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. In this section, we discuss outsourcing decisions, process selection, and process plans.

•Process planning: converts designs into workable instructions for manufacture or delivery.

PROCESS SELECTION

The next step in process planning is to select a production process for those items we will produce in-house. Production processes can be classified into projects, batch production, mass production, and continuous production.

•Projects: one-at-a-time production of a product to customer order.

Projects take a long time to complete, involve a large investment of funds and resources, and produce one item at a time to consumer order. Examples include construction projects, shipbuilding, new-product development, and aircraft manufacturing.

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. Examples of batch production include printers, bakeries, machine shops, education and furniture making.

•Batch production: processing many different jobs at the same time in groups (or batches).

Figure 6.1. The Sourcing Continuum

Figure 6.2. The Product Process Matrix Source: Adapted from Robert Hayes and Steven Wheelwright, Restoring the Competitive Edge Competing Through Manufacturing (New York, John Wiley & Sons, 1984), p. 209.

•Mass production: producing large volumes of a standard product for a mass market.

Mass production produces large volumes of a standard product for a mass market. Product demand is stable, and product volume is high. Goods that are mass produced include automobiles, televisions, personal computers, fast food, and most consumer goods.

•Continuous production: producing very high-volume commodity products.

Continuous production is used for very high-volume commodity products that are very standardized. The system is highly automated and is typically in operation continuously 24 hours a day. Refined oil, treated water, paints, chemicals, and foodstuffs are produced by continuous production.

The process chosen to create the product or service must be consistent with product and service characteristics. The most important product characteristics (in terms of process choice) are degree of standardization and demand volume. Figure 6.2 shows a product-process matrix that matches product characteristics with process choice.

The best process strategy is found on the diagonal of the matrix. Companies or products that are off the diagonal have either made poor process choices or have found a means to execute a competitive advantage. For example, technological advancements in flexible automation allow Motorola to mass produce customized pagers. Volvo and Rolls Royce occupy a special market niche by producing cars in a crafted, customized fashion. Examples of poor process choice include Texas Instruments' attempt to produce consumer products for mass markets by the same process that had been successful in the production of scientific products for specialized markets, and Corning's production of low-volume consumer items, such as range covers, with the same continuous process used for other items formed from glass.

Table 6.1 summarizes the characteristics of each type of process. As we move from projects to continuous production, demand volume increases; products become more standardized; systems become more capital-intensive, more automated, and less flexible; and customers become less involved.

PROCESS SELECTION WITH BREAKEVEN ANALYSIS

Several quantitative techniques are available for selecting a process. One that bases its decision on the cost tradeoffs associated with demand volume is breakeven analysis. The components of breakeven analysis are volume, cost, revenue, and profit.

•Breakeven analysis: examines the cost trade-offs associated with demand volume.

Volume is the level of production, usually expressed as the number of units produced and sold. We assume that the number of units produced can be sold.

Cost is divided into two categories: fixed and variable. Fixed costs remain constant regardless of the number of units produced, such as plant and equipment and other elements of overhead. Variable costs vary with the volume of units produced, such as labor and material. The total cost of a process is the sum of its fixed cost and its total variable cost (defined as volume times per unit variable cost).

Table 6.1. Types of Processes

	Project	Batch Production	Mass Production	Continuous Production
Type of product	Unique	Made-to-order (customized)	Made-to-stock (standardized)	Commodity
Type of customer	One-at-a-time	Few individual customers	Mass market	Mass market
Product demand	Infrequent	Fluctuates	Stable	Very stable
Demand volume	Very low	Low to medium	High	Very high
No. of different products	Infinite variety	Many, varied	Few	Very few
Production system	Long-term project	Discrete, job shops	Repetitive, assembly lines	Continuous, process industries
Equipment	Varied	General-purpose	Special-purpose	Highly automated
Primary type of work	Specialized contracts	Fabrication	Assembly	Mixing, treating, refining
Worker skills	Experts, craftspersons	Wide range of skills	Limited range of skills	Equipment monitors
Advantages	Custom work, latest technology	Flexibility, quality	Efficiency, speed, low cost	Highly efficient, large capacity, ease of control
Disadvantages	Nonrepetitive, small customer base, expensive	Costly, slow, difficult to manage	Capital investment, lack of responsiveness	Difficult to change, far-reaching errors, limited variety
Examples	Construction, shipbuilding, spacecraft	Machine shops, print shops, bakeries, education	Automobiles, televisions, computers, fast food	Paint, chemicals, foodstuffs

Revenue on a per-unit basis is simply the price at which an item is sold. Total revenue is price times volume sold. Profit is the difference between total revenue and total cost. These components can be expressed mathematically as follows:

Total cost = fixed cost + total variable cost

TC = c_f + vc_v

Continuous processes are used for very-high-volume, commodity products whose output is measured rather than counted. The production system is capital-intensive and highly automated (with workers who monitor the equipment rather than perform the work) and is typically operated 24 hours a day.

where

In selecting a process, it is useful to know at what volume of sales and production we can expect to earn a profit. We want to make sure that the cost of producing a product does not exceed the revenue we will receive from the sale of the product. By equating total revenue with total cost and solving for v, we can find the volume at which profit is zero. This is called the breakeven point. At any volume above the breakeven point, we will make a profit. A mathematical formula for the breakeven point can be determined as follows:

BreakEven Analysis

Travis and Jeff own Up Right Paddlers, a new startup company with the goal of designing, making, and marketing stand-up paddle boards for streams and rivers. A new fitness craze, stand-up paddle boards are similar to surfboards in appearance, but are used by individuals to navigate down rivers in an upright position with a single long pole (or paddle), instead of sitting in tubes or rafts and floating down. The boards are constructed from heavy duty raft material that is inflatable, rather than the fiberglass material used in surfboards. Unlike surfboards that market for $500 to $1000 each, paddle boards are typically sold for between $100 and $400. Since Travis and Jeff are just starting out and the demand for paddle boards on the East Coast has not been firmly established, they anticipate selling their product for $100 each. Travis estimates the fixed cost for equipment and space will be $20,000, and the material and labor costs will run $50 per unit. What volume of demand will be necessary for Travis and Jeff to break even on their new venture?

Solution

The solution is shown graphically in the following figure. The x-axis represents production or demand volume, and the y-axis represents dollars of revenue, cost, or profit. The total revenue line extends from the origin, with a slope equal to the unit price of a board. The total cost line intersects the y-axis at a level corresponding to the fixed cost of the process and has a slope equal to the per-unit variable cost. The intersection of these two lines is the breakeven point. If demand is less than the breakeven point, the company will operate at a loss. But if demand exceeds the breakeven point, the company will be profitable. The company needs to sell more than 40 paddle boards to make a profit.

Breakeven analysis is especially useful when evaluating different degrees of automation. More automated processes have higher fixed costs but lower variable costs. The "best" process depends on the anticipated volume of demand for the product and the tradeoffs between fixed and variable costs. Example 6.2 shows how breakeven analysis can guide the selection of a process among several alternatives. The example uses this procedure:

1. Formulate a total cost equation for each process considered.

2. Calculate the point of indifference between two alternative processes (i.e., the volume at which the total cost of manufacturing is the same for the two processes) by setting their total cost equations equal to each other and solving for v, demand volume.

3. Above the point of indifference, choose the alternative with the lowest variable cost.

4. Below the point of indifference, choose the alternative with the lowest fixed cost.

Process Selection

Jeff, the more optimistic of the two owners of UpRight Paddlers, believes that demand for paddle boards will exceed the breakeven point of 40 units calculated in Example 6.1. He proposes spending $10,000 in fixed costs to buy more automated equipment that would reduce the materials and labor cost to $30 per board. The boards would sell for $100, regardless of which manufacturing process is chosen. Compare the two processes and determine for what level of demand each process would be preferred. Label Travis' proposal as Process A, and Jeff's proposal as Process B.

solution

If demand is less than or equal to 400 boards, the alternative with the lowest fixed cost, process A, should be chosen. If demand is greater than or equal to 400 boards, the alternative with the lowest variable cost, process B, is preferred. Our decision can be confirmed by examining the next graph. (Because the boards will be sold for $100 apiece regardless of which process is used to manufacture them, no revenue line is needed.)

Process analysis is the systematic examination of all aspects of a process to improve its operation—to make it faster, more efficient, less costly, or more responsive to the customer. The basic tools of process analysis are process flowcharts, diagrams, and maps. Exhibit 6.1 shows the various flowcharts available in Microsoft Visio to map out business processes.

These flowcharts come in many different sizes, shapes, and forms; several are depicted in this chapter. While the format and symbols used may vary, the "process" of building a flowchart follows these steps:

Figure 6.3. An Assembly Chart for a Big Mac

PROCESS FLOWCHARTS

The classic process flowchart looks at the manufacture of a product or delivery of a service from a broad perspective. The chart uses five standard symbols, shown in Figure 6.5, to describe a process:

•Process flowchart: a document that uses standardized symbols to chart the productive and nonproductive flow of activities involved in a process.

Figure 6.4. An Operations Sheet for a Plastic Part

Figure E6.1. Flowcharts Available in Microsoft Visio

Figure 6.5. A Process Flowchart of Apple Processing

Process improvement teams are likely to make a first pass at diagramming a process, with adhesive notes plastered on large sheets of paper connected with hand-drawn arrows. As documentation of the process becomes more complete, departments or companies may prefer particular symbols to represent inputs, outputs, decisions, activities, and resources.

Flowcharts can take many forms, from freehand drawings to animated simulations. Exhibit 6.2 shows a simple flowchart created in Excel. More sophisticated flowcharting tools are available from Microsoft Visio, SmartDraw (www.smartdraw.com), iGrafx (www.igrafx.com), and others. You may be able to download free trial copies of the software for limited periods of time.

Figure 6.6 shows a process map, or swimlane chart, so called because it maps out the activities performed by various people in the process. Often process maps will include a time scale as well. Figure 6.7 shows a simple value chain flowchart from supplier to customer.

These workers at a Dow Chemical plant are displaying a process map they developed to analyze an existing process. The flowchart is not neat and tidy, but it does offer some obvious candidates for improvement. U.S. workers and managers in both industry and government are examining their processes in an attempt to redesign work for high-quality, less waste, and speedier operation.

ALONG THE SUPPLY CHAIN

Making Fast Food Faster

Go behind the counter of a fast food restaurant and you'll find a finely tuned operating system—portion-controlled french fry containers, automated drink carousels, optimized kitchen layouts, and lights and buzzers to signal action. But "speed" today means streamlining the order-taking process as well as the delivery process. The drive-thru now accounts for two-thirds of fast food sales. So, understandably, in a survey of fast food mangers last year, 82% were engaged in programs to improve speed at the drive-thru. The initiatives range from walking up to drivers to take their orders while they wait in line, to rooftop cameras and artificial intelligence software that predict upcoming orders based on the number and kind of vehicles entering the drive-thru line.

A Colorado Springs McDonald's restaurant set the world record for drive-thru speed at 349 transactions an hour. True, that was part of a special promotion, but even when it's not going for the record, the restaurant averages about one minute a transaction, compared to the industry average of 3.5 minutes. A reason for the superb efficiency is the use of a remote call center to take orders, a trend gaining popularity in fast food entities across the country.

At McDonald's call center, workers are experts in the menu, and they are trained to be articulate, polite, and fast. They also urge customers to add items to their order. Each worker takes up to 95 orders an hour during peak times. Customers pulling up to the drive-thru menu are connected to the computer of a call-center employee using Internet calling technology. When the customer pulls away from the menu to pay for the food and pick it up, it takes around 10 seconds for another car to pull forward. During that time, call-center workers can be answering a call from a different McDonald's, where someone has already pulled up. In addition to increased speed and sales volume, specialized order-takers improve accuracy. Accuracy problems at the drive-thru in a typical restaurant are often the result of too much multitasking by employees—taking orders, helping to fill them, accepting cash, and keeping the restaurants clean and stocked.

In the fast food industry, time is literally money. Statistics show that every six-second improvement in speed of service results in a 1% jump in sales. Managers must precisely predict traffic volumes in hourly intervals or less in order to make staffing and food preparation decisions. Underestimate demand, and lines form, customers lose patience, and the restaurant loses business. Overestimate demand, and food is wasted and profit margins tank.

When you enter a drive-thru, everything is timed: how long you take to order and to pay, how long it takes to prepare the food and hand it out the pickup window, how much time you waste looking for a place to put your drink before pulling away. That's why companies bundle items for faster ordering. Ordering a #2 takes less time than ordering á la carte. And woe is the customer who takes the time to check his order for accuracy before proceeding. To discourage those activities, companies use special order checkers, see- through bags, and bags with orders written on the outside.

Another improvement in the order-taking process is the inclusion of multilane drive-thrus, where two or more order lanes merge into a single payment and pickup lane. A second lane can increase capacity by 50% by letting cars bypass slower customers who can't decide what to order. Two lanes present decisions, such as how much space is needed between the cash window and pickup window, say, seven car lengths.

It's at the cash register where the next major leap in speed is expected. A cash transaction takes about 30 seconds, so restaurants are pushing credit and debit options, and test-piloting everything from prepaid cash cards to electronic "fast pass" tags like those used at toll booths. At McDonald's, by foregoing signatures on credit transactions, processing time goals are down to three seconds per transaction. Cashless payment at the drive-thru, online ordering, and self-service kiosks are becoming more common throughout the fast food industry.

While speed is important for fast food, making a customer feel rushed is deadly to repeat business. McDonalds's claims that friendly service increases customer satisfaction by 30%, irregardless of service time. Consider Subway, known for fresh, made-to-order subs. They recently installed self-service kiosks to speed the ordering process. Customers no longer watch the employee construct their sandwich. Although the new process is faster, this disconnect between customer and service provider upsets some customers. What do you think?

Sources: Adapted from Matt Richtel, "The Long-Distance Journey of a Fast Food Order," The New York Times, April 11, 2006; Joanna Pachner, "Faster Hotter Sooner," Financial Post, March 6, 2007.

Figure E6.2. Flowcharts in Excel

Figure 6.6. A Process Map or Swimlane Chart of Restaurant Service: Source: www.SmartDraw.com

Figure 6.7. A Simple Value Chain Flowchart

Processes are planned in response to new facilities, new products, new technologies, new markets, or new customer expectations. Processes should be analyzed for improvement on a continuous basis. When continual improvement efforts have been exhausted and performance expectations still cannot be reached with an existing process, it is time to completely redesign or innovate the process.

Process innovation^[11] projects are typically chartered in response to a breakthrough goal for rapid, dramatic improvement in process performance. Performance improvement of 50 to 100% within 12 months is common. In order to achieve such spectacular results, an innovation team is encouraged to start with a clean sheet of paper and rethink all aspects of a process, from its purpose to its outputs, structure, tasks, and technology. Figure 6.8 shows the relationship between continuous improvement, breakthrough improvement, and process innovation.

•Process innovation: the total redesign of a process for breakthrough improvements.

Process innovation is most successful in organizations that can view their system as a set of processes providing value to the customer, instead of functional areas vying for limited resources. Figure 6.9 shows this change from a functional to a process orientation. In an environment of rapid change, the ability to learn faster, reconfigure processes faster, and execute processes faster is a competitive advantage.

STEPS IN PROCESS INNOVATION

Figure 6.10 outlines the innovation process. Let's review the process step-by-step. The initial step establishes the goals for process performance. Data from the existing process are used as a baseline to which benchmarking data on best industry practices, customer requirements data, and strategic directives are compared.^[12] Analyzing the gap between current and desired performance helps to determine whether the process needs to be redesigned. If redesign is necessary, a project team is chartered and provided with the preliminary analysis and resulting goals and specifications for process performance. Although the goals for a process may be specific, the specifications are not (or else the creativity of the group is hampered). It is important that the project team be convinced that total redesign of the process is absolutely necessary to achieve the performance objectives.

Establish goals and specifications.

Figure 6.8. Continuous Improvements and Breakthroughs

Figure 6.9. From Function to Process

Process maps work backward from a performance goal.

A useful tool in beginning the redesign of a process is a high-level process map. Pared to its simplest form, a high-level map contains only the essential building blocks of a process. As shown in Figure 6.11, it is prepared by focusing on the performance goal—stated in customer terms—and working backward through the desired output, subprocesses, and initial input requirements. Design principles, such as performing subprocesses in parallel whenever possible, help to structure the map efficiently. Table 6.2 lists several additional design principles recommended for process innovation. Innovative ideas can challenge the conventional ordering of subprocesses, or the need for a subprocess. Table 6.3 presents various techniques to prompt innovative thinking.

Figure 6.10. Process Innovation

Figure 6.11. A High-Level Process Map

After the general concept of redesign is agreed on, a detailed map is prepared for each subprocess or block in the high-level map. Blocks are added only if an activity can contribute to the output goal. The existence of each block or activity is challenged: Does it add value for the customer? Does it have to be done? Could it be done more quickly, more easily, or sooner? Could someone else do it better?

A detailed map guides decisions on allocation of resources and work methods. To guarantee that the detailed map will produce the desired results, key performance measures are determined and set in place. The model is also validated through simulation, interviewing, and partial testing. When the team is satisfied that the performance objective can be reached with the new design, a pilot study is conducted.

Use pilot studies for rapid prototyping.

Process innovation is not like other projects, which can be carefully planned and flawlessly executed. Innovation is by definition something new and untested. Milestones, costs, and benefits are guesses at best. A pilot study allows the team to try something, see if it works, modify it, and try again.

Table 6.2. Principles for Redesigning Processes

Source: Omar El Savvy, Redesigning Enterprise Processes for e-Business (New York: McGraw-Hill, 2001), pp. 57-75.

Remove waste, simplify, and consolidate similar activities. Link processes to create value. Let the swiftest and most capable enterprise execute the process. Flex the process for any time, any place, any way. Capture information digitally at the source and propagate it through the process. Provide visibility through fresher and richer information about process status. Fit the process with sensors and feedback loops that can prompt action. Add analytic capabilities to the process. Connect, collect, and create knowledge around the process through all who touch it. Personalize the process with the preference and habits of participants.

Table 6.3. Techniques for Generating Innovative Ideas

Source: Adapted from AT&T Quality Steering Committee, Reengineering Handbook (Indianapolis: AT&T Technical Publications Center, 1991).

Vary the entry point to a problem. (In trying to untangle fishing lines, it' best to start from the fish, not the poles!) Draw analogies. (A previous solution to an old problem might work.) Change your perspective. (Think like a customer; bring in persons who have no knowledge of the process.) Try inverse brainstorming. (What would increase cost? displease the customer?) Chain forward as far as possible. (If I solve this problem, what is the next problem?) Use attribute brainstorming. (How would this process operate if . . . our workers were mobile and flexible? there were no monetary constraints? we had perfect knowledge?)

After a successful pilot study, full-scale implementation can begin. Since process innovation involves radical change, the transition period between introducing the changed process and the incorporation of the new process into day-to-day operations can be difficult. The redesigned process may involve changing the way executives manage, the way employees think about their work, or how workers interact. The transition needs to be managed with a special concern for the "people" aspects of change. The innovation process is complete when the transition has been weathered and the new process consistently reaches its objective.

The concept of process innovation emerged in response to rapid changes in technology that rendered existing processes obsolete. In the next section, we discuss the impact of technology decisions and provide resources for a more in-depth study of technology.

ANASTASIA THATCER

I'm a process manager for the public sector division of one of the largest and best performing health-care corporations in the United States. My region is the Northeast where the processes I oversee are responsible for the health care of over 400,000 lives.

I began my work auditing claims processing, and then became interested in how a claim works its way through the system. I noticed all sorts of inefficiencies. For example, high dollar claims were manually handled with 10 different touch points. The Claims Processor would identify high dollar claims and then forward it to the Special Matters Expert, who would work with the Claims Liaison, who would need approval from the Executive Director of the plan, who would consult the Claims Analyst, who would ask Contracting to get back to them so that they could inform the Executive Director, who would make a decision and send it to the Liaison, who would notify the Special Matters Expert, who would lastly pass along the decision to the Claims Processor, who would pay the claim. After redesign, the approval goes from Claims Processor to Special Matters Expert to Executive Director, period. The process flows more efficiently using fewer resources, and the providers are happier because they receive their payments more quickly, which ultimately ensures that members get access to the best care possible.

Like a lot of manufacturing firms, we have more data than we can process efficiently, and it seems that people are always looking for the same information. I remember one situation in particular with case management of high-risk pregnancies. There was a two-month backlog, which meant that by the time the case manager got around to contacting the patient, the pregnancy was too far along for treatment to make much of a difference. I analyzed the process and found that if we developed a shared database between the applicants, the case managers, and the nurses, we could eliminate the manual data entry of cases. That one change reduced the backlog to zero, saved the company millions, and most importantly reduced the number of detained babies (those that need to stay in the hospital after the mother had been released) by 50%. In this job, you can make a real difference. You can save lives.

I was amazed when I took the operations management class at NYU that there's a field of study for what I do. I live by flowcharts and Pareto analysis. We're always configuring and reconfiguring systems. If it doesn't work, we try something else. It's important to take a step back and look at the broader picture. Then you have to take risks and make decisions, and always look for ways of improving the process.

Technology decisions involve large sums of money and can have a tremendous impact on the cost, speed, quality, and flexibility of operations. More importantly, they define the future capabilities of a firm and set the stage for competitive interactions. Thus, it is dangerous to delegate technology decisions to technical experts or financial analysts. A manager's ability to ask questions and understand the basic thrust of proposed technology is invaluable in making wise technology choices.

In this section we discuss the financial justification of new technology, followed by a brief technology primer.

A TECHNOLOGY PRIMER

Technology is important in both manufacturing and service operations. Cars now have hundreds of embedded systems performing thousands of computerized functions. Pacemakers, vending machines, Xerox copiers, and store shelves notify the manufacturer when repairs or restocking are needed. Coming soon are clothes that measure the wearer's vital statistics and notify a physician or change medication regimes when necessary, and refrigerators that pre-order ingredients to match weekly menus or order milk when the supply is low. We discuss many of the information technology advances that support these systems in more detail in Chapter 10. In this section, we present a brief overview of technology advances in manufacturing systems.

Technology in manufacturing includes computer aided design, robots, automated guided vehicles, computer numerically controlled machines, automated storage and retrieval systems, and flexible manufacturing systems. Automated manufacturing systems integrated through computer technology are aptly called computer-integrated manufacturing (CIM). With the advent of the Internet and the increased globalization of both markets and production, CIM has evolved into a Web-centric collaborative venture known as e-manufacturing (eM).

E-manufacturing involves sharing real-time data with trading partners and customers and making collaborative decisions about production based on that data. In order to collaborate, information must be converted into electronic form, protocols for communication must be established, and infrastructure must be in place for connectivity with customers, suppliers, and partners. Rather than making huge volumes of standard products in anticipation of demand, e-manufacturing uses realtime information on customer orders and productive capacity across the supply chain to speed customized products directly to the customer. Figure 6.12 shows the components of e-manufacturing categorized by product, process, manufacturing, and information technologies. Table 6.4 serves as a technology primer, briefly defining the terms listed in the figure.

Figure 6.12. Components of e-Manufacturing

Table 6.4. A Technology Primer

Product Technology
CAD	Computer-aided design	Creates and communicates designs electronically
GT	Group technology	Classifies designs into families for easy retrieval and modification
CAE	Computer-aided engineering	Tests the functionality of CAD designs electronically
CPC	Collaborative product commerce	Facilitates electronic communication and exchange of information among designers and suppliers
PDM	Product data management	Keeps track of design specs and revisions for the life of the product
PLM	Product lifecycle management	Integrates the decisions of those involved in product development, manufacturing, sales, customer service, recycling, and disposal
Product configuration		Defines products "configured" by customers who have selected among various options, usually from a Web site

Process Technology
STEP	Standard for exchange of product model data (ISO 10303)	Set standards for communication among different CAD vendors; translates CAD data into requirements for automated inspection and manufacture
CAD/CAM	Computer-aided design and manufacture	The electronic link between automated design (CAD) and automated manufacture (CAM)
CAPP	Computer aided process planning	Generates process plans based on a database of similar requirements
E-procurement		Electronic purchasing of items from e-marketplaces, auctions, or company Web sites

Manufacturing Technology
CNC	Computer numerically controlled	Machines controlled by software code to perform a variety of operations with the help of automated tool changers; also collects processing information and quality data
FMS	Flexible manufacturing system	A collection of CNC machines connected by an automated material handling system to produce a wide variety of parts
Robots		Manipulators that can be programmed to perform repetitive tasks; more consistent than workers but less flexible
Conveyors		Fixed-path material handling; moves items along a belt or overhead chain; "reads" packages and diverts them to different directions; can be very fast
AGV	Automatic guided vechicle	A driverless truck that moves material along a specified path; directed by wire or tape embedded in the floor or by radio frequencies; very flexible
ASRS	Automated storage and retrieval system	An automated warehouse—some 26 stories high—in which items are placed in a carousel-type storage system and retrieved by fast-moving stacker cranes; controlled by computer
Process Control		Continuous monitoring of automated equipment; makes real-time decisions on ongoing operation, maintenance, and quality
CIM	Computer-integrated manufacturing	Automated manufacturing systems integrated through computer technology; also called e-manufacturing

Information Technology
B2B	Business-to-business	Electronic transactions between businesses usually over the Internet
B2C	Business-to-consumer	Electronic transactions between businesses and their customers usually over the Internet
Internet		A global information system of computer networks that facilitates communication and data transfer
Intranet		Communication networks internal to an organization; can be password (i.e., firewall) protected sites on the Internet
Extranet		Intranets connected to the Internet for shared access with select suppliers, customers, and trading partners
Bar codes		A series of vertical lines printed on most packages that identifies the item and other information when read by a scanner
RFID	Radio frequency identification tags	An integrated circuit embedded in a tag that can send and receive information; a twenty-first century bar code with read/write capabilities
EDI	Electronic data interchange	A computer-to-computer exchange of business documents over a proprietary network; very expensive and inflexible
XML	Extensible markup language	A programming language that enables computer-to-computer communication over the internet by tagging data before its is sent
ERP	Enterprise resource planning	Software for managing the basic requirements of an enterprise. Including sales & marketing, finance & accounting, production & materials management, and human resources
SCM	Supply chain management	Software for managing the flow of goods and information among a network of suppliers, manufacturers, and distributors
CRM	Customer relationship management	Software for managing interactions with customers and compiling and analyzing customer data
DSS	Decision support systems	An information system that helps managers make decisions; includes a quantitative modeling component and an interactive component for what-if? analysis
ES	Expert systems	A computer system that uses an expert knowledge base to diagnose or solve a problem
Al	Artificial intelligence	A field of study that attempts to replicate elements of human thought in computer processes; includes expert systems, genetic algorithms, neural networks, and fuzzy logic (see Chapter 17)

Important issues in process design are types of processes, process planning, analysis and innovation, and technology decisions. The type of production process selected depends primarily on demand volume and degree of product standardization. Projects are produced one at a time to customer order. Batch production is used to process a variety of low-volume jobs. Mass production produces large volumes of a standard product for a mass market. Continuous production is used for very-high-volume commodity products.

Process planning consists of converting product designs into workable instructions for manufacture. They often appear in the form of assembly charts, process flowcharts, operations sheets, and manufacturing or delivery specifications. On a broader scale, process planning involves process selection, technology decisions, and decisions on outsourcing. Process analysis drives the continuous improvement of operations; process innovation drives breakthrough improvements.

assembly chart a schematic diagram of a product that shows the relationship of component parts to parent assemblies, the groupings of parts that make up a subassembly, and the overall sequence of assembly.

batch production the low-volume production of customized products.

breakeven analysis a technique that determines the volume of demand needed to be profitable; it takes into account the trade-off between fixed and variable costs.

continuous production the production of a very-high-volume commodity product with highly automated equipment.

mass production the high-volume production of a standard product for a mass market.

operations sheet a document that shows the series of operations necessary to make each item listed on the assembly chart.

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

process flowchart a document that uses standardized symbols to chart the productive and nonproductive flow of activities involved in a process; it may be used to document current processes or as a vehicle for process improvement.

process innovation the total redesign of a process.

process planning the conversion of designs into workable instructions for manufacture, along with associated decisions on component purchase or fabrication, and process and equipment selection.

process plans a set of documents that detail manufacturing or service delivery specifications.

process strategy an organization's overall approach for physically producing goods and services.

project the one-of-a-kind production of a product to customer order that requires a long time to complete and a large investment of funds and resources.

vertical integration the degree to which a firm produces the parts that go into its products

Breakeven point

Point of indifference

Texloy Manufacturing Company must select a process for its new product, TX2, from among three different alternatives. The following cost data have been gathered:

For what volume of demand would each process be desirable?

SOLUTION

If v represents the number of TX2s demanded (and, we assume, produced), then

Next, we calculate the points of indifference between each pair of processes by equating their total costs and solving for demand volume, v. Always begin with the process that has the lowest fixed cost and compare it to the process with the next lowest fixed cost, and so on. For this example, we'll compare process A to process B and process B to process C.

Comparison 1: Process A versus Process B

If demand is less than or equal to 10,000, we should choose the alternative with the lowest fixed cost, process A. Conversely, if demand is greater than 10,000, we should choose the aternative with the lowest variable cost, process B. At 10,000 units we can actually choose either A or B.

Comparison 2: Process B versus Process C

If demand is greater than 30,000 units, we should choose process C. If demand is less than 30,000 but greater than 10,000 (see comparison 1), we should choose process B. At 30,000, we can choose either B or C.

The Excel solution to this problem is shown in Exhibit 6.3.

To summarize, from the graph in Exhibit 6.3 and our decision rules, we can recommend the following process selection:

Figure E6.3. Using Excel for the Point of Indifference

6-1. Discuss the types of decisions that are involved in creating a process strategy. Apply the four elements of process strategy to the process of completing a project or paper for one of your classes. Does the process differ from class to class?

6-2. List and explain six factors that affect the decision to out-source. Explain the sourcing continuum.

6-3. Describe the four basic types of production processes. What are the advantages and disadvantages of each? When should each be used?

6-4. What are the major cost factors considered in process selection? How is breakeven analysis used for process selection?

6-5. What kind of information do the following documents communicate?

6-6. What does process planning entail? How would process planning differ for batch and continuous processes?

6-7. Explain the basic steps involved in process innovation.

6-8. Our thinking process, limited by the paradigms under which we operate, can become very rigid. Try these out-of box thinking exercises:

6-9. Describe the factors often overlooked in the financial justification of new technology.

6-10. Briefly discuss the components of e-manufacturing. In what ways can companies collaborate in producing goods and services? Report on at least one Web source on collaborative manufacturing or e-manufacturing.

6.11. Read about issues in outsourcing from a search on the Web. Then, look at the Web site of a company that you buy from to see where their products are made.

6.12. Create a flowchart for the process of building flowcharts described on page 235.

6.13. Explore the sustainability requirements of production outsourced to different parts of the world.

6-1. Construct a process flowchart of a process with which you are familiar. Identify bottlenecks, potential failure points, and opportunities for improvement.

6-2. Create an operations chart for making pancakes.

6-3. Mikey W. Smitty, an emerging rapper, is getting ready to cut his first CD, called "Western Rap." The cost of recording the CD is $5000 but copies are $5 apiece. If the CDs can be sold for $15 each, how many CDs must be sold to break even? What is the breakeven point in dollars?

6-4. Mikey W. Smitty is confident that demand for his "Western Rap" CD will substantially exceed the break-even point computed in Problem 6-3. So, Mikey is contemplating having his CD cut at a classier (and pricier) studio. The cost to record the CD would rise to $9000. However, since this new studio works with very high volume, production costs would fall to $2 per CD.

6-5. Patricia Zell, a dollmaker from Olney, Maryland, is interested in the mass marketing and production of a ceramic doll of her own design called Tiny Trisha. The initial investment required for plant and equipment is estimated at $25,000. Labor and material costs are approximately $10 per doll. If the dolls can be sold for $50 each, what volume of demand is necessary for the Tiny Trisha doll to break even?

6-6. Although it will fulfill her lifelong dream, Patricia is not confident that demand for her Tiny Trisha doll will exceed chooses a less appealing site and does more of the work by hand, her initial investment cost can be reduced to $5000, but her per-unit cost of manufacture will rise to $15 per doll.

6-7. David Austin recently purchased a chain of dry cleaners in northern Wisconsin. Although the business is making a modest profit now, David suspects that if he invests in a new press, he could recognize a substantial increase in profits. The new press costs $15,400 to purchase and install and can press 40 shirts an hour (or 320 per day). David estimates that with the new press, it will cost $0.25 to launder and press each shirt. Customers are charged $1.10 per shirt.

6-8. The school cafeteria can make pizza for approximately $0.30 a slice. The cost of kitchen use and cafeteria staff runs about $200 per day. The Pizza Den nearby will deliver whole pizzas for $9.00 each. The cafeteria staff cuts the pizza into eight pieces and serves them in the usual cafeteria line. With no cooking duties, the staff can be reduced by half, for a fixed cost of $75 per day. Should the school cafeteria make or buy its pizzas?

6-9. Soft Key is trying to determine how best to produce its newest product, DVORK keyboards. The keyboards could be produced in-house using either Process A or Process B, or purchased from a supplier. Cost data are given below. For what levels of demand should each process be chosen?

6-10. NanoTech is ready to begin production of its exciting new technology. The company is evaluating three methods of production: (A) a small production facility with older equipment, (B) a larger production facility that is more automated, and (C) subcontracting to an electronics manufacturer in Singapore. The costs of each alternative are shown below. Determine for what level of demand each production process should be chosen.

6-11. Alma has decided to purchase a cell phone with Internet access and must choose a rate plan. The "occasional-user" plan is $0.50/minute, regardless of how many minutes of air time are used. The "frequent-user" plan charges a flat rate of $55/month for 70 minutes of air time plus $0.33/minute for any time over 70 minutes. The "executive" plan charges a flat fee of $75 per month for 100 minutes of air time plus $0.25/minute over 100 minutes. In the interest of simplicity, Alma has decided to go with the occasional-user plan to start with and then upgrade as she sees fit at a later date.

6-12. Merrimac Manufacturing Company has always purchased a certain component part from a supplier on the East Coast for $50 per part. The supplier is reliable and has maintained the same price structure for years. Recently, improvements in operations and reduced product demand have cleared up some capacity in Merrimac's own plant for producing component parts. The particular part in question could be produced at $40 per part, with an annual fixed investment of $25,000. Currently, Merrimac needs 300 of these parts per year.

6-13. Prydain Pharmaceuticals is reviewing its employee healthcare program. Currently, the company pays a fixed fee of $300 per month for each employee, regardless of the number or dollar amount of medical claims filed. Another health-care provider has offered to charge the company $100 per month per employee and $30 per claim filed. A third insurer charges $200 per month per employee and $10 per claim filed. Which health-care program should Prydain join? How would the average number of claims filed per employee per month affect your decision?

6-14. Gemstone Quarry is trying to decide whether to invest in a new material-handling system. The current system (which is old and completely paid for) has an annual maintenance cost of $10,000 and costs approximately $25 to transport each load of material. The two new systems that are being considered vary both in sophistication and cost. System 1 has a fixed cost of $40,000 and a cost per load estimated at $10. System 2 has a fixed cost of $100,000 but a per-load cost of $5. At what volume of demand (i.e., number of loads) should Gemstone purchase System 1? System 2?

6-15. Tribal Systems, Inc., is opening a new plant and has yet to decide on the type of process to employ. A labor-intensive process would cost $10,000 for tools and equipment and $14 for labor and materials per item produced. A more automated process costs $50,000 in plant and equipment but has a labor/material cost of $8 per item produced. A fully automated process costs $300,000 for plant and equipment and $2 per item produced. If process selection were based solely on lowest cost, for what range of production would each process be chosen?

6-16. Lydia and Jon order their holiday gifts through the mail. They have spent many evenings at home comparison-shopping through gift catalogues and have found all the things they need from three mail-order houses, B.B. Lean, Spoogle's, and Sea's End. The purchase price for their selections from each catalogue is given here. The shipping and handling charge per item is also given. If Lydia and Jon want to order all their gifts from the same source, which catalogue should they choose? How does the number of items ordered affect your recommendation?

6-17. Sandra Saunders and her design team are analyzing the production costs for three alternative monitor designs. Given the cost information below, and assuming form and function are similar for each design, which monitor design would you recommend?

6-18. Three Bags Full is a small grocery store chain in the Lehigh Valley. The company is trying to decide whether to include a bakery section in its stores. You have been asked to run the numbers using pies as an example. Baking the pies in-house would cost $80 per day and $1 per pie. Pies can be purchased for $4 each from a local bakery, or $3 each from a large regional bakery. The regional bakery requires a minimum purchase of 25 pies per day. Which alternative would you recommend? (Hint: graph the problem.)

6-19. Keisha has been inundated with product-of-the-month offers from various marketing companies. She is considering joining a club that allows DVDs to be downloaded from a members-only Web site, but can't decide which membership offers the best deal. Given the cost information below, which club would you recommend for Keisha?

6-20. Pete Patel is the sports liaison for the student government association. During the fall semester, the group promotes school spirit with "orange effect" t-shirts. The shirts feature a special screen-printed logo that can be expensive to make. Pete's supplier, Classic Tees, has quoted three prices for the shirts with differing logo packages, as shown below.

6-21. Sized Rite is trying to determine how best to produce its new line of shoes for expanded feet. Demand for its w-i-d-e products is uncertain. Given the alternative processes and costs below, determine at what level of demand you would choose each process.

A Manager's Woes

Kyle Peschken has been a manager for the discount store, Zelmart, for the past two years. It's time for his annual performance review, and Kyle would like to make a big impression on the corporate staff. Walking through the store, he makes a mental note of which departments need to be straightened, which ones need to be reorganized, and which employees he'd like to schedule during the week of his review. And then he sees it—blocking the aisles, creating commotion, and looking very unprofessional—the long line in the electronics department. It's time to confront Chris, the sales clerk.

"Chris what's the holdup here?"

"I'm waiting for a manager to approve this $120 check. And then I have to show this lady a digital camera from the display cabinet. She's been waiting half an hour, and then. . . ."

"Alright Chris . . . I can help out for a little while . . . "

Two hours later, Kyle exited the electronics department disheartened. That's no way for a store manager to spend his afternoon. There's got to be a logical way to solve this, thought Kyle. He walked back to his office and wrote down the facts as he knew them.

Help Kyle come up with a solution to his inefficient department. Draw a flowchart of the current process from the customer's point of view and try to identify areas for improvement. If small improvements will not fix the problem, try a more innovative approach. Chart out your suggestions and bring them to class. [It may help to visit a similar store and watch their checkout process.]

Wrong Meds, Again!

"It was horrible," said the distraught client. "No matter how many times I provided the information, no one listened to me. And they obviously didn't listen to each other either, because they used the wrong meds . . . again."

"Okay, calm down. Now tell me what happened from the beginning," urged Melanie Torrent, the Quality Assurance Manager for Hope Memorial Hospital.

"I got a call at work saying my father was being taken to the hospital from the nursing home. The nursing home always sends a list of medications with the ambulance, but when I got to the emergency room, they were asking my dad what medications he was taking. Of course my dad told them he wasn't taking any medications and they believed him! He's sent to the emergency room from a nursing home and they decide it's reasonable for him not to be on any medications . . . so of course I corrected him and told them to find the medication list. I don't know whether the ambulance driver forgot to bring in the list, or gave it to the wrong person, or what, but they couldn't find it. My dad must be on 12 different medications so I wasn't sure I could remember them correctly. I called the nursing home and we went over the list with them, and then I gave the handwritten list to the nursing station.

In the meantime, my dad was admitted to the hospital and moved to a hospital room. Again, a nurse came in with a computer and asked me to tell them what meds he was talking. I tried to tell them that the emergency room had the list, but she said it would be the next morning before the list got updated online. Nevertheless, the nurse called down to the emergency room and was faxed up the list of medications. Only the fax was unreadable, so they came back to me. It was a few hours before his next meds were due, so I drove over to the nursing home, had them make several legible copies of the meds list and drove back to the hospital. I gave the nurse the list, kept one for myself and posted the other on the bulletin board in my dad's room. The nurse thanked me and said she'd take care of it at the end of her shift.

After a long night at the hospital, I woke up the next morning to see my dad hallucinating. I knew immediately what had happened—there's a certain drug that he has this reaction to. I ran down to the nurse's station and had her look up the medications he had been given. Sure enough, it was there, along with several other medications he should no longer be taking. Turns out, the list was from two years ago when he had last been admitted to the hospital! How could they have made that kind of mistake—using data from two years ago?"

"That is something we'll look into. More importantly, has your father been taken off the drug?"

"Yes."

"And has the medication list been corrected?"

"Yes."

"And how is he doing today?"

"Fine today, but it could have been more serious and I think you should look into changing your procedures so this doesn't happen again . . ."

"I appreciate you bringing this to my attention. I will speak to the persons involved and I assure you this will not happen again. Hope Memorial prides itself on being a caring and responsible health care provider. Now if you'll excuse me, I have another client to see . . ."

The DPA Protocol

Blake is an intern in the Department of Performing Arts (DPA) at State University. One of his duties is to schedule end-of-term recitals for the department's graduating seniors and to create and distribute programs for those recitals. The recitals for each student include several performance pieces and often feature classical pieces with foreign titles and composers. The students submit a request for recital online and are sent an email confirmation of their recital schedule (from Blake). With that confirmation is a reminder that the material for the program needs to be submitted by a certain time. Generally, these are emailed to Blake, who puts them in standard program format and prints, folds, and distributes them to the recital venue on the evening of the performance. The department has recently been-embarrassed by mistakes in the programs, and after verifying that the source of the error is usually with the student, not Blake, the department has created a new protocol to improve the process.

Below are copies of emails about the new protocol. Create a flowchart of the old and new protocols and identify where problems or delays might occur. What would you do to improve the process?

Bedworth, D., M. Henderson, and P. Wolfe. Computer-Integrated Design and Manufacturing. New York: McGraw-Hill, 1991.

Bylinsky, Gene. "Hot New Technologies for American Factories." Fortune Now (June 26, 2000).

Curan, Thomas, Gerhard Keller, and Andrew Ladd. SAP R/3 Business Blueprint. Upper Saddle River, NJ: Prentice Hall, 1998.

El Sawy, Omar. Redesigning Enterprise Processes for e-Business. New York: McGraw-Hill, 2001.

Foston, L. Fundamentals of Computer Integrated Manufacturing. Upper Saddle River, NJ: Prentice Hall, 1991.

Hammer, Michael, and James Champy. Reengineering the Corporation. New York: HarperCollins, 1993.

Hammer, Michael, and Steven Stanton. The Reengineering Revolution. New York: HarperCollins, 1995.

Hayes, Robert, Gary Pisano, David Upton, and Steven Wheel-wright. Operations Strategy and Technology: Pursuing the Competitive Edge. Hoboken, NJ: Wiley, 2005.

Hunt, V. Daniel. Process Mapping. New York: Wiley, 1996. Keen, Peter. The Process Edge. Boston: Harvard Business School Press, 1997.

Nevens, J., D. Whitney, T. DeFazio, A. Edsall, R. Gustavson, R. Metzinger, and W. Dvorak. Concurrent Design of Products and Process: A Strategy for the Next Generation in Manufacturing. New York: McGraw-Hill, 1989.

Noori, H. Managing the Dynamics of New Technology. Upper Saddle River, NJ: Prentice Hall, 1990.

Reinhardt, Andy. "Log On, Link Up, Save Big." BusinessWeek (June 22, 1998), pp. 132–138.

Richards, Bill. "Superplant." eCompany Now (November 2000).

Skinner, W. Manufacturing: The Formidable Competitive Weapon. New York: Wiley, 1985.

Teresko, John. "The Dawn of e-Manufacturing." Industry Week (October 2, 2000).

Valery, N. "Factory of the Future." The Economist (May 30, 1987), pp. 3–18.

Worldwide Robotics Survey and Directory. Pittsburgh: The Robotic Institute of America, 1999.

Zurawski, Laura, and Mark Hoske. "E-manufacturing: A Catchy Name for What You Should be Doing Anyway." Control Engineering (February 13, 2001).