Module-03 - Product- Process & Service Design

8/6/2019 Module-03 - Product- Process & Service Design

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1

Module-3 (Chapter 4)Module-3 (Chapter 4)Module-3 (Chapter 4)Module-3 (Chapter 4)

ProductProduct



2

Module-3 : SyllabusModule-3 : SyllabusModule-3 : SyllabusModule-3 : Syllabus

qProduct Life CycleProduct Life Cycle

q

Product DesignProduct Designq

Product DevelopmentProduct Development



3

OverviewOverviewOverviewOverviewq Product Life CycleProduct Life Cycleq Designing and Developing ProductsDesigning and Developing Productsq Process Planning and DesignProcess Planning and Designq Major Factors Affecting Process DesignMajor Factors Affecting Process Design

DecisionsDecisionsq Types of Process DesignsTypes of Process Designsq Interrelationships Among Product Design,Interrelationships Among Product Design,

ProcessProcess Design, and Inventory PolicyDesign, and Inventory Policyq Process Design in ServicesProcess Design in Servicesq Deciding Among Processing AlternativesDeciding Among Processing Alternativesq

Wrap-Up: What World-Class Companies DoWrap-Up: What World-Class Companies Do



4

Stages in a Product’s Life CycleStages in a Product’s Life CycleStages in a Product’s Life CycleStages in a Product’s Life Cycle

q

IntroductionIntroduction- Sales begin, production and- Sales begin, production andmarketing are developing, profits are negative.marketing are developing, profits are negative.

q GrowthGrowth - Sales grow dramatically, marketing- Sales grow dramatically, marketing

efforts intensify, capacity is expanded, profitsefforts intensify, capacity is expanded, profits

begin. begin.

q MaturityMaturity - Production focuses on high-volume,- Production focuses on high-volume,

efficiency, low costs; marketing focuses onefficiency, low costs; marketing focuses on

competitive sales promotion; profits are at peak.competitive sales promotion; profits are at peak.

q DeclineDecline - Declining sales and profit; product might- Declining sales and profit; product might

be dropped or replaced. be dropped or replaced.



5

Stages of a Product’s Life CycleStages of a Product’s Life CycleStages of a Product’s Life CycleStages of a Product’s Life Cycle

Introduction Growth Maturity DeclineIntroduction Growth Maturity Decline

B&W TVB&W TV

AutomobileAutomobile

Video Recorder Video Recorder

CD Player CD Player Color Copier Color Copier

Cell PhoneCell Phone

Internet RadioInternet Radio

Fax MachineFax MachineDot-MatrixDot-Matrix

Printer Printer

ANNUAL SALES GROW DECLINE



6

Evolution of Positioning StrategiesEvolution of Positioning StrategiesEvolution of Positioning StrategiesEvolution of Positioning Strategies

VolumeVolumeVeryVery

LowLowLowLow HighHigh

VeryVery

HighHigh

FocusFocus ProcessProcess ProcessProcess ProductProduct ProductProduct

Fin.Gds.Fin.Gds. To-Order To-Order To-Order To-Order To-Stock To-Stock To-Stock To-Stock

BatchBatch

SizeSizeVeryVery

SmallSmallSmallSmall LargeLarge

VeryVery

LargeLarge

ProductProduct CustomCustomSlightlySlightly

StandardStandardStandardStandard

HighlyHighly

StandardStandard

LifeLifeStageStage

Intro.Intro.EarlyEarly

GrowthGrowthLateLate

GrowthGrowthMaturityMaturity



7

CONCEPT OF PRODUCTION PROCESSCONCEPT OF PRODUCTION PROCESS

LIFE CYCLELIFE CYCLE

CONCEPT OF PRODUCTION PROCESSCONCEPT OF PRODUCTION PROCESS

LIFE CYCLELIFE CYCLE

q

Production Systems tend to evolve as products move through their Production Systems tend to evolve as products move through their product life cycles, product life cycles,

q ‘‘Product life cycle’Product life cycle’ andand ‘production process life cycle’‘production process life cycle’ areare

interdependent; each affects the other.interdependent; each affects the other.

PRODUCTION

PROCESSES

PRODUCTION

COST, QUALITY,

& PRODUCTION

CAPACITY

VOLUME OF

PRODUCTS

THAT CAN BE

SOLD

VOLUME OF

PRODUCTS

THAT ARE

SOLD

TYPE OF PRODUCTION

PROCESSES THAT

CAN BE JUSTIFIED



8

PRODUCT, PROCESS AND SERVICE DESIGNPRODUCT, PROCESS AND SERVICE DESIGNPRODUCT, PROCESS AND SERVICE DESIGNPRODUCT, PROCESS AND SERVICE DESIGN

DESIGNING ANDDESIGNING AND

DEVELOPINGDEVELOPINGPRODUCTS ANDPRODUCTS AND

SERVICESSERVICES



9

Product / Service DesignProduct / Service DesignProduct / Service DesignProduct / Service Design

When a product /service is designed:When a product /service is designed:q The detailed characteristics of theThe detailed characteristics of the

product/service are established. product/service are established.

q The characteristics of the product / serviceThe characteristics of the product / servicedirectly affects how the product / servicedirectly affects how the product / service

can be produced / delivered.can be produced / delivered.

q How the product/service is produced /How the product/service is produced /delivered determines the design of thedelivered determines the design of the

production / delivery system. production / delivery system.



10

Product / Service DesignProduct / Service DesignProduct / Service DesignProduct / Service Design

Product / service design directly affects :Product / service design directly affects :q Product / service qualityProduct / service quality

q Production / delivery costProduction / delivery cost

q Customer satisfactionCustomer satisfaction



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Product / Service Design and DevelopmentProduct / Service Design and DevelopmentProduct / Service Design and DevelopmentProduct / Service Design and Development

q Sources of product innovationSources of product innovation

q Developing new products / servicesDeveloping new products / services

q Getting them to market faster Getting them to market faster q Improving current products / servicesImproving current products / services

q

Designing for ease of productionDesigning for ease of productionq Designing for qualityDesigning for quality

q Designing and developing new servicesDesigning and developing new services

FOLLOWING ARE RELEVANT :



12

Sources of Product / Service InnovationSources of Product / Service InnovationSources of Product / Service InnovationSources of Product / Service Innovation

q CustomersCustomersq ManagersManagers

q MarketingMarketing

q OperationsOperations

q EngineeringEngineering

q Research and Development (R&D)Research and Development (R&D)

q Basic researchBasic research

q Applied researchApplied research



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Steps in Developing New ProductsSteps in Developing New ProductsSteps in Developing New ProductsSteps in Developing New Products

1.1. Technical and economic feasibility studiesTechnical and economic feasibility studies2.2. Prototype designPrototype design

3.3. Performance testing of prototypePerformance testing of prototype

4.4. Market sensing / evaluation and economicMarket sensing / evaluation and economicevaluation of the prototypeevaluation of the prototype

5.5. Design of production modelDesign of production model

6.6. Market / performance / process testing andMarket / performance / process testing and

economic evaluation of production modeleconomic evaluation of production model

7.7. Continuous modification of production modelContinuous modification of production model



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1.1. Technical and Economic FeasibilityTechnical and Economic FeasibilityStudies :Studies :

q Determine the advisability of Determine the advisability of

establishing a project for developingestablishing a project for developing

the productthe product

q

If initial feasibility studies areIf initial feasibility studies arefavorable, engineers prepare an initialfavorable, engineers prepare an initial

prototype design prototype design



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2.2. Prototype Design :Prototype Design :q This design should exhibit the basicThis design should exhibit the basic

form, fit, and function of the finalform, fit, and function of the final product product

q It will not necessarily be identicalIt will not necessarily be identical

to the production modelto the production model



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3.3. Performance Testing of PrototypePerformance Testing of Prototypeq Performance testing andPerformance testing and

redesign of the prototyperedesign of the prototypecontinues until this design-test-continues until this design-test-

redesign process produces aredesign process produces a

satisfactorily performingsatisfactorily performing

prototype prototype



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4.4. Market Sensing / Evaluation and EconomicMarket Sensing / Evaluation and EconomicEvaluation of the Prototype :Evaluation of the Prototype :q Accomplished by demonstrations to potentialAccomplished by demonstrations to potential

customers, market test, or market surveyscustomers, market test, or market surveys

q If the response to the prototype is favorable, economicIf the response to the prototype is favorable, economic

evaluation of the prototype is performed to estimateevaluation of the prototype is performed to estimate

production volume, costs, and profits production volume, costs, and profits

q

If the economic evaluation is favorable, the projectIf the economic evaluation is favorable, the projectenters the production design phase.enters the production design phase.



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5.5. Design of Production ModelDesign of Production Modelq The initial design of the productionThe initial design of the production

model will not be the final design;model will not be the final design;the model will evolve.the model will evolve.



19


6.6. Market / Performance / Process Testing andMarket / Performance / Process Testing andEconomic Evaluation of Production ModelEconomic Evaluation of Production Model

q The production model should exhibit:The production model should exhibit:q

low costlow costq reliable qualityreliable qualityq superior performancesuperior performanceq the ability to be produced in the desiredthe ability to be produced in the desired

quantities on the intended equipmentquantities on the intended equipment



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7.7. Continuous Modification of ProductionContinuous Modification of ProductionModel :Model :q Production designs are continuously modified to:Production designs are continuously modified to:

q Adapt to changing market conditionsAdapt to changing market conditionsq Adapt to changing production technologyAdapt to changing production technologyq Allow for manufacturing improvementsAllow for manufacturing improvements



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Managing Product Development ProjectsManaging Product Development ProjectsManaging Product Development ProjectsManaging Product Development Projects

q About 5% of all new-product ideas survive toAbout 5% of all new-product ideas survive to

production, and only about 10% of these are production, and only about 10% of these are

successful.successful.

q It is best to cancel unpromising new-It is best to cancel unpromising new-

product/service development projects early! product/service development projects early!

q Employees often become emotionally caught upEmployees often become emotionally caught up

in these projects and are overly optimisticin these projects and are overly optimistic

q An impartial management review board is neededAn impartial management review board is needed

for periodic reviews of the progress of thesefor periodic reviews of the progress of these

projects. projects.



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Getting New Products to Market FasterGetting New Products to Market FasterGetting New Products to Market FasterGetting New Products to Market Faster

q Speed creates competitive advantagesSpeed creates competitive advantagesq Speed saves moneySpeed saves money

q Tools to improve speed:Tools to improve speed:

q Autonomous design and developmentAutonomous design and development

teamsteams

q

Computer-aided design/computer-aidedComputer-aided design/computer-aidedmanufacturing (CAD/CAM)manufacturing (CAD/CAM)

q Simultaneous (concurrent) engineeringSimultaneous (concurrent) engineering



23

Tools to Improve Speed to MarketTools to Improve Speed to MarketTools to Improve Speed to MarketTools to Improve Speed to Market

q

Autonomous Design and Development TeamsAutonomous Design and Development Teamsq Teams are given decision-making responsibilityTeams are given decision-making responsibility

and more freedom to design and introduce newand more freedom to design and introduce new

products/services products/services

q Time-to-market has been slashed dramaticallyTime-to-market has been slashed dramatically

q Enormous sums of money have been savedEnormous sums of money have been saved

q Teams do not have to deal with the bureaucratic redTeams do not have to deal with the bureaucratic red

tape ordinarily required to obtain approvalstape ordinarily required to obtain approvals



24


q

Computer-Aided Design/Computer-AidedComputer-Aided Design/Computer-AidedManufacturing (CAD/CAM) :Manufacturing (CAD/CAM) :q Engineers, using CAD/CAM, can generate many viewsEngineers, using CAD/CAM, can generate many views

of parts, rotate images, magnify views, and check for of parts, rotate images, magnify views, and check for

interference between partsinterference between partsq Part designs can be stored in a data base for use on other Part designs can be stored in a data base for use on other

products productsq When it is time for manufacturing, the product design isWhen it is time for manufacturing, the product design is

retrieved, translated into a language that productionretrieved, translated into a language that productionmachinery understands, and then the production systemmachinery understands, and then the production systemcan be automatically set up.can be automatically set up.



25


q

SimultaneousSimultaneous(Concurrent)(Concurrent)

EngineeringEngineering

Economic and TechnicalEconomic and Technical

Feasibility StudiesFeasibility Studies

Product/Product/Service IdeasService Ideas

Production Process DesignProduction Process DesignProduct/Service DesignProduct/Service Design

Produce and MarketProduce and Market

New Product/ServiceNew Product/Service

Continuous

Interaction

I i th D iI i th D iI i th D iI i th D i



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Improving the DesignImproving the Design

of Existing Products/Servicesof Existing Products/Services

Improving the DesignImproving the Design

of Existing Products/Servicesof Existing Products/Services

q Focus is on improving performance, quality,Focus is on improving performance, quality,

and costand cost

q Objective is maintaining or improving marketObjective is maintaining or improving market

share of maturing products/servicesshare of maturing products/services

q Little changes can be significantLittle changes can be significant

q Small, steady (continuous) improvements canSmall, steady (continuous) improvements can

add up to huge long-term improvementsadd up to huge long-term improvements

q Value analysisValue analysis is practiced, meaning designis practiced, meaning design

features are examined in terms of their cost /features are examined in terms of their cost /

benefit (value). benefit (value).



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Designing for Ease of ProductionDesigning for Ease of ProductionDesigning for Ease of ProductionDesigning for Ease of Production

q

Ease of Production (Manufacturability)Ease of Production (Manufacturability)q SpecificationsSpecifications - Precise information about the- Precise information about the

characteristics of the productcharacteristics of the product

q

TolerancesTolerances - Minimum & maximum limits on a- Minimum & maximum limits on adimension that allows the item to function asdimension that allows the item to function as

designeddesigned

q StandardizationStandardization - Reduce variety among a group of - Reduce variety among a group of

products or parts products or partsq SimplificationSimplification - Reduce or eliminate the complexity- Reduce or eliminate the complexity

of a part or productof a part or product



28

Designing for QualityDesigning for QualityDesigning for QualityDesigning for Quality

q Crucial element of product design is itsCrucial element of product design is itsimpact on qualityimpact on quality

q Quality is determined by the customer’sQuality is determined by the customer’s

perception of the degree of excellence of perception of the degree of excellence of

the product/service’s characteristicsthe product/service’s characteristics

q

Chapter 7 covers the principles of Chapter 7 covers the principles of

designing products / services for qualitydesigning products / services for quality



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Designing and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New Services

Three general dimensions of service design are:Three general dimensions of service design are:q Degree of Standardization of the ServiceDegree of Standardization of the Service

q Custom-fashioned for particular customers or Custom-fashioned for particular customers or basically the same for all customers? basically the same for all customers?

q Degree of Customer Contact in Delivering the ServiceDegree of Customer Contact in Delivering the Serviceq High level of contact (dress boutique) or low levelHigh level of contact (dress boutique) or low level

(fast-food restaurant)?(fast-food restaurant)?q

Mix of Physical Goods and Intangible ServicesMix of Physical Goods and Intangible Servicesq Mix dominated by physical goods (tailor’s shop) or Mix dominated by physical goods (tailor’s shop) or

by intangible services (university)? by intangible services (university)?



30

Designing and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New ServicesDesigning and Developing New Services

q

Differences Between New Service and NewDifferences Between New Service and NewProduct Development :Product Development :

q Unless services are dominated by physicalUnless services are dominated by physical

goods, their development usually does notgoods, their development usually does not

require engineering, testing, and prototyperequire engineering, testing, and prototype

building. building.

q Because many service businesses involveBecause many service businesses involve

intangible services, market sensing tends to beintangible services, market sensing tends to be

more by surveys rather than by market testsmore by surveys rather than by market tests

and demonstrations.and demonstrations.



31

ProcessProcessPlanning and DesignPlanning and Design

ProcessProcessPlanning and DesignPlanning and Design



32

Inputs:Inputs:• Product/Service InformationProduct/Service Information• Production System InformationProduction System Information• Operations StrategyOperations Strategy

Process Planning & Design:Process Planning & Design:• Process-Type SelectionProcess-Type Selection• Vertical Integration StudiesVertical Integration Studies

• Process/Product StudiesProcess/Product Studies• Equipment StudiesEquipment Studies• Production Procedures StudiesProduction Procedures Studies• Facilities StudiesFacilities Studies

Outputs:Outputs:• Process TechnologyProcess Technology

• FacilitiesFacilities• Personnel EstimatesPersonnel Estimates

Process Planning and Design SystemProcess Planning and Design SystemProcess Planning and Design SystemProcess Planning and Design System



33


MAJOR FACTORSMAJOR FACTORS

AFFECTINGAFFECTINGPROCESS DESIGNPROCESS DESIGN

DECISIONSDECISIONS



34

Major Factors Affecting Process DesignsMajor Factors Affecting Process DesignsMajor Factors Affecting Process DesignsMajor Factors Affecting Process Designs

q Nature of product/service Nature of product/servicedemanddemand

q Degree of vertical integrationDegree of vertical integrationq Production flexibilityProduction flexibility

q Degree of automationDegree of automationq Product/Service qualityProduct/Service quality



35

Nature of Product/Service DemandNature of Product/Service DemandNature of Product/Service DemandNature of Product/Service Demand

q

Production processes must have adequate capacity toProduction processes must have adequate capacity to produce the volume of the products/services that produce the volume of the products/services thatcustomers need.customers need.

q Provisions must be made for expanding or Provisions must be made for expanding or contracting capacity to keep pace with demandcontracting capacity to keep pace with demand

patterns. patterns.q Some types of processes are more easily expandedSome types of processes are more easily expanded

and contracted than others.and contracted than others.q Product/service price affects demand, so pricingProduct/service price affects demand, so pricing

decisions and the choice of processes must bedecisions and the choice of processes must besynchronized.synchronized.



36

Degree of Vertical IntegrationDegree of Vertical IntegrationDegree of Vertical IntegrationDegree of Vertical Integration

q

Vertical integrationVertical integr ation is the amount of the productionis the amount of the productionand distribution chain that is brought under theand distribution chain that is brought under theownership of a company.ownership of a company.

q This determines how many production processes needThis determines how many production processes needto be planned and designed.to be planned and designed.

q Decision of integration is based on cost, availabilityDecision of integration is based on cost, availabilityof capital, quality, technological capability, and more.of capital, quality, technological capability, and more.

q Strategic outsourcingStrategic outsourcing (lower degree of integration) is(lower degree of integration) isthe outsourcing of processes in order to react quicker the outsourcing of processes in order to react quicker

to changes in customer needs, competitor actions, andto changes in customer needs, competitor actions, andtechnology.technology.



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Production FlexibilityProduction FlexibilityProduction FlexibilityProduction Flexibility

q

Product flexibilityProduct flexibility -- ability of the production (or -- ability of the production (or delivery) system to quickly change from producingdelivery) system to quickly change from producing

(delivering) one product (or service) to another.(delivering) one product (or service) to another.

q Volume flexibilityVolume flexibility -- ability to quickly increase or -- ability to quickly increase or

reduce the volume of product( or service) producedreduce the volume of product( or service) produced(or delivered).(or delivered).



38

Degree of AutomationDegree of AutomationDegree of AutomationDegree of Automation

q

Advantages of automationAdvantages of automationq Improves product qualityImproves product quality

q Improves product flexibilityImproves product flexibility

q

Reduces labor and related costsReduces labor and related costsq Disadvantages of automationDisadvantages of automation

q Equipment can be very expensiveEquipment can be very expensive

q Integration into existing operations can be difficultIntegration into existing operations can be difficult



40


TYPES OFTYPES OF

PROCESSPROCESS

DESIGNSDESIGNS



41

Types of Process DesignsTypes of Process DesignsTypes of Process DesignsTypes of Process Designs

q Product-FocusedProduct-Focusedq Process-FocusedProcess-Focused

q Group Technology / Cellular Group Technology / Cellular

ManufacturingManufacturing



42

Product-FocusedProduct-FocusedProduct-FocusedProduct-Focused

q

Processes (conversions) are arranged based onProcesses (conversions) are arranged based onthe sequence of operations required to producethe sequence of operations required to produce

a product or provide a servicea product or provide a service

q

Also called “Production Line” or “AssemblyAlso called “Production Line” or “AssemblyLine”Line”

q Two general formsTwo general forms

q

Discrete unit – automobiles, dishwashersDiscrete unit – automobiles, dishwashersq Process (Continuous) – petrochemicals,Process (Continuous) – petrochemicals,

paper paper



43

PurchasedPurchased

Components,Components,SubassembliesSubassemblies


2222

33

11

44

1

77

66

55

ComponentsComponents Subassem.Subassem.

AssembliesAssemblies

Product/Material FlowProduct/Material Flow

Production OperationProduction Operation

A s s e m b l

i e s

A s s e m b l

i e s

Raw MaterialRaw Material

ComponentsComponentsC o m

p o n .

C o m p o n .

S u b a s s e m .

S u b a s s e m .

Raw MaterialRaw Material

Fin. GoodsFin. Goods



44


q AdvantagesAdvantagesq Lower labor-skill requirementsLower labor-skill requirementsq Reduced worker trainingReduced worker trainingq

Reduced supervisionReduced supervisionq Ease of planning and controllingEase of planning and controlling production production

q

DisadvantagesDisadvantagesq Higher initial investment levelHigher initial investment levelq Relatively low product flexibilityRelatively low product flexibility



45

Process-FocusedProcess-FocusedProcess-FocusedProcess-Focused

q

Processes (conversions) are arranged based on theProcesses (conversions) are arranged based on thetype of process, i.e., similar processes are groupedtype of process, i.e., similar processes are grouped

together together

q Products/services (jobs) move from departmentProducts/services (jobs) move from department

(process group) to department based on that particular (process group) to department based on that particular job’s processing requirements job’s processing requirements

q Also called “Job Shop” or “Intermittent Production”Also called “Job Shop” or “Intermittent Production”

q

ExamplesExamplesq Auto body repair Auto body repair q Custom woodworking shopCustom woodworking shop



46

Process-FocusedProcess-FocusedProcess-FocusedProcess-Focused

CuttingCutting AssemblyAssembly SandingSanding FinishingFinishingPlaningPlaning

DrillingDrilling

ShapingShaping

TurningTurning

1111 5555 7777

3333

2222

1111 6666

3333

6666

4444

2222Job AJob AJob AJob A

Job BJob B

4444 5555

Custom Woodworking ShopCustom Woodworking Shop



48

Group Technology/Cellular ManufacturingGroup Technology/Cellular ManufacturingGroup Technology/Cellular ManufacturingGroup Technology/Cellular Manufacturing

q

Group TechnologyGroup Technologyq Each part produced receives a multi-digit code thatEach part produced receives a multi-digit code that

describes the physical characteristics of the part.describes the physical characteristics of the part.

q Parts with similar characteristics are grouped intoParts with similar characteristics are grouped into

part families part families

q Parts in a part family are typically made on theParts in a part family are typically made on the

same machines with similar toolingsame machines with similar tooling



49


q

Cellular ManufacturingCellular Manufacturingq Some part families (those requiring significantSome part families (those requiring significant

batch sizes) can be assigned to manufacturing batch sizes) can be assigned to manufacturing

cells.cells.

q The organization of the shop floor into cells isThe organization of the shop floor into cells is

referred to asreferred to as cellular manufacturingcellular manufacturing..

q Flow of parts within cells tend to be more likeFlow of parts within cells tend to be more like

product-focused systems product-focused systems



50


q

Advantages (relative to a job shop)Advantages (relative to a job shop)q Process changeovers simplifiedProcess changeovers simplified

q Variability of tasks reduced (less training needed)Variability of tasks reduced (less training needed)

q

More direct routes through the systemMore direct routes through the systemq Quality control is improvedQuality control is improved

q Production planning and control simpler Production planning and control simpler

q Automation simpler Automation simpler



51


q

DisadvantagesDisadvantagesq Duplication of equipmentDuplication of equipment

q Under-utilization of facilitiesUnder-utilization of facilities

q

Processing of items that do not fit into a familyProcessing of items that do not fit into a familymay be inefficientmay be inefficient



52


q

Candidates for GT/CM are job shops having:Candidates for GT/CM are job shops having:q A degree of parts standardizationA degree of parts standardization

q Moderate batch sizesModerate batch sizes



53

Product/Process Design & Inventory PolicyProduct/Process Design & Inventory PolicyProduct/Process Design & Inventory PolicyProduct/Process Design & Inventory Policy

q

Standard Products and Produce to Stock Standard Products and Produce to Stock q Sales forecasts drive production scheduleSales forecasts drive production schedule

q Maintain pre-determined finished-goods levelsMaintain pre-determined finished-goods levels

q

MRP forecast drives material orderingMRP forecast drives material orderingq Custom Products and Produce to OrderCustom Products and Produce to Order

q Orders set production schedule and drive materialOrders set production schedule and drive material

deliveriesdeliveriesq Design time (Design time ( preproduction planning preproduction planning) may be) may be

required before production can be scheduledrequired before production can be scheduled



54


PROCESSPROCESS

DESIGN INDESIGN IN

SERVICESSERVICES

P D i i S i



55

Process Design in ServicesProcess Design in ServicesProcess Design in ServicesProcess Design in Services

q

Some of the factors important in process design for Some of the factors important in process design for products are also important in services: products are also important in services:

q Nature (level and pattern) of customer demand Nature (level and pattern) of customer demand

q Degree of vertical integrationDegree of vertical integration

q Production flexibilityProduction flexibility

q Degree of automationDegree of automation

q Service qualityService quality

P D i i S ii i S iP D i i S i



56


q

Three schemes for producing and delivering servicesThree schemes for producing and delivering servicesq Quasi-ManufacturingQuasi-Manufacturing

q Customer-as-ParticipantCustomer-as-Participant

q

Customer-as-ProductCustomer-as-Product

P D i i S iP D i i S iP D i i S i



57


q

Quasi-ManufacturingQuasi-Manufacturingq Physical goods are dominant over intangiblePhysical goods are dominant over intangible

serviceserviceq Production of goods takes place along a productionProduction of goods takes place along a production

linelineq Operations can be highly automatedOperations can be highly automatedq Almost no customer interactionAlmost no customer interactionq Little regard for customer relationsLittle regard for customer relationsq Example – bank’s checking encoding operationExample – bank’s checking encoding operation



P D i i S iP D i i S iP D i i S iP D i i S i



59


q

Customer-as-ProductCustomer-as-Productq Service is providedService is provided through personal attention tothrough personal attention to

the customer the customer q Customized serviceCustomized service onon the customer the customer q High degree of customer contactHigh degree of customer contactq There is a perception of high qualityThere is a perception of high qualityq Customer becomes the central focus of the processCustomer becomes the central focus of the process

designdesignq Examples: medical clinic, hair salonExamples: medical clinic, hair salon

P R i iP R i iP R i iP R i i



60

Process ReengineeringProcess ReengineeringProcess ReengineeringProcess Reengineering

q

The concept of drastically changing an existingThe concept of drastically changing an existing process design process design

q Not merely making marginal improvements to athe Not merely making marginal improvements to athe

process process

q A correctly reengineered process should be moreA correctly reengineered process should be more

efficientefficient

q A smaller labor force is often the resultA smaller labor force is often the result

PRODUCT PROCESS AND SERVICE DESIGNPRODUCT PROCESS AND SERVICE DESIGNPRODUCT PROCESS AND SERVICE DESIGNPRODUCT PROCESS AND SERVICE DESIGN



61


DECIDINGDECIDING

AMONGAMONGPROCESSINGPROCESSING

ALTERNATIVESALTERNATIVES

D idi A P i Alt tiD idi A P i Alt tiD idi A P i Alt tiD idi A P i Alt ti



62

Deciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing Alternatives

q

Batch Size and Product/Service VarietyBatch Size and Product/Service Varietyq Capital RequirementsCapital Requirements

q Economic AnalysisEconomic Analysis

q

Cost Functions of Alternative ProcessesCost Functions of Alternative Processes

q Break-Even AnalysisBreak-Even Analysis

q Financial AnalysisFinancial Analysis

Process Design DependsProcess Design DependsProcess Design DependsProcess Design Depends



63

g pg p

on Product Diversity and Batch Sizeon Product Diversity and Batch Size

g pg p

on Product Diversity and Batch Sizeon Product Diversity and Batch Size

Small

Batch

Size

Larg

e

Few Number of Product Designs Many

ProductProductFocused,Focused,

DedicatedDedicated

SystemsSystems

ProductProduct

Focused,Focused,

BatchBatch

SystemSystem

Process-Focused,Process-Focused,

Job ShopJob Shop

Cellular Cellular


C it l R i tC it l R i tC it l R i tCapital Requirements



64

Capital RequirementsCapital RequirementsCapital RequirementsCapital Requirements

q

The amount of capital required tends to differ for The amount of capital required tends to differ for each type of production processeach type of production process

q Generally, the capital required is greatest for product-Generally, the capital required is greatest for product-

focused, dedicated systemsfocused, dedicated systems

q Generally, the capital required is lowest for process-Generally, the capital required is lowest for process-

focused, job shopsfocused, job shops

q The amount of capital available and the cost of capitalThe amount of capital available and the cost of capital

are important considerationsare important considerations

Economic Anal sisEconomic AnalysisEconomic AnalysisEconomic Analysis



65

Economic AnalysisEconomic AnalysisEconomic AnalysisEconomic Analysis

q

Cost Functions of Processing AlternativesCost Functions of Processing Alternativesq Fixed CostsFixed Costs

q Annual cost when production volume is zeroAnnual cost when production volume is zeroq Initial cost of buildings, equipment, and other Initial cost of buildings, equipment, and other

fixed assetsfixed assets

q Variable CostsVariable Costsq Costs that vary with production volumesCosts that vary with production volumesq Labor, material, and variable overheadLabor, material, and variable overhead

C t F ti f P i Alt tiCost Functions of Processing AlternativesCost F nctions of Processing Alternati esCost Functions of Processing Alternatives



66

Cost Functions of Processing AlternativesCost Functions of Processing AlternativesCost Functions of Processing AlternativesCost Functions of Processing Alternatives

Annual Cost of Production ($000)Annual Cost of Production ($000)

UnitsUnits

ProducedProduced

Per YearPer Year

100,000100,000 250,000250,000

Cellular Cellular


PreferredPreferred

AutomatedAutomated

Assembly LineAssembly Line

PreferredPreferred

JobJob

ShopShop

PreferredPreferred500500

1,0001,000

2,0002,000

1,5001,500

J o b S h

o p

J o b S h

o p

C e l l u l a

r M a n u

f.

C e l l u l a

r M a n u

f.

A u to m. Asse m b l y

L i ne

A u to m. Asse m b l y

L i ne

Cost F nctions of Processing Alternati esCost Functions of Processing AlternativesCost Functions of Processing AlternativesCost Functions of Processing Alternatives



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q

ExampleExampleThree production processes (A, B, and C) haveThree production processes (A, B, and C) have

the following cost structure:the following cost structure:

Fixed CostFixed Cost Variable CostVariable Cost

ProcessProcess Per Year Per Year Per Year Per Year AA $120,000$120,000 $3.00$3.00BB 90,00090,000 4.004.00CC 80,00080,000 4.504.50

What is the most economical process for a volume of What is the most economical process for a volume of

8,000 units per year?8,000 units per year?




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q

ExampleExample

TC = FC + v(Q)TC = FC + v(Q)

A: TC = 120,000 + 3.00(8,000) = $144,000 per year A: TC = 120,000 + 3.00(8,000) = $144,000 per year

B: TC = 90,000 + 4.00(8,000) = $122,000 per year B: TC = 90,000 + 4.00(8,000) = $122,000 per year C: TC = 80,000 + 4.50(8,000) = $116,000 per year C: TC = 80,000 + 4.50(8,000) = $116,000 per year

The most economical process at 8,000 units isThe most economical process at 8,000 units is

Process CProcess C, with the lowest annual cost., with the lowest annual cost.




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q

Break-Even AnalysisBreak-Even Analysisq Widely used to analyze and compare decisionWidely used to analyze and compare decision

alternativesalternatives

q Can be displayed either algebraically or Can be displayed either algebraically or

graphicallygraphicallyq Disadvantages:Disadvantages:

q Cannot incorporate uncertaintyCannot incorporate uncertaintyq

Costs assumed over entire range of valuesCosts assumed over entire range of valuesq Does not take into account time value of moneyDoes not take into account time value of money

Break Even AnalysisBreak Even AnalysisBreak Even AnalysisBreak Even Analysis



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Break-Even AnalysisBreak-Even AnalysisBreak-Even AnalysisBreak-Even Analysis

q

ExampleExampleBreak-Even Points of Processes A, B, and C,Break-Even Points of Processes A, B, and C,

assuming a $6.95 selling price per unitassuming a $6.95 selling price per unit

Q = FC / (p-v)Q = FC / (p-v)A: Q = 120,000 / (6.95 - 3.00) = 30,380 unitsA: Q = 120,000 / (6.95 - 3.00) = 30,380 units

B: Q = 90,000 / (6.95 - 4.00) = 30,509 unitsB: Q = 90,000 / (6.95 - 4.00) = 30,509 units

C: Q = 80,000 / (6.95 - 4.50) = 32,654 unitsC: Q = 80,000 / (6.95 - 4.50) = 32,654 units

Process A has the lowest break-even point.Process A has the lowest break-even point.




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q

Financial AnalysisFinancial Analysisq A great amount of money is invested in productionA great amount of money is invested in production

processes and these assets are expected to last a processes and these assets are expected to last a

long timelong time

q The time value of money is an importantThe time value of money is an importantconsiderationconsiderationq Payback periodPayback periodq net present valuenet present valueq internal rate of returninternal rate of returnq Profitability indexProfitability index



Payback PeriodPayback PeriodPayback PeriodPayback Period



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Payback PeriodPayback PeriodPayback PeriodPayback Period

q

Payback Payback is the number of years required to recover theis the number of years required to recover theoriginal cash outlay invested in a project.original cash outlay invested in a project.

q If the project generates constant annual cash inflows,If the project generates constant annual cash inflows,

the payback period can be computed by dividing cashthe payback period can be computed by dividing cash

outlay by the annual cash inflow. That is:outlay by the annual cash inflow. That is:

q

Assume that a project requires an outlay of Rs 50,000Assume that a project requires an outlay of Rs 50,000

and yields annual cash inflow of Rs 12,500 for 7 years.and yields annual cash inflow of Rs 12,500 for 7 years.

The payback period for the project is:The payback period for the project is:

0Initial Investment

Payback = =Annual Cash Inflow

C

C

Rs 50,000PB = = 4 years

Rs 12,000



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q

Unequal cash flowsUnequal cash flows In case of unequal cash inflows,In case of unequal cash inflows,the payback period can be found out by adding up thethe payback period can be found out by adding up the

cash inflows until the total is equal to the initial cashcash inflows until the total is equal to the initial cash

outlay.outlay.

q

Suppose that a project requires a cash outlay of RsSuppose that a project requires a cash outlay of Rs20,000, and generates cash inflows of Rs 8,000; Rs20,000, and generates cash inflows of Rs 8,000; Rs

7,000; Rs 4,000; and Rs 3,000 during the next 4 years.7,000; Rs 4,000; and Rs 3,000 during the next 4 years.

What is the project’s payback?What is the project’s payback?

3 years + 123 years + 12 × (1,000/3,000) months× (1,000/3,000) months

3 years + 4 months3 years + 4 months

Acceptance RuleAcceptance RuleAcceptance RuleAcceptance Rule



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q The project would be accepted if its payback period isThe project would be accepted if its payback period isless than the maximum or less than the maximum or standard payback standard payback period periodset by management.set by management.

q As a ranking method, it gives highest ranking to theAs a ranking method, it gives highest ranking to the

project, which has the shortest payback period and project, which has the shortest payback period andlowest ranking to the project with highest payback lowest ranking to the project with highest payback

period. period.

Net Present Value MethodNet Present Value MethodNet Present Value MethodNet Present Value Method



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Net Present Value MethodNet Present Value MethodNet Present Value MethodNet Present Value Method

q Net present value should be found out by Net present value should be found out by

subtracting present value of cash outflows fromsubtracting present value of cash outflows from

present value of cash inflows. The formula for the present value of cash inflows. The formula for the

net present value can be written as follows:net present value can be written as follows:

31 2

02 3

0

1

NPV(1 ) (1 ) (1 ) (1 )

NPV (1 )

n

n

n

t

t

t

C C C C C

k k k k

C

C k =

= + + + + − + + + +

= −+∑

L

Calculating Net Present ValueCalculating Net Present ValueCalculating Net Present ValueCalculating Net Present Value



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Calculating Net Present ValueCalculating Net Present Value Calculating Net Present ValueCalculating Net Present Value

q

Assume that ProjectAssume that Project X X

costs Rs 2,500 now and iscosts Rs 2,500 now and isexpected to generate year-end cash inflows of Rs 900,expected to generate year-end cash inflows of Rs 900,

Rs 800, Rs 700, Rs 600 and Rs 500 in years 1 throughRs 800, Rs 700, Rs 600 and Rs 500 in years 1 through

5. The opportunity cost of the capital may be assumed5. The opportunity cost of the capital may be assumed

to be 10 per cent.to be 10 per cent.2 3 4 5

1, 0.10 2, 0.10 3, 0.10

4, 0.10 5, 0.

Rs 900 Rs 800 Rs 700 Rs 600 Rs 500 NPV Rs 2,500

(1+0.10) (1+0.10) (1+0.10) (1+0.10) (1+0.10)

NPV [Rs 900(PVF ) + Rs 800(PVF ) + Rs 700(PVF )

+ Rs 600(PVF ) + Rs 500(PVF

= + + + + −

=

10)] Rs 2,500 NPV [Rs 900 0.909 + Rs 800 0.826 + Rs 700 0.751 + Rs 600 0.683

+ Rs 500 0.620] Rs 2,500

NPV Rs 2,725 Rs 2,500 = + Rs 225

−= × × × ×

× −

= −




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q Accept the project when NPV is positiveAccept the project when NPV is positive

NPV > 0 NPV > 0

q Reject the project when NPV is negativeReject the project when NPV is negative

NPV NPV < 0< 0

q May accept the project when NPV is zeroMay accept the project when NPV is zero

NPV = 0 NPV = 0

q The NPV method can be used to select betweenThe NPV method can be used to select betweenmutually exclusive projects; the one with themutually exclusive projects; the one with the

higher NPV should be selected.higher NPV should be selected.

Internal Rate of Return MethodInternal Rate of Return MethodInternal Rate of Return MethodInternal Rate of Return Method



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Internal Rate of Return MethodInternal Rate of Return MethodInternal Rate of Return MethodInternal Rate of Return Method

q The internal rate of return (IRR) is the rate thatThe internal rate of return (IRR) is the rate that

equates the investment outlay with the presentequates the investment outlay with the present

value of cash inflow received after one period.value of cash inflow received after one period.

This also implies that the rate of return is theThis also implies that the rate of return is thediscount rate which makes NPV = 0.discount rate which makes NPV = 0.

31 2

0 2 3

0

1

0

1

(1 ) (1 ) (1 ) (1 )

(1 )

0(1 )

n

n

n

t

t

t

n

t

t

t

C C C C C

r r r r

C C

r

C C

r

=

=

= + + + ++ + + +

= +

− =+

∑

∑

L

Calculation of IRRCalculation of IRRCalculation of IRRCalculation of IRR



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Calculation of IRR Calculation of IRR Calculation of IRR Calculation of IRR

q Uneven Cash FlowsUneven Cash Flows: Calculating IRR by Trial: Calculating IRR by Trialand Error and Error q The approach is to select any discount rate to computeThe approach is to select any discount rate to compute

the present value of cash inflows. If the calculatedthe present value of cash inflows. If the calculated present value of the expected cash inflow is lower than present value of the expected cash inflow is lower thanthe present value of cash outflows, a lower rate shouldthe present value of cash outflows, a lower rate should

be tried. On the other hand, a higher value should be be tried. On the other hand, a higher value should betried if the present value of inflows is higher than thetried if the present value of inflows is higher than the

present value of outflows. This process will be repeated present value of outflows. This process will be repeatedunless the net present value becomes zero.unless the net present value becomes zero.



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q Level Cash FlowsLevel Cash Flows q Let us assume that an investment would cost Rs 20,000Let us assume that an investment would cost Rs 20,000

and provide annual cash inflow of Rs 5,430 for 6 years.and provide annual cash inflow of Rs 5,430 for 6 years.q The IRR of the investment can be found out as follows:The IRR of the investment can be found out as follows:

6,

6,

6,

NPV Rs 20,000 + Rs 5,430(PVAF ) = 0

Rs 20,000 Rs 5,430(PVAF )

Rs 20,000PVAF 3.683

Rs 5,430

r

r

r

= −

=

= =




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q Accept the project whenAccept the project when r r >> k.k.

q Reject the project whenReject the project when r r << k.k.

q

May accept the project whenMay accept the project when r r == k.k.

Profitability IndexProfitability IndexProfitability IndexProfitability Index



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q Profitability indexProfitability index is the ratio of the present valueis the ratio of the present value

of cash inflows, at the required rate of return, toof cash inflows, at the required rate of return, to

the initial cash outflow of the investmentthe initial cash outflow of the investment..



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q The initial cash outlay of a project is Rs 100,000 andThe initial cash outlay of a project is Rs 100,000 andit can generate cash inflow of Rs 40,000, Rs 30,000,it can generate cash inflow of Rs 40,000, Rs 30,000,Rs 50,000 and Rs 20,000 in year 1 through 4.Rs 50,000 and Rs 20,000 in year 1 through 4.Assume a 10 per cent rate of discount. The PV of Assume a 10 per cent rate of discount. The PV of

cash inflows at 10 per cent discount rate is:cash inflows at 10 per cent discount rate is:

.1235.11,00,000Rs

1,12,350RsPI

12,350Rs=100,000Rs112,350Rs NPV

0.6820,000Rs+0.75150,000Rs+0.82630,000Rs+0.90940,000Rs=

)20,000(PVFRs+)50,000(PVFRs+)30,000(PVFRs+)40,000(PVFRsPV 0.104,0.103,0.102,0.101,

==−=

××××

=

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q The following are the PThe following are the PIIacceptance rules:acceptance rules:

q Accept the project when PI is greater than one. PI > 1Accept the project when PI is greater than one. PI > 1q Reject the project when PI is less than one. PI < 1Reject the project when PI is less than one. PI < 1q

May accept the project when PI is equal to one. PI = 1May accept the project when PI is equal to one. PI = 1

q The project with positive NPV will have PI greater The project with positive NPV will have PI greater than one. PI less than means that the project’sthan one. PI less than means that the project’s

NPV is negative. NPV is negative.

Deciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing Alternatives



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Deciding Among Processing AlternativesDeciding Among Processing AlternativesDeciding Among Processing Alternativesg g g

q Assembly ChartsAssembly Charts (Gozinto Charts)(Gozinto Charts)q Macro-view of how materials are unitedMacro-view of how materials are unitedq Starting point to understand factory layout needs,Starting point to understand factory layout needs,

equipment needs, training needsequipment needs, training needsq

Ideal for getting bird’s-eye view of processIdeal for getting bird’s-eye view of processq Process ChartsProcess Charts

q Details of how to build product at each processDetails of how to build product at each processq Includes materials needed, types of processesIncludes materials needed, types of processes

product flows through, time it takes to process product flows through, time it takes to process product through each step of flow product through each step of flow

q Useful for comparing operationsUseful for comparing operations

Wrap-Up: World Class PracticeWrap-Up: World Class PracticeWrap-Up: World Class PracticeWrap-Up: World Class Practice



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Wrap Up: World Class PracticeWrap Up: World Class PracticeWrap Up: World Class PracticeWrap Up: World Class Practice

q Fast new product introductionFast new product introductionq Design products for ease of productionDesign products for ease of productionq Refine forecastingRefine forecastingq Focus on core competencies ... less verticalFocus on core competencies ... less vertical

integrationintegrationq Lean productionLean productionq Flexible automationFlexible automationq Job shops move toward cellular manufacturingJob shops move toward cellular manufacturingq Manage information flow ..... automate and simplify!Manage information flow ..... automate and simplify!

Module-03 - Product- Process & Service Design

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