Chapter 3: Design

Of The Operations
System
3.1. Products and Services
design

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 Purpose of a product design
• designs are ‘creative’ in nature and they should be so; but the design should
serve the organizational objectives while being creative.
• Since an organization has a purpose, the product design should help to serve
that larger purpose.
• Providing value to the customer, the return on investment to the company and
the competitiveness of the company should form the basis of the product
design effort.
• A product’s design has tremendous impact on:
what materials and components would be used,
which suppliers will be included,
what machines or what type of processes will be used to manufacture it,
 where it will be stored,
how it will be transported.
• Since a customer does not necessarily imply an already tied-up
customer, but also a potential one, what and how will the general yet
target customer community be informed depends upon what the
design of the product is.
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 Definition
• Product design - is the process of deciding on the unique
characteristics and features of the company’s product and
service.
• Process selection - is the development or acquisition of the
process necessary to produce the designed product.
• The two go together – products require processes and
processes limit what products can be produced.
• A company can have a highly innovative design for its product,
but if it has not determined how to make the product in a cost
effective way, the product will stay a design forever.
• Product design and process selection affect product quality,
product cost, and customer satisfaction.

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 Design of Goods vs. Services
• Product design deals with its form and function.
• Form implies the shape and appearance of the product while function is
related to the working of the product.
• It specifies:
materials to be used
determines dimensions and tolerances
defines appearance of the product
set standards for performance
• Service design is unique in that we are designing both the service and the
entire service concept.
• As with a tangible product, the service concept is based on meeting
customer needs.
• The service design, however, adds the aesthetic and psychological benefits of
the product.
• Service design defines the characteristics of a service, specifies what physical
items, sensual benefits, and psychological benefits is to receive from service.
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Cont’d…

Product design Service design

 defines appearance of product  specifies what physical items,
 specifies which materials are to sensual benefits, and psychological
be used benefits is to receive from service
 determines dimensions and  depends on trained personnel
tolerances  defines environment in which
 value stored in the product service will take place.
 often standardized  value conveyed as used
 often designed in industry  often customized
environment  designed in market ( with
 Quality inherent in product customer) environment.
 quality inherent in process

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Cont’d….

Steps in the product design process

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A ) Idea generation- To remain competitive, companies must be innovative and
bring out new products regularly.
Sources of product ideas
1. Within the organization (Market researchers, Sales people, R&D, company
workers, managers)
2. Customers complaints or suggestions
3.Technological developments
4.Competitors- way of using competitors’ ideas:
i) benchmarking- refers to finding the best-in-class product or process,
measuring the performance of your product or process against it, and making
recommendations for improvement based on the results. The benchmarked
company may be in an entirely different line of business.
ii) Reverse Engineering- carefully disassembling the product of competitor and
analyze its parts and features to include best features in to its own product.
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Reverse engineering at Ford company

Audi’s accelerator
Pedal - Germany

Toyota’s fuel-gauge Taurus automobile- Ford

accuracy
Of 400 features of competitors’
products, more than 300 were
copied, adapted or enhanced
BMW’s tire and jack
storage
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iii) Perceptual maps- a visual method of comparing customer
perceptions of a company’s product with competitor’s products.

A Perceptual Map
of Breakfast
Cereals

*The lack of an entry in the good-taste, high-nutrition category

suggests there are opportunities for this kind of cereal in the market

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 Idea generation cont’d…
5. Suppliers-early supplier involvement (ESI) - where suppliers
are involved in the early stages of product design.
• For products and services whereby customers are attracted by
superior technology and creative ideas, research and
development is the primary source of new product ideas.
• Research & Development (R&D) is an Organized efforts to
increase scientific knowledge or product innovation & may
involve:
• Basic Research advances knowledge about a subject
without near-term expectations of commercial applications.
• Applied Research achieves commercial applications.
• Development converts results of applied research into
commercial applications.
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B) Product( idea) Screening- involves evaluating ideas generated to
determine their likelihood of success.
•Approximately 80 percent of ideas do not make it past the screening
stage .
•Product concept is a detailed description of an idea, which you
describe from the perspective of your customer.
•It is the value of the product idea to your customer - its value
proposition
•Taking your customers' viewpoint when describing your product
concept will help you test and evaluate how responsive your market
will be to your product.
Crucial questions to identify the value proposition of your product:
•What extra value does the product bring to the marketplace?
•How does the product create value for the customer?
•How is the product different from what is offered in the marketplace now?
•Will customers be interested in and willing to buy your product?
•How many customers will buy your product? Will they buy more than one?
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C) Feasibility study/product screening -The company’s product
screening team evaluates the product design idea according to the
needs of the major business functions; that is:
• Feasibility study consists of a market analysis, an economic
analysis, and a technical/strategic analysis.
a) Operations /Technical
• What are the production needs of the proposed new product and how do they match our
existing resources?
• Will we need new facilities, technology and equipment?
• Do we have the labor and management skills to make the product?
• Can the material for production be readily obtained?
• Does the new product provide a competitive advantage for the company?

b) Marketing
• What is the potential size of the market for the proposed new product?
• How much effort will be needed to develop a market for the product and
• What is the long-term product potential? through customer surveys, interviews, focus
groups, or market tests
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c) Finance
• What is the proposed new product’s financial potential, cost, and return on
investment?
• Is the risk or capital investment excessive?
• Unfortunately, there is no magic formula for deciding whether or not to
pursue a particular product idea.
• Managerial skill and experience, however, are key.
• Fortunately, we have decision-making tools to help us evaluate new product
ideas.
• A popular one is break-even analysis – computing the breakeven point.
• An assessment can then be made as to how difficult or easy it will be to
cover costs and make a profit.
• A product with a break-even quantity that is hard to attain might not be a
good product choice to pursue

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Cont’d….

BEQ=

 Fixed cos t 
BEQ =  
 selling price / unit  var iable cos t / unit 

Output of feasibility study

• Performance specification report –a written report for product concepts
that pass the feasibility study and are approved for development- they
describe the function of the product-what should the product do to
satisfy customer needs, which leads to prototyping.

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D) Preliminary Design and Testing- Design engineers translate general
performance specifications into technical specifications.
• It involves building prototypes( Preliminary design) and testing them.
• Rapid prototyping: creating, testing, and revising a preliminary design model.
• Creates preliminary design models that are quickly tested and either
discarded (as fast failures) or further refined.
• Changes are made based on test results, and the process of revising,
rebuilding a prototype, and testing continues until a visible design is
determined. For service companies this may entail testing the offering on a
small scale and working with customers to refine the service offering.
• Staying long in testing risks imitation of the product by competitor, while
rushing creates the risk that all the “bugs” have not been worked out, which
can prove very costly. The iterative process of revising, rebuilding a
prototype, and testing involves form and functional design, as well as
production design.
• It is important that these design decisions be performed concurrently at the
rapid prototype stage as design decisions affect sales strategies, efficiency of
manufacture, assembly quality, speed of repair, and product cost.
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 Concurrent design:
• a new approach to design that involves the simultaneous design
of products and processes by design teams.
• Improves quality of early design decisions and cost
• Involves suppliers
• Incorporates production process
• Uses a price-minus system unlike cost plus in traditional
approach
• Scheduling and management can be complex as tasks are done in
parallel.

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Concurrent engineering

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 Sequential vs. Concurrent design
Traditional approach:
• “over-the-wall” approach, because the designers would throw their design
“over-the-wall” to operations that then had to decide how to produce the
product.
• There are many problems with the old approach:
First, it is very inefficient and costly- Concurrent engineering allows
everyone to work together so these problems do not occur.
Second, it takes a longer amount of time than when product and process
design are performed concurrently
Third, it does not create a team atmosphere, which is important in today’s
work environment. Rather, it creates an atmosphere where each function
views its role separately in a type of “us versus them” mentality
• With concurrent engineering the team is responsible for designing and
getting the product to market.
• Team members continue working together to resolve problems with the
product and improve the process.
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Typical BMW( top two) and Ford (bottom) car
form

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 Reliability

Reliability: The ability of a product, part, or system to perform its intended function under a
prescribed set of conditions for specified period of time.
• It is used by customers:
 to compare alternatives,
impact on repeat sales,
reflection on producer’s image and
 legal implication if it is too low
The three dimensions of reliability:
Reliability as probability – if an item has a reliability of say 0.9, this means the probability
that it will function as intended is 90% and that the probability it will fails is 10%.
Failure: Situation in which a product, part, or system does not perform as intended.
• This includes instances in which the item :
i. does not function at all,
ii. it is substandard or
• do not function as intended. E.g.. smoke alert may not detect the smoke at all or an alarm is
too low to give warning or might sound an alarm even though no smoke is present.
Normal operating conditions: The set of conditions under which an item’s reliability is
specified. Failure to regard these conditions leads to premature failure of parts or system
completely.
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 Improving reliability

• Reliability can be improved by :

• simplifying product design, improving the reliability of individual
components, or
• adding redundant components.
• Products that are easier to manufacture
or assemble, are well maintained, and have users who are trained in proper
use have higher reliability.

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 E. Final product Design - Product design process cont’d…

• This is where final product specifications are drawn up.

• The final specifications are then translated into specific processing
instructions to manufacture the product, which include :
• selecting equipment,
• outlining jobs that need to be performed,
• identifying specific materials needed and suppliers that will be used,
and
• all the other aspects of organizing the process of product production.
• Launching a new product involve ramping up production, coordinating
supply chain, rolling out mkt plans.

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 Issues for Product Design/ Development
1. Robust Design
2. Modular Design
3. Design for Manufacturing
4. Design for Simplification
5. Computer-Aided Design (CAD)
6. Computer-Aided Manufacturing (CAM)
7. Virtual Reality Technology
8. Product Life Cycle
9. Design for Disassembly
10. Ethics and Environmentally Friendly Design

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1. Robust Design
 Product is designed so that small variations in production or assembly
do not adversely affect the product
 Design that results in products or services that can function over a
broad range of conditions
 Typically results in lower cost and higher quality
Taguchi Approach: Robust Design
• Design a robust product
• Insensitive to environmental factors either in manufacturing or in use.
• Central feature is Parameter Design limiting factor: a fact or circumstance
that restricts how something is done or what can be done.
• Determines:
• factors that are controllable and those not controllable
• their optimal levels relative to major product advances

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2. Modular Design
 Products designed in easily segmented components
 Adds flexibility to both production and marketing
 Improved ability to satisfy customer requirements
 Helps to achieve mass-customization
3. Design for Manufacturing
Beyond the overall objective to achieve customer satisfaction while making a
reasonable profit is:
Designing for Manufacturing(DFM)
The designers’ consideration of the organization’s manufacturing capabilities
when designing a product.
The more general term design for operations encompasses services as well
as manufacturing

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 Manufacturability
• Manufacturability is the ease of fabrication and/or assembly which is important
for:
• Cost Qu
alit
y

t
Cos
• Productivity
• Quality

Productivity

4. Design for simplification

Design simplification - reducing the number of parts and
features of the product whenever possible or reducing
unnecessary variety in the product line by decreasing the
number and variety of products produced

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5. Computer Aided Design (CAD)

6. Computer-Aided Manufacturing (CAM)

 Utilizing specialized computers and program to control
manufacturing equipment
 Often driven by the CAD system (CAD/CAM)
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7. Virtual Reality Technology
 Computer technology used to develop an interactive, 3-D model of a
product from the basic CAD data
 Allows people to ‘see’ the finished design before a physical model is
built
 Very effective in large-scale designs such as plant layout

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8. Product Life Cycle
• Most products go through a series of stages of changing product
demand called the product life cycle.
• There are typically four stages of the product life cycle: introduction,
growth, maturity, and decline.

• Products in the introductory stage are not well defined and neither is their
market. Often all the “bugs” have not been worked out and customers are
uncertain about the product.
• In the growth stage, the product takes hold and both product and market
continue to be refined.
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Cont’d….
• The third stage is that of maturity, where demand levels off and there are
usually no design changes: the product is predictable at this stage and so is
its market. Many products, such as toothpaste, can stay in this stage for
many years.
• Finally, there is a decline in demand, because of new technology, better
product design, or market saturation.
• The first two stages of the life cycle can collectively be called the early
stages of the product life cycle because the product is still being improved
and refined, and the market is still in the process of being developed.
• The last two stages of the life cycle can be referred to as the later stages
because here the product and market are both well defined. Understanding
the stages of the product life cycle is important for product design
purposes such as :
knowing at which stage to focus on design changes.
when considering a new product, the expected length of the life cycle is
critical in order to estimate future profitability relative to the initial
investment
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9. Design for Disassembly
Design for disassembly- is the ease with which product’s component parts can be
dismantled or disassembled

 Remanufacturing - is a concept that has been gaining increasing importance, as

our society becomes more environmentally conscious and focuses on efforts
such as recycling and eliminating waste.
 uses components of old products in the production of new ones.
 In addition to the environmental benefits, there are significant cost benefits
because remanufactured products can be half the price of their new
counterparts.
 Remanufacturing has been quite popular in the production of computers,
televisions, and automobiles.
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Recycling: recovering materials for future use
Recycling reasons:
 Cost savings
 Environment concerns
 Environment regulations

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10. Ethics and Environmentally Friendly Designs
It is possible to enhance productivity, drive down costs, and
preserve resources
Effective at any stage of the product life cycle
 Design
 Production
 Destruction
The Ethical Approach
 View product design from a systems perspective
 Inputs, processes, outputs
 Costs to the firm/costs to society
 Consider the entire life cycle of the product

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 Goals for Ethical and Environmentally Friendly Designs
1. Develop safe and more environmentally sound products
2. Minimize waste of raw materials and energy
3. Reduce environmental liabilities
4. Increase cost-effectiveness of complying with environmental regulations
5. Be recognized as a good corporate citizen

Guidelines for Environmentally Friendly Designs

1. Make products recyclable
2. Use recycled materials
3. Use less harmful ingredients
4. Use lighter components
5. Use less energy
6. Use less material

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 Defining The Product
 First definition is in terms of functions
 Rigorous specifications are developed during the design phase
 Manufactured products will have an engineering drawing
 Bill of material (BOM) lists the components of a product

Product Documents

 Engineering drawing
 Shows dimensions, tolerances, and materials
 Shows codes for Group Technology
 Bill of Material
 Lists components, quantities and where used
 Shows product structure

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 Service Design
• Services are acts, deeds, performances or relationships that produce time,
place, form or psychological utilities for customers.
• Service- Something that is done to or for a customer
• Service delivery system- The facilities, processes, and skills needed to provide a
service
• Product bundle- The combination of goods and services provided to a
customer
• Service package- The physical resources needed to perform the service
 Service typically includes direct interaction with the customer
 Increased opportunity for customization
 Reduced productivity
 Cost and quality are still determined at the design stage
 Delay customization
 Modularization
 Reduce customer interaction, often through automation
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Service Design
(a) Customer participation in design such as
pre-arranged funeral services or cosmetic
surgery

(b) Customer participation in delivery

such as stress test for cardiac exam or
delivery of a baby

(c) Customer participation in design and delivery

such as counseling, college education, financial
management of personal affairs, or interior
decorating

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 Designing Services
• Service Characteristics
• Pure services
• Quasi-Manufacturing
• Mixed services
• Service Package
• The physical goods
• The sensual benefits
• The psychological benefits
• Differing designs
• Substitute technology for
people
• Get customer involved
• High customer attention
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 Service Design Process
1) Service concept
• purpose of a service; it defines target market and customer experience.
• It also defines how our service is different from others and how it will compete in the
marketplace.
• Sometimes services are successful because their service concept fills a previously
unoccupied niche or
• differs from the generally accepted mode of operation
2) Service package
From the service concept, a service package is created to meet customer needs
It is mixture of physical items, sensual benefits, and psychological benefits
 For a restaurant:
• the physical items consist of the facility, food, drinks, tableware, napkins, and other
touchable commodities.
• The sensual benefits include the taste and aroma of the food and the sights and
sounds of the people.
Psychological benefits are rest and relaxation, comfort, status, and a sense of well-being.

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Example: A fast-food restaurant promises nourishment with speed. The customer is served
quickly and is expected to consume the food quickly. Thus, the tables, chairs, and booths
are not designed to be comfortable, nor does their arrangement encourage lengthy or
personal conversations. The service package is consistent.
3. Service specifications
From the service package, service specifications are developed for performance, design,
and delivery.
I) Performance specifications - outline expectations and requirements for general and
specific customers. Performance specifications are converted into design specifications and,
finally, delivery specifications (in lieu of manufacturing specifications).
ii) Design specifications - must describe the service in sufficient detail for the desired service
experience
to be replicated for different individuals at numerous locations.
 The specifications typically consist of activities to be performed, skill requirements and
guidelines for service providers, and cost and time estimates. Facility size, location, and
layout, as well as equipment needs, are also included.
iii) Delivery specifications - Outline the steps required in the work process, including the
work schedule, deliverable s, and the locations at which the work is to be performed.

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Exercise

• Instruction: select only one of these two questions and

give your answer on a paper
• Be very precise and clear when giving your answers

1. List down and discuss the product design process.

2. What are the 10 common issues of product
design/development? List and discuss briefly.

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3.2. PROCESS SELECTION

• A process is a group of related tasks with specific inputs and outputs.

Processes exist to create value for the customer, the shareholder, or society.
• Process design defines what tasks need to be done and how they are to be
coordinated among functions, people, and organizations. Planning,
analyzing, and improving processes are the essence of operations
management. Processes are planned, analyzed, and redesigned as required
by changes in strategy and emerging technology.
• Process strategy is an organization’s overall approach for physically
producing goods and providing services. Process decisions should reflect
how the firm has chosen to compete in the marketplace, reinforce product
decisions, and facilitate the achievement of corporate goals.
• A firm’s process strategy defines its:
• Vertical integration: The extent to which the firm will produce the
inputs and control the outputs of each stage of the production process.

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 • Capital intensity: The mix of capital (i.e., equipment, automation) and
labor resources used in the production process.
• Process flexibility: The ease with which resources can be adjusted in
response to changes in demand, technology, products or services, and
resource availability.
• Customer involvement: The role of the customer in the production
process.
• Process planning determines how a product will be produced or a service
provided. It decides which components will be made in-house and which will
be purchased from a supplier, selects processes, and develops and
documents the specifications for manufacture and delivery.
Types of production Processes
• Production processes can be classified into projects, Job-Shop Production,
batch production, mass production, and continuous production.
1. Project
• Projects are used to make one-of-a-kind products exactly to customer
specifications. These processes are used when there is high customization
and low product volume, because each product is different.
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• Examples can be seen in construction, shipbuilding, medical procedures, and
creation of artwork, custom tailoring, and interior design. With project
processes the customer is usually involved in deciding on the design of the
product. Project take a long time to complete, involve a large investment of
funds and resources, and produce one item at a time to consumer order.
2. Job-Shop Production
Job-shop productions are characterized by manufacturing one or few quantity
of products designed and produced as per the specification of customers
within prefixed time and cost. The distinguishing feature of this is low volume
and high variety of products. A job-shop comprises of general-purpose
machines arranged into different departments. Each job demands unique
technological requirements, demands processing on machines in a certain
sequence.
Job-shop Production is characterized by:
• High variety of products and low volume.
• Use of general purpose machines and facilities.
• Highly skilled operators who can take up each job as a challenge because of
uniqueness.
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• Large inventory of materials, tools, parts.
• Detailed planning is essential for sequencing the requirements of each
product, capacities for each work center and order priorities.
3. Batch Production
• Batch productions are used to produce small quantities of products in
groups or batches based on customer orders or product specifications.
They are also known as job shops. The volumes of each product produced
are still small, and there can still be a high degree of customization.
• Examples can be seen in bakeries, education, and printing shops furniture
making. The classes you are taking at the university use a batch process.
Batch production processes many different jobs through the production
system at the same time in groups or batches. Products are typically made
to customer order, volume (in terms of customer order size) is low, and
demand fluctuates.

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Batch Production is characterized by:
• Shorter production runs.
• Plant and machinery are flexible.
• Plant and machinery set up is used for the production of item in a batch and
change of set up is required for processing the next batch.
• Manufacturing lead-time and cost are lower as compared to job order
production.
4. Mass Production
• These are designed to produce a large volume of a standardized product for
mass production. They are also known as flow shops, flow lines, or assembly
lines. With line processes the product that is produced is made in high
volume with little or no customization.
• Think of a typical assembly line that produces everything from cars,
computers, television sets, shoes, candy bars, even food items. The machines
are arranged in a line or product layout.
• Product and process standardization exists and all outputs follow the same
path. Product demand is stable, and product volume is high.
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Goods that are mass produced include automobiles, televisions, personal
computers, fast food, and most consumer goods.
Mass Production is characterized by:
• Standardization of product and process sequence.
• Dedicated special purpose machines having higher production capacities
and output rates.
• Large volume of products.
• Shorter cycle time of production.
• Lower in process inventory.
• Flow of materials, components and parts is continuous and without any
back tracking.
• Production planning and control is easy.
• Material handling can be completely automatic.

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5. Continuous processes
• Continuous production operates continually to produce very high volume of
fully standardized commodity products. The system is highly automated
and is typically in operation continuously 24 hours a day.
• Examples include oil refineries, water treatment plants, and certain paint
facilities. The products produced by continuous processes are usually in
continual rather than discrete units, such as liquid or gas.
• They usually have a single input and a limited number of outputs. Also,
these facilities are usually highly capital intensive and automated.
Continuous processes are more extreme cases of high volume and product
standardization than are line processes.
Continuous production is characterized by:
• Dedicated plant and equipment with zero flexibility.
• Material handling is fully automated.
• Process follows a predetermined sequence of operations.
• Component materials cannot be readily identified with final product.
• Planning and scheduling is a routine action.
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Product-Process Matrix

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3.3. Capacity planning
Capacity planning-determination of both long and short term capacity
requirements and deciding how these needs can be met.
Capacity questions:
How much should a plant be able to produce?
How many customers should a service facility should be able to serve?
What kinds of problems arise as the production system expands?
When do we need to determine productive capacity requirements?
When designing a new system
 Expanding an existing one
 For the shorter operating periods during which the plant size cannot be
changed.
Capacity: Definition- the amount of output that a system is capable of
achieving over a specified period of time or Capacity may also refer to an
upper limit or maximum ceiling on the load that an operating unit can
handle.
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• The operating unit might be a plant, department, a machine, a store or a
worker.
• The load can be specified in terms either inputs or outputs.
• In selecting a measure of capacity, it is important to choose one that does
not require revision; Birr is a poor measure of capacity since price change
necessitates continual updating of that measure.
• Where only one product or service is involved, the capacity of the
productive unit is measured in terms of that item. Eg. Producing 45
casting per hour
• When multiple products are involved and when it is impractical to list
capacity in terms of all products, especially if there are frequent changes
in mix of output, availability of resources can be used as measure of
capacity. Eg in hospitals, no of beds; in mfg organizations, machine hrs
etc.
Note: No measure of capacity will be appropriate in every situation. Rather
measure of capacity must be somewhat tailored to the situation at hand.

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Examples of commonly used measures of capacity
Type of business Resource available Output
Automobile mfg. Labor hrs, Machine No of cars per shift
hrs
Steel mill Size of furnace Tones of steel per week
Oil refinery Size of refinery Gallons of fuel oil per day
Farm No of acres, cows Tones of grain per year, gallon of milk
per week
Restaurants No of tables No of meals served per day
Theater No of seats No of performances per week
• Capacity of an operating facility is an important piece of information for
planning purposes: it enables managers to quantify production capability, in
terms of either inputs or outputs, and thereby make other decisions or plans
related to those quantities.
• The basic questions in capacity planning of any sort are the following:
 What capacity is needed? It is the most fundamental in any organizations
which relates to the products and services that management intends to
produce or provide, and govern all other decisions relative to capacity,
facilities, location and the like.
 How much is intended?
 When it is needed?
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 Types of Capacity:

• Design or Theoretical Capacity (DC): The maximum output under ideal

conditions as designed by engineers.
• Effective or System Capacity (EC): The maximum output under operating
restrictions such as schedules.
• Actual or operating capacity (AC): This is the rate of output actually
achieved. Accordingly, AC is less than EC and EC is less than DC.
• There are two measures of system’s effectiveness: Efficiency and Utilization
i. Efficiency- is the ratio actual output to effective capacity.

ii. Utilization – the ratio of actual output to designed capacity.

Utilization
Note: Actual output cannot exceed effective capacity and is often less than
effective capacity because of machine breakdown, absenteeism, and
effective capacity often less than design capacity. (AO<EC<DC)

04/25/2023 55
Example: A plastic firm has four work centers ( A, B, C, and D
in series with individual capacities( units/day) and actual output
as shown.

306
360 400 Actual out
450 390 put/day

•What is:
i. the system capacity?
ii. The system efficiency?
Solution
a) system capacity = capacity of most limited component in the line
= 360 units/day
b) system efficiency = SE= actual output/ system capacity
= 306/360
= 85%
04/25/2023 56
 • It is quite common for managers to focus exclusively on efficiency, but in most
instances it may be misleading.
• This happens when effective capacity is low compared to design capacity. In
those cases, high efficiency could seem to indicate effective use of resources
when that is not the case.
• The following example will illustrate this point.
Design capacity = 80 trucks/ day
Effective capacity = 40 trucks /day
Actual out put = 36 units/ day 
= 90 %
= 45 %
Thus, compared to the effective capacity of 40 per units, 36 units per day looks
pretty good. However, compared to the design capacity of 80 units per day, 36
units per day is much less impressive although probably more meaningful.
• Note: Because effective capacity acts as a lid on actual output, the real key to
improving capacity utilization is to increase effective capacity.
04/25/2023 57
 Determinants of Effective Capacity

Facilities Process
 Design, Location, Layout, Quantity Capabilities
Environment Quality capacities
Product/service Human factors
Design Job content, Job design
Product/service mix Motivation, Compensation
Operational Absenteeism, turnover, learning rates,
Scheduling training
Materials mgt External factors
Quality assurance Product standards
Maintenance policies Safety regulations
Equipment breakdowns Unions
(Read Stevenson for detail) Pollution control standards
04/25/2023 58
 Considerations in Adding Capacity

Many issues must be considered when adding capacity. The important ones
are maintaining system balance, frequency of capacity additions, and the use
of external capacity.
1. Maintaining System Balance: In a perfectly balanced plant, the output of
stage 1 provides the exact input requirement for stage 2. Stage 2’s output
provides the exact input requirement for stage 3 and so on. In practice,
however, achieving such a “perfect” design is usually both impossible and
undesirable.
• One reason is that the best operating levels for each stage generally differ.
• Another reason is that variability in product demand and the processes
themselves generally lead to imbalance except in automated production lines,
which, in essence, are just one big machine.
Ways of dealing with imbalances:
i) to add capacity to those stages that are the bottlenecks(a stage that limits
the capacity of the process). This can be done by temporary measures
such as scheduling overtime, leasing equipment, or going outside the
system and purchasing additional capacity through subcontracting.
04/25/2023 59
04/25/2023 60
ii) use of buffer inventories in front of the bottleneck stage to ensure that it always
has something to work on.
Buffer- a storage area b/n stages where the output of a stage is placed prior to being
used in the downstream stage.
iii) duplicating the facilities of one department on which another is dependent.
2. Frequency of Capacity Additions:
 There are two types of costs to consider when adding capacity: the cost of
upgrading too frequently and that of upgrading too infrequently.
 Upgrading capacity too frequently is expensive. Reasons:
a) there are direct costs, such as removing and replacing old equipment and
training employees on the new equipment.
b)the new equipment must be purchased, often for considerably more than the
selling price of the old.
c) there is the opportunity cost of idling the plant or service site during the
changeover period.
Conversely, upgrading capacity too infrequently is also expensive.
 Infrequent expansion means that capacity is purchased in larger chunks. Any
excess
04/25/2023
capacity that is purchased must be carried as overhead until it is utilized.
61
3. External Sources of Capacity:
• In some cases, it may be less expensive to not add
capacity at all, but rather to use some existing external
source of capacity.
• Two common strategies used by organizations are
subcontracting and sharing capacity.
• An example of subcontracting is ETV sub contracts
small micro finances for bill collection.
• An example of sharing capacity is two domestic airlines
flying different routes with different seasonal demands
exchanging aircraft (suitably repainted) when one’s
routes are heavily used and the others are not.

04/25/2023 62
 3.4 Plant/Facility Location: Introduction
• the question of location is very much linked to two competitive imperatives:
• The need to produce close to the customer due to time-based
competition, trade agreements, and shipping costs.
• The need to locate near the appropriate labor pool to take advantage of
low wage costs and /or high technical skills.
THE STRATEGIC IMPORTANCE OF LOCATION
• The strategic decision often depends on the type of business.
• For industrial location decisions the strategy is usually is minimizing costs, whereas
for service organizations the strategy focuses on maximizing revenue.
• In general, the objective of location strategy is to maximize the benefit of location to
the firm.
LOCATION OPTIONS INCLUDE:
(1) not moving, but instead expanding an existing facility,
(2) maintaining current sites, but adding another facility elsewhere,
(3) closing the existing facility and moving to another location.
(4) Starting
04/25/2023 new facility 63
 Types of Facilities

• Heavy-manufacturing facilities: large, require a lot of space, and are

expensive
• Factors in Heavy Manufacturing Location
• Construction costs, Land costs, Raw material and finished goods shipment
modes, Proximity to raw materials, Utilities and Labor availability
• Light-industry facilities: Smaller plants and usually less costly
• Factors in Light Industry Location
• Transportation costs, Proximity to markets, Frequency of delivery required
by customer, Land costs, Easily accessible geographic region, Education
and training capabilities
• Retail and service facilities: smallest and least costly
• Factors in Retail Location
• Proximity to customers, Location is everything

04/25/2023 64
Global Location Factors
Raw material availability
Government stability
Number and proximity of suppliers
Government regulations Transportation and distribution
Political and economic systems system
Economic stability and growth Labor cost and education
Exchange rates Available technology
Culture Commercial travel
Climate Technical expertise
Export import regulations, duties Cross-border trade regulations
and tariffs Group trade agreements
Location Incentives
• Tax credits
• Relaxed government regulation
• Job training
• Infrastructure improvement
• Money
04/25/2023 65
Regional Location Factors

• Labor (availability, education, cost, • Modes and quality of transportation

and unions) • Transportation costs
• Proximity of customers • Community government Local
• Number of customers business regulations
• Construction/leasing costs • Government services (e.g., Chamber
of Commerce)
• Land cost
• Infrastructure (e.g., roads, water,
• Business climate
sewers)
• Community services
• Quality of life
• Incentive packages
• Taxes
• Government regulations
• Availability of sites
• Environmental regulations
• Financial services
• Raw material availability
• Community inducements
• Commercial travel
• Proximity of suppliers
• Climate
• Education system

04/25/2023 66
Location Analysis Techniques
1. Location rating factor 2. Breakeven 3. Center-of-gravity

1. Location Rating Factor

 Identify important factors
 Weight factors (0.00 - 1.00)
 Subjectively score each factor (0 - 100)
 Sum weighted scores
Location Factor Rating: Example
SCORES (0 TO 100)
LOCATION FACTOR WEIGHT Site 1 Site 2 Site 3
Labor pool and climate .30 80 65 90
Proximity to suppliers .20 100 91 75
Wage rates .15 60 95 72
Community environment .15 75 80 80
Proximity to customers .10 65 90 95
Shipping modes .05 85 92 65
Air service .05 50 65 90
Weighted Score for “Labor pool and climate” for
04/25/2023 Site 1 = (0.30)(80) = 24 67
 Location Factor Rating

WEIGHTED SCORES
Site 1 Site 2 Site 3
24.00 19.50 27.00
20.00 18.20 15.00 Site 3 has the
9.00 14.25 10.80 highest factor rating
11.25 12.00 12.00
6.50 9.00 9.50
4.25 4.60 3.25
2.50 3.25 4.50
77.50 80.80 82.05

04/25/2023 68
2. Locational break-even analysis
• Locational break-even analysis is the use of cost-volume analysis to
make an economic comparison of location alternatives.
• By identifying fixed and variable cost and graphing them for each
location, we can determine which one provides the lowest cost.
• Locational break-even analysis can be done mathematically or
graphically. The graphic approach has the advantage of providing the
range of volume which each location is preferable.
The three steps to locational break-even analysis are:
Determine the fixed and variable cost for each location
Plot the costs for each location, which costs on the vertical axis of
the graph and annual volume on the horizontal axis
Select the location that has the lowest total cost for the expected
production volume.
04/25/2023 69
Example:
• A manufacturer of automobile carburetors is considering three
locations Addis, Awassa and Adama for a new plant. Cost studies
indicate the fixed costs per year at the sites are $30,000. $60,000, and
$110,000, respectively; and variable costs are $75 per unit, $45 per
unit, and $25 per unit respectively. The expected selling price of the
carburetors produced is $120. The company wishes to find the most
economical location for an expected volume of zeros units) and the
total cost (fixed cost + variable costs) at the expected volume of
output. Identify the range over which each site is economical?
3. Center-of-Gravity Technique
 Locate facility at center of geographic area
 Based on weight and distance traveled establish grid-map of area
 Identify coordinates and weights shipped for each location

04/25/2023 70
 Grid-Map Coordinates

y n n
 xiWi  yiWi
2 (x2, y2), W2 i=1 i=1
y2 x= n y= n
 Wi  Wi
1 (x1, y1), W1 i=1 i=1
y1
where,
x, y = coordinates of
3 (x3, y3), W3 new facility at center of
y3 gravity
xi, yi = coordinates of
existing facility i
Wi =annual weight
shipped from facility i
x1 x2 x3 x
04/25/2023 71
Center-of-Gravity Technique: Example

y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
500 (105)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles

04/25/2023 72
 Center-of-Gravity Technique: Example (cont.)

n
 xW
i i
i=1 (200)(75) + (100)(105) + (250)(135) + (500)(60)
x= = = 238
n 75 + 105 + 135 + 60
 W
i
i=1

n
 yW
i i
i=1 (200)(75) + (500)(105) + (600)(135) + (300)(60)
y= n
= = 444
75 + 105 + 135 + 60
 W
i
i=1

04/25/2023 73
 Center-of-Gravity Technique: Example (cont.)

y A B C D
700 x 200 100 250 500
C y 200 500 600 300
600 (135)
B Wt 75 105 135 60
500 (105)
Center of gravity (238, 444)
Miles

400
D
300
A (60)
200 (75)
100

0 100 200 300 400 500 600 700 x

Miles

04/25/2023 74
 LINEAR PROGRAMMING

• The transportation method of linear programming can be used to test the

cost impact of different candidate locations on the entire production-
distribution network.
LOCATING SERVICE FACILITIES
• the focus in the service sector is on maximizing revenue since
manufacturing costs tend to vary substantially between locations, but in
service firms’ location often has more impact on revenue than cost.
• Therefore, for the service firm a specific location often influences revenue
more than it does cost. This means that the location focus for service firms
should be on determining the volume of business and revenue.
• A common problem encountered by service-providing organizations are
deciding how many service outlets to establish within a geographic area,
and where.
• The problem is complicated by the many possible locations and several
options in the absolute number of service centers. Thus, attempting to find
a good solution, much less than optimal one can be extremely time
consuming even for a relatively small problem.
04/25/2023 75
 3.5 Facility layout
• Facility layout decision entails determining the placement of departments,
workstations, machines, and stockholding points within a productive facility.
• Its general objective is to arrange these elements in a way that ensures a
smooth workflow (in a factory) or a particular traffic pattern (in a service
organization).
Specific objectives:
• Increase capacity
• Minimize material-handling costs • Facilitate entry, exit, and placement of
• Utilize space efficiently material, products, and people
• Utilize labor efficiently • Incorporate safety and security
• Eliminate bottlenecks measures
• Facilitate communication and • Promote product and service quality
interaction • Encourage proper maintenance
• Reduce manufacturing cycle time activities
• Reduce customer service time • Provide a visual control of activities
• Eliminate wasted or redundant • Provide flexibility to adapt to changing
movement conditions
04/25/2023 76
 Characteristics of good layout
a)Manufacturing and Back-Office Operations
Straight-line flow pattern (or adaptation), backtrack kept to a minimum.
Production time predictable, Little inter stage storage of materials
Open plan floors so that everyone can see what’s going on, Bottleneck operations under control.
Workstations close together.
Orderly handling and storage of materials.
No unnecessary re- handling of materials.
Easily adjustable to changing conditions.
b)Face-to-Face Services
• Easily understood service flow pattern.
• Adequate waiting facilities.
• Easy communication with customers.
• Customer surveillance easily maintained.
• Clear exit and entry points with adequate checkout capabilities.
• Departments and processes arranged so that those customers see only what you want them to see.
• Balance between waiting areas and service areas.
• Minimum walking and material movement.
• Lack of mess
• High04/25/2023
sales volume per square foot of facility. 7-77
STRATEGIC IMPORTANCE OF LAYOUT DECISIONS
• Layout has numerous strategic implications because it
establishes a firm’s competitive priority in regard to capacity,
processes, flexibility, and cost, as well as quality work life.
• An effective layout can help a firm to achieve the following:
Higher utilization of space, equipment, and people.
Improve flow of information, materials, or people.
More convenience to the customer.
Improved employee morale and safer working conditions.

04/25/2023 7-78
 Basic layouts: Fixed-position, Process &Product

Fixed-position layouts- are used for projects in which product cannot be moved
• A fixed-position layout is one in which the project remains stationary and
require workers and equipment to come to one work area.
Examples of this of project are a ship, a highway, a bridge, a house, and a
boring oil well.  
• The techniques for addressing the fixed-position layout are not well-developed.
• The fixed-position layout is complicated by three factors:
Space is limited at virtually all sites
At different stages in the construction process different materials are needed
therefore, different items become critical as the project develops. This adds the
dynamics of scheduling to the layout problem.
The volume of materials needed is dynamic. For example, the rate of use of
steel panels for the hull of a ship changes as the project progresses.
Because the fixed-position layout is so difficult to solve well at the site, an
alternative strategy is to complete as much of the project as possible off-site.
04/25/2023 79
 Typical fixed position layout

04/25/2023 80
 PROCESS-ORIENTED(functional) LAYOUT
Process layouts- group similar activities together according to process or function they
perform
Groups similar activities together according to the process they perform.
 can simultaneously handle a wide variety of products or services.
A big advantage is its flexibility in equipment and labor assignments.
The breakdown of one machine, for example, need not halt an entire process; work can
be transferred to other machines in the department.
 is also good for handling the manufacture of parts in small batches, or job lots, and for
the production of a wide variety of parts in different sizes or forms.
Require large aisles for customers and forklifts
• The disadvantages of process-oriented layout come from the general-purposes of the
equipment.
Orders take more time and money to move through the system because of difficult
scheduling setups, and material handling.
 labor skill requirements and work-in-process inventories are higher because of larger
imbalances in the production process.
High labor skill needs increase the required level of training and experience; high work-
in-process
04/25/2023
increases capital investment. 81
 Process layout in services

Women’s
lingerie Shoes Housewares

Women’s Cosmetics and Children’s

dresses jewelry department

Women’s Entry and display Men’s

sportswear area department

04/25/2023 7-82
 Manufacturing Process Layout
Major concern will be where to locate department or work center in
relation to each other.
Milling
Lathe Department Department Drilling Department
M M D D D D
L L

M M D D D D
L L

G G G P
L L

G G G P
L L
Grinding Painting Department
Department
L L
Receiving and A A A
Shipping Assembly

04/25/2023 7-83
 PRODUCT-ORIENTED LAYOUT
• Product layouts- arrange activities in line according to sequence of
operations for a particular product or service
• Arrange activities according to the sequence of operation for a particular
product or service.
• layouts are organized around a product or a family of similar high volume,
low-variety products.
• The assumptions are:
Volume is adequate for high equipment utilization.
Product demand is stable enough to justify high investment in specialized
equipment.
Product is standardized or approaching a phase of its life cycle that justifies
investment in specialized equipment.
• Supplies of raw material and components are adequate and of uniform
quality (adequately standardized) to ensure they will work with the
specialized equipment.
• Two version of a product-oriented layout are: a fabrication line; and an
assembly line.
04/25/2023 7-84
• The fabrication line builds components, such as automobile tires or metal
parts for a refrigerator, on a series of machines.
• An assembly line puts the fabricated parts together at a series of
workstations.
• Fabrication lines tend to be machine paced and require mechanical and
engineering changes to facilitate balancing.
• Assembly lines, on the other hand, tend to be paced by work tasks assigned
to individuals or to workstations.

In

Out

04/25/2023 7-85
 Cont’d…

Assembly lines therefore, can be balanced by moving tasks from one

individual/workstation to another. In this manner, the amount of time
required by each individual or station is equalized.
The major concern is balancing the assembly line so that no one
workstation becomes bottleneck and holds up the flow of work through
the line.
Material move in one direction along the assembly line and always in the
same pattern.
Conveyors (can be paced or un paced) are the most common material
handling equipment for product layout.

04/25/2023 7-86
Comparison of Product and Process Layouts
Product Process
 Sequential arrangement of  Functional grouping of
Description
activities activities
Type of
 Continuous, mass  Intermittent, job shop, batch
process production, mainly assembly production, mainly fabrication
Product
 Standardized, made to stock  Varied, made to order
Demand
 Stable  Fluctuating
Volume
 High  Low
Equipment
 Special purpose  General purpose
Workers
 Limited skills  Varied skills
Inventory
 Low in-process, high finished  High in-process, low finished
Storage space
Material goods goods
 Small  Large
handling
Aisles  Fixed path (conveyor)  Variable path (forklift)
Scheduling  Narrow  Wide
Layout  Part of balancing  Dynamic
 Line balancing  Machine location
decision
Goal  Equalize work at each station  Minimize material handling
Advantage  Efficiency cost
04/25/2023  Flexibility 7-87
3.6 Human resources, Job Design and Work Measurement asst3
• Titles to be covered includes
1. Human resource strategy for competitive advantage from Jay Heizer
2. Labor planning from Jay Heizer
3. Job design from Jay Heizer
4. Ergonomics and the work environment, Method analysis from Jay Heizer
5. Behavioral considerations in job design Chase & Aquilano
6. Work measurement and standards Chase & Aquilano

04/25/2023 88