7 - 1 Learning Modules Introduction to POM Chapters, 1, 2, & 3 Design of Goods and Services Chapter...

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OutlineOutline Four Process Strategies

Process Focus

Repetitive Focus

Product Focus

Mass Customization Focus

Capacity Break-Even Analysis

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Process StrategiesProcess Strategies

The objective of a process strategy is The objective of a process strategy is to build a production process that to build a production process that meets customer requirements and meets customer requirements and product specifications within cost product specifications within cost and other managerial constraintsand other managerial constraints

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Process, Volume, and VarietyProcess, Volume, and Variety

Process Focusprojects, job shops

(machine, print, hospitals, restaurants)

Arnold Palmer Hospital

Repetitive(autos, motorcycles,

home appliances)Harley-Davidson

Product Focus(commercial

baked goods, steel, glass, beer)

Frito-Lay

High Varietyone or few units per run,(allows customization)

Changes in Modulesmodest runs, standardized modules

Changes in Attributes (such as grade, quality, size, thickness, etc.) long runs only

Mass Customization(difficult to achieve, but huge rewards)

Dell Computer

Poor Strategy (Both fixed and variable costs

are high)

Low Volume

Repetitive Process

High Volume

Volume

Va

riety

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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

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Four basic strategies

1. Process focus

2. Repetitive focus

3. Product focus

4. Mass customization

Within these basic strategies there are Within these basic strategies there are many ways they may be implementedmany ways they may be implemented

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Process FocusProcess 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

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Process FocusProcess Focus Many inputs

(surgeries, sick patients, baby deliveries, emergencies)

Many different outputs(uniquely treated patients)

Many departments and many routings

(low volume, high variety, intermittent processes)

Arnold Palmer Hospital

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Repetitive FocusRepetitive 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

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Repetitive Repetitive FocusFocus

Raw materials and module inputs

Modules combined for manyOutput options

(many combinations of motorcycles)

Few modules

(multiple engine models, wheel modules)

(modular)

Harley Davidson

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Product FocusProduct Focus

Facilities are organized by product

High volume but low variety of products

Long, continuous production runs enable efficient processes

Typically high fixed cost but low variable cost

Generally less skilled labor

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Product FocusProduct Focus Few Inputs

(corn, potatoes, water, seasoning)

Output variations in size, shape, and packaging

(3-oz, 5-oz, 24-oz package labeled for each material)

(high-volume, low variety, continuous process)

Frito-Lay

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Product FocusProduct FocusNucor Steel Plant

Co

nti

nu

ou

s ca

ster

Continuous cast steel sheared into 24-ton slabs

Hot tunnel furnace - 300 ft

Hot mill for finishing, cooling, and coiling

D

E F

GHI

Scrap steel

Ladle of molten steelElectric furnace

A

BC

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Mass CustomizationMass 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

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Vehicle models 140 286Vehicle types 18 1,212Bicycle types 8 211,000Software titles 0 400,000Web sites 0 162,000,000Movie releases per year 267 765New book titles 40,530 300,000Houston TV channels 5 185Breakfast cereals 160 340Items (SKUs) in 14,000 150,000 supermarketsLCD TVs 0 102

Number of Choices

Item 1970s 21st Century

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Mass Mass CustomizationCustomization

Many parts and component inputs

Many output versions(custom PCs and notebooks)

Many modules

(chips, hard drives, software, cases)

(high-volume, high-variety)

Dell Computer

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Mass Customization

Effective scheduling techniques

Rapid throughput techniques

Repetitive FocusFlexible peopleand equipment

Process-FocusedHigh variety, low volume

Low utilization (5% to 25%)General-purpose equipment

Product-FocusedLow variety, high volume

High utilization (70% to 90%)Specialized equipment

Modular techniques

Accommodating Product and

Process DesignResponsive

Supply Chains

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Imaginative and fast product design

Rapid process design

Tightly controlled inventory management

Tight schedules

Responsive supply chain partners

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CapacityCapacity

The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time

Determines fixed costs

Determines if demand will be satisfied

Three time horizons

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Planning Over a Time Planning Over a Time HorizonHorizon

Figure S7.1

Modify capacity Use capacity

Intermediate-range planning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range planning

Schedule jobsSchedule personnel Allocate machinery*

Long-range planning

Add facilitiesAdd long lead time equipment *

* Difficult to adjust capacity as limited options exist

Options for Adjusting Capacity

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Design and Effective Design and Effective CapacityCapacity

Design capacity is the maximum theoretical output of a system Normally expressed as a rate

Effective capacity is the capacity a firm expects to achieve given current operating constraints Often lower than design capacity

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Economies and Economies and Diseconomies of ScaleDiseconomies of Scale

Economies of scale

Diseconomies of scale

25 - room roadside motel 50 - room

roadside motel

75 - room roadside motel

Number of Rooms25 50 75

Av

era

ge

un

it c

os

t(d

olla

rs p

er

roo

m p

er n

igh

t)

Figure S7.2

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Break-Even AnalysisBreak-Even Analysis

Technique for evaluating process and equipment alternatives

Objective is to find the point in dollars and units at which cost equals revenue

Requires estimation of fixed costs, variable costs, and revenue

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Break-Even AnalysisBreak-Even Analysis Fixed costs are costs that continue

even if no units are produced Depreciation, taxes, debt, mortgage

payments

Variable costs are costs that vary with the volume of units produced Labor, materials, portion of utilities

Contribution is the difference between selling price and variable cost

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Costs and revenue are linear functions Generally not the case in the

real world

We actually know these costs Very difficult to verify

Time value of money is often ignored

AssumptionsAssumptions

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Profit corri

dor

Loss

corridor

Break-Even AnalysisBreak-Even AnalysisTotal revenue line

Total cost line

Variable cost

Fixed cost

Break-even pointTotal cost = Total revenue

–

900 –

800 –

700 –

600 –

500 –

400 –

300 –

200 –

100 –

–| | | | | | | | | | | |

0 100 200 300 400 500 600 700 800 900 10001100

Co

st in

do

llars

Volume (units per period)Figure S7.5

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BEPx = break-even point in unitsBEP$ = break-even point in dollarsP = price per unit (after all discounts)

x = number of units producedTR= total revenue = PxF = fixed costsV = variable cost per unitTC= total costs = F + Vx

TR = TCor

Px = F + Vx

Break-even point occurs whenBreak-even point occurs when

BEPx =F

P - V

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BEPx = break-even point in unitsBEP$ = break-even point in dollarsP = price per unit (after all discounts)

x = number of units producedTR= total revenue = PxF = fixed costsV = variable cost per unitTC= total costs = F + Vx

BEP$ = BEPx P

= P

=

=

F(P - V)/P

FP - V

F1 - V/P

Profit = TR - TC= Px - (F + Vx)= Px - F - Vx= (P - V)x - F

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Break-Even ExampleBreak-Even Example

Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F

1 - (V/P)$10,000

1 - [(1.50 + .75)/(4.00)]

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Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F

1 - (V/P)$10,000

1 - [(1.50 + .75)/(4.00)]

= = $22,857.14$10,000

.4375

BEPx = = = 5,714F

P - V$10,000

4.00 - (1.50 + .75)

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50,000 –

40,000 –

30,000 –

20,000 –

10,000 –

–| | | | | |

0 2,000 4,000 6,000 8,000 10,000

Do

llars

Units

Fixed costs

Total costs

Revenue

Break-even point

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7 - 1 Learning Modules Introduction to POM Chapters, 1, 2, & 3 Design of Goods and Services Chapter...

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