Operations Management: Product and Service Design PDF

OPERATIONS MANAGEMENT LESSON 4: Product and Service Design https://www.helpwithassignment.com/blog/operations-management-product-design-from-help-with-assignment/ I. Introduction The essence of a business organization is the products and services it offe...

OPERATIONS MANAGEMENT LESSON 4: Product and Service Design https://www.helpwithassignment.com/blog/operations-management-product-design-from-help-with-assignment/ I. Introduction The essence of a business organization is the products and services it offers, and every aspect of the organization and its supply chain are structured around those products and services. Organizations that have well-designed products or services are more likely to realize their goals than those with poorly designed products or services. Hence, organizations have a strategic interest in product and service design. Product or service design should be closely tied to an organization’s strategy. The introduction of new products or services, or changes to product or service designs, can have impacts throughout the organization and the entire supply chain. Some processes may change very little, while others may have to change considerably in terms of what they do or how and when they do it. New processes may have to be added, and some current ones may be eliminated. New suppliers and distributors may need to be found and integrated into the system, and some current suppliers and distributors may no longer be an appropriate fit. Moreover, it is necessary to take into account projected impact on demand as well as financial, marketing, and distribution implications. Because of the potential for widespread effects, taking “big picture” systems approach early and throughout the design or redesign process is imperative to reduce the chance of missing some implications and costs, and to understand the time it will take. Likewise, input from engineering, operations, marketing, finance, accounting, and supply chains is crucial. What Does Product and Service Design Do? The various activities and responsibilities of product and service design include the following (functional interactions are shown in parentheses): 1. Translate customer wants and needs into product and service requirements. (marketing, operations) 2. Refine existing products and services. (marketing) 3. Develop new products and/or services. (marketing, operations) 4. Formulate quality goals. (marketing, operations) 5. Formulate cost targets. (accounting, finance, operations) 6. Construct and test prototypes. (operations, marketing, engineering) 7. Document specifications. 8. Translate product and service specifications into process specifications. (engineering, operations)  OPERATIONS MANAGEMENT Product and service design involves or affects nearly every functional area of an organization. However, marketing and operations have major involvement. Key Questions From a buyer’s standpoint, most purchasing decisions entail two fundamental considerations; one is cost and the other is quality or performance. From the organization’s standpoint, the key questions are: 1. Is there demand for it? What is the potential size of the market, and what is the expected demand profile (will demand be long term or short term, will it grow slowly or quickly)? 2. Can we do it? Do we have the necessary knowledge, skills, equipment, capacity, and supply chain capability? For products, this is known as manufacturability; for services, this is known as serviceability. Also, is outsourcing some or all of the work an option? 3. What level of quality is appropriate? What do customers expect? What level of quality do competitors provide for similar items? How would it fit with our current offerings? 4. Does it make sense from an economic standpoint? What are the potential liability issues, ethical considerations, sustainability issues, costs, and profits? For nonprofits, is the cost within budget? Reasons for Product and Service Design or Redesign Product and service design has typically had strategic implications for the success and prosperity of an organization. Furthermore, it has an impact on future activities. Consequently, decisions in this area are some of the most fundamental that managers must make. Organizations become involved in product and service design or redesign for a variety of reasons. The main forces that initiate design or redesign are market opportunities and threats. The factors that give rise to market opportunities and threats can be one or more changes: Economic (e.g., low demand, excessive warranty claims, the need to reduce costs). Social and demographic (e.g., aging baby boomers, population shifts). Political, liability, or legal (e.g., government changes, safety issues, new regulations). Competitive (e.g., new or changed products or services, new advertising/promotions). Cost or availability (e.g., of raw materials, components, labor, water, energy). Technological (e.g., in product components, processes). II. Idea Generation Ideas for new or redesigned products or services can come from a variety of sources, including customers, the supply chain, competitors, employees, and research. Customer input can come from surveys, focus groups, complaints, and unsolicited suggestions for improvement. Input from suppliers, distributors, and employees can be obtained from interviews, direct or indirect suggestions, and complaints. One of the strongest motivators for new and improved products or services is competitors’ products and services. By studying a competitor’s products or services and how the competitor operates (pricing policies, return policies, warranties, location strategies, etc.), an organization can glean many ideas. Beyond that, some companies purchase a competitor’s product and then carefully dismantle and inspect it, searching for ways to improve their own product. This is called reverse engineering. Sometimes reverse engineering can enable a company to leapfrog the competition by developing an even better product. Suppliers are still another source of ideas, and with increased emphasis on supply chains and supplier partnerships, suppliers are becoming an important source of ideas. Research is another source of ideas for new or improved products or services. Research and development (R&D) refer to organized efforts that are directed toward increasing scientific knowledge and product or process innovation. Most of the advances in semiconductors, medicine, communications, and space technology can be attributed to R&D efforts at colleges and universities, research foundations, government agencies, and private enterprises. R&D efforts may involve basic research, applied research, or development. 1  OPERATIONS MANAGEMENT Basic research has the objective of advancing the state of knowledge about a subject, without any near-term expectation of commercial applications. Applied research has the objective of achieving commercial applications. Development converts the results of applied research into useful commercial applications. Legal and Ethical Considerations Designers must be careful to take into account a wide array of legal and ethical considerations. Generally, they are mandatory. Moreover, if there is a potential to harm the environment, then those issues also become important. Most organizations are subject to numerous government agencies that regulate them. Among the more familiar federal agencies are the Food and Drug Administration, the Occupational Health and Safety Administration, the Environmental Protection Agency, and various state and local agencies. Product liability can be a strong incentive for design improvements. Product liability is the responsibility of a manufacturer for any injuries or damages caused by a faulty product because of poor workmanship or design. Many business firms have faced lawsuits related to their products. The suits and potential suits have led to increased legal and insurance costs, expensive settlements with injured parties, and costly recalls. Moreover, increasing customer awareness of product safety can adversely affect product image and subsequent demand for a product. Thus, it is extremely important to design products that are reasonably free of hazards. When hazards do exist, it is necessary to install safety guards or other devices for reducing accident potential, and to provide adequate warning notices of risks. Consumer groups, business firms, and various government agencies often work together to develop industrywide standards that help avoid some of the hazards. Ethical issues often arise in the design of products and services; it is important for managers to be aware of these issues and for designers to adhere to ethical standards. Designers are often under pressure to speed up the design process and to cut costs. These pressures often require them to make trade-off decisions, many of which involve ethical considerations. Organizations generally want designers to adhere to guidelines such as the following: Produce designs that are consistent with the goals of the organization. For instance, if the company has a goal of high quality, don’t cut corners to save cost, even in areas where it won’t be apparent to the customer. Give customers the value they expect. Make health and safety a primary concern. At risk are employees who will produce goods or deliver services, workers who will transport the products, customers who will use the products or receive the services, and the general public, which might be endangered by the products or services. Human Factors Human factor issues often arise in the design of consumer products. Safety and liability are two critical issues in many instances, and they must be carefully considered. For example, the crashworthiness of vehicles is of much interest to consumers, insurance companies, automobile producers, and the government. Another issue for designers to take into account is adding new features to their products or services. Companies in certain businesses may seek a competitive edge by adding new features. Although this can have obvious benefits, it can sometimes be “too much of a good thing,” and be a source of customer dissatisfaction. This “creeping featurism” is particularly evident in electronic products such as handheld devices that continue to offer new features, and more complexity, even while they are shrinking in size. This may result in low consumer ratings in terms of “ease of use.” Cultural Factors Product designers in companies that operate globally also must take into account any cultural differences of different countries or regions related to the product. Global Product and Service Design 2  OPERATIONS MANAGEMENT Traditionally, product design has been conducted by members of the design team who are located in one facility or a few nearby facilities. However, organizations that operate globally are discovering advantages in global product design, which uses the combined efforts of a team of designers who work in different countries and even on different continents. Such virtual teams can provide a range of comparative advantages over traditional teams such as engaging the best human resources from around the world without the need to assemble them all in one place, and operating on a 24-hour basis, thereby decreasing the time-to-market. The use of global teams also allows for customer needs assessment to be done in more than one country with local resources, opportunities, and constraints to be taken into account. Global product design can provide design outcomes that increase the marketability and utility of a product. The diversity of an international team may yield different points of view and ideas and information to enrich the design process. However, care must be taken in managing the diversity, because if it is mismanaged, that can lead to conflicts and miscommunications. Advances in information technology have played a key role in the viability of global product design teams by enabling team members to maintain continual contact with each other and to instantaneously share designs and progress, and to transmit engineering changes and other necessary information. Environmental Factors: Sustainability Product and service design is a focal point in the quest for sustainability. Key aspects include cradle-to-grave assessment, end-of-life programs, reduction of costs and materials used, reuse of parts of returned products, and recycling. Cradle-to-Grave Assessment Cradle-to-grave assessment, also known as life cycle analysis, is the assessment of the environmental impact of a product or service throughout its useful life, focusing on such factors as global warming (the amount of carbon dioxide released into the atmosphere), smog formation, oxygen depletion, and solid waste generation. For products, cradle-to-grave analysis takes into account impacts in every phase of a product’s life cycle, from raw material extraction from the earth, or the growing and harvesting of plant materials, through fabrication of parts and assembly operations, or other processes used to create products, as well as the use or consumption of the product, and final disposal at the end of a product’s useful life. It also considers energy consumption, pollution and waste, and transportation in all phases. Although services generally involve less use of materials, cradle-to-grave assessment of services is nonetheless important, because services consume energy and involve many of the same or similar processes that products involve. The goal of cradle-to-grave assessment is to choose products and services that have the least environmental impact while still taking into account economic considerations. End-of-Life Programs End-of-life (EOL) programs deal with products that have reached the end of their useful lives. The products include both consumer products and business equipment. The purpose of these programs is to reduce the dumping of products, particularly electronic equipment, in landfills or third-world countries, as has been the common practice, or incineration, which converts materials into hazardous air and water emissions and generates toxic ash. Although the programs are not limited to electronic equipment, that equipment poses problems because the equipment typically contains toxic materials such as lead, cadmium, chromium, and other heavy metals. The Three Rs: Reduce, Reuse, and Recycle Designers often reflect on three particular aspects of potential cost saving and reducing environmental impact: reducing the use of materials through value analysis; refurbishing and then reselling returned goods that are deemed to have additional useful life, which is referred to as remanufacturing; and reclaiming parts of unusable products for recycling. Reduce: Value Analysis - Value analysis refers to an examination of the function of parts and materials in an effort to reduce the cost and/or improve the performance of a product. Typical questions that would be asked as part of the analysis include: Could a cheaper part or 3  OPERATIONS MANAGEMENT material be used? Is the function necessary? Can the function of two or more parts or components be performed by a single part for a lower cost? Can a part be simplified? Could product specifications be relaxed, and would this result in a lower price? Could standard parts be substituted for nonstandard parts? Reuse: Remanufacturing - An emerging concept in manufacturing is the remanufacturing of products. Remanufacturing refers to refurbishing used products by replacing worn-out or defective components and reselling the products. This can be done by the original manufacturer, or another company. Among the products that have remanufactured components are automobiles, printers, copiers, cameras, computers, and telephones. There are a number of important reasons for doing this. One is that a remanufactured product can be sold for about 50 percent of the cost of a new product. Another is that the process requires mostly unskilled and semiskilled workers. And in the global market, European lawmakers are increasingly requiring manufacturers to take back used products, because this means fewer products end up in landfills and there is less depletion of natural resources such as raw materials and fuel. Designing products so that they can be more easily taken apart has given rise to yet another design consideration: Design for disassembly (DFD). Recycle - Recycling is sometimes an important consideration for designers. Recycling means recovering materials for future use. This applies not only to manufactured parts but also to materials used during production, such as lubricants and solvents. Reclaimed metal or plastic parts may be melted down and used to make different products. Companies recycle for a variety of reasons, including o 1. Cost savings. o 2. Environment concerns. o 3. Environmental regulations. An interesting note: Companies that want to do business in the European Union must show that a specified proportion of their products are recyclable. The pressure to recycle has given rise to the term design for recycling (DFR), referring to product design that takes into account the ability to disassemble a used product to recover the recyclable parts. III. Other Design Considerations Aside from legal, ethical, environmental, and human considerations designers must also take into account product or service life cycles, how much standardization to incorporate, product or service reliability, and the range of operating conditions under which a product or service must function. These topics are discussed in this section. We begin with life cycles. Strategies for Product or Service Life Stages Most, but not all, products and services go through a series of stages over their useful life, sometimes referred to as their life cycle. Demand typically varies by phase. Different phases call for different strategies. In every phase, forecasts of demand and cash flow are key inputs for strategy. When a product or service is introduced, it may be treated as a curiosity item. Many potential buyers may suspect that all the bugs haven’t been worked out and that the price may drop after the introductory period. Strategically, companies must carefully weigh the trade-offs in getting all the bugs out versus getting a leap on the competition, as well as getting to the market at an advantageous time. Over time, design improvements and increasing demand yield higher reliability and lower costs, leading the growth in demand. In the growth phase, it is important to obtain accurate projections of the demand growth rate and how long that will persist, and then to ensure that capacity increases coincide with increasing demand. In the next phase, the product or service reaches maturity, and demand levels off. Few, if any, design changes are needed. Generally, costs are low and productivity is high. New uses for products or services can extend their life and increase the market size. In the decline phase, decisions must be made on whether to discontinue a product or service and replace it with new ones or abandon the market, or to attempt to find new uses or new users for the existing product or service. 4  OPERATIONS MANAGEMENT The Product Life Cycle Degree of Standardization An important issue that often arises in both product/service design and process design is the degree of standardization. Standardization refers to the extent to which there is absence of variety in a product, service, or process. Standardized products are made in large quantities of identical items; calculators, computers, and 2 percent milk are examples. Standardized service implies that every customer or item processed receives essentially the same service. Standardized processes deliver standardized service or produce standardized goods. Standardization carries a number of important benefits as well as certain disadvantages. Standardized products are immediately available to customers. Standardized products mean interchangeable parts, which greatly lower the cost of production while increasing productivity and making replacement or repair relatively easy compared with that of customized parts. Design costs are generally lower Another benefit of standardization is reduced time and cost to train employees and reduced time to design jobs. Similarly, scheduling of work, inventory handling, and purchasing and accounting activities become much more routine, and quality is more consistent. Standardization also has disadvantages. A major one relates to the reduction in variety. This can limit the range of customers to whom a product or service appeals. And that creates a risk that a competitor will introduce a better product or greater variety and realize a competitive advantage. Another disadvantage is that a manufacturer may freeze (standardize) a design prematurely and, once the design is frozen, find compelling reasons to resist modification. Obviously, designers must consider important issues related to standardization when making choices. Designing for Mass Customization Companies like standardization because it enables them to produce high volumes of relatively low-cost products, albeit products with little variety. Customers, on the other hand, typically prefer more variety, although they like the low cost. The question for producers is how to resolve these issues without (1) losing the benefits of standardization and (2) incurring a host of problems that are often linked to variety. These include increasing the resources needed to achieve design variety; increasing variety in the production process, which would add to the skills necessary to produce products, causing a decrease in productivity; creating an additional inventory burden during and after production, by having to carry replacement parts for the increased variety of parts; and adding to the difficulty of diagnosing and repairing product failures. The answer, at least for some companies, is mass customization, a strategy of producing standardized goods or services, but incorporating some degree of customization in the final product or service. Several tactics make this possible. One is delayed differentiation, and another is modular design. Delayed differentiation is a postponement tactic: the process of producing, but not quite completing, a product or service, postponing completion until customer preferences or specifications are known. 5  OPERATIONS MANAGEMENT Modular design is a form of standardization. Modules represent groupings of component parts into subassemblies, usually to the point where the individual parts lose their separate identity. Reliability Reliability is a measure of the ability of a product, a part, a service, or an entire system to perform its intended function under a prescribed set of conditions. The importance of reliability is underscored by its use by prospective buyers in comparing alternatives and by sellers as one determinant of price. Reliability also can have an impact on repeat sales, reflect on the product’s image, and, if it is too low, create legal implications. Reliability is also a consideration for sustainability; the higher the reliability of a product, the fewer the resources that will be needed to maintain it, and the less frequently it will involve the three Rs. The term failure is used to describe a situation in which an item does not perform as intended. This includes not only instances in which the item does not function at all, but also instances in which the item’s performance is substandard or it functions in a way not intended. Reliabilities are always specified with respect to certain conditions, called normal operating conditions. These can include load, temperature, and humidity ranges as well as operating procedures and maintenance schedules. Failure of users to heed these conditions often results in premature failure of parts or complete systems Improving Reliability. Reliability can be improved in a number of ways, some of which are listed: 1. Improve component design. 2. Improve production and/or assembly techniques. 3. Improve testing. 4. Use backups. 5. Improve preventive maintenance procedures. 6. Improve user education. 7. Improve system design. Robust Design Some products or services will function as designed only within a narrow range of conditions, while others will perform as designed over a much broader range of conditions. The latter have robust design. The more robust a product or service, the less likely it will fail due to a change in the environment in which it is used or in which it is performed. Hence, the more designers can build robustness into the product or service, the better it should hold up, resulting in a higher level of customer satisfaction Taguchi’s Approach. Japanese engineer Genichi Taguchi’s approach is based on the concept of robust design. His premise is that it is often easier to design a product that is insensitive to environmental factors, either in manufacturing or in use, than to control the environmental factors. Degree of Newness Product or service design change can range from the modification of an existing product or service to an entirely new product or service: 1. Modification of an existing product or service. 2. Expansion of an existing product line or service offering. 3. Clone of a competitor’s product or service. 4. New product or service. The degree of change affects the newness to the organization and the newness to the market. For the organization, a low level of newness can mean a fairly quick and easy transition to producing the new product, while a high level of newness would likely mean a slower and more difficult, and therefore 6  OPERATIONS MANAGEMENT more costly, transition. For the market, a low level of newness would mean little difficulty with market acceptance, but possibly low profit potential. Even in instances of low profit potential, organizations might use this strategy to maintain market share. A high level of newness, on the other hand, might mean more difficulty with acceptance, or it might mean a rapid gain in market share with a high potential for profits. Unfortunately, there is no way around these issues. It is important to carefully assess the risks and potential benefits of any design change, taking into account clearly identified customer wants. IV. Phases in Product Design and Development Product design and development generally proceeds in a series of phases 1. Feasibility analysis. Feasibility analysis entails market analysis (demand), economic analysis (development cost and production cost, profit potential), and technical analysis (capacity requirements and availability, and the skills needed). Also, it is necessary to answer the question, Does it fit with the mission? It requires collaboration among marketing, finance, accounting, engineering, and operations. 2. Product specifications. This involves detailed descriptions of what is needed to meet (or exceed) customer wants, and requires collaboration between legal, marketing, and operations. 3. Process specifications. Once product specifications have been set, attention turns to specifications for the process that will be needed to produce the product. Alternatives must be weighed in terms of cost, availability of resources, profit potential, and quality. This involves collaboration between accounting and operations. 4. Prototype development. With product and process specifications complete, one (or a few) units are made to see if there are any problems with the product or process specifications. 5. Design review. At this stage, any necessary changes are made or the project is abandoned. Marketing, finance, engineering, design, and operations collaborate to determine whether to proceed or abandon. 6. Market test. A market test is used to determine the extent of consumer acceptance. If unsuccessful, the product returns to the design review phase. This phase is handled by marketing. 7. Product introduction. The new product is promoted. This phase is handled by marketing. Follow-up evaluation. Based on user feedback, changes may be made or forecasts refined. This phase is handled by marketing. V. Service Design There are many similarities between product and service design. However, there are some important differences as well, owing to the nature of services. One major difference is that unlike manufacturing, where production and delivery are usually separated in time, services are usually created and delivered simultaneously. Service refers to an act, something that is done to or for a customer (client, patient, etc.). It is provided by a service delivery system, which includes the facilities, processes, and skills needed to provide the service. Many services are not pure services, but part of a product bundle —the combination of goods and services provided to a customer. The service component in products is increasing. The ability to create and deliver reliable customer-oriented service is often a key competitive differentiator. Successful companies combine customer-oriented service with their products. System design involves development or refinement of the overall service package. 1. The physical resources needed. 2. The accompanying goods that are purchased or consumed by the customer or provided with the service. 3. Explicit services (the essential/core features of a service, such as tax preparation). 4. Implicit services (ancillary/extra features, such as friendliness, courtesy). Differences between Service Design and Product Design Service operations managers must contend with issues that may be insignificant or nonexistent for managers in a production setting. These include the following: 7  OPERATIONS MANAGEMENT 1. Products are generally tangible; services are generally intangible. Consequently, service design often focuses more on intangible factors (e.g., peace of mind, ambiance) than does product design. 2. In many instances services are created and delivered at the same time (e.g., a haircut, a car wash). In such instances there is less latitude in finding and correcting errors before the customer has a chance to discover them. Consequently, training, process design, and customer relations are particularly important. 3. Services cannot be inventoried. This poses restrictions on flexibility and makes capacity issues very important. 4. Services are highly visible to consumers and must be designed with that in mind; this adds an extra dimension to process design, one that usually is not present in product design. 5. Some services have low barriers to entry and exit. This places additional pressures on service design to be innovative and cost-effective. 6. Location is often important to service design, with convenience as a major factor. Hence, design of services and choice of location are often closely linked. 7. Service systems range from those with little or no customer contact to those that have a very high degree of customer contact. Here are some examples of those different types: Insulated technical core; little or no customer contact (e.g., software development). Production line; little or no customer contact (e.g., automatic car wash). Personalized service (e.g., haircut, medical service). Consumer participation (e.g., diet program, dance lessons). Self-service (e.g., supermarket). If there is little or no customer contact, service system design is like product system design. 8. Demand variability alternately creates waiting lines or idle service resources. VI. Phases in the Service Design Process The Service Design Process 1. Conceptualize. a. Idea generation b. Assessment of customer wants/needs (marketing) c. Assessment of demand potential (marketing) 2. Identify service package components needed (operations and marketing). 3. Determine performance specifications (operations and marketing). 4. Translate performance specifications into design specifications. 5. Translate design specifications into delivery specifications. Service Blueprinting A useful tool for conceptualizing a service delivery system is the service blueprint , which is a method for describing and analyzing a service process. A service blueprint is much like an architectural drawing, but instead of showing building dimensions and other construction features, a service blueprint shows the basic customer and service actions involved in a service operation. Sample Service Blueprint 8  OPERATIONS MANAGEMENT The major steps in service blueprinting are as follows: 1. Establish boundaries for the service and decide on the level of detail needed. 2. Identify and determine the sequence of customer and service actions and interactions. A flowchart can be a useful tool for this. 3. Develop time estimates for each phase of the process, as well as time variability. 4. Identify potential failure points and develop a plan to prevent or minimize them, as well as a plan to respond to service errors. Characteristics of Well-Designed Service Systems There are a number of characteristics of well-designed service systems. They can serve as guidelines in developing a service system. They include the following: 1. Being consistent with the organization’s mission. 2. Being user-friendly. 3. Being robust if variability is a factor. 4. Being easy to sustain. 5. Being cost-effective. 6. Having value that is obvious to customers. 7. Having effective linkages between back-of-the-house operations (i.e., no contact with the customer) and front-of-the-house operations (i.e., direct contact with customers). Front operations should focus on customer service, while back operations should focus on speed and efficiency. 8. Having a single, unifying theme, such as convenience or speed. 9. Having design features and checks that will ensure service that is reliable and of high quality. Guidelines for Successful Service Design 1. Define the service package in detail. A service blueprint may be helpful for this. 2. Focus on the operation from the customer’s perspective. Consider how customer expectations and perceptions are managed during and after the service. 3. Consider the image that the service package will present both to customers and to prospective customers. 4. Recognize that designers’ familiarity with the system may give them a quite different perspective than that of the customer and take steps to overcome this. 5. Make sure that managers are involved and will support the design once it is implemented. 6. Define quality for both tangibles and intangibles. Intangible standards are more difficult to define, but they must be addressed. 7. Make sure that recruitment, training, and reward policies are consistent with service expectations. 8. Establish procedures to handle both predictable and unpredictable events. 9. Establish systems to monitor, maintain, and improve service. VII. Operations Strategy Product and service design is a fertile area for achieving competitive advantage and/or increasing customer satisfaction. Potential sources of such benefits include the following: Packaging products and ancillary services to increase sales. Examples include selling PCs at a reduced cost with a two-year Internet access sign-up agreement, offering extended warranties on products, offering installation and service, and offering training with computer software. Using multiple-use platforms. Auto manufacturers use the same platform (basic chassis, say) for several nameplates (e.g., Jaguar S type, Lincoln LS, and Ford Thunderbird have shared the same platform). There are two basic computer platforms, PC and Mac, with many variations of computers using a particular platform. Implementing tactics that will achieve the benefits of high volume while satisfying customer needs for variety, such as mass customization. 9  OPERATIONS MANAGEMENT Continually monitoring products and services for small improvements rather than the “big bang” approach. Often the “little” things can have a positive, long-lasting effect on consumer attitudes and buying behavior. Shortening the time it takes to get new or redesigned goods and services to market. LESSON 5: Strategic Capacity Planning for Products and Services https://pressbooks.senecacollege.ca/operationsmanagementintro/chapter/strategic-capacity-planning/ Strategic Capacity Planning for Products and Services Capacity refers to an upper limit or ceiling on the load that an operating unit can handle. The load might be in terms of the number of physical units produced (e.g., bicycles assembled per hour) or the number of services performed (e.g., computers upgraded per hour). The operating unit might be a plant, department, machine, store, or worker. Capacity needs include equipment, space, and employee skills. The goal of strategic capacity planning is to achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demand. Organizations become involved in capacity planning for various reasons. Among the chief reasons are changes in demand, changes in technology, changes in the environment, and perceived threats or opportunities. A gap between current and desired capacity will result in capacity that is out of balance. Overcapacity causes operating costs that are too high, while undercapacity causes strained resources and possible loss of customers. The key questions in capacity planning are the following: 1. What kind of capacity is needed? 2. How much is needed to match demand? 3. When is it needed? The question of what kind of capacity is needed depends on the products and services that management intends to produce or provide. Hence, in a very real sense, capacity planning is governed by those choices. Forecasts are key inputs used to answer the questions of how much capacity is needed and when is it needed. I. Capacity Decisions Are Strategic For a number of reasons, capacity decisions are among the most fundamental of all the design decisions that managers must make. In fact, capacity decisions can be critical for an organization: 1. Capacity decisions have a real impact on the ability of the organization to meet future demands for products and services; capacity essentially limits the rate of output possible. 10  OPERATIONS MANAGEMENT Having capacity to satisfy demand can often allow a company to take advantage of tremendous benefits. 2. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched, which will tend to minimize operating costs. In practice, this is not always achieved because actual demand either differs from expected demand or tends to vary (e.g., cyclically). In such cases, a decision might be made to attempt to balance the costs of over- and undercapacity. 3. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater its cost. This does not necessarily imply a one-for-one relationship; larger units tend to cost proportionately less than smaller units. 4. Capacity decisions often involve long-term commitment of resources and the fact that, once they are implemented, those decisions may be difficult or impossible to modify without incurring major costs. 5. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can affect delivery speed, which can be a competitive advantage. 6. Capacity affects the ease of management; having appropriate capacity makes management easier than when capacity is mismatched. 7. Globalization has increased the importance and the complexity of capacity decisions. Far- flung supply chains and distant markets add to the uncertainty about capacity needs. 8. Because capacity decisions often involve substantial financial and other resources, it is necessary to plan for them far in advance. For example, it may take years for a new power- generating plant to be constructed and become operational. However, this increases the risk that the designated amount of capacity will not match actual demand when the capacity becomes available. 9. II. Defining and Measuring Capacity Capacity often refers to an upper limit on the rate of output. Even though this seems simple enough, there are subtle difficulties in actually measuring capacity in certain cases. These difficulties arise because of different interpretations of the term capacity and problems with identifying suitable measures for a specific situation. In selecting a measure of capacity, it is important to choose one that does not require updating. Functional Definitions of Capacity 1. Design capacity : The maximum output rate or service capacity an operation, process, or facility is designed for. 2. Effective capacity : Design capacity minus allowances such as personal time, and maintenance. Design capacity is the maximum rate of output achieved under ideal conditions. Effective capacity is always less than design capacity owing to realities of changing product mix, the need for periodic maintenance of equipment, lunch breaks, coffee breaks, problems in scheduling and balancing operations, and similar circumstances. Actual output cannot exceed effective capacity and is often less because of machine breakdowns, absenteeism, shortages of materials, and quality problems, as well as factors that are outside the control of the operations managers. These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective capacity. Capacity utilization is the ratio of actual output to design capacity. Actual Output Efficiency = x 100% Effective Capacity Utilization = Actual Output x 100% 11  OPERATIONS MANAGEMENT Design Capacity Both measures are expressed as percentages. Sample Problem: Given the following information, compute the efficiency and the utilization of the vehicle repair department: Design capacity = 50 trucks per day Effective capacity = 40 trucks per day Actual output = 36 trucks per day 36 trucks per day Efficiency = x 100% = 90% 40 trucks per day Utilizatio 36 trucks per day = x 100% = 72% n 50 trucks per day Compared to the effective capacity of 40 units per day, 36 units per day looks pretty good. However, compared to the design capacity of 50 units per day, 36 units per day is much less impressive although probably more meaningful. III. Determinants of Effective Capacity Many decisions about system design have an impact on capacity. The same is true for many operating decisions. The main factors relate to facilities, products or services, processes, human considerations, operational factors, the supply chain, and external forces Facilities. The design of facilities, including size and provision for expansion, is key. Locational factors, such as transportation costs, distance to market, labor supply, energy sources, and room for expansion, are also important. Likewise, layout of the work area often determines how smoothly work can be performed, and environmental factors such as heating, lighting, and ventilation also play a significant role in determining whether personnel can perform effectively or whether they must struggle to overcome poor design characteristics. Product and Service Factors. Product or service design can have a tremendous influence on capacity Generally speaking, the more uniform the output, the more opportunities there are for standardization of methods and materials, which leads to greater capacity. The particular mix of products or services rendered also must be considered since different items will have different rates of output. Process Factors. The quantity capability of a process is an obvious determinant of capacity. A more subtle determinant is the influence of output quality. For instance, if quality of output does not meet standards, the rate of output will be slowed by the need for inspection and rework activities. Productivity also affects capacity. Process improvements that increase quality and productivity can result in increased capacity. Also, if multiple products or multiple services are processed in batches, the time to change over equipment settings must be taken into account. Human Factors. The tasks that make up a job, the variety of activities involved, and the training, skill, and experience required to perform a job all have an impact on the potential and actual output. In addition, employee motivation has a very basic relationship to capacity, as do absenteeism and labor turnover. Policy Factors. Management policy can affect capacity by allowing or not allowing capacity options such as overtime or second or third shifts. Operational Factors. Scheduling problems may occur when an organization has differences in equipment capabilities among alternative pieces of equipment or differences in job requirements. Inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased 12  OPERATIONS MANAGEMENT materials and parts, and quality inspection and control procedures also can have an impact on effective capacity. Inventory shortages of even one component of an assembled item can cause a temporary halt to assembly operations until the components become available. This can have a major impact on effective capacity. Thus, insufficient capacity in one area can affect overall capacity. Supply Chain Factors. Supply chain factors must be taken into account in capacity planning if substantial capacity changes are involved. Key questions include: What impact will the changes have on suppliers, warehousing, transportation, and distributors? If capacity will be if capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain? External Factors. Product standards, especially minimum quality and performance standards, can restrict management’s options for increasing and using capacity. Thus, pollution standards on products and equipment often reduce effective capacity, as does paperwork required by government regulatory agencies by engaging employees in nonproductive activities. A similar effect occurs when a union contract limits the number of hours and type of work an employee may do. IV. Strategy Formulation The three primary strategies are leading, following, and tracking. A leading capacity strategy builds capacity in anticipation of future demand increases. If capacity increases involve a long lead time, this strategy may be the best option. A following strategy builds capacity when demand exceeds current capacity. A tracking strategy is similar to a following strategy, but it adds capacity in relatively small increments to keep pace with increasing demand. An organization typically bases its capacity strategy on assumptions and predictions about long-term demand patterns, technological changes, and the behavior of its competitors. These typically involve (1) the growth rate and variability of demand, (2) the costs of building and operating facilities of various sizes, (3) the rate and direction of technological innovation, (4) the likely behavior of competitors, and (5) availability of capital and other inputs. In some instances a decision may be made to incorporate a capacity cushion , which is an amount of capacity in excess of expected demand when there is some uncertainty about demand. Capacity cushion = capacity - expected demand. Typically, the greater the degree of demand uncertainty, the greater the amount of cushion used. Organizations that have standard products or services generally have smaller capacity cushions. Cost and competitive priorities are also key factors. Steps in the Capacity Planning Process 1. Estimate future capacity requirements. 2. Evaluate existing capacity and facilities and identify gaps. 3. Identify alternatives for meeting requirements. 4. Conduct financial analyses of each alternative. 5. Assess key qualitative issues for each alternative. 6. Select the alternative to pursue that will be best in the long term. 7. Implement the selected alternative. 8. Monitor results. 13  OPERATIONS MANAGEMENT Capacity planning can be difficult at times due to the complex influence of market forces and technology. V. Forecasting Capacity Requirements Capacity planning decisions involve both long-term and short-term considerations. Longterm considerations relate to overall level of capacity, such as facility size; short-term considerations relate to probable variations in capacity requirements created by such things as seasonal, random, and irregular fluctuations in demand. Because the time intervals covered by each of these categories can vary significantly from industry to industry, it would be misleading to put times on the intervals. However, the distinction will serve as a framework within which to discuss capacity planning. Long-term capacity needs require forecasting demand over a time horizon and then converting those forecasts into capacity requirements. When trends are identified, the fundamental issues are (1) how long the trend might persist, because few things last forever, and (2) the slope of the trend. If cycles are identified, interest focuses on (1) the approximate length of the cycles and (2) the amplitude of the cycles (i.e., deviation from average). Short-term capacity needs are less concerned with cycles or trends than with seasonal variations and other variations from average. These deviations are particularly important because they can place a severe strain on a system’s ability to satisfy demand at some times and yet result in idle capacity at other times. Calculating for Processing Requirements A necessary piece of information is the capacity requirements of products that will be processed. To get this information, one must have reasonably accurate demand forecasts for each product and know the standard processing time per unit for each product, the number of workdays per year, and the number of shifts that will be used. Processing time needed Units of capacity needed = Processing time capacity per unit VI. Do it In-house or Outsource it? Once capacity requirements have been determined, the organization must decide whether to produce a good or provide a service itself, or to outsource from another organization. Many organizations buy parts or contract out services, for a variety of reasons. Among those factors are: 1. Available capacity. If an organization has available the equipment, necessary skills, and time, it often makes sense to produce an item or perform a service in-house. The additional costs would be relatively small compared with those required to buy items or subcontract services. On the other hand, outsourcing can increase capacity and flexibility. 2. Expertise. If a firm lacks the expertise to do a job satisfactorily, buying might be a reasonable alternative. 3. Quality considerations. Firms that specialize can usually offer higher quality than an organization can attain itself. Conversely, unique quality requirements or the desire to closely monitor quality may cause an organization to perform a job itself. 4. The nature of demand. When demand for an item is high and steady, the organization is often better off doing the work itself. However, wide fluctuations in demand or small orders are usually better handled by specialists who are able to combine orders from multiple sources, which results in higher volume and tends to offset individual buyer fluctuations. 5. Cost. Any cost savings achieved from buying or making must be weighed against the preceding factors. Cost savings might come from the item itself or from transportation cost savings. If there are fixed costs associated with making an item that cannot be reallocated if the service or product is outsourced, that has to be recognized in the analysis. Conversely, outsourcing may help a firm avoid incurring fixed costs. 6. Risks. Buying goods or services may entail considerable risks. Loss of direct control over operations, knowledge sharing, and the possible need to disclose proprietary information are 14  OPERATIONS MANAGEMENT three risks. And liability can be a tremendous risk if the products or services of other companies cause harm to customers or the environment, as well as damage to an organization’s reputation. Reputation can also be damaged if the public discovers that a supplier operates with substandard working conditions. In some cases, a firm might choose to perform part of the work itself and let others handle the rest in order to maintain flexibility and to hedge against loss of a subcontractor. If part or all of the work will be done in-house, capacity alternatives will need to be developed. LESSON 7: Inventory Management https://www.sutisoft.com/blog/the-key-benefits-of-mobile-inventory-management/ Inventory Management An inventory is a stock or store of goods. Firms typically stock hundreds or even thousands of items in inventory, ranging from small things such as pencils, paper clips, screws, nuts, and bolts to large items such as machines, trucks, construction equipment, and airplanes. Naturally, many of the items a firm carries in inventory relate to the kind of business it engages in. I. The Nature and Importance of Inventories Inventories are a vital part of business. Not only are they necessary for operations, but they also contribute to customer satisfaction. To get a sense of the significance of inventories, consider the following: Some very large firms have tremendous amounts of inventory. The different kinds of inventories include the following: Raw materials and purchased parts. Partially completed goods, called work-in-process (WIP). Finished-goods inventories (manufacturing firms) or merchandise (retail stores). Tools and supplies. Maintenance and repairs (MRO) inventory. Goods-in-transit to warehouses, distributors, or customers (pipeline inventory). Both manufacturing and service organizations have to take into consideration the space requirements of inventory. In some cases, space limitations may pose restrictions on inventory storage capability, thereby adding another dimension to inventory decisions. To understand why firms have inventories at all, you need to be aware of the various functions of inventory. 15  OPERATIONS MANAGEMENT Functions of Inventory Inventories serve a number of functions. Among the most important are the following: 1. To meet anticipated customer demand. A customer can be a person who walks in off the street to buy a new stereo system, a mechanic who requests a tool at a tool crib, or a manufacturing operation. These inventories are referred to as anticipation stocks because they are held to satisfy expected (i.e., average demand.) 2. To smooth production requirements. Firms that experience seasonal patterns in demand often build up inventories during pre-season periods to meet overly high requirements during seasonal periods. These inventories are aptly named seasonal inventories. Companies that process fresh fruits and vegetables deal with seasonal inventories. So do stores that sell greeting cards, skis, snowmobiles, or Christmas trees. 3. To decouple operations. Historically, manufacturing firms have used inventories as buffers between successive operations to maintain continuity of production that would otherwise be disrupted by events such as breakdowns of equipment and accidents that cause a portion of the operation to shut down temporarily. The buffers permit other operations to continue temporarily while the problem is resolved. Similarly, firms have used buffers of raw materials to insulate production from disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations from manufacturing disruptions. More recently, companies have taken a closer look at buffer inventories, recognizing the cost and space they require, and realizing that finding and eliminating sources of disruptions can greatly decrease the need for decoupling operations. Inventory buffers are also important in supply chains. Careful analysis can reveal both points where buffers would be most useful and points where they would merely increase costs without adding value. 4. To reduce the risk of stockouts. Delayed deliveries and unexpected increases in demand increase the risk of shortages. Delays can occur because of weather conditions, supplier stockouts, deliveries of wrong materials, quality problems, and so on. The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of expected demand to compensate for variabilities in demand and lead time. 5. To take advantage of order cycles. To minimize purchasing and inventory costs, a firm often buys in quantities that exceed immediate requirements. This necessitates storing some or all of the purchased amount for later use. Similarly, it is usually economical to produce in large rather than small quantities. Again, the excess output must be stored for later use. Thus, inventory storage enables a firm to buy and produce in economic lot sizes without having to try to match purchases or production with demand requirements in the short run. This results in periodic orders or order cycles. 6. To hedge against price increases. Occasionally a firm will suspect that a substantial price increase is about to occur and purchase larger-than-normal amounts to beat the increase. 7. To permit operations. The fact that production operations take a certain amount of time (i.e., they are not instantaneous) means that there will generally be some work-in process inventory. In addition, intermediate stocking of goods—including raw materials, semifinished items, and finished goods at production sites, as well as goods stored in warehouses—leads to pipeline inventories throughout a production-distribution system. Little's Law can be useful in quantifying pipeline inventory. It states that the average amount of inventory in a system is equal to the product of the average rate at which inventory units leave the system (i.e., the average demand rate) and the average time a unit is in the system. 8. To take advantage of quantity discounts. Suppliers may give discounts on large orders. Objective of Inventory Management Inadequate control of inventories can result in both under- and overstocking of items. Understocking results in missed deliveries, lost sales, dissatisfied customers, and production bottlenecks; overstocking unnecessarily takes up space and ties up funds that might be more productive elsewhere. Although overstocking may appear to be the lesser of the two evils, the price tag for excessive overstocking can be staggering when inventory holding costs are high and matters can easily get out of hand. 16  OPERATIONS MANAGEMENT Inventory management has two main concerns. One is the level of customer service, that is, to have the right goods, in sufficient quantities, in the right place, at the right time. The other is the costs of ordering and carrying inventories. The overall objective of inventory management is to achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds. He or she must make two fundamental decisions: the timing and size of orders (i.e., when to order and how much to order). The greater part of this chapter is devoted to models that can be applied to assist in making those decisions. Managers have a number of performance measures they can use to judge the effectiveness of inventory management. The most obvious, of course, is customer satisfaction, which they might measure by the number and quantity of backorders and/or customer complaints. A widely used measure is inventory turnover, which is the ratio of annual cost of goods sold to average inventory investment. The turnover ratio indicates how many times a year the inventory is sold. Another useful measure is days of inventory on hand, a number that indicates the expected number of days of sales that can be supplied from existing inventory. Here, a balance is desirable; a high number of days might imply excess inventory, while a low number might imply a risk of running out of stock. II.Requirements For Effective Inventory Management Management has two basic functions concerning inventory. One is to establish a system to keep track of items in inventory, and the other is to make decisions about how much and when to order. To be effective, management must have the following: 1. A system to keep track of the inventory on hand and on order. 2. A reliable forecast of demand that includes an indication of possible forecast error. 3. Knowledge of lead times and lead time variability. 4. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs. 5. A classification system for inventory items. III. Inventory Ordering Policies Inventory ordering policies address the two basic issues of inventory management, which are how much to order and when to order. Inventory that is intended to meet expected demand is known as cycle stock , while inventory that is held to reduce the probability of experiencing a stockout (i.e., running out of stock) due to demand and/or lead time variability is known as safety stock. A. How Much To Order: Economic Order Quantity Models The question of how much to order can be determined by using an economic order quantity (EOQ) model. EOQ models identify the optimal order quantity by minimizing the sum of certain annual costs that vary with order size and order frequency. Three order size models are described here: a. The basic economic order quantity model. b. The economic production quantity model. c. The quantity discount model. a. Basic Economic Order Quantity (EOQ) Model The basic EOQ model is the simplest of the three models. It is used to identify a fixed order size that will minimize the sum of the annual costs of holding inventory and ordering inventory. The unit purchase price of items in inventory is not generally included in the total cost because the unit cost is unaffected by the order size unless quantity discounts are a factor. If holding costs are specified as a percentage of unit cost, then unit cost is indirectly included in the total cost as a part of holding costs. The basic model involves a number of assumptions 1. Only one product is involved. 2. Annual demand requirements are known. 3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant. 17  OPERATIONS MANAGEMENT 4. Lead time is known and constant. 5. Each order is received in a single delivery. 6. There are no quantity discounts b. Economic Production Quantity (EPQ) The batch mode is widely used in production. Even in assembly operations, portions of the work are done in batches. The reason for this is that in certain instances, the capacity to produce a part exceeds the part's usage or demand rate. As long as production continues, inventory will continue to grow. In such instances, it makes sense to periodically produce such items in batches, or lots, instead of producing continually. The assumptions of the EPQ model are similar to those of the EOQ model, except that instead of orders received in a single delivery, units are received incrementally during production. The assumptions are 1. Only one product is involved. 2. Annual demand is known. 3. The usage rate is constant. 4. Usage occurs continually, but production occurs periodically. 5. The production rate is constant when production is occurring. 6. Lead time is known and constant. 7. There are no quantity discounts. c. Quantity Discounts Quantity discounts are price reductions for larger orders offered to customers to induce them to buy in large quantities. When quantity discounts are available, there are a number of questions that must be addressed to decide whether to take advantage of a discount. These include: 1. Will storage space be available for the additional items? 2. Will obsolescence or deterioration be an issue? 3. Can we afford to tie up extra funds in inventory? If the decision is made to take advantage of a quantity discount, the goal is to select the order quantity that will minimize total cost. B. How Much To Order: Fixed-Order Interval Model The fixed-order-interval (FOI) model is used when orders must be placed at fixed time intervals (weekly, twice a month, etc.): The timing of orders is set. The question, then, at each order point, is how much to order. Fixed-interval ordering systems are widely used by retail businesses. If demand is variable, the order size will tend to vary from cycle to cycle. This is quite different from an EOQ/ROP approach in which the order size generally remains fixed from cycle to cycle, while the length of the cycle varies (shorter if demand is above average, and longer if demand is below average). Reasons for Using the Fixed-Order-Interval Model In some cases, a supplier's policy might encourage orders at fixed intervals. Even when that is not the case, grouping orders for items from the same supplier can produce savings in shipping costs. Furthermore, some situations do not readily lend themselves to continuous monitoring of inventory levels. Many retail operations (e.g., drugstores, small grocery stores) fall into this category. The alternative for them is to use fixed-interval ordering, which requires only periodic checks of inventory levels. Benefits and Disadvantages The fixed-interval system results in tight control. In addition, when multiple items come from the same supplier, grouping orders can yield savings in ordering, packing, and shipping costs. Moreover, it may be the only practical approach if inventory withdrawals cannot be closely monitored. On the negative side, the fixed-interval system necessitates a larger amount of safety stock for a given risk of stockout because of the need to protect against shortages during an entire order interval plus 18  OPERATIONS MANAGEMENT lead time (instead of lead time only), and this increases the carrying cost. Also, there are the costs of the periodic reviews. The Single-Period Model The single-period model (sometimes referred to as the newsboy problem ) is used to handle ordering of perishables (fresh fruits, vegetables, seafood, cut flowers) and items that have a limited useful life (newspapers, magazines, spare parts for specialized equipment). The period for spare parts is the life of the equipment, assuming that the parts cannot be used for other equipment. What sets unsold or unused goods apart is that they are not typically carried over from one period to the next, at least not without penalty. Day-old baked goods, for instance, are often sold at reduced prices; leftover seafood may be discarded; and out-of-date magazines may be offered to used book stores at bargain rates. There may even be some cost associated with disposal of leftover goods. IV. Operations Strategy Inventories often represent a substantial investment. More important, improving inventory processes can offer significant benefits in terms of cost reduction and customer satisfaction. Among the areas that have potential are the following: Record keeping. It is important to have inventory records that are accurate and up-to-date, so that inventory decisions are based on correct information. Estimates of holding, ordering, and setup costs, as well as demand and lead times, should be reviewed periodically and updated when necessary. Variation reduction. Lead time variations and forecast errors are two key factors that impact inventory management, and variation reduction in these areas can yield significant improvement in inventory management. Lean operation. Lean systems are demand driven, which means that goods are pulled through the system to match demand instead of being pushed through without a direct link to demand. Moreover, lean systems feature smaller lot sizes than more traditional systems, based in part on the belief that holding costs are higher than those assigned by traditional systems, and partly as a deliberate effort to reduce ordering and setup costs by simplifying and standardizing necessary activities. An obvious benefit is a decrease in average inventory on hand and, hence, lower carrying costs. Other benefits include fewer disruptions of work flow, reduction in space needs, enhanced ability to spot problems, and increased feasibility to place machines and workers closer together, which allows more opportunities for socialization, communication, and cooperation. Supply chain management. Working more closely with suppliers to coordinate shipments, reduce lead times, and reduce supply chain inventories can reduce the size and frequency of stockouts while lowering inventory carrying costs. Blanket orders and vendor-managed inventories can reduce transaction costs. Also, consignment agreements, where buyers are not charged for inventory items until the items are sold, may be an option. Storage costs can sometimes be reduced by using cross docking, whereby inbound trucks with goods arriving at distributor warehouses from suppliers are directly loaded onto outbound trucks for store or dealer delivery, avoiding warehouse handling and storage costs. 19