Productions and Operations Management

Product Design and Process Selection

(Chapter 3)

Production & Operations Management

INFO 335-71

Week 5

2

Learning Objectives

⚫ 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

⚫ Understand how to use a process flowchart

⚫ Understand how to use process performance metrics

⚫ Understand current technology advancements and

how they impact process and product design

⚫ Understand issues impacting the design of service

operations

3

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 - based on test results, facility, equipment,

material, & labor skills defined, suppliers identified

4

Break-Even Analysis - Screening

⚫ 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

5

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 $8. They estimate that concession sales will average $2 per patron. 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?

6

Break-Even Example Calculations

⚫ 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 patrons (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 concessions only average $.50/patron, what is break-even Q now? (sensitivity analysis)

($8.50)Q = 1,000,000 - $6*Q

Q = 400,000 patrons (67% occupancy)

7

Factors Impacting Product Design

⚫ Must Design for Manufacturing – DFM

• Design parts for multiply applications (standardization) • Use modular design • Avoid tools • Simplify operations • Minimize parts/features (simplification)

⚫ Product Life Cycle

⚫ Concurrent Engineering

⚫ Remanufacturing

8

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)

9

Intermittent and Repetitive

Operations

10

Underlying Process Relationship

Between Volume and

Standardization Continuum

11

Designing Processes

⚫ Process design tools include: • Process flow analysis • Process flowchart

⚫ Design considerations include: • Make-to-stock strategy • Assemble-to-order strategy • Make-to-order strategy

12

Flowchart for Different Product

Strategies at Antonio’s Pizzeria

13

Process Performance Metrics

14

Linking Product Design &

Process Selection

⚫ Product design and process selection are directly linked

⚫ Type of product selected defines type of operation required

⚫ Type of operation available defines broader organizational aspects such as • Competitive priorities • Equipment required • Facility arrangement • Organizational structure • Product and service strategy

15

Linking Design & Process Selection

Organizational Decisions appropriate for different types of operations

Degrees of Vertical Integration &

Make or Buy

⚫ Vertical integration refers to the degree a firm chooses to do processes itself- raw material to sales • Backward Integration

means moving closer to primary operations

• Forward Integration means moving closer to customers

⚫ Make-or-Buy choices should be based on the following considerations: • Strategic impact • Available capacity • Expertise • Quality considerations • Speed • Cost (fixed cost + variable

cost)make = Cost (fixed cost + Variable cost)buy

16

17

Designing Services

⚫ Service Characteristics

• Pure services • Quasi-Manufacturing • Mixed services

⚫ Service Package

• The physical goods • The sensual benefits • The psychological

benefits

⚫ Differing designs

• Substitute technology for people

• Get customer involved • High customer attention