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Measuring and Managing
Process Performance
Chapter 7
Facility Layout Systems
There are three general types of facility designs:
– Process Layouts
– Product Layouts
– Group Technology
Regardless of the type of facility design, a central
goal of the design process is to streamline
operations and thus increase the operating income
of the system
Process Layouts
All similar equipment or functions are grouped together
Production of unique products is done in small batches
Product follows a serpentine path, usually in batches
High inventory levels
Products might travel for several miles within a factory
during the production process
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WIP Accumulation
Work-in-process inventory accumulates at processing
stations in a conventional organization for three reasons:
– Handling work in batches
– If the rate at which each processing area handles work
is unbalanced, work piles up at the slowest processing
station
– If processing area managers are evaluated on their
ability to meet production quotas
Product Layouts
In a product layout, equipment is organized to
accommodate the production of a specific product
Product layouts exist primarily in companies with high-
volume production
The product moves along an assembly line beside which
the parts to be added to it have been stored
Placement of equipment or processing units is made to
reduce the distance that products must travel
Group Technology
The organization of a plant into a number of cells
Within each cell all machines required to manufacture
a group of similar products are arranged in close
proximity to each other
The machines in a cellular manufacturing layout are
usually flexible and can be adjusted easily or even
automatically to make different products
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Group Technology
The shape of a cell is often a U shape
The number of employees needed to produce a product
can often be reduced due to the new work design
U shape also provides better visual control of the work
flow
Problems with Batch Production
Creates inventory costs
Creates delays associated with storing and moving
inventory
– These delays increase cycle times, thereby reducing
service to customers
Delays may even happen before manufacturing begins
The Theory of Constraints (TOC)
TOC maintains that operating income can be increased
by carefully managing the bottlenecks in a process
– A bottleneck is any condition that impedes or constrains the
efficient flow of a process
– A bottleneck can be identified by determining points at which
excessive amounts of work-in-process inventories are
accumulating
– The buildup of inventories also slows the cycle time of
production
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Theory of Constraints
The theory of constraints relies on the use of three
measures
1. Throughput contribution is the difference between
revenues and direct materials for the quantity of
product sold
2. Investments equal the materials costs contained in
raw materials, work-in-process, and finished goods
inventories
3. Operating costs are all other costs, except for direct
materials costs, that are needed to obtain throughput
contribution
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Theory of Constraints
Emphasis is on the short-run optimization of
throughput contribution
Assumes that operating costs are difficult to alter in
the short run
ABC focuses on longer term cost optimization
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Contribution Margin
When faced with a bottleneck it can be helpful to
determine what the contribution margin is “per unit” of the
bottleneck.
The total contribution is limited by the quantity available,
so the goal is to maximize the CM for the amount of
bottleneck.
This may result in producing an item with a lower CM per
unit, because the bottleneck limits production
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Inventory-Related Costs
Demands for inventory lead to huge costs in
organizations, including the cost of moving, handling,
storing, obsolescence, and damage
Factory layouts and inefficiencies that create the need to
hold work-in-process inventory may hide other problems
leading to excessive costs of rework
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Processing time
Processing time—time expended for the product to be
made
Processing cycle efficiency (PCE)—measure of the
efficiency of the manufacturing process
PCE = Processing Time
Processing Time + Moving Time
+ Storage Time + Inspection Time
Processing time is the only value adding time
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Cost of Nonconformance and Quality Issues
Cost reduction has become a significant factor in the
management of most organizations
The premise underlying cost reduction efforts today is to
decrease costs while maintaining, or improving
product quality in order to be competitive
If the quality of products and services does not conform
to quality standards, then the organization incurs a cost
known as the cost of nonconformance (CONC) to
quality standards
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Quality
Quality usually may be viewed as hinging on two major
factors:
– Satisfying customer expectations regarding the
attributes and performance of the product
– Ensuring that the technical aspects of the product’s
design and performance conform to the
manufacturer’s standards
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Quality Standards
Global competition has led to the development of
international quality standards
Company certification under these standards indicates to
customers that management has committed their
company to follow procedures and processes that will
ensure the production of the highest-quality goods and
services
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Costs Of Quality Control
Classification of quality costs:
1. Prevention costs
2. Appraisal costs
3. Internal failure costs
4. External failure costs
Experience shows that it is much less expensive to
prevent defects than to detect and repair them after they
have occurred
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1. Prevention Costs
Prevention costs are incurred to ensure that companies
produce products according to quality standards:
– Quality engineering
– Training employees in methods designed to maintain
quality
– Statistical process control
– Training and certifying suppliers so that they can
deliver defect-free parts and materials and better,
more robust, product designs
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2. Appraisal Costs
Appraisal costs relate to inspecting products to make
sure they meet both internal and external customers’
requirements
Inspection costs of purchased parts and materials
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3. Internal Failure Costs
An internal failure occurs when the manufacturing
process detects a defective component or product before
it is shipped to an external customer
Reworking defective components or products is a
significant cost of internal failures
The cost of downtime in production is another example
of internal failure
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4. External Failure Costs
External failures occur when customers discover a
defect
All costs associated with correcting the problem
For many companies, this is the most critical quality
cost to avoid
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Cost-of-Quality Report
This information is compiled in a cost-of-quality (COQ)
report, developed for several reasons
The report illustrates the financial magnitude of quality
factors
Cost-of-quality information helps managers set priorities
for the quality issues and problems they should address
The cost of quality report allows managers to see the big
picture of quality issues
It allows them to try to find the root causes of their quality
problems
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Kaizen Costing
Also focused on cost-reduction
Focuses on reducing costs during the manufacturing
stage of the total life cycle of a product
Kaizen is the Japanese term for making improvements to
a process through small, incremental amounts rather
than through large innovations
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Concerns About Kaizen Costing
The system places enormous pressure on employees to
reduce every conceivable cost
Kaizen costing leads to incremental rather than radical
process improvements
– This can cause myopia as management tends to focus
on the details rather than the overall system
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Benchmarking
A way for organizations to gather information regarding
the best practices of others
Often highly cost effective
Selecting appropriate benchmarking partners is a critical
aspect of the process
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