Chapter Five

Process Design and Capacity Planning

Chapter overview
 We now turn to production process.
 A major decision for an operations manager is finding the best way to produce so as not
to waste our planet's resources.
 A process
Group of related tasks with specific inputs and outputs.
Exist to create value for the customer, the shareholder, or society.
 Process design defines what tasks need to be done and how they are to be coordinated
among functions, people, and organizations.
 Processes are planned, analyzed, and redesigned as required by changes in strategy and
emerging technology Let's look at ways to help managers design a process for achieving
this goal.
5.1. PROCESS STRATEGIES
 A process (or transformation) strategy is an organization's approach to transforming
resources into goods and services.
 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.
 The process selected will have a long-term effect on efficiency and flexibility of
production, as well as on cost and quality of the goods produced.
 Therefore, the limitations of a firm's operations strategy are determined at the time of the
process decision.
 Virtually every good or service is made by using some variation of one of four process
strategies: (1) process focus, (2) repetitive focus, (3) product focus, and (4) mass
customization.
 The relationship of these four strategies to volume and variety is shown in Figure 7.1. We
examine

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1. Process Focus
 Devoted to making low-volume, high-variety products in places called "job shops."
 Such facilities are organized around specific activities or processes.
o In a factory, these processes might be departments devoted to welding, grinding, and
painting.
o In an office, the processes might be accounts payable, sales, and payroll. In a
restaurant, they might be bar, grill, and bakery.
o Such facilities are process focused in terms of equipment, layout, and supervision.
 They provide a high degree of product flexibility as products move between processes.
 Each process is designed to perform a wide variety of activities and handle frequent
changes.
 Consequently, they are also called intermittent processes. Process-focused facilities
have high variable costs with extremely low utilization of facilities, as low as 5%. This
is the case for many restaurants, hospitals, and machine shops.

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2. Repetitive Focus
 A repetitive process falls between the product and process focuses.
 Repetitive processes use modules.
 Modules are parts or components previously prepared, often in a continuous process.
 The repetitive process is the classic assembly line.
 Widely used in the assembly of virtually all automobiles and household appliances, it
has more structure and consequently less flexibility than a process focused facility.
 Fast-food firms are another example of a repetitive process using modules.
 This type of production allows more customizing than a product-focused facility;
modules (for example, meat, cheese, sauce, tomatoes, onions) are assembled to get a
quasi-custom product, a cheeseburger.
 In this manner, the firm obtains both the economic advantages of the continuous
model.

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3. Product Focused
 High-volume, low-variety processes are product focused.
 The facilities are organized around products.
 They are also called continuous processes, because they have very long, continuous
production runs.
 Products such as glass, paper, tin sheets, light bulbs, beer, and potato chips are made via a
continuous process.
 The specialized nature of the facility requires high fixed cost, but low variable costs
reward high facility utilization.

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4. Mass Customization Focus
 Mass customization is the rapid, low-cost production of goods and services that fulfill
increasingly unique customer desires.
 But mass customization is not just about variety; it is about making precisely what the
customer wants when the customer wants it economically.
 Mass customization brings us the variety of products traditionally provided by low-
volume manufacture (a process focus) at the cost of standardized high-volume (product-
focused) production.
 However, achieving mass customization is a challenge that requires sophisticated
operational capabilities. Building agile processes that rapidly and inexpensively produce
Requirements to Achieve Mass Customization

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Comparison of Process Choices

Advantages exist across the continuum of processes, and firms may find strategic advantage in any
process. Each of the processes, when properly matched to volume and variety, can produce a low cost
advantage. For instance, unit costs will be less in the continuous-process case when high volume (and
high utilization) exists. However, we do not always use the continuous-process (that is, specialized
equipment and facilities) because it is too expensive when volumes are low or flexibility is required. A
low-volume, unique, highly differentiated good or service is more economical when produced under
process focus; this is the way fine-dining restaurants and general-purpose hospitals are organized. Just as
all four processes, when appropriately selected and well managed, can yield low cost, so too can all four
be responsive and produce differentiated products.

Process Focus Repetitive Focus Product Focus Mass Customization

(Low volume, high (Modular) (High-volume, low (High-volume, high-
variety) variety) variety)
Small quantity, large Long runs, standardized Large quantity, small Large quantity, large
variety of products product made from modules variety of products variety of products
General purpose Special equipment aids in Special purpose equipment Rapid changeover on
equipment use of assembly line flexible equipment

Operators are broadly Employees are modestly Operators are less broadly Flexible operators are
skilled trained skilled trained for the necessary
customization
Many job instructions Repetition reduces training Few work orders and job Custom orders require
as each job changes and changes in job instructions because jobs many job instructions
instructions standardized
Raw material JIT procurement techniques Raw material inventories Raw material inventories
inventories high used are low are low

Work-in-process is high JIT inventory techniques Work-in-process inventory Work-in-process inventory

used is low driven down by JIT, lean
production
Units move slowly Movement is measured in Swift movement of unit Goods move swiftly
through the plant hours and days through the facility is through the facility
typical
Finished goods made to Finished goods made to Finished goods made to Finished goods often
order frequent forecast forecast and stored build-to-order (BTO)

Scheduling is complex, Scheduling based on Relatively simple Sophisticated scheduling

trade-offs between building various models scheduling, establishing required to accommodate
inventory, availability, from a variety of modules to output rate to meet forecasts custom orders
customer service forecasts
Fixed costs low, Fixed costs dependent on Fixed costs high, variable Fixed costs high, variable
variable costs high flexibility of the facility costs low costs must be low

Costing estimated Costs usually known due to High fixed costs mean costs High fixed costs and
before job, known only extensive experience dependent on utilization of dynamic variable costs
after the job capacity make costing a challenge

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 Crossover Charts
The comparison of processes can be further enhanced by looking at the point where the total
cost of the processes changes.
Example
Kleber Enterprises would like to evaluate three accounting software products (A, B and C) to
support changes in its internal accounting processes. The cost of the software for these processes
is:
Total fixed cost Dollars required per
accounting report
Software A $ 200,000 $60
Software B $300,000 $25
Software C $400,000 $10
Solve the crossover point for software A and B, and then the crossover point for software B and
C.

Example 2
Jeff, the more optimistic of the two owners of Up Right Paddlers, believes
that demand for paddle boards will exceed the breakeven point of 40 units.
He proposes spending $10,000 in fixed costs to buy more automated
equipment that would reduce the materials and labor cost to $30 per board.
The boards would sell for $100, regardless of which manufacturing process is
chosen. Compare the two processes and determine for what level of demand

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each process would be preferred. Label Travis’ proposal as Process A, and
Jeff’s proposal as Process B.

5.2. PROCESS ANALYSIS AND DESIGN

When analyzing and designing processes, we ask questions such as the following:
Is the process designed to achieve competitive advantage in terms of differentiation,
response, or low cost?
Does the process eliminate steps that do not add value?
Does the process maximize customer value as perceived by the customer?
Will the process win orders?
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.

A number of tools help us understand the complexities of process design and redesign. They are
simply ways of making sense of what happens or must happen in a process. Let's look at five of
them: flow chart, time-function mapping, value-stream mapping, process charts, and service
blueprinting.
1. Flow Chart
 Schematic or drawing of the movement of material, product, or people.
 Such charts can help understanding, analysis, and communication of a process.
2. Time-function Mapping
 A second tool for process analysis and design is a flowchart, but with time added on the
horizontal axis.
 Such charts are sometimes called time function mapping, or process mapping.
 With time-function mapping, nodes indicate the activities and the arrows indicate the
flow direction, with time on the horizontal axis.
 This type of analysis allows users to identify and eliminate waste such as extra steps,
duplication, and delay.
 The Figure shows the use of process mapping before and after process improvement at
American National Can Company. In this example, substantial reduction in waiting
time and process improvement in order processing contributed to a savings of 46 days.

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3. Value Stream Mapping
o A variation of time-function mapping is value stream mapping (VSM);
o However, value-stream mapping takes an expanded look at where value is added (and not
added) in the entire production process, including the supply chain.
o As with time-function mapping, the idea is to start with the customer and understand the
production process, but value-stream mapping extends the analysis back to suppliers.
Example
Motorola has received an order for 11,000 cell phones per month and wants to understand how
the order will be processed through manufacturing. To fully understand the process from
customer to supplier, Motorola wants to prepare a value steam map shown in Figure 7.6.

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Solution
a) Begin with symbols for customer, supplier, and production to ensure the big picture.
b) Enter customer order requirements.
c) Calculate the daily production requirements.
d) Enter the outbound shipping requirements and delivery requirements.
e) Determine inbound shipping method and delivery frequency.
f) Determine the process steps (i.e., machine, assemble) in sequence, left to right.
g) Add communication methods, and their frequency, and show the direction with arrows.
h) Add inventory quantities between every step of the entire flow.
i) Determine total working time (value added time) and delay (non-value added time).

4. Process Flow Charts

 The fourth tool is the process chart.
 Process charts use symbols, time, and distance to provide an objective and structured
way to analyze and record the activities that make up a process.
 They allow us to focus on value-added activities.
 For instance, the process chart shown in Figure 7.7, which includes the present method
of hamburger assembly at a fast-food restaurant, includes a value-added line to help us
distinguish between value-added activities and waste.

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  Identifying all value-added operations (as opposed to inspection, storage, delay, and
transportation, which add no value) allows us to determine the percent of value added to
total activities.
 We can see from the computation at the bottom of Figure 7.7 that the value added in this
case is 85.7%. The operations manager's job is to reduce waste and increase the percent
of value added. The non value-added items are a waste; they are resources lost to the firm
and to society forever.

5. Service Blue Printing

 Products with high service content may warrant use of yet a fifth process technique.
 Service blueprinting is a process analysis technique that focuses on the customer and the
provider's interaction with the customer.
 In the second level are activities of the service provider interacting with the customer.
 The third level includes those activities that are performed away from, and not
immediately visible to, the customer.
 Each level suggests different management issues. For instance,
 The top level may suggest educating the customer or modifying expectations,
 The second level may require a focus on personnel selection and training.
 The third level lends itself to more typical process innovations.

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Each of these five process analysis tools has its strengths and variations.
 Flowcharts are a quick way to view the big picture and try to make sense of the entire
system.
 Time-function mapping adds some rigor and a time element to the macro analysis.
 Value-stream mapping extends beyond the immediate organization to customers and
suppliers.
 Process charts are designed to provide a much more detailed view of the process, adding
items such as value-added time, delay, distance, storage, and so forth.
 Service blueprinting, on the other hand, is designed to help us focus on the customer
interaction part of the process.
Because customer interaction is often an important variable in process design, we now examine
some additional aspects of service process design.
5.3. SPECIAL CONSIDERATIONS FOR SERVICE PROCESS DESIGN
1. Customer Interaction and Process Design
The four quadrants of Figure 5.9 provide additional insight on how operations managers design
service processes to find the best level of specialization and focus while maintaining the
necessary customer interaction and customization.

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Upper Quadrants
mass service and professional service,
labor content is high
We expect the manager to focus extensively on human resources.
kThis is often done with personalized services, requiring high labor involvement and
therefore significant selection and training issues in the human resources area.
This is particularly true in the professional service quadrant.
Lower Quadrants
 The quadrants with ,low customization tend to
(1) Standardize or restrict some offerings, as do fast-food restaurants,
(2) Automate, as have airlines with ticket-vending machines, or
(3) Remove some services, such as seat assignments, as has Southwest Airlines.
 Require innovations in process design as well as capital investment. Such is the case with
airline ticket vending and bank ATMs.
 A reduction in a customization capability will require added strength in other areas.
Because customer feedback is lower in the quadrants with low customization, tight control
may be required to maintain quality standards.
 Operations with low labor intensity may lend themselves particularly well to innovations in
process technology and scheduling.

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 2. Additional techniques for innovative process design in services

Strategy Technique Example

Separation Structure service so customers must go where Bank customers go to a manager to

service is offered open a new account, to loan officers
for loans, and to tellers for deposits

Self-service Self-service so customers examine, compare, and Supermarkets and department

evaluate at their own pace stores, Internet ordering

Postponement Customizing at delivery Customizing vans at delivery rather

than at production

Focus Restricting the offerings Limited-menu restaurant

Modules Modular selection of service, modular production Investment and insurance selection,
prepackaged food modules in
restaurants

Automation Separating services that may lend themselves to Automatic teller machines
automation

Scheduling Precise personnel scheduling Scheduling ticket counter personnel

at 15-minute intervals at airlines

Training Clarifying the service options, explaining how to Investment counselor, funeral
avoid problems directors, after-sale maintenance
personnel

5.4. SELECTION OF EQUIPMENT AND TECHNOLOGY

Ultimately, the decisions about a particular process require decisions about equipment and
technology. That choice of equipment requires considering the following criteria:
a) Purchase Cost
 Basic purchase price  maintenance,
 The cost of special tools  and engineering or
and fixtures, programming
 Installation adjustments
 Training
b) Operating Costs To assess more accurately the requirements of the new
technology, it is useful to consider, step-by-step, how the equipment will
be operated, started, stopped, loaded, unloaded, changed over,
upgraded, networked, maintained, repaired, cleaned up, speeded up, and
slowed down.
c) Annual Savings most new technology is justified based on
 Direct labor savings.
 Use less material and require less machine time or fewer repairs,
so that downtime is reduced.
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  A process that produces a better-quality product can result in
fewer inspections and less scrap and rework.
 New processes (especially those that are automated) may
significantly reduce safety costs, in terms of compliance with
required regulations, as well as fines or compensation for safety
violations.
d) Revenue Enhancement
Improvements in product quality, price reductions due to decreased costs,
and more rapid or dependable delivery can increase market share and, thus,
revenue.
e) Replacement Analysis
Replacement analysis maps out different schedules for equipment purchases
over a two to five year period and selects a replacement cycle that will
minimize cost.
f) Risk and Uncertainty
Estimates of equipment capabilities, length of life, and operating cost may
be uncertain. Because of the risk involved, financial analysts tend to assign
higher hurdle rates (i.e., required rates of return) to technology investments,
making it difficult to gain approval for them.

5.5. PRODUCTION1ECHNOlOGY
Advances in technology that enhance production and productivity have a wide range of
applications in both manufacturing and services. Technology is important in both manufacturing
and service operations. In this section, we present a brief overview of technology advances in
manufacturing systems.
Manufacturing Technology
CNC Computer Numerically Machines controlled by software code to perform a variety
Controlled of operations with the help of automated tool changers;
also collects processing information and quality data

FMS Flexible Manufacturing A collection of CNC machines connected by an automated

material handling system to produce a wide variety of
System parts

AVG Automatic Guided A driverless truck that moves material along a specified
path; directed by wire or tape embedded in the floor or by
Vehicle radio frequencies; very flexible

ASRS Automated Storage and An automated warehouse—some 26 stories high—in which

items are placed in a carousel-type storage system and
Retrieval System retrieved by fast-moving stacker cranes; controlled by
computer
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CIM Computer Integrated Automated manufacturing systems integrated through
computer technology; also called e-manufacturing
Manufacturing
AISs Automatic
Improved data acquisition, Reduced data entry errors, Increased
Identification Systems speed, Increased scope of process automation

Robots Manipulators that can be programmed to perform

repetitive
tasks; more consistent than workers but less flexible
Process Continuous monitoring of automated equipment; makes
real-time decisions on ongoing operation, maintenance,
Control
and quality
Vision Vision systems combine video cameras and computer technology and are
often used in inspection roles
systems

Technology in Services
Financial Services Debit cards, electronic funds transfer, ATMs, Internet stock trading

Education Electronic bulletin boards, on-line journals, WebCT and Blackboard

Utilities and Automated one-man garbage trucks, optical mail and bomb scanners, flood warning
government systems
Restaurants and foods Wireless orders from waiters to kitchen, robot butchering, transponders on cars that track
sales at drive-throughs

Communications Electronic publishing, interactive TV

Hotels Electronic check-in/check-out, electronic key/lock system

Wholesale/retail trade ATM-like kiosks, point-of-sale (POS) terminals, e-commerce, electronic communication
between store and supplier, bar coded data
Transportation Automatic toll booths, satellite-directed navigation systems
Health care Online patient-monitoring, online medical information systems, robotic surgery

Airlines Ticketless travel, scheduling, Internet purchases

5.6. Capacity planning

 Capacity is the "throughput," or the numbers of units a facility can hold, receive, store, or
produce in a given time.
 Capacity decisions often determine capital requirements and therefore a large portion of
'fixed cost’.
 Capacity also determines whether demand will be satisfied or whether facilities will be
idle.
 If a facility is too large, portions of it will sit unused and add cost to existing production.
 If a facility is too small, customers-and perhaps entire markets-will be lost.
Capacity planning can be viewed in three time horizons.
a) Long-range capacity
 Greater than 1 year
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  is a function of adding facilities and equipment that have a long lead time.
b) In the intermediate range
 3 to 18 months,
 We can add equipment, personnel, and shifts; we can subcontract; and we can build
or use inventory.
 This is the "aggregate planning" task.
c) In the short run
Usually up to 3 months
we are primarily concerned with scheduling jobs and people, as well as allocating
machinery.
Modifying capacity in the short run is difficult, as we are usually constrained by
existing capacity.
Design and Effective Capacity
a) Design capacity
 The maximum theoretical output of a system in a given period under ideal conditions.
 It is normally expressed as a rate, such as the number of tons of steel that can be
produced per week, per month, or per year.
 It is the maximum number of units the company is capable of producing in a specific
time. However, for some organizations, determining capacity can be more difficult
b) Effective capacity
 the capacity a firm expects to achieve given the current operating constraints.
 Effective capacity is often lower than design capacity because the facility may have
been designed (or an earlier version of the product or a different product mix than is
currently being produced.
Efficiency and Utilization
a) Utilization
 Simply the percent of design capacity actually achieved.
b) Efficiency
 The percent of effective capacity actually achieved.
 Depending on how facilities are used and managed, it may be difficult or impossible to
reach 100% efficiency.
 Operations managers tend to be evaluated on efficiency.
 The key to improving efficiency is often found in correcting quality problems and in
effective scheduling, training, and maintenance.

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Utilization and efficiency are computed below:
Utilization = Actual output/Design capacity
Efficiency = Actual output/Effective capacity
Design capacity, utilization, and efficiency are all important measures for an operations
manager. But managers often need to know the expected output of a facility or process. To do
this, we solve for actual (or in this case, future or expected) output as shown below:
Actual (or Expected) output = (Effective capacity) (Efficiency)
Expected output is sometimes referred to as rated capacity. With knowledge of effective
capacity and efficiency, a manager can find the expected output of a facility. If the expected
output is inadequate, additional capacity may be needed. Much of the remainder of this chapter
addresses how to effectively and efficiently add that capacity.
Example-1
Sara James Bakery has a plant for processing deluxe breakfast rolls and wants to better
understand its capacity. Last week, the facility produced 148,000 rolls. The effective capacity is
175,000 rolls. The production line operates 7 days per week, with three 8-hour shifts per day.
The line was designed to process Deluxe rolls at a rate of 1200 per hour.
Required: Determine the design capacity, utilization, and efficiency for this plant when
producing this Deluxe roll.
Example-2
The manager of Sara James Bakery now needs to increase production of deluxe roll. To meet,
this demand, she will add a second production line. The manager must determine the expected
output of this second line for the sales department.
Effective capacity of this line= 175,000
Operating efficiency= 75%
What is the expected output of this line?
Managing Demand
Even with good forecasting and facilities built to that forecast, there may be a poor match
between the actual demand that occurs and available capacity. A poor match may mean demand
exceeds capacity or capacity exceeds demand. However, in both cases, firms have options.
Case 1: Demand Exceeds Capacity
When demand exceeds capacity, the firm may be able to curtail demand simply by
 Raising prices,
 scheduling long lead times (which may be inevitable), and
 Discouraging marginally profitable business.
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 However, because inadequate facilities reduce revenue below what is possible, the long-term
solution is usually to increase capacity.
Case 2: Capacity Exceeds Demand
When capacity exceeds demand, the firm may want to stimulate demand through
 price reductions
 aggressive marketing, or
 Product changes
 Layoffs and plant closings.
Evaluating Capacity Alternatives
A. Cost-volume-profit/Breakeven Analysis Alternatives
B. Decision Theory
A. Cost-volume-profit/Breakeven Analysis Alternatives
Break-even analysis is the critical tool for determining the capacity a facility must have to
kachieve profitability. The objective of break-even analysis is to find the point, in dollars and
units, at which costs equal revenue. This point is the break-even point. Firms must operate above
this level to achieve profitability.

Example 1: Single Product Case

Stephen, Inc. wants to determine the minimum dollar volume and unit volume needed at its new
facility to break even. The first the firm determines that it has a fixed cost of $10,000 this period.
Direct labor cost is $ 1.5 per unit and material is $0,75 per unit. The selling price is $ 4.00 per
unit.

Example 2: Multiple Product case

Le Bistro makes three types of products and would like to know its breakeven point in dollars.
Details are as follows:

Item Price Cost Annual Forecasted sales

Sandwich $5.00k $3.00 9,000

Drinks $1.50 $0.50 9,000

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Baked Potato $2.00 $1.00 7000

B) Decision Theory

Example
A firm is weighing three capacity alternatives: small, medium, and large job shop. Whatever
capacity choice is made, the market for the firm's product can be "moderate" or "strong." The
probability of moderate acceptance is estimated to be 40 percent; strong acceptance has a
probability of 60 percent. The payoffs are as follows. Small job shop, moderate market
=$24,000; Small job shop, strong market = $54,000. Medium job shop, moderate market =
$20,000; medium job shop, strong market = $64,000. Large job shop, moderate market = -
$2,000; large job shop, strong market = $96,000. Which capacity choice should the firm make
under each of the following decision criteria?
a) Maximax e) Equal likelihood
b) Maximin f) EMV
c) Minimax regret
d) Hurwicz (α = 0.3)
EXAMPLE 3

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5.7. Demand and Capacity Management in the Service Sector
In the service sector, scheduling customers is demand management, and scheduling the
workforce is capacity management.
Demand Management
When demand and capacity are fairly well matched, demand management can often be
handled with
 appointments,
 Reservations, or
 First-come, first-served rule.
In some businesses, such as doctors' and lawyers' offices, an appointment system is the
schedule and is adequate.

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 Reservations systems work well in rental car agencies, hotels, and some restaurants as a
means of minimizing customer waiting time and avoiding disappointment over unfilled
service.
In retail shops, a post office, or a fast-food restaurant, a first-come, first-served rule for
serving customers may suffice; each industry develops its own approaches to matching
demand and capacity.
Capacity Management
When managing demand is not feasible, then managing capacity through changes in
 Full-time,
 temporary, or
 Part-time staff may be an option.
This is the approach in many services. For instance, hospitals may find capacity limited by a
shortage of board-certified radiologists willing to cover the graveyard shifts. Getting fast and
reliable radiology readings can be the difference between life and death for an emergency room
patient.

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