Chapter 3 - Product
Design & Process
Selection
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
© 2010 Wiley 1
Learning Objectives
Define product design and explain
its strategic impact on organizations
Describe steps to develop a product
design
Using break-even analysis as a tool
in selecting between alternative
products
Identify different types of processes
and explain their characteristics
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Product Design & Process
Selection - defined
Product design – the process of defining all of the companies
product characteristics
Product design must support product manufacturability
(the ease with which a product can be made)
Product design defines a product’s characteristics of:
•appearance,
• tolerances, and
•materials,
• performance
•dimensions,
standards.
Process Selection – the development of the process
necessary to produce the designed product.
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Design of Services versus
Goods
Service design is unique in that the service
and entire service concept are being
designed
must define both the service and concept
- Physical elements, aesthetic &
psychological benefits
e.g. promptness, friendliness, ambiance
Product and service design must match the needs
and preferences of the targeted customer group
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The Product Design
Process
Idea development: all products
begin with an idea whether from:
customers,
competitors or
suppliers
Reverse engineering: buying a
competitor’s product
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Product Design Process
Idea developments selection affects
Product quality
Product cost
Customer satisfaction
Overall manufacturability – the ease
with which the product can be made
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The Product Design Process
Step 1 - Idea Development - Someone thinks of a need and a
product/service design to satisfy it: customers, marketing,
engineering, competitors, benchmarking, reverse
engineering
Step 2 - Product Screening - Every business needs a
formal/structured evaluation process: fit with facility and
labor skills, size of market, contribution margin, break-even
analysis, return on sales
Step 3 – Preliminary Design and Testing - Technical
specifications are developed, prototypes built, testing starts
Step 4 – Final Design - Final design based on test results,
facility, equipment, material, & labor skills defined,
suppliers identified
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Product Screening Tool –
Break-Even Analysis
Computes the quantity of goods
company needs to sell to cover its
costs
QBE = F/ (SP - VC)
QBE – Break even quantity
F – Fixed costs
SP – selling price/unit
VC – Variable cost
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Product Screening Tool –
Break-Even Analysis con’t
Break-even analysis also includes
calculating
Total cost – sum of fixed and variable cost
Total cost = F + (VC)*Q
Revenue – amount of money brought in from
sales
Revenue = (SP) * Q
Q = number of units sold
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Break-Even Analysis: Graphical
Approach
Compute quantity of goods
that must be sold to break-
even
Compute total revenue at
an assumed selling price
Compute fixed cost and
variable cost for several
quantities
Plot the total revenue line
and the total cost line
Intersection is break-even
Sensitivity analysis can be
done to examine changes in
all of the assumptions made
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Break-Even Example:
A company is planning to establish a chain of
movie theaters. It estimates that each new
theater will cost approximately $1 Million. The
theaters will hold 500 people and will have 4
showings each day with average ticket prices
at $10. The variable costs in labor and
material are estimated to be $6 per patron.
They will be open 300 days each year. What
must average occupancy be to break-even?
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Break-even calculation: A company is planning to establish a chain of
movie theaters. It estimates that each new theater will cost approximately
$1 Million. The theaters will hold 500 people and will have 4 showings
each day with average ticket prices at $10. The variable costs in labor and
material are estimated to be $6 per patron. They will be open 300 days
each year. What must average occupancy be to break-even?
Break-Even Point
Total revenues = Total costs @ break-even point Q
Selling price*Q = Fixed cost + variable cost*Q
($8+$2)Q= $1,000,000 + $6*Q
Q = 250,000 ticket (42% occupancy)
What is the gross profit if they sell 300,000 tickets
Profit = Total Revenue – Total Costs
P = $10*300,000 – (1,000,000 + $6*300,000)
P = $200,000
If the average ticket price is $8.5, what is break-
even Q now? (sensitivity analysis)
($8.50)Q = 1,000,000 - $6*Q
Q = 400,000 ticket (67% occupancy)
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Types of Processes
Intermittent processes:
Processes used to produce a variety of
products with different processing
requirements in lower volumes. (such
as healthcare facility)
Repetitive processes:
Processes used to produce one or a
few standardized products in high
volume. (such as a cafeteria, or car
wash)
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