Designing Goods and Servicesand Process Selection

Chapter 3

MGMT 326

Foundations

of Operatio

nsIntroductio

n

Strategy

QualityAssuran

ce

Capacity,Facilities,& WorkDesign

Planning& Control

Products &

ProcessesProduct

Design

ProcessDesign

Designing Goods and Services

Service Design• Service package• Approaches to service design

Designing Goods

ProductCharacteristics• Form design• Functional design• Learning from other companies

Design Methods• Design for manufacture• Concurrent engineering

Breakeven Analysis in Product Screeningand Process Selection

Basic Concepts• Design and strategy• Feasibility study• Operations issues

Strategy and Product Design

The core product may be a good or a service Product design should support the business

strategy Product design should meet the needs of a

target market. Product design should give the company a

competitive advantage.

Feasibility Study

Purpose is to determine whether the company can make a product that Meets the needs of customers in a target market Can be made by the company with the required

level of quality and delivery schedule Can be sold at a price that customers are willing

to pay While allowing the company to meet its profit

targets. This depends on costs estimated by Accounting and revenue estimated by Marketing

Operations Issues in Product Design

Product design and technology Product design is a joint responsibility of

marketing, operations, engineering (in manufacturing) and Accounting/Finance

Process technology (along with engineering)

Would we need a new or modified facility? Can the firm make this product with

consistent quality? How many workers will we need?

What skills will they need?

Breakeven Analysisin Product Screening

The breakeven point (in terms of units) is the volume at which total costs = revenue Q = quantity sold, SP = selling price Revenue = (SP)Q F = fixed cost, VC = variable cost per unit At the breakeven point (QBE),

F + (VC)Q=(SP)Q

VCSP

FQBE

Product Screening ExampleProblem 1, pages 90 -91

Given: F= fixed cost = $40,000VC = variable cost per unit = $50SP = selling price = $70

VCSP

FQBE

Interpreting Breakeven Analysis

In Product Screening

When Q = QBE, the firm does not make money or lose money

When Q < QBE, revenue < costs, the firm loses money

When Q > QBE, revenue > costs, the firm makes a profit

QBE will be different for different production technologies

Breakeven Analysis in Process Selection

Problem 2, Page 91

Current EquipmentProcess A

New EquipmentProcess B

Fixed cost $40,000 $60,000

Variable costper unit

$50 $25

Total cost $40,000 + 50Q $60,000 + 25QPoint of indifference: costs for the 2 processes are equal$40,000 + 50Q= $60,000 + 25Q25Q = $20,000, so Q = 800

Interpreting Breakeven Analysis

in Process Selection

If expected sales < 800,use process A

If expected sales > 800, use process B

Designing Services – Service Package

Physical elements: facility, equipment and furnishings, inventories

Sensory and aesthetic aspects Psychological benefits Quality standards

Approaches to Service Design

Design for efficiency: Compete on consistency, cost, speed High standardization Limited variety Automation may be used High-volume services purchase at low

cost. Example: fast food

Approaches to Service Design (2)

Customer involvement in producing the service The customer does part of the work Reduces costs and may allow the

customer to do some customization Example: self-service salad bar

Approaches to Service Design (3)

High customer attention Highly customized service, provided

by highly trained people Used in professional services

(medical care, legal services, high-end tax preparation services)

Also used by luxury retailers, hotels, restaurants

Designing Goods

Form design: Sensory aspects of the product (aesthetics) Size, color, shape, sound "Look and feel" Form design contributes to customer's

impressions of quality Functional design: how the product

performs

Form Design: How the Product Looks, Etc.

Ipod Touch Toyota Camry

Functional Design of GoodsWhat the Product Does

2009 Toyota Prius2009 Honda Civic Hybrid

2009 Honda Civic NGVNatural Gas Vehicle

Functional Design of GoodsWhat the Product Does

Functional Design of Goods (2)How the Product Performs

Fitness for use: product performs as intended

Durability: how long the product lasts

Reliability: consistent performance

Maintainability: ease and cost of repairs

Learning from Other Companies

Benchmarking: comparing your operations with those of a "best in class" firm Product benchmark – compare your product

with competing products Process benchmark

How competing products or services are produced

How other companies perform business functions

Cost benchmark – what your competitors spend to make comparable products

Learning from Other Companies (2)

Reverse engineering: taking your competitor's products apart and figuring out how it is made Physical products Software

Market research on competitor's products: customer needs and satisfaction

Design for Manufacture

Value engineering: Eliminate product features that add cost but do not add value to the customer.

Reduce the number of parts. Reduces the cost of ordering, purchasing,

and storing parts. Reduces the space required to hold

inventory Reduces the number of tools and operations

required (by eliminating bolts, screws, etc.) Reduces the time required to make the

product

Design for Manufacture (2)

Example of reducing the number of parts, operations, and tools.

Design for Manufacture (3)

Modular design: Design products to be assembled from standard components. Example: Dell buys standard video cards,

processors, power supplies, hard drives, etc., and assembles computers

Use standard parts to reduce design costs and purchasing costs. Examples: Computer makers often buy

standard power supplies.

Sequential vs. Concurrent Design

Concurrent Engineering

Design the product and the process at the same time.

Use a design team that includes marketing, operations, engineering, operations, and suppliers. Stay in touch with customers during the

design process. Requires good project

management and coordination among all groups involved.

Advantages of Concurrent Engineering

Increases the chances of a successful product.

Shorter design time Shortens time to market. Reduces design costs

Supplier expertise can help design a product that meets customer needs at lower cost

Reduces the need to make expensive changes in the product and the process later

Process Selection

ProcessDesign Tools• Reengineering• Flowcharts

Intermittent

• Project• Batch

Process Types

Repetitive• Assembly line• Continuous

Impact of Process Type• Layout• Inventory policy• Costs

Intermittent Operations

Intermittent operations: processes used to produce a variety of products with different processing requirements at lower volumes Project processes: used to make one-of-a-

kind items to customer specifications Batch processes: used to make small

quantities of products in batches based on customer orders or specifications Also called job shops

Repetitive Operations

Repetitive operations: Processes used to make one product or a few standardized products in high volume Line process – also called an assembly line

or flow shop May have assemble-to-order options

Continuous process: operates continuously, produces a high volume of a fully standardized product

Some firms use more than one type of process

Underlying Process Relationship Between Volume and Standardization

High-volumeprocesses areusually morestandardizedthan low-volumeprocesses.

Process Choice and Layout

Intermittent operations usually use a process (department) layout: workers & equipment are grouped by function•Different products may take different paths through the production processRepetitive operations use a product layout: workers & equipment are grouped in the order in which they will be needed. The product passes from one work station to the next.

Process Choice and Inventory Policy

Process Choice and Costs

Intermittent processes Lower capital costs than repetitive processes Lower breakeven point than repetitive processes High variable cost per unit High total cost per unit

Repetitive processes Higher capital costs than intermittent processes Higher breakeven point than intermittent

processes Low variable cost per unit Low total cost per unit if volume is high

Process Design Tools

Process flow analysis is a tool used to analyze and document the sequence of steps within a total process. Usually first step in process reengineering.

Process reengineering is the fundamental rethinking and radical redesign of a process to bring about dramatic improvements in performance Cost Quality Time Flexibility

Process Design Tools (2)

Both operations processes and business processes can be re-engineered.

Re-engineer a process before you automate it or computerize it.

Process Flow in a Pizza Restaurant