OPERATIONS MANAGEMENT WITH TOTAL QUALITY

MANAGEMENT
QUIZ 2

MODULE 3 KEY QUESTIONS

PRODUCT AND SERVICE DESIGN 1. Is there a demand for it?
● Market size
STRATEGIC PRODUCT AND SERVICE ● Demand profile (long term or short term,
will it grow slowly or quickly)
DESIGN
● The essence of an organization is the
2. Can we do it?
goods and services it offers
● MANUFACTURABILITY - the capability of
● Every aspect of the organization is
an organization to produce an item at an
structured around them.
acceptable profit
● Product and service design – or redesign -
● SERVICEABILITY - the capability of an
should be closely tied to an organization’s
organization to provide a service at an
strategy
acceptable cost or profit
● GOOD DESIGN: makes good business
sense because it translates customer
3. What level of quality is appropriate?
needs into the shape and form of the
● Customer expectations
product or service and so enhances
● Competitor quality
profitability. Its objectives are the following:
● Fit with current offering
➔ to create a good or service with
excellent functional utility and sales 4. Does it make sense from an economic
appeal at an acceptable cost within standpoint?
a reasonable time ● Liability issues, ethical considerations,
➔ it should have high-quality, low-cost sustainability issues, costs and profits
materials, and methods
● SERVICE DESIGN: a process in which the REASONS TO DESIGN OR RE-DESIGN
designer focuses on creating optimal The driving forces for product and service design
service experiences Sequencing, by or redesign are market opportunities or threats:
partitioning a complex service into separate 1. Economic
processes
➔ Low demand, excessive warranty
➔ Evidencing, by visualizing service claim, need to reduce costs
experiences and making them 2. Social and demographic
tangible
➔ Aging baby boomers, pop shifts
3. Political, liability, or legal
WHAT DOES PRODUCT AND SERVICE
➔ Government changes, safety
DESIGN DO? issues, new regulations
1. Translate customer wants and needs into
4. Competitive
product and service requirements (marketing,
operations) ➔ New or changed products/services,
2. Refine existing products and services new advertising and promo
(marketing) 5. Cost or availability
3. Develop new products and services ➔ Raw materials, components, labor
(marketing, operations) 6. Technological
4. Formulate quality goals (marketing, ➔ Product components, processes
operations)
5. Formulate cost targets (acctg, finance, IDEA GENERATION
operations)
6. Construct and test prototypes (operations,
marketing, engineering)
7. Document specifications
8. Translate product and service specifications
into process specifications (engineering,
operations)
9. Involve inter-functional collaboration

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SUPPLY-CHAIN BASED in a suit filed by a woman who had lung
● Ideas can come from anywhere in the cancer and claimed that smoking
supply chain: cigarettes had caused her sickness and
★ Customers that her tobacco addiction was caused
★ Suppliers by the tobacco company's failure to
warn her of the risks of smoking. The
★ Distributors
company was ordered to pay punitive
★ Employees damages of a whopping $28 billion and
★ Maintenance $850,000 in compensatory damages.
★ Repair personnel Philip Morris appealed the case and
● SOURCES OF DATA – suppliers, nine years later the amount was
distributors, customers, employees & reduced to $28 million.
personnel ➔ In 1998, Dow Corning [a joint venture of
● CUSTOMER INPUT – surveys, focus The Dow Chemical Co. (DOW) and
group, complaints, suggestions, studying Corning Inc. (GLW)] was reached a
competitor’s products & services settlement in which it agreed to pay $2
● Input from suppliers, distributors, billion as part of a larger $4.25 billion
employees, maintenance or repair class action suit filed by customers who
personnel might come from interviews, claimed that their silicone breast
direct or indirect suggestions, or complaints implants were rupturing, causing injury,
bodily damage, scleroderma and
COMPETITOR BASED death.
● By studying how a competitor operates and ➔ In December 1998, Owens Corning
its products and services, many useful Corp. (OC) agreed to pay $1.2 billion to
ideas can be generated settle asbestos-related product liability
● REVERSE ENGINEERING - Dismantling lawsuits claiming that its asbestos
and inspecting a competitor’s product to building materials caused
discover product improvements mesothelioma cancer and death. There
were 176,000 individuals involved in
RESEARCH BASED this product liability case
● RESEARCH AND DEVELOPMENT (R&D)
- Organized efforts to increase scientific ● UNIFORM COMMERCIAL CODE - Under
knowledge or product innovation the UCC, products carry an implication of
★ BASIC RESEARCH - Has the merchantability and fitness
objective of advancing the state of ➔ Design products that are free of
knowledge about a subject without hazards! (product should be usable for
any near-term expectation of its intended purpose)
commercial applications ETHICAL CONSIDERATIONS
★ APPLIED RESEARCH - Has the ● Designers are often under pressure to
objective of achieving commercial ➔ Speed up the design process
applications
➔ Cut costs
★ DEVELOPMENT - Converts the ● These pressures force trade-off decisions
results of applied research into
➔ What if a product has bugs?
useful commercial applications
➔ Release the product and risk damage
to your reputation
LEGAL & ETHICAL CONSIDERATIONS
LEGAL CONSIDERATIONS ➔ Work out the bugs and forego revenue
● PRODUCT LIABILITY - The responsibility ➔ Vaporware – releasing software before
a manufacturer has for any injuries or bugs are corrected
damages caused by as faulty product
➔ In February 2014, it was discovered DESIGNERS ADHERE TO GUIDELINES
that several of its automobile models ● Produce designs that are consistent with
were manufactured with faulty ignition the goals of the company
switches that could shut off the engine ● Give customers the value they expect
during driving, disable power steering ● Make health and safety a primary concern
and brakes, and prevent airbags from ● Consider potential harm to the environment
inflating ● goal of high quality, don’t cut corners to
➔ In 2002, Philip Morris [now known as save cost even in areas where it won't be
Altria Group, Inc. (MO)] faced charges apparent to the customer
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HUMAN FACTORS SUSTAINABILITY
● Human factors often arise in the design of ● Using resources in ways that do not harm
consumer products. Safety and liability are ecological systems that support human
2 critical issues existence
● Crashworthiness of vehicles is of much
interest to consumers, insurance KEY ASPECTS OF DESIGNING FOR
companies, auto producers and the SUSTAINABILITY
government. ● CRADLE-TO-GRAVE ASSESSMENT
● Another issue for designers is adding new (LIFE-CYCLE ASSESSMENT) - The
features to their products and services assessment of the environmental impact of
a product or service throughout its useful
CULTURAL FACTORS life.
● Multinational companies must take into ● Focuses on such factors as
account cultural differences related to the ➔ Global warming
product design. ➔ Smog formation
➔ Oxygen depletion
GLOBAL PRODUCT DESIGN
➔ Solid waste generation
VISUAL TEAMS
● LCA procedures are part of the ISO
● Uses combined efforts of a team of
14000 environmental management
designers working in different countries
procedures
● Provides a range of comparative
● END OF LIFE PROGRAMS - Deal with
advantages over traditional teams such as:
products that have reached their useful
★ Engaging the best human resources lives, final stage of a product's existence
around the world ● The purpose if to reduce dumping
★ Possibly operating on a 24-hr basis of products in landfills or
★ Global customer needs assessment incineration which converts
★ Global design can increase materials into hazardous air & water
marketability emissions & generates toxic ash
● ORIGINAL EQUIPMENT
MANUFACTURER (OEM) - designs and THE 3Rs
manufactures a product based on its own A. REDUCTION OF COSTS AND MATERIALS
specifications and sells to another USED
company for branding and distribution. ● VALUE ANALYSIS - Examination of the
➔ Aisin Seiki sells to BMW, Volvo, GM function of parts and materials in an effort
● ORIGINAL DESIGN MANUFACTURER to reduce the cost and/or improve the
(ODM) - Designs and manufactures a performance of a product
product according to purchaser’s ● COMMON QUESTIONS IN VALUE
specifications ANALYSIS
➔ Qanta Computer Inc. handles ★ Is the item necessary; does it have
production of notebooks, for clients value; could it be eliminated?
like Apple, Cisco, Compaq, Dell, ★ Are there alternative sources for the
Fujitsu item?
● ORIGINAL BRAND MANUFACTURER ★ Could another material, part, or
(OBM) - Sells an entire product that is service be used instead?
manufactured by a second company under ★ Can two or more parts be
its own brand combined?
➔ Acer – launched its own brand of ★ Can specifications be less stringent
computers, laptops, mobiles and to save time or money?
personal digital asst PDAs
★ Do suppliers/providers have
suggestions for improvements?
ENVIRONMENTAL FACTORS
★ Can packaging be improved or
● The assessment of the environmental
made less costly?
impact of a product or service throughout
its useful life.
B. RE-USING PARTS OF RETURNED
PRODUCTS
● REMANUFACTURING - Refurbishing
used products by replacing worn-out or
defective components
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 ● Can be performed by the original ● The goal of the PLM is to eliminate waste
manufacturer or another company and improve efficiency
● Refurbishing used products by replacing ● DEFENSIVE RESEARCH POSTURE -
worn-out or defective components. Prolong useful life by improving reliability,
● Remanufactured products can be sold for reducing costs, redesigning, changing
50% of the cost of a new producer packaging or seek alternative source of the
● Remanufacturing can use unskilled labor product. E.g. baking soda, duct tape
● Some governments require manufacturers ● Search for replacement product during
to take back used products maturity stage
● REASONS TO MANUFACTURE ● 3 PHASES OF PLM
● Remanufactured products can be ➔ BEGINNING OF LIFE – design and
sold for about 50% of the cost of a development
new product ➔ MIDDLE OF LIFE - working with
● The process requires mostly suppliers, managing product
unskilled and semi-skilled workers information and warranties
● In the global market, European ➔ END OF LIFE – strategies for
lawmakers are increasingly requiring product discontinuance, disposal
manufacturers to take back used and recycling
products
● DESIGN FOR DISASSEMBLY (DFD) -
Designing a product so that used products
can be easily taken apart

STANDARDIZATION
C. RECYCLING ● Extent to which there is an absence of
● Recovering materials for future use; variety in a product, service, or process
applies not only to manufactured parts but ● Products are made in large quantities of
also to materials used during production. identical items
● DESIGN FOR RECYCLING (DFR) - ● Every customer or item processed receives
Product design that takes into account the essentially the same service
ability to disassemble a used product to
recover the recyclable parts. ADVANTAGES DISADVANTAGES

● immediately ● reduction in
OTHER DESIGN CONSIDERATIONS
available to variety
Aside from legal, ethical, environmental and
customers ● creates a risk for
human considerations, designers must also take
● lower costs competitor to
into account.
(production, introduce a
● Strategies for Product or Service Life
design) better or more
Stages
● higher appealing
● How much standardization to incorporate
productivity product or
● Product or service reliability
● reduced time & service
● Range of operating conditions under which
training cost ● designs may be
a product or service must function
● reduced time to frozen & resist
design jobs modifications
PRODUCT LIFE CYCLE MANAGEMENT
● quality is
● Systematic approach to managing the
consistent
series of changes a product goes through,
from its conception, design, development,
through production and any redesign to its MASS CUSTOMIZATION
end of life ● A strategy of producing basically
● Includes everything related to a particular standardized goods or services, but
product
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 incorporating some degree of E. DEGREE OF NEWNESS
customization in the final product or service ● Product or service design changes:
● Facilitating techniques 1. Modification of an existing product or
➔ Delayed differentiation service
➔ Modular design 2. Expansion of an existing product line
or service offering
DELAYED DIFFERENTIATION 3. Clone of a competitor’s product or
● The process of producing, but not quite service
completing, a product or service until 4. New product or service
customer preferences are known ● The degree of change affects the newness
● It is a postponement tactic of the product or service to the market and
to the organization
➔ Produce a piece of furniture, but do
● QUALITY FUNCTION DEPLOYMENT
not stain it; the customer chooses the
(QFD) - An approach that integrates the
stain
“voice of the customer” into both product
and service development
MODULAR DESIGN
➔ The purpose is to ensure that
● A form of standardization in which
customer requirements are factored
component parts are grouped into modules
into every aspect of the process
that are easily replaced or interchanged
➔ Listening to and understanding the
customer is the central feature of QFD
ADVANTAGES DISADVANTAGES ➔ EXAMPLE OF THE HOUSE OF
QUALITY: THE MAIN QFD MATRIX
● Easier diagnosis ● Limited number
and remedy of of possible
failures product
● Easier repair and configurations
replacement ● Limited ability to
● Simplification of repair a faulty
manufacturing module; the
and assembly entire module
● Training costs are must often be
relatively low scrapped

D. RELIABILITY
● The ability of a product, part, or system to
perform its intended function under a
prescribed set of conditions
● FAILURE - Situation in which a product, THE HOUSE OF QUALITY
part, or system does not perform as
intended
● Reliabilities are always specified with
respect to certain conditions
● NORMAL OPERATING CONDITIONS -
The set of conditions under which an item’s
reliability is specified
● ROBUST DESIGN - A design that results
in products or services that can function
over a broad range of conditions
➔ The more robust a product or
service, the less likely it will fail due
to a change in the environment in
which it is used or in which it is
performed
➔ Pertains to product as well as
process design

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 PHASES IN PRODUCT DESIGN
● FEASIBILITY ANALYSIS: entails market
analysis (demand), economic analysis
(development cost and production cost,
profit potential), and technical analysis
(capacity requirements and availability,
and the skills needed)
● PRODUCT SPECIFICATIONS: This
involves detailed descriptions of what is
needed to meet (or exceed) customer
wants, and requires collaboration between
legal, marketing, and operations
● PROCESS SPECIFICATION: Once
product specifications have been set,
attention turns to specifications for the
process that will be needed to produce the
product
➔ Alternatives must be weighed in
terms of cost, availability of
resources, profit potential, and
quality
KANO MODEL
● BASIC QUALITY - Refers to customer ➔ This involves collaboration between
requirements that have only limited effect accounting and operations.
on customer satisfaction if present, but lead ● PROTOTYPE DEVELOPMENT: With
to dissatisfaction if absent product and process specifications
● PERFORMANCE QUALITY - Refers to complete, one (or a few) units are made to
customer requirements that generate see if there are any problems with the
satisfaction or dissatisfaction in proportion product or process specifications
to their level of functionality and appeal ● DESIGN REVIEW: At this stage, any
● EXCITEMENT QUALITY - Refers to a necessary changes are made or the project
feature or attribute that was unexpected by is abandoned
the customer and causes excitement ➔ Marketing, finance, engineering,
design, and operations collaborate
to determine whether to proceed or
abandon
● MARKET TEST: A market test is used to
determine the extent of consumer
acceptance
➔ If unsuccessful, the product returns
to the design review phase. This
phase is handled by marketing.
● PRODUCT INTRODUCTION: The new
product is promoted and is handled by
marketing
● FOLLOW-UP EVALUATION: Based on
user feedback, changes may be made or
forecasts refined. This phase is handled by
marketing

DESIGNING FOR PRODUCTION

● CONCURRENT ENGINEERING - Bringing
engineering design and manufacturing
personnel together early in the design
phase
➔ Also may involve manufacturing,
marketing and purchasing personnel
in loosely integrated cross-functional
teams

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 ➔ Views of suppliers and customers ➔ Opportunities to buy in bulk from
may also be sought suppliers
➔ The purpose is to achieve product ➔ Commonality of parts for repair
designs that reflect customer wants ➔ Fewer inventory items must be
as well as manufacturing capabilities handled
➔
● COMPUTER AIDED DESIGN (CAD) - STRATEGIC PRODUCT AND SERVICE
Product design using computer graphics DESIGN
➔ ADVANTAGES ● The essence of an organization is the
★ Increases productivity of goods and services it offers
designers, 3 to 10 times ➔ Every aspect of the organization is
★ Creates a database for structured around them
manufacturing information and ● Product and service design – or redesign
product specifications should be closely tied to an organization’s
★ Provides possibility of strategy
engineering and cost analysis on
proposed designs SERVICE DESIGN
➔ CAD that includes finite element SERVICE PACKAGE
analysis (FEA) can significantly ● The physical resources needed
reduce time to market ● The accompanying goods that are
➔ Enables developers to perform purchased or consumed by the customer,
simulations that aid in the design, provided with the service
analysis, and commercialization of ● Explicit services ( the essential/core
new products features of a service, such as tax
● PRODUCTION REQUIREMENTS preparation)
● Implicit services (ancillary/extra features,
➔ Designers must take into account
such as friendliness, courtesy)
production capabilities
★ Equipment
OVERVIEW OF SERVICE DESIGN
★ Skills
● Begins with a choice of service strategy,
★ Types of materials which determines the nature and focus of
★ Schedules the service, and the target market.
★ Technologies ● Key Issues in service design
★ Special abilities ➔ Degree of variation in service
● Beyond the overall objective to achieve requirements
customer satisfaction while making a ➔ Degree of customer contact and
reasonable profit is: involvement
➔ Manufacturability is the ease of
fabrication and/or assembly, which is DIFFERENCES BETWEEN PRODUCT AND
important for: Cost , Productivity and SERVICE DESIGN
Quality ● Tangible – intangible
● DESIGN FOR MANUFACTURING (DFM) ● Services created and delivered at the same
– designing of products that are compatible time
with an organization’s capabilities ● Services cannot be inventoried
● DESIGN FOR ASSEMBLY (DFA) – design ● Services highly visible to customers
that focuses on reducing the number of ● Services have low barrier to entry and exit
parts in a product or on assembly methods ● Location is important to service design
and sequence ● Range of service systems from little or no
contact to very high customer contact
COMPONENT COMMONALITY ➔ Insulated technical core
● When products have a high degree of
➔ Production line
similarity in features and components, a
part can be used in multiple products ➔ Personalized service (hair cut,
● BENEFITS medical service)
➔ Savings in design time ➔ Consumer participation (diet
program)
➔ Standard training for assembly and
installation ➔ Self-service
● Demand variability creates waiting lines
and idle service resources
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 ➔ SERVICE DESIGN MAJOR STEPS IN SERVICE
PERSPECTIVE: Cost and BLUEPRINTING
efficiency perspective, Customer 1. Establish boundaries for the service & decide
perspective on the level of detail needed
➔ Reducing consumer choices → 2. Identify & determine sequence of customer
frustrating & irritating to customers service actions & interactions
➔ Standardizing or simplifying certain ➔ Prepare a flowchart
elements of a service → eliminates 3. Develop time estimates for each phase of the
features that customers value process
➔ Incorporating flexibility in capacity 4. Identify potential failure points & develop a
management by employing part- plan to minimize them
time or temporary staff → less
skilled or less interested people THE WELL-DESIGNED SERVICE SYSTEM
CHARACTERISTICS
PHASES IN SERVICE DESIGN ● Being consistent with the organization
1. Conceptualize mission
2. Identify service package components ● Being user-friendly
3. Determine performance specifications ● Being robust if variability is a factor • Being
4. Translate performance specifications into easy to sustain
design specifications ● Being cost-effective
5. Translate design specifications into delivery ● Having value that is obvious to the
specifications customer
● Having effective linkages between back-
SERVICE BLUEPRINTING and front of-the-house operations
● A method used in service design to ● Having a single, unifying theme
describe and analyze a proposed service ● Having design features and checks that will
● Shows the basic customer and service ensure service that is reliable and of high
actions involved in a service operation quality
● A useful tool for conceptualizing a service
delivery system CHALLENGE OF SERVICE DESIGN
● Variability
SERVICE BLUEPRINT COMPONENTS ● Difficult to describe and are dynamic in
● CUSTOMER ACTIONS: line of interaction nature esp. when there is a direct contact
● “ONSTAGE” CONTACT EMPLOYEE with the customer
ACTIONS: line of visibility
● “BACKSTAGE” CONTACT EMPLOYEE GUIDELINES FOR SUCCESSFUL SERVICE
ACTIONS: line of internal interaction DESIGN
● SUPPORT PROCESSES 1. Define the service package in detail
2. Focus on the operation from the customer’s
perspective
3. Consider the image that the service package
will present both to customers and to
prospective customers
4. Recognize that designers’ familiarity with the
system may give them a quite different
perspective than that of the customer, and
take steps to overcome this
5. Make sure that managers are involved and
will support the design once it is implemented
6. Define quality for both tangibles and
intangibles
7. Make sure that recruitment, training, and
reward policies are consistent with service
expectations
8. Establish procedures to handle both
predictable and unpredictable events
9. Establish system to monitor, maintain, and
improve service

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OPERATIONS STRATEGY
● Effective product and service design can CAPACITY DECISIONS ARE STRATEGIC
help the organization achieve competitive 1. Impact the ability of the organization to meet
advantage: future demands
➔ Packaging products and ancillary 2. Affect operating costs
services to increase sales 3. Are a major determinant of initial cost – the
➔ Using multiple-use platforms greater the capacity of a productive unit, the
➔ Implementing tactics that will achieve greater its cost.
the benefits of high volume while 4. Often involve long- term commitment of
satisfying customer needs for variety resources
➔ Continually monitoring products and ➔ Difficult to modify once implemented
services for small improvement w/o incurring major costs
opportunities 5. Can affect competitiveness – barrier to entry if
firm has excess capacity
➔ Reducing the time it takes to get a new
6. Affect the ease of management
or redesigned product or service to the
7. Have become more important and complex
market
due to globalization
➔ Need to be planned for in advance due
SHORTEN TIME TO MARKET
to their consumption of financial and
1. Use standardized components
other resources; designated amount of
2. Use technology
capacity may not match actual
3. Use concurrent engineering
demand when capacity becomes
available.
MODULE 4
STRATEGIC CAPACITY PLANNING MEASURES OF CAPACITY
FOR PRODUCT AND SERVICES

STRATEGIC CAPACITY PLANNING

● CAPACITY - The upper limit or ceiling on
the load that an operating unit can handle
● Capacity needs include:
➔ Equipment
➔ Space
➔ Employee skills
● GOAL - To achieve a match between the DEFINING AND MEASURING CAPACITY
long-term supply capabilities of an ● Measure capacity in units that do not
organization and the predicted level of require updating
long-term demand ➔ Why is measuring capacity in
➔ OVERCAPACITY - operating costs dollars problematic?
that are too high ● DESIGN CAPACITY - The maximum
➔ UNDER CAPACITY - strained output rate or service capacity an
resources and possible loss of operation, process, or facility is designed
customers for
● EFFECTIVE CAPACITY - Design capacity
minus allowances such as personal time
CAPACITY PLANNING QUESTIONS
and maintenance
KEY QUESTIONS
● What kind of capacity is needed?
● How much is needed to match demand? MEASURING SYSTEM EFFECTIVENESS
● When is it needed? ● ACTUAL OUTPUT - The rate of output
actually achieved. It cannot exceed
RELATED QUESTIONS effective capacity
● How much will it cost? ● EFFICIENCY
● What are the potential benefits and risks?
● Are there sustainability issues?
● Should capacity be changed all at once, or ● UTILIZATION
through several smaller changes
● Can the supply chain handle the necessary
changes? ➔ Measures as percentages
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 ● EXAMPLE: ➔ Safety regulations
Design Capacity = 50 trucks per day ➔ Unions
Effective Capacity = 40 trucks per day ➔ Pollution control standards
Actual Output = 36 trucks per day
SUPPLY CHAIN FACTORS
● What impact will the changes have on
suppliers, warehousing, transportation and
distributors
● Will they be able to handle an increase in
capacity?
LABOR PRODUCTIVITY ● If capacity is decreased, what impact will
the loss of business have on these
elements of the supply chain?

EXTERNAL FACTORS
● Product standards
● Safety regulations
● Unions
● Pollution control standards

CAPACITY STRATEGIES
● LEADING - Build demand capacity in
anticipation of future demand increases
● FOLLOWING - Build capacity when
demand exceeds current capacity
● TRACKING - Similar to the following
DETERMINANTS OF EFFECTIVE strategy, but adds capacity in relatively
CAPACITY small increments to keep pace with
● Facilities increasing
➔ Design
➔ Location STRATEGY FORMULATION
➔ Layout ● Strategies are typically based on
➔ Environment assumptions and predictions about:
● Product and service factors ➔ Growth rate and variability of
➔ Design demand
➔ Product or service mix ➔ Costs of building and operating
● Process factors facilities of various sizes
➔ Quantity capabilities ➔ The rate and direction of
technological change
➔ Quality capabilities
● Human factors ➔ The likely behavior of competitors
➔ Job content ➔ Availability of capital and other
inputs
➔ Job design
➔ Training and experience
CAPACITY CUSHION
➔ Motivation ● Extra capacity used to offset demand
➔ Compensation uncertainty
➔ Learning rates ● Capacity cushion = 100% - utilization
➔ Absenteeism and labor turnover ● Capacity cushion strategy
● Policy factors ➔ Organizations that have greater
● Operational factors demand uncertainty typically have
➔ Scheduling greater capacity cushion
➔ Materials management ➔ Organizations that have standard
➔ Quality assurance products and services generally
➔ Maintenance policies have smaller capacity cushion
➔ Equipment breakdowns
● Supply chain factors STEPS IN CAPACITY PLANNING
● External factors 1. Estimate future capacity requirements
➔ Product standards
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2. Evaluate existing capacity and facilities; nuclear accidents, discovery of
identify gaps health hazards
3. Identify alternatives for meeting requirements ➔ Marketing, through customer
4. Conduct financial analysis contracts, demographic analyses &
5. Assess key qualitative issues forecasts, can supply vital info to
6. Select the best alternative for the long term ops for ascertaining capacity needs
7. Implement alternative chosen for both long & short term
8. Monitor results

● Capacity planning can be difficult at times due

to the complex influence of market forces and CALCULATING PROCESS
technology
REQUIREMENTS
● Calculating processing requirements
FORECASTING CAPACITY requires reasonably accurate demand
REQUIREMENTS forecasts, standard processing times, and
● Long-term considerations relate to overall available work time
level of capacity requirements (facility size)
➔ Require forecasting demand over a
time horizon and converting those
needs into capacity requirements Where:
● COMMON DEMAND PATTERNS

DETERMINING NEEDED CAPACITY

➔ If trends are identified – fundamental

issues – how long is the trend or slope
of the trend
➔ If cycles are identified – length of the
cycle and amplitude (deviation from SERVICE CAPACITY PLANNING
average ● Service capacity planning can present a
number of challenges related to:
● Short-term considerations relate to ➔ The need to be near customers:
probable variations in capacity Convenience
requirements ➔ The inability to store services:
➔ Less concerned with cycles and trends Cannot store services for
than with seasonal variations and other consumption later
variations from average ★ Results in negatives for an
➔ These variations can put a strain on the org. Speed of delivery or
ability to satisfy demand at some time customer waiting time –
or idle capacity at other times concerns in capacity
● When time interval is too short to have planning
seasonal variation ➔ The degree of demand volatility:
Volume and timing of demand and
Time required to service individual
customers

● IRREGULAR VARIATIONS – impossible DEMAND MANAGEMENT STRATEGIES

or difficult to predict ● Strategies used to offset capacity
limitations and that are intended to achieve
➔ Major equipment breakdown, freak
a closer match between supply and
storms that disrupt normal routines,
demand
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 ➔ Pricing BOTTLENECK OPERATION
➔ Promotions ● An operation in a sequence of operations
➔ Discounts whose capacity is lower than that of the
➔ Other tactics to shift demand from other operations
peak periods into slow periods

IN-HOUSE OR OUTSOURCE?
● Once capacity requirements are
determined, the organization must decide
whether to produce a good or service itself
or outsource
● FACTORS TO CONSIDER Total capacity of 40/hr but the 5th operation
➔ Available capacity can only process 30/hr – waiting line of
➔ Expertise 10/hr
➔ Quality considerations
➔ The nature of demand DEVELOPING CAPACITY ALTERNATIVES
➔ Cost
(CONT.)
➔ Risks

DEVELOPING CAPACITY ALTERNATIVES

● Things that can be done to enhance
capacity management:
● Design flexibility into systems ➔ Operation 2 constraints the system to its
● Take stage of life cycle into account capacity of 10/hr
➔ Increasing output = increasing ➔ Need to increase the capacity of the
capacity leads to higher bottleneck operation
investment and complexity ➔ The potential for increasing the capacity
which leads to higher risk of of the process is only 5 units – 15
overcapacity and leads to high units/hr. beyond that operation 3’s
unit cost. capacity would limit process capacity to
➔ Strategy is to compete on non 15/hr
price attributes by investing in ● Prepare to deal with capacity “chunks”
technology and process ➔ desired capacity is 55 units/hr but
improvement to make the machine produces only 40
differentiation a competitive units/hr
advantage ➔ another machine would cause
➔ Size of market levels off; tends capacity to be 15 units/hr short of
to have stable market shares; what is needed
may still increase profitability by ➔ two machines would result in an
reducing costs and making full excess capacity of 25 units/hr
use of capacity. Others may still ➔ Capacity increases are often
try to increase capacity if they acquired in big chunks rather than
believe this stage to be fairly smooth increments making it
long or the cost to increase difficult to achieve a match between
capacity is relatively small desired capacity and feasible
➔ Underutilization of capacity due capacity
to declining demand; may sell, ➔ Open hearth furnaces or no. of
introduce new product or airplanes needed to provide a
transfer to a new location with desired level of capacity
lower labor costs ● Attempt to smooth capacity requirements
● Take a “big-picture” approach to ➔ Inclement weather – public
capacity changes transport tends to increase
➔ Additional motel rooms ➔ Increasing number of buses
➔ Will suppliers be able to handle ➔ Demand for buses – random and
the increased volume? seasonal (predictable)

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 ➔ Identify Goods With ➔ Complexity increases costs
Complementary Demand Patterns ➔ Inflexibility can be an issue
– heating and air conditioning ➔ Additional levels of bureaucracy
● Managers choose to respond to higher
than normal demand FACILITY SIZE AND OPTIMAL OPERATING
➔ Overtime work LEVEL
➔ Subcontract ● Minimum cost & optimal operating rate are
➔ Draw down finished goods functions of size of production unit.
inventories during periods of high
demand and replenish them during
periods of low demand
● Identify the optimal operating level

● As general capacity of plant, optimum

output rate increases, minimum cost
decreases
● Choose a strategy if expansion is involved ● Larger plants tend to have higher optimal
➔ Consider whether incremental output rates and lower min cost than
expansion or single step is more smaller ones
appropriate
➔ Factors include competitive CONSTRAINT MANAGEMENT
pressures, market opportunities, ● Something that limits the performance of a
costs and availability of funds, process or system in achieving its goals. Its
disruption of operations and categories are:
training requirements ➔ Market: Insufficient Demand
➔ Decide whether to lead or follow ➔ Resource: Too little of one or more
competitors resources
➔ Leading is more risky but has more ➔ Material: Too little of one or more
potential for rewards materials
➔ Financial: Insufficient funds
ECONOMIES AND DISECONOMIES OF ➔ Knowledge or competency:
SCALE Needed knowledge or skills missing
● ECONOMIES OF SCALE: If output rate is or incomplete
less than the optimal level, increasing the ➔ Policy: Law or regulation interfere
output rate results in decreasing average
per unit costs RESOLVING CONSTRAINT ISSUES
➔ Fixed costs are spread over a larger ● The following steps are used in when
number of units resolving constraint issues:
➔ Construction costs increase at a 1. Identify the most pressing
decreasing rate as facility size constraint
increases 2. Change the operation to achieve
➔ Processing costs decrease due to maximum benefit, given the
standardization constraint
3. Make sure other portions of the
● DISECONOMIES OF SCALE: If the output process are supportive of the
rate is more than the optimal level, constraint
increasing the output rate results in 4. Explore and evaluate ways to
increasing average per unit costs overcome the constraint
5. Repeat the process until the
➔ Distribution costs increase due to
constraint levels are at acceptable
traffic congestion and shipping from
levels
a centralized facility rather than
● CONSTRAINT ISSUES: Low demand,
multiple smaller facilities
Capacity, Additional funds, Supplier,
diamla, foronda, gan 13
 Knowledge and skills and Law or ● BREAK-EVEN POINT: The volume of
government regulations. output at which total cost and total
revenue are equal
EVALUATING ALTERNATIVES ➔ Profit (P) = TR - TC = R x Q - (FC
● ECONOMIC +v x Q) = Q(R – v) – FC
➔ Is it economically feasible? 𝐹𝐶
➔ QBEP =
➔ How much will it cost? 𝑅−𝑣
➔ How soon can we have it?
● COST VOLUME RELATIONSHIPS
➔ What will operating and
maintenance costs be?
➔ What will its useful life be?
➔ Will it be compatible with present
personnel and present operations?

● NON-ECONOMIC
➔ Public Opinion

TECHNIQUES FOR EVALUATING

ALTERNATIVES
A. COST VOLUME ANALYSIS
● Focuses on the relationship between
cost, revenue, and volume of output
● a valuable tool for comparing capacity
alternatives if certain assumptions are
satisfied
➔ One product is involved
➔ Everything produced can be sold
➔ The variable cost per unit is the
same regardless of volume
➔ Fixed costs do not change with
volume changes, or they are step
changes
➔ The revenue per unit is the same
regardless of volume
➔ Revenue per unit exceeds variable ● INDIFFERENCE POINT: The quantity that
cost per unit would make two alternatives equivalent
● FIXED COST: Tend to remain constant ● STEP COSTS: Also involved in capacity
regardless of output volume alternatives
● VARIABLE COST: Vary directly with ➔ costs that increase stepwise as
volume of output potential volume increases
➔ VC = Quantity(Q) x variable cost ➔ The implication of such a situation
per unit (v) is the possible occurrence of
● TOTAL COST: TC = FC + VC multiple break even quantities
● TOTAL REVENUE: TR = revenue per
unit (R) x Q

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 flows, and any expected salvage value
in a single value called the equivalent
current value
● takes into account the time value of
money

3. INTERNAL RATE OF RETURN

● summarizes the initial cost, expected
annual cash flows, and estimated future
salvage value of an investment proposal
in an equivalent interest rate
● identifies the rate of return that equates
the estimated future returns and the
initial cost

C. DECISION THEORY
● helpful tool for financial comparison of
alternatives under conditions of risk or
uncertainty
● suited to capacity decisions and to a
wide range of other decisions managers
must make
● involves identifying a set of possible
future conditions that could influence
results, listing alternative courses of
action, and developing a financial
outcome for each alternative–future
condition combination

D. WAITING LINE ANALYSIS

● have a tendency to form in a wide variety
of service systems
● useful in helping managers choose a
capacity level that will be cost-effective
through balancing the cost of having
customers wait with the cost of providing
additional capacity
● can aid in the determination of expected
B. FINANCIAL ANALYSIS costs for various levels of service
● CASH FLOW: The difference between capacity
cash received from sales and other
sources, and cash outflow for labor, E. SIMULATION
material, overhead, and taxes ● useful tool in evaluating what-if
● PRESENT VALUE: The sum, in current scenarios
value, of all future cash flow of an
investment proposal OPERATIONS STRATEGY
● Capacity planning impacts all areas of the
METHODS OF FINANCIAL ANALYSIS organization
1. PAYBACK ● It determines the conditions under which
● crude but widely used method that operations will have to function
focuses on the length of time it will take ● Flexibility allows an organization to be agile
for an investment to return its original
➔ It reduces the organization’s
cost
dependence on forecast accuracy
● ignores the time value of money
and reliability
● Its use is easier to rationalize for short
term than for long term projects ➔ Many organizations utilize capacity
cushions to achieve flexibility
2. PRESENT VALUE METHOD ● Bottleneck management is one way by
● summarizes the initial cost of an which organizations can enhance their
investment, its estimated annual cash effective capacities
diamla, foronda, gan 15
 ● Capacity expansion strategies are
important organizational considerations
➔ Expand-early strategy
➔ Wait-and-see strategy
● Capacity contraction is sometimes
necessary
➔ Capacity disposal strategies
become important under these
conditions

PAYBACK PERIOD FORMULA

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