Marketing product characteristics decisions for the product process matrix

Chapter 4:

Process Selection

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McGraw-Hill Education

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The purpose of this chapter is to describe the major types of processes available and the factors that should be considered in any process selection decision. Two major dimensions of process classification are considered; flow of the product, and type of customer order. The product-process matrix, formulated by Hayes and Wheelwright, provides a basis for process selection by linking product-process and corporate strategy. Focused Operations, Mass Customization and 3D Printing are also covered as part of process selection decisions.

Chapter 4 Learning Objectives

LO 4.1 Contrast and compare the five types of product-flow processes.
LO 4.2 Describe the differences among order fulfillment processes.
LO 4.3 Explain how companies should make process selection decisions.
LO 4.4 Correctly place examples of products on the diagonal of the product-process matrix.
LO 4.5 Describe the features of focused operations.
LO 4.6 Discuss the advantages and disadvantages of mass customization and 3D Printing.
LO 4.7 Contrast pollution prevention, control and practices.
Copyright © 2018 by The McGraw-Hill Companies, Inc. All rights reserved.

4-*

Copyright © 2018 by The McGraw-Hill Companies, Inc. All rights reserved.

Here are our Learning Objectives for this course. Between these videos, the textbook, supplemental readings, assignments and Discussion Boards, you will end the course with some new skills and many new insights.

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Product-Flow Characteristics

Types of Product Flow

Continuous process
Assembly line
Batch flow
Job shop
Project
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Process selection decisions determine the type of process used to make a product or service. The considerations required for process selection include the volume of the product and whether the product is standardized or customized. Remember that standardization refers to mass production of the same product (i.e. cookie cutter). This helps keep the unit cost down by limiting the flexibility of change the product. Customization enables manufacturers to give customers many choices. Generally speaking, high-volume products that are standardized will be made using either a continuous process or an assembly line, both where there is little to no downtime. Low-volume customized products will be made using a batch or job shop process where there’s more down time associated with producing the product.

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Product-Flow Characteristics:
Continuous Process

Highly standardized and automated
Flexibility limited
High volumes of production
Commodity products
Low cost is the ‘Order Winner’
Process industries (sugar, paper, oil, electricity, etc.)
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Continuous production tends to make products that are difficult to differentiate and low cost becomes the “order winner” for manufacturing to compete in very price-sensitive markets. Therefore, continuous production tends to be highly automated, operate at capacity, and minimize inventories and distribution costs to reduce the total cost of manufacturing.

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Product-Flow Characteristics:
Assembly Line

Linear sequence of operations (often paced)
Large capital investment, use of automation
Very efficient
High-volume, standardized products
Low flexibility to product and volume changes
Discrete products (autos, appliances, computers, etc.)
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Assembly lines make only one or a few products and use inflexible equipment and labor. The assembly-line flow is characterized by a linear sequence of operations where the product moves from one step to the next in a sequential manner from beginning to end. The example I like to reference is Subway or Chipotle fast food restaurants. You start at one end then work your way down the assembly line as your order is being finalized. The sub-assemblies of products are laid out to give the customer a modular design of options to produce a finished good.

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Assembly Line: Metal Bracket (Figure 4.1)

paint

drill

bend

Task or work station

Product flow

cut

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Example of how an assembly line production is set up in a linear flow.

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Product-Flow Characteristics:
Batch Flow

Production of batches or lots
Batches flow as a unit (set) from one work center to another
Process layout of work centers (by tasks)
Flow is jumbled and intermittent
Flexible labor and equipment (general purpose)
Low to high volume, variety of products
Many types of products (furniture, dishes, boats)
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Earlier I mentioned that batch flow production has more downtime than continuous flow and assembly line productions. This is because items can travel from one work center to another in jumbled patterns. Because work is completed in batches or lots, only 10% to 20% of the work being completed. Imagine 50 boards of lumber waiting to be sawed or cut to a metric of 30 inches each. While the first board is being cut, the other 49 boards are waiting (downtime) to be cut. While the second board is being cut, again, the other 49 boards are waiting. Not until all boards are cut do they travel to the next work station, say drilling. If that particular work order does not require any holes to be drilled, then they can skip that work center (drilling) and move to another work center (painting). There’s flexible labor and equipment build into this form of production flow.

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Batch Flow: Three Metal Brackets (Figure 4.2)

Cut

Paint

Task or work station

Product flows

Bend

Drill

Batch A

Batch B

Batch C

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Example of how a batch flow production line is set up in a jumbled flow.

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Product-Flow Characteristics:
Job Shop

Customized to customer order
Production of small batches or lots
Layout/flow similar to Batch Flow
Flexible labor and equipment (general purpose)
Many types of made-to-order products (plastic parts, machine components, sheet metal parts, custom signs, artificial limbs, etc.)
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Like the batch process, a job shop uses general-purpose equipment and has a jumbled flow. It has high flexibility for product is and volume of production, but the costs are higher since the volume and standardization are low. Typical products produced in a job shop include products that are made-to-order.

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Product-Flow Characteristics:
Project

Production of customized single products
Labor and materials brought to site
Planning, scheduling challenges
Little automation, general purpose equipment
Highly skilled and flexible labor
Unique, one of a kind products (bridges, building construction, large aircraft, etc.)
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In the project form of operations, each unit is made individually and is different from the other units. Projects are used when the customer desires customization and uniqueness. The costs of production for projects are high and sometimes difficult to control. This is the case because the project may be difficult to define in all its details with the project scope.

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Throughput Ratio: Process efficiency

TR =

Total processing time for the job

Total time in operations

X 100%

Typically:

90-100% in Continuous Process and Assembly Line

10-20% in Batch Flow and Job Shop

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Copyright © 2018 by The McGraw-Hill Companies, Inc. All rights reserved.

I stated several times that “time is money” and producing on a continuous flow or assembly line lowers the product’s unit cost. This is because of the throughput ratio and how it relates to uptime and downtime. In the numerator of the throughput ratio is the total processing time for the job, which includes only the time the job actually spends being processed by machines or labor, excluding any waiting time between operations. The denominator includes the total time the job spends in operations, including both processing and waiting time. Batch flow items have between 10% to 20% throughput ratios which mean they can spend 80% to 90% of their time waiting to be processed.

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Order Fulfillment

Make-to-Stock (MTS)
Make-to-Order (MTO)
Assemble-to-Order (ATO)
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Another critical decision of operations is how the orders from customers are fulfilled. Remember the difference in operations when we spoke of the assembly to order process that Chipotle uses versus the make to order process of a standard taco shop.

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Make-to-Stock (MTS)

Produce finished goods according to production schedule
Customer buys from inventory
Advantage: faster fulfillment of customer demand, lower cost, smooth production rate
Disadvantage: inventory holding costs, slower to respond to changes in customer preferences
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When you consider manufactured products that “make-to-stock” you should think of the word inventory. Remember that inventory is money sitting on a shelf until it is purchased to you should only produce what the market pulls from your stock. So what your company is doing is producing a product that is made to forecast because there is no end-user request yet. The end-user walks into a store and purchases the product from the store’s inventory.

This process results in lower unit costs and smoother production rates because as we forecast demand, we can level out product cost. For example: if the market demands 100,000 bicycles per month, we can break or smooth that product rate down to 5,000 bicycles per day (5 production days per week times 4 weeks per month). Once we know what our production rate (5,000) is per day, we hire the right amount of employees, order the precise number of raw materials to arrive just-in-time, and budget the associated transportation and holding costs.

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Make-to-Stock (Figure 4.3)

Customer

Forecast orders

Production

Finished goods inventory

Product

Customer order

Product

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This is a visual example of the make-to-stock product cycle. The market provides a forecast that is used to calculate production and produce finished goods that are held in inventory until customer purchase.

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MTS Performance Measures

Service level (orders filled when requested)
Inventory replenishment time
Inventory turnover (sales/avg. inventory)
Capacity utilization
Time to fill back order
Others, such as shrinkage rate
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Inventory turnover is critical because if market demand slows or stops, a company can be left with over-production. If market demand increases, a company can suffer from stock outs or lost sales. Accurate forecasting is also critical to replenishment time for the same reasons.

Using Christmas day as an example, for customers to have their purchases available by 12/25, the traditionally conduct their shopping the day after the Thanksgiving holiday, known as Black Friday or Cyber Monday. Therefore stores want their shelfs stocked by 11/25. With 4 weeks manufacturing lead and throughput times, a company would need to start producing the products on 10/25. To ensure the raw materials arrive just-in-time for production to start on 10/25, they may require their suppliers to commence their production months earlier depending how far backwards their supply chain are connected. If we use the bicycles as the products, the manufacturing company that assembles the bicycles on 10/25 would need to forecast and order the frames, handle bars, chains, tires, wheels, etc. months before production begins.

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Make-to-Order (MTO)

Start production after customer orders
No finished goods inventory
Advantage: higher flexibility to customize order; no finished goods inventory costs
Disadvantage: intermittent production (i.e., lumpy demand pattern), slower response to customer demand
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No forecast is needed for make-to-order production because it is more customized per the customer’s wishes. This requires much flexibility from the manufacturer and the customer. Lead times are longer because production cycles and rates cannot be smoothed over time.

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Make-to-Order (Figure 4.3)

Customer

Production

Product

Customer order

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Copyright © 2018 by The McGraw-Hill Companies, Inc. All rights reserved.

This is a visual example of the make-to-order product cycle. The market does not need to provide a forecast as production does not begin until the customer places an order. There is no finished inventory.

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MTO Performance Measures

Lead time

Orders completed on time (%)

Customer request date

Promise date

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The most critical aspect of MTO is delivering the final product when promised. Lead times will be longer as raw materials and a customer’s preference is unknown until the order is placed.

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Assemble-to-Order (ATO)

Produce parts and subassemblies (modules); complete production when customer places order
Advantage: less finished goods inventory, faster fulfillment of customer order
Disadvantage: work-in-process inventory
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Assemble-to-order uses a hybrid process of MTO and MTS. There are subassemblies or made-to-stock, but the final assembly is made-to-order. Visualize walking into a Chipotle or Subway for lunch. The final product is made from subassemblies of ingredients and as you walk down the assembly line, you have a say in how the final product is made.

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Assemble-to-Order (Figure 4.3)

Customer

Forecast orders

Production of subassemblies

Inventory of subassemblies

Customer order

Product

Assembly of the order

Subassembly

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This is a visual example of the assemble-to-order product cycle. The market provides a forecast that is used to calculate production of subassemblies, and then the finished good is assembled once the customer’s order is received.

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Process Selection Decisions

Process characteristics (produce when? produce how?)
When: MTS, MTO, ATO
How: Continuous process, Assembly line, Batch flow, Job shop, Project
Factors affecting process choice
Market conditions
Capital requirements
Availability and cost of labor
Technology options
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We have discussed two dimensions that can be used for process classification purposes: product flow and approaches to order fulfillments. These dimensions are used to construct the six-cell matrix you will see in the next slide.

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Process Characteristics Matrix (Table 4.2)

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Characteristics

Make-to-Stock

Make-to-Order

or ATO

Continuous and

Assembly

Line Flow

Automobile assembly

Oil refinery

Cannery

Cafeteria

Automobile assembly

Dell computers

Electronic components

Fast food

Batch and Job Shop

Machine shop

Wine

Glassware factory

Costume jewelry

Machine shop

Restaurant

Hospital

Custom jewelry

Project

Speculation homes

Commercial paintings

Noncommissioned art

Buildings

Movies

Ships

This matrix contains the six combinations used in practice. Multiple combinations may be used by a single firm, depending on the products and volumes required by the market. Although it is common for an assembly-line operation to make-to-stock, it can also assemble-to-order. For example, an automobile assembly line is used to produce a large variety of different automobile options for particular customers, as well as cars that are being made for dealer stock.

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Product-Process Strategy

Strategy must consider product characteristics and process capabilities.
Product life cycle:
Often begins in Job Shop, then Batch Flow, then Continuous/Assembly Line.
Example: Bread was first produced by hand in individual units in traditional bakeries, and is now produced in very large batches in modern automated bakeries.
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Process decisions are not static because processes evolve over time. The product-process matrix on the next slide will show you how a business can decide to move from batch flow to continuous/assembly flow as market demands increase and production rates are ramped up to meet that demand.

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Product-Process Matrix (Figure 4.5)

Low volume,

low

standardization

Printing

Heavy

Equipment

Auto

assembly

Sugar

Refinery

Low volume,

multiple

products

Higher volume

few major

products

High volume, high

standardization,

commodity

NONE

NONE

Unique, one of

a kind

product

Project

Building

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A firm might be tempted to move down the diagonal ahead of its competitors and thus gain competitive advantage at lower cost. This can be a good idea if the customer is ready to accept a more standardized and higher-volume product.

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Mass Customization

Strategy to produce products in lot sizes = 1, in high volume.
Made possible by flexible manufacturing.
Traditional mass production provides economies of scale.
Mass Customization means using a high volume process (economies of scale = low unit cost) to produce relatively custom products (economies of scope = high variety).
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With the advent of flexible manufacturing, due in large part by using the modular design concept (few common components offering a large variety of finished goods), mass customization is now possible. This dichotomy between mass production and customization can be overcome by using modern technologies, including computers, robotics, and the Internet.

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Chapter 4 Summary

LO 4.1 Contrast and compare the five types of product-flow processes.
LO 4.2 Describe the differences among order fulfillment processes.
LO 4.3 Explain how companies should make process selection decisions.
LO 4.4 Correctly place examples of products on the diagonal of the product-process matrix.
LO 4.5 Describe the features of focused operations.
LO 4.6 Discuss the advantages and disadvantages of mass customization and 3D Printing.
LO 4.7 Contrast pollution prevention, control and practices.
Copyright © 2018 by The McGraw-Hill Companies, Inc. All rights reserved.

4-*

Copyright © 2018 by The McGraw-Hill Companies, Inc. All rights reserved.

Summarize

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The purpose of this chapter is to describe the major types of processes available and the factors that should be considered in any process selection decision. Two major dimensions of process classification are considered; flow of the product, and type of customer order. The product-process matrix, formulated by Hayes and Wheelwright, provides a basis for process selection by linking product-process and corporate strategy. Focused Operations, Mass Customization and 3D Printing are also covered as part of process selection decisions.

Here are our Learning Objectives for this course. Between these videos, the textbook, supplemental readings, assignments and Discussion Boards, you will end the course with some new skills and many new insights.

*

Process selection decisions determine the type of process used to make a product or service. The considerations required for process selection include the volume of the product and whether the product is standardized or customized. Remember that standardization refers to mass production of the same product (i.e. cookie cutter). This helps keep the unit cost down by limiting the flexibility of change the product. Customization enables manufacturers to give customers many choices. Generally speaking, high-volume products that are standardized will be made using either a continuous process or an assembly line, both where there is little to no downtime. Low-volume customized products will be made using a batch or job shop process where there’s more down time associated with producing the product.

*

Continuous production tends to make products that are difficult to differentiate and low cost becomes the “order winner” for manufacturing to compete in very price-sensitive markets. Therefore, continuous production tends to be highly automated, operate at capacity, and minimize inventories and distribution costs to reduce the total cost of manufacturing.

*

Assembly lines make only one or a few products and use inflexible equipment and labor. The assembly-line flow is characterized by a linear sequence of operations where the product moves from one step to the next in a sequential manner from beginning to end. The example I like to reference is Subway or Chipotle fast food restaurants. You start at one end then work your way down the assembly line as your order is being finalized. The sub-assemblies of products are laid out to give the customer a modular design of options to produce a finished good.

*

Example of how an assembly line production is set up in a linear flow.

*

Earlier I mentioned that batch flow production has more downtime than continuous flow and assembly line productions. This is because items can travel from one work center to another in jumbled patterns. Because work is completed in batches or lots, only 10% to 20% of the work being completed. Imagine 50 boards of lumber waiting to be sawed or cut to a metric of 30 inches each. While the first board is being cut, the other 49 boards are waiting (downtime) to be cut. While the second board is being cut, again, the other 49 boards are waiting. Not until all boards are cut do they travel to the next work station, say drilling. If that particular work order does not require any holes to be drilled, then they can skip that work center (drilling) and move to another work center (painting). There’s flexible labor and equipment build into this form of production flow.

*

Example of how a batch flow production line is set up in a jumbled flow.

*

Like the batch process, a job shop uses general-purpose equipment and has a jumbled flow. It has high flexibility for product is and volume of production, but the costs are higher since the volume and standardization are low. Typical products produced in a job shop include products that are made-to-order.

*

In the project form of operations, each unit is made individually and is different from the other units. Projects are used when the customer desires customization and uniqueness. The costs of production for projects are high and sometimes difficult to control. This is the case because the project may be difficult to define in all its details with the project scope.

*

I stated several times that “time is money” and producing on a continuous flow or assembly line lowers the product’s unit cost. This is because of the throughput ratio and how it relates to uptime and downtime. In the numerator of the throughput ratio is the total processing time for the job, which includes only the time the job actually spends being processed by machines or labor, excluding any waiting time between operations. The denominator includes the total time the job spends in operations, including both processing and waiting time. Batch flow items have between 10% to 20% throughput ratios which mean they can spend 80% to 90% of their time waiting to be processed.

*

Another critical decision of operations is how the orders from customers are fulfilled. Remember the difference in operations when we spoke of the assembly to order process that Chipotle uses versus the make to order process of a standard taco shop.

*

When you consider manufactured products that “make-to-stock” you should think of the word inventory. Remember that inventory is money sitting on a shelf until it is purchased to you should only produce what the market pulls from your stock. So what your company is doing is producing a product that is made to forecast because there is no end-user request yet. The end-user walks into a store and purchases the product from the store’s inventory.

This process results in lower unit costs and smoother production rates because as we forecast demand, we can level out product cost. For example: if the market demands 100,000 bicycles per month, we can break or smooth that product rate down to 5,000 bicycles per day (5 production days per week times 4 weeks per month). Once we know what our production rate (5,000) is per day, we hire the right amount of employees, order the precise number of raw materials to arrive just-in-time, and budget the associated transportation and holding costs.

*

This is a visual example of the make-to-stock product cycle. The market provides a forecast that is used to calculate production and produce finished goods that are held in inventory until customer purchase.

*

Inventory turnover is critical because if market demand slows or stops, a company can be left with over-production. If market demand increases, a company can suffer from stock outs or lost sales. Accurate forecasting is also critical to replenishment time for the same reasons.

Using Christmas day as an example, for customers to have their purchases available by 12/25, the traditionally conduct their shopping the day after the Thanksgiving holiday, known as Black Friday or Cyber Monday. Therefore stores want their shelfs stocked by 11/25. With 4 weeks manufacturing lead and throughput times, a company would need to start producing the products on 10/25. To ensure the raw materials arrive just-in-time for production to start on 10/25, they may require their suppliers to commence their production months earlier depending how far backwards their supply chain are connected. If we use the bicycles as the products, the manufacturing company that assembles the bicycles on 10/25 would need to forecast and order the frames, handle bars, chains, tires, wheels, etc. months before production begins.

*

No forecast is needed for make-to-order production because it is more customized per the customer’s wishes. This requires much flexibility from the manufacturer and the customer. Lead times are longer because production cycles and rates cannot be smoothed over time.

*

This is a visual example of the make-to-order product cycle. The market does not need to provide a forecast as production does not begin until the customer places an order. There is no finished inventory.

*

The most critical aspect of MTO is delivering the final product when promised. Lead times will be longer as raw materials and a customer’s preference is unknown until the order is placed.

*

Assemble-to-order uses a hybrid process of MTO and MTS. There are subassemblies or made-to-stock, but the final assembly is made-to-order. Visualize walking into a Chipotle or Subway for lunch. The final product is made from subassemblies of ingredients and as you walk down the assembly line, you have a say in how the final product is made.

*

This is a visual example of the assemble-to-order product cycle. The market provides a forecast that is used to calculate production of subassemblies, and then the finished good is assembled once the customer’s order is received.

*

We have discussed two dimensions that can be used for process classification purposes: product flow and approaches to order fulfillments. These dimensions are used to construct the six-cell matrix you will see in the next slide.

*

This matrix contains the six combinations used in practice. Multiple combinations may be used by a single firm, depending on the products and volumes required by the market. Although it is common for an assembly-line operation to make-to-stock, it can also assemble-to-order. For example, an automobile assembly line is used to produce a large variety of different automobile options for particular customers, as well as cars that are being made for dealer stock.

*

Process decisions are not static because processes evolve over time. The product-process matrix on the next slide will show you how a business can decide to move from batch flow to continuous/assembly flow as market demands increase and production rates are ramped up to meet that demand.

*

A firm might be tempted to move down the diagonal ahead of its competitors and thus gain competitive advantage at lower cost. This can be a good idea if the customer is ready to accept a more standardized and higher-volume product.

*

With the advent of flexible manufacturing, due in large part by using the modular design concept (few common components offering a large variety of finished goods), mass customization is now possible. This dichotomy between mass production and customization can be overcome by using modern technologies, including computers, robotics, and the Internet.

*

Summarize

*

Characteristics Make-to-Stock

Make-to-Order

or ATO

Continuous and

Assembly

Line Flow

Automobile assembly

Oil refinery

Cannery

Cafeteria

Automobile assembly

Dell computers

Electronic components

Fast food

Batch and Job Shop

Machine shop

Wine

Glassware factory

Costume jewelry

Machine shop

Restaurant

Hospital

Custom jewelry

Project

Speculation homes

Commercial painting s

Noncommissioned art

Buildings

Movies

Ships