OMGT2228

Operations Management
Week 5

Process Design and

Location Strategies

Outline

1. Process Design

Process Strategies

Four Process Strategies

Tools for Process Analysis and Design

Selection of Technology

Technology in Services

2. Location Strategy

Factors that Affect Location Decisions

Methods of Evaluating Location Alternatives

The Factor-Rating Method
Locational Break-Even Analysis
Center-of-Gravity Method
Transportation Model
3

Process Design
http://www.youtube.com/watch?v=0YG
F5R9i53A&feature=fvst

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 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
6

Process Strategies
Four basic strategies
1. Process focus
2. Repetitive focus
3. Product focus
4. Mass customization
Within these basic strategies there are
many ways they may be implemented
7

1. 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
8

Process Focus

(low volume, high variety,

intermittent processes)

Many inputs
(surgeries, sick patients,
baby deliveries, emergencies)

Many departments and

many routings

Hospital

Many different outputs

(uniquely treated patients)
9

2. 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
10

Repetitive
Focus

Raw materials and

module inputs
(multiple engine models,
wheel modules)

Few
modules

(modular)
Harley Davidson

Modules combined for many

Output options
(many combinations of motorcycles)

11

3. Product Focus
Facilities are organized by product
High volume and low variety of
products
Long, continuous production runs
enable efficient processes
Typically high fixed cost but low
variable cost
Generally less skilled labor
12

Few Inputs
(corn, potatoes, water,
seasoning)

Product Focus

Output variations in size,

shape, and packaging

13

Product Focus
D

Continuous caster

Scrap
steel

Nucor Steel Plant

B
Ladle of molten steel

Continuous cast steel

sheared into 24-ton slabs
Hot tunnel furnace - 300 ft

Electric
furnace

Hot mill for finishing, cooling, and coiling

14

4. 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
15

Mass Customization
Item
Vehicle models
Vehicle types
Bicycle types
Software titles
Web sites
Movie releases per year
New book titles
Houston TV channels
Breakfast cereals
Items (SKUs) in
supermarkets
LCD TVs

Number of Choices
1970s
21st Century
140
18
8
0
0
267
40,530
5
160
14,000

286
1,212
211,000
400,000
162,000,000
765
300,000
185
340
150,000

102

16

Mass
Customization

Many parts and

component inputs
(chips, hard drives,
software, cases)

Many modules

(high-volume, high-variety)
Dell Computer

Many output versions

(custom PCs and notebooks)
17

Tools for Process Analysis and

Design
Flow Charts - Shows the movement of
materials
Time-Function Mapping - Shows flows and
time frame
Value-Stream Mapping - Shows flows and
time and value added beyond the
immediate organization
Process Charts - Uses symbols to show
key activities

18

Process Analysis and Design

Flow Charts - Shows the movement of
materials

Chart from: http://faculty.washington.edu

19

Baseline Time-Function Map

Print

Wait

WIP

Warehouse

Plant B

Wait

Extrude

Wait
Product

WIP

Plant A

Product

Wait
Order

Production
control

Product

Process
order

WIP

Sales

Receive
product

WIP

Order
product

Order

Customer

Move

Transport
12 days

13 days

1 day

4 days

1 day 10 days

Move
1 day

0 day

1 day

52 days
20

Value-Stream Mapping

21

Process Chart

22

Selection of Technology
Often complex decisions
Possible competitive advantage
Flexibility
Stable processes

23

Production Technology
Machine technology
Automatic identification
systems (AISs)
Process control
Vision system
Robot
Automated storage and retrieval systems
(ASRSs)
Automated guided vehicles (AGVs)
Computer-integrated manufacturing (CIM)
24

Machine Technology
Increased precision
Increased productivity
Increased flexibility
Improved environmental impact
Reduced changeover time
Decreased size
Reduced power requirements
25

Automatic Identification
Systems (AISs)
Improved data acquisition
Reduced data entry errors
Increased speed
Increased scope
of process
automation
Example Bar codes and RFID
26

Process Control
Real-time monitoring and control of
processes
Sensors collect data
Devices read data
on periodic basis
Measurements translated into digital
signals then sent to a computer
Computer programs analyze the data
Resulting output may take numerous
forms
27

Vision Systems
Particular aid to inspection
Consistently
accurate
Never bored
Modest cost
Superior to
individuals performing the same
tasks
28

Robots
Perform monotonous or dangerous
tasks
Perform tasks
requiring significant
strength or
endurance
Generally enhanced
consistency and
accuracy
29

Automated Storage and

Retrieval Systems (ASRSs)
Automated
placement and
withdrawal of
parts and
products
Reduced errors
and labor
Particularly
useful in
inventory and
test areas of
manufacturing
firms
Source: http://www.iblogku.com

30

Automated Guided Vehicle

(AGVs)
Electronically
guided and
controlled carts
Used for
movement of
products and/or
individuals
http://www.jbtc-agv.com

31

Computer-Integrated
Manufacturing (CIM)
Computer controls both the
workstation and the material handling
equipment.
Backwards to engineering and inventory
control
Enhance flexibility
Forward into warehousing and shipping
Can also include financial and customer
service areas
32

Technology in Services
Service Industry

Example

Financial
Services

Debit cards, electronic funds transfer, ATMs,

Internet stock trading, on-line banking via
cell phone

Education

Electronic bulletin boards, on-line journals,

WebCT, Blackboard and smart phones

Utilities and
government

Automated one-man garbage trucks, optical

mail and bomb scanners, flood warning
systems, meters allowing homeowners to
control energy usage and costs

Restaurants and
foods

Wireless orders from waiters to kitchen,

robot butchering, transponders on cars that
track sales at drive-throughs

Communications Interactive TV, ebooks via Kindle 2

33

Technology in Services
Service Industry

Example

Hotels

Electronic check-in/check-out, electronic

key/lock system, mobile web booking

Wholesale/retail
trade

ATM-like kiosks, point-of-sale (POS)

terminals, e-commerce, electronic
communication between store and supplier,
bar coded data, RFID

Transportation

Automatic toll booths, satellite-directed

navigation systems, WiFi in automobile

Health care

Online patient-monitoring, online medical

information systems, robotic surgery

Airlines

Ticketless travel, scheduling, Internet

purchases, boarding passes twodimensional bar codes on smart phones
34

Location Strategy
The objective of location strategy is
to maximize the benefit of location
to the firm

35

Location Strategy
One of the most important decisions a
firm makes
Increasingly global in nature
Significant impact on fixed and
variable costs
Decisions made relatively infrequently
The objective is to maximize the
benefit of location to the firm
36

Location Decisions
Long-term decisions
Decision greatly affects both fixed
and variable costs
Once committed to a location,
many resource and cost issues
are difficult to change

37

Location Decisions
Country Decision

Key Success Factors

1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic
issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and
currency risks
38

Global Competitiveness Index of Countries

Country
Switzerland
Singapore
Findland
Sweden
Netherland
Germany
USA
UK
Hong Kong
Japan
Australia

2012 Rank
1
2
3
4
5
6
7
8
9
10
20

http://www.weforum.org/issues/global-competitiveness

39

Location Decisions
Region/
Community
Decision

Key Success Factors

1. Corporate desires
2. Attractiveness of region
3. Labor availability and costs
4. Costs and availability of utilities
5. Environmental regulations
6. Government incentives and
fiscal policies
7. Proximity to raw materials and
customers
8. Land/construction costs

Figure from :http://wwp.greenwichmeantime.com/time-zone/australia/

40

Location Decisions
Site Decision

Key Success Factors

1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues

Figure from: http://www.goway.com/downunder/australia/victoria/

41

Factors That Affect

Location Decisions
1. Labor productivity
Wage rates are not the only cost
Lower productivity may increase total cost
Labor cost per day (labor content)
= Cost per unit
Productivity (units per day)
Output
Input

= Productivity

Example:
A company producing coils pays $70 per day with 60 produced per day in Sydney. It
will pay less on Melbourne with $25 per day with production of 20 units per day.
Based on the given data which city is more attractive?

Sydney
$70
60 units

= $1.17 (cost) per unit

Melbourne
$25
20 units

= $1.25 (cost) per unit

42

Factors That Affect

Location Decisions
2. Exchange rates and currency risks
Can have a significant impact on costs
Rates change over time

3. Costs
Tangible - easily measured costs such as
utilities, labor, materials, taxes
Intangible - less easy to quantify and
include education, public transportation,
community, quality-of-life
43

Factors That Affect

Location Decisions
2. Exchange rates and currency risks
Can have a significant impact on cost
Location
structure
decisions
based
Rates change over
time

on costs alone
can
create
Tangible - easily measured costs such as
difficult
ethical
utilities, labor, materials,
taxes
Intangible - less easysituations
to quantify and

3. Costs

include education, public transportation,

community, quality-of-life

44

Factors That Affect

Location Decisions
4. Political risk, values, and culture
National, state, local governments
attitudes toward private and intellectual
property, zoning, pollution, employment
stability may be in flux
Worker attitudes towards turnover, unions,
absenteeism
Globally cultures have different attitudes
towards punctuality, legal, and ethical
issues
45

Ranking Corruption
Least
Corrupt
2012
Ranking
Rank Country
Denmark
1
1
Finland
1
New Zealand
4
Sweden
5
Singapore
6
Switzerland
7
Australia
7
Norway
9
Canada
9
Netherlands
11
Iceland

Most
Corrupt

http://cpi.transparency.org/cpi2012/results/

46

Factors That Affect

Location Decisions
5. Proximity to markets
Very important to services
JIT systems or high transportation costs
may make it important to manufacturers

6. Proximity to suppliers
Perishable goods, high transportation
costs, bulky products

47

Factors That Affect

Location Decisions
7. Proximity to competitors
Called clustering
Often driven by resources such as natural,
information, capital, talent
Found in both manufacturing and service
industries

48

Methods of Evaluating Location Alternatives

1. Factor-Rating Method
Popular because a wide variety of factors
can be included in the analysis
Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Recommend the location with the highest
point score

49

Factor-Rating Method Example

An entertainment company based in US has decided to expand its
operations by opening its first park in Europe. It wishes to select
between France and Denmark. The following rating sheet lists key
success factors that management has decided are important. Their
weightings and their rating are shown in the following table. Using a
Factor-Rating Method which country is preferable?
Key
Scores
Success
(out of 100)
Factor
Weight France Denmark
Labor
availability
and attitude

.25

70

60

People-tocar ratio

.05

50

60

Per capita
income

.10

85

80

Tax structure

.39

75

70

50

Factor-Rating Example
Key
Success
Factor
Labor
availability
and attitude
People-tocar ratio
Per capita
income
Tax structure
Education
and health
Totals

Scores
(out of 100)
Weight France Denmark

Weighted Scores
France
Denmark

.25

70

60

.05

50

60

.10
.39

85
75

80
70

(.10)(85) = 8.5 (.10)(80) = 8.0

(.39)(75) = 29.3 (.39)(70) = 27.3

.21

60

70

(.21)(60) = 12.6 (.21)(70) = 14.7

1.00

(.25)(70) = 17.5 (.25)(60) = 15.0

(.05)(50) = 2.5

70.4

(.05)(60) = 3.0

68.0
51

2. Locational Break-Even Analysis

Method of cost-volume analysis used for
industrial locations
Three steps in the method
1. Determine fixed and variable costs for
each location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume

52

Locational Break-Even Analysis Example

Three locations: Akron, Bowling Green and Chicago
Question: Based on expected volume of 2000 units which
location should be selected? What about 2500 units? 500?
Here is more information:
Selling price = $120
Expected volume = 2,000 units

City
Akron
Bowling Green
Chicago

Fixed Variable
Cost
Cost
$30,000
$75
$60,000
$45
$110,000
$25

Total
Cost
$180,000
$150,000
$160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

53

Locational Break-Even Analysis

Example Solution

Annual cost

Total cost = 30,000+75(volume)

$180,000

$160,000
$150,000
e

curv
t
s
o
$130,000
go c
a
c
i
Ch
$110,000
n
ree

G
g ve
wlin cur
t
$80,000 Bo cos t
s

co
$60,000 ron ve
r
Ak cu

Akron
$30,000
Bowling Green
lowest
lowest cost

cost
$10,000
|
|
|
|
|

0
500
1,000
1,500
2,000

Total cost = 60,000+45(volume)

Total cost = 110,000+25(volume

Chicago
lowest
cost
|

2,500

3,000

Volume
54

3. Center-of-Gravity Method
Finds location of distribution
center that minimizes distribution
costs
Considers
Location of markets
Volume of goods shipped to those
markets
Shipping cost (or distance)
55

Center-of-Gravity Method
Place existing locations on a
coordinate grid
Grid origin and scale is arbitrary
Maintain relative distances

Calculate X and Y coordinates for

center of gravity
Assumes cost is directly
proportional to distance and
volume shipped
56

Center-of-Gravity Method
dixQi
x - coordinate =

Qi
i

diyQi
y - coordinate =

Qi
i

where

dix =
x-coordinate of
location i
diy =
y-coordinate of
location i
Qi =
Quantity of goods

57

Center-of-Gravity Method: Example

Discount Depart Stores a chain of four large Target-type
outlets, has store locations in Chicago, Pittsburgh, New York,
and Atlanta. They are currently being supplied out of an old and
inadequate warehouse in Pittsburgh. The firm wants to find
some central location in which to build a new warehouse.
The Demand rate at each outlet are given in the following table:

Using Center of Gravity method find a suitable location for new

location
No. of Container shipped
warehouse toStore
minimise
the delivery
time.
per month
Chicago
Pittsburgh
New York
Atlanta

2000
1000
1000
2000

58

Center-of-Gravity Method
North-South

New York (130, 130)

Chicago (30, 120)

120

Pittsburgh (90, 110)

90
60
30

Atlanta (60, 40)

30
Arbitrary
origin

60

90

120

150

East-West

59

Center-of-Gravity Method
Number of Containers
Store Location
Shipped per Month
Chicago (30, 120)
2,000
Pittsburgh (90, 110)
1,000
New York (130, 130)
1,000
Atlanta (60, 40)
2,000
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
60

Center-of-Gravity Method
North-South

New York (130, 130)

Chicago (30, 120)

120

Pittsburgh (90, 110)

90

Center of gravity (66.7, 93.3)

60
30

Atlanta (60, 40)

30
Arbitrary
origin

60

90

120

150

East-West

61

4. Transportation Model
Finds amount to be shipped from
several points of supply to several
points of demand
Solution will minimize total
production and shipping costs
A special class of linear
programming problems (discussed in

detail in OMGT2146 Supply Chain Analysis and

Design)
62

Worldwide Distribution of
Volkswagens and Parts

63

Question?

64