
Average output rate
Utilisationeffective =
100
Effective capacity

46

Load Percent

Load Percent =

47

Load
100%
Capacity

Capacity Planning
Capacity planning is the long-term

strategic decision that establishes a

firms overall level of resources.
It extends over a time horizon long enough to

48

obtain those resources usually a year or

more.
Capacity decisions affect product lead times,
customer responsiveness, operating costs,
and a firms ability to compete.
Inadequate capacity can lose customers and
limit growth.
Excess capacity can drain companys
resources.

Capacity Strategies
Capacity lead strategy

Capacity is expended in anticipation of

demand growth. It is aggressive strategy.
Average Capacity Strategy

Capacity is expanded to coincide with average

expected demand.
Capacity Lag Strategy

Capacity is increased after an increase in

demand has been documented.

49

Capacity Expansion Strategies

50

Capacity Decisions (cont.)

Capacity increase depends on
volume and certainty of anticipated demand
strategic objectives
costs of expansion and operation
Best operating level
% of capacity utilization that minimizes unit

costs
Capacity cushion
% of capacity held in reserve for unexpected
occurrences
51

Best Operating Level for a Hotel

52

Capacity Cushions
(How much capacity cushion is best for various
processes?)

The amount of reserve capacity that a

firm maintains to handle sudden

increases in demand or temporary
losses of production capacity; it
measures the amount by which the
average utilisation falls below of 100
percent (uses effective capacity).

Capacity cushion = 100% utilisation rate (%)

53

Large or Small Cushions

Large cushions are appropriate when:
Demand varies
Future demand is uncertain and resource
flexibility is low
Product mix changes due to varying
demands
There is supply uncertainty
Small cushions are expected when

unused capacity costs money

54

Economies of Scale
it costs less per unit to produce high

levels of output

fixed costs can be spread over a larger

number of units
production or operating costs do not increase
linearly with output levels
quantity discounts are available for material
purchases
operating efficiency increases as workers
gain experience

55

Diseconomies of Scale
Occur above a certain level of output
Diseconomies of Distribution
Diseconomies of Bureaucracy
Diseconomies of Confusion
Diseconomies of Vulnerability

56

Diseconomies of
Confusion

57

Estimate Capacity
Requirements
The foundation for estimating long-term capacity

needs is forecasts of demand, productivity,

competition, and technological changes that extend
well into future.
The demand forecast has to be converted to a
number that can be compared directly with the
capacity measure being used.
Dp
N [1 (C / 100)]
Where
M=

M = number of machines / units

D = number of units forecast per year
p = processing time per unit
N = total number of hours per year during which the process operates
C = desired capacity cushion
58

Capacity Requirements

If multiple product or services involved, extra

time is needed to change over from one

product or service to the next.
Setup time is the time required to change a
machine from making one product or service to
making another.
The total setup time is found by dividing the
number of units forecast per year (D) by the
number
units
made in each lot (Q).
[ Dp + ( D / Q)of
s ] product
1 + [ Dp + ( D / Q ) s ] product 2 + ............ + [ Dp + ( D / Q ) s ] product n

M=

Q = number of units in each lot

s = setup time (in hours) per lot

59

N [1 (C / 100)]

Problem 6-9
Soft Key is trying to determine how best to

produce its newest product, DVORK keyboards.

The keyboards could be produced in-house using
either Process A or Process B, or purchased from a
supplier. Cost data are given below. For what
levels of demand should each process be chosen?

60

Process

Fixed Cost

Variable Cost

Process A

$ 8,000

$ 10

Process B

$ 20,000

$4

Supplier

$0

$ 20

6-22
Model

The Best Wheels Bicycle

61

Company has scheduled the

production of the bicycles
given below. The two critical
work centres for producing
these bikes are welding and
assembly. Welding has an
efficiency of 95% and
utilisation of 90%. Assembly
has an efficiency of 90%
and utilisation of 92%. The
time required (in hours) by
each bike in the two work
centres is given in the table.
Assume 40 hours is
available per week for each
work center. Calculate the
capacity and load percent
per work center per week.

Week
1

(B261
0)

10
speed

50

10
0

19
5

1
5
0

(B200
3)

3 speed 15

30

65

4
5

(B200
1)

1 speed 20

40

80

6
0

Model

Welding

Assembly

B2610

0.20

0.18

B2003

0.15

0.15

B2001

0.07

0.10

Example
A copy center in an office building prepares bound

reports for two clients. The center makes multiple

copies (the lot size) of each report. The processing
time run, collate, and bind each copy depends on,
among other factors, the number of pages. The
center operates 250 days per year, with one 8 hour
shift. Management believes that capacity cushion of
15 percent is best. It currently has three copy
machines. Based on the following table of
information, determine how many machines are
needed at copy center.

62