Marketing product characteristics decisions for the product process matrix

Part Two

4. Process Selection . 5. Service Delivery System Design

6. Process-Flow Analysis

7. Lean Thinking and Lean Systems

Among the most important decisions made by operations managers are those involving the design and improvement of the process for producing goods and services. These decisions include choice of process and technology, analysis of flows through operations, and the associated value added in operations. Two themes underlie and unify Part Two: first. the idea of designing and improving a process to enhance the flows of materials, customers, and information; second, the idea of eliminating waste in process design. These principles can be used to design and manage a process that not only is efficient but provides value for the customer.

~~

62

Process Selection

Chapter outline

4.1 Product-f low cha racteristics

4.2 Approaches to order fulfillment

4.3 Process selection decisions

4.4 Product-process strategy

4.5 Focused operations

4.6 Mass customization

4.7 Environmenta l concerns

4.8 Cross-functiona l decision making

4.9 Key points and terms

Process selection decisions determine the type of process used to make a product or service. For example, automobiles are made using an assembly-line type of pro- cess, wine making is a batch type of process, and a tailor shop is a job shop type of process. The considerations required for process selection include the volume of the product and whether the product is standardized or customized. Generally speaking, high-volume products that are standardized will be made on an assem- bly line, and low-volume customized products will be made using a batch or job shop process.

Process selection decisions are strategic in nature. They require a long-term per- spective and a great deal of cross-functional coordination, since marketing, fi- nance, human resource, and operations issues are all affected by these decisions. Process selection decisions tend to be capital intensive and cannot be easily changed. Therefore, the firm is committed to the process choice and bound by these decisions for many years.

This chapter describes the various types of processes that can be selected and the corresponding situations when one process or another is preferred. Two main types of classifications are provided. One classification is by the product flow, in- cluding continuous flow, assembly line, batch, job shop, and project. The second classification is by the type of order fulfillment: whether the product is made-to- order, assembled-to-order, or made-to-stock.

After treating process types and order fulfillment, we discuss focused opera- tions and mass customization as process choices. We also discuss environmen- tal concerns and the prominent role process selection plays in determining the impact of a firm on its natural environment. At the end of this chapter, we

Chapter 4 Process Selection 63

consider the cross-functional nature of process selection. This chapter concen- trates primarily on manufacturing processes; the next chapter treats service processes in detail.

4.1 PRODUCT-FLOW CHARACTERISTICS

"The Manufacturing

Process," Vol. I

There are five types of product flow: continuous process, assembly line, batch, job shop, and project. In manufacturing, the product flow is the flow of materials, since materials are being converted into the product. In services, there may not be a product flow, but there may be a flow of customers or information.

Continuous Processes Continuous process refers to the so-called process industries, such as sugar, paper, oil, and electricity. Here the output is made in a continuous fashion and tends to be highly standardized and with very high volumes of production. Often continu- ous flow products are liquids or semisolids that can be pumped or that flow from one operation to another. For example, an oil refinery consists of miles of pipes, tanks, and distillation columns through which crude oil is pumped and refined into gasoline, diesel, oil, lubricants, and many other products.

Continuous production tends to make commodity products. Since it is difficult to differentiate the product, low cost becomes the "order winner" for manufactur- ing 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. While cost per unit of output is low, flexibility to change product mix or product type is very limited in continuous processes . . Assembly Lines Here we discuss traditional assembly lines that make only one or a few prod- ucts and use inflexible equipment and labor. Later in this chapter we describe mass customization (Section 4.6) that allows much more flexible assembly lines. Assembly-line flow is characterized by a linear sequence of operations. The product moves from one step to the next in a sequential manner from beginning to end. Unlike continuous processes, in which the products are liquids or semi- solids, assembly lines make discrete products such as automobiles, refrigera- tors, computers, printers, and a vast array of mass-produced consumer products. Products are moved from one operation to the next, usually by a con- veyor system.

Figure 4.1 shows how an assembly-line process is used to make a metal bracket. The first step in production is to cut a rectangular metal blank in the required shape of the bracket. At the second workstation, two holes are drilled into the metal blank. Then the bracket is bent at a 90-degree angle, and finally it is painted. Notice how the workstations are placed in the proper sequence needed so that the product moves sequentially from one end of the line to the other.

Like continuous production processes, traditional assembly-line operations are very efficient but also very inflexible. The assembly-line operation requires high- volume products that are standardized. At the same time, this makes it difficult to make changes in the product itself or the volume of flow, resulting in inflexibility of operations. For example, it takes several weeks to change over a traditional au- tomobile assembly line to a new model. Also, the line runs at a constant speed,

64 Part Two Process Design

Most automobile manufacturing processes are assembly lines.

~~

FIGURE 4.1 Assembly-line flow.

and so the volume can be altered only by changing the number of hours worked by the plant.

Assembly-line operations can be justified only in certain situations. They gen- erally require large amounts of capital investment and must have high volume to justify the investment. For example, a modern plant that makes semi- conductor wafers costs over $2 billion in initial investment, and an automobile assembly plant costs about $1 billion. An automobile assembly plant completes the production of a car every minute, or about 350,000 automobiles a year, if operated on a two-shift basis. Secause of the significant amount of capital required, finance is concerned with the choice of an assembly-line process and

0

a T"k m WO

The Product (a metal bracket)

GURE 4.2 Batch -~,-(metal brackets).

Chapter 4 Process Selection 65

works closely with operations in making these investments. Also, marketing must be geared toward the mass appeal of the resulting high-volume product.

Batch Flow Batch flow is characterized by production of the product in batches or lots. Each batch of the product travels together from one operation or work center to an- other. A work center is a group of similar machines or processes used to make the product.

Figure 4.2 shows various low-volume brackets that are made using a batch pro- cess. In this simple example, three differently shaped brackets-A, B, and C-flow through the four work centers. Notice how bracket A requires work in all four work centers, bracket B requires only cutting, bending, and painting, and bracket C requires cutting, drilling, and painting. One characteristic of a batch operation is that it can be used to make many different types of products, and so more variety is typical than on an assembly line. Each of these products can have a different flow path, and some products actually skip certain work centers. As a result, the flow is jumbled and intermittent. Contrast this to the flow of a line process, which is regular and sequentiaL

Batch operations often use general-purpose equipment that is not specialized to make just one particular product. This offers flexibility. Labor is more skilled and flexib le in its ability to make different products. As a result, a batch opera- tion is configured with both equipment and labor to be more flexible than an assembly-line process. Lot sizes can be quite variable in size, from hundreds down to as few as one unit. As a result, batch processes can be configured to handle low-volume orders.

Product A Product B Product C

\l---.... ~ Batch A --- .BatchB

....... BatchC

66 Part Two Process Design

The jumbled flow of a batch operation results in considerable production sched- uling and inventory challenges. When loaded to nearly full capacity, the batch op- eration will typically have high inventories as jobs wait in line to be processed. High capacity utilization results in job interference between the various jobs as they wait for labor or equipment that is assigned to another job at the time. This results in a loss of efficiency in a batch operation.

A batch operation uses a so-called process layout because the machines and labor are organized by process types into work centers. The assembly-line process, however, uses a product layout because the machines and labor are organized ac- cording to the product flow itself. An example of a process layout is the typical high school, where classrooms are organized according to subjects (or processes) such as English, math, and chemistry. The students flow through the facility in batches (classes), going from one process to the next.

Batch operations are used when the volume is not high or there are many differ- ent products. In this case, the batch operation is the most economical and incurs the least risk. Examples of products made in batch operations are furniture, boats, dishware, and other products with large variety and low to moderate volumes. Furniture making, for example, requires many different styles and options. Sofas are ordered by customers and also ordered for stock. Each sofa may have a differ- ent fabric and may have different features on the arms or back and different lengths. As a result, there are a tremendous number of variations that are made using a small batch process or even made one at a time.

Job Shop Job shops make products to customer order by using a process layout. Thus, we consider the job shop a special case of the batch process. In a job shop the product is made in batches, usually in small lot sizes, but the product must be made to customer order.

Like the batch process, a job shop uses general-purpose equipment and has a jumbled flow. It has high flexibility for product mix and volume of production, but the costs are generally higher since the volume and standardization are low. Typi- cal products produced in a job shop include plastic parts, machine components, electronic parts, and sheet metal parts that are made-to-order.

Project The project form of operations is used for unique or creative products. Examples of projects are concerts, construction of buildings, and production of large aircraft. Technically speaking, the product doesn't flow in a project since materials and labor are brought to the project site and the project itself is stationary. Projects are characterized by difficult planning and scheduling problems since the product may not have been made before. Also, projects are difficult to automate, though some general-purpose equipment may be used. Labor must be highly skilled because of the unique nature of the product or service being made.

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. Generally speaking, the cost of production for projects is high and sometimes difficult to control. This is the case because the project may be dif- ficult to define in all its details, and innovation may be required during the course of production.

TABLE 4.1 Process

Characteristics

Chapter 4 Process Selection 67

Boeing makes large aircraft by using a project process. Each airplane is assem- bled at a fixed site within the factory with materials and labor brought to the site. A complex schedule is made that must balance work across all the different aircraft being produced. The tasks and resources must be sequenced and scheduled to meet the required delivery dates of the individual planes. The construction indus- try uses projects to construct buildings, roads, and dams. Service industries also use projects for fund-raising events, political campaigns, concerts, and art fairs.

Discussion of Process Types The characteristics of the five processes we have been discussing-continuous, assembly line, batch, job shop, and project- are summarized in Table 4.1. This table makes direct comparisons among the types of processes. Notice that continuous and assembly-line operations have relatively low-skilled labor and high automation, whereas batch, job shop, and project operations are the opposite. Also, the objectives and the product characteristics are at opposite extremes for these processes.

One way to measure the efficiency of a process is the throughput ratio (TR):

Total processing time for the job TR = . . . X 100%

Total time m operatwns

In the numerator of the throughput ratio is 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. Most batch and job shop operations have TRs of 10 percent or 20 percent, rarely higher than 40 percent. This means that a typical job spends most of its time waiting to be processed relative to the actual processing time. In contrast,

Continuous and Batch and Characteristics Assembly Line Job Shop Project

Product

Order type Continuous or Batch Single unit large batch

Flow of product Sequenced Jumbled None Product variety Low High Very high Market type Mass Custom Unique Volume High Medium to low Single unit

Labor

Skills Low High High Task type Repetitive Nonroutine Non routine Pay Medium High High

Capital

Investment High Medium Medium Inventory Low High Little Equipment Special ·purpose General purpose General purpose

Objectives

Flexibil ity Low Medium High Cost Low Medium High Quality Conformance Conformance Conformance Delivery On time On time On time

68 Part Two Process Design

continuous and assembly-line processes have TRs of 90 to 100 percent. The through- put ratio represents the proportion of time in operations during which value is actively being added to the job.

At this point, examples from the housing industry may help solidify some of the process choices. At the project end of the continuum is the custom-built house. A unique plan for it may be drawn by an architect, or existing plans may be modi- fied for each house built. Since the construction of the house is customized, plan- ning, sequencing, and control of various construction activities often become major challenges. The customer is highly involved in all stages of construction, and sometimes the plans are modified while the house is being built. The process is labor-intensive, time-consuming, and costly, but it is very flexible. General- purpose equipment is used to complete the work.

The batch process is characterized by the production of similar houses in groups. In this case, the customer can select one of several standard houses with only minor options for things such as colors, fixtures, and carpets. The company may buy materials in large lots, and specialized equipment or jigs may be used to speed up construction. A crew that is very familiar with the type of house being built is brought in, and the entire structure-except for final touches-may be put up in only a few months. Such a house is usually less expensive per square foot than a custom-built project house, but there is less flexibility in operations.

The assembly-line method of house production is characterized by modular or factory operations. Standard houses are produced i.p. sections, in a factory, by rela-

tively cheap labor. The use of expensive plumbers, carpenters, and electricians largely is avoided by installing complete electrical and plumbing sys- tems at the factory. Special-purpose equipment is used in the factory to cut costs still further. After being built on an assembly line, the house sections are brought to the site and erected in a few days, using a crane. These modular houses are typically the least expensive of all and provide the least flexibility in customer choice.

House construction can be completed using various types of processes.

Obviously, a company faces a major strategic decision in choosing the type of process to use for the construction of houses. All three approaches may be used, but then care must be taken to sepa- rate these processes because of their different re- quirements for labor, management, and capital. If

all three types of houses are to be offered, the company may form a separate divi- sion for each type of process because each has different labor, equipment, and management requirements.

4.2 APPROACHES TO ORDER FULFILLMENT

~ "Made for You,"

Vol. III

Another critical decision for operations is how the orders from customers are fulfilled: whether the product is made-to-order, assembled-to-order, or made- to-stock. There are advantages and disadvantages to each of these. A make-to- stock (MTS) process can provide faster service to customers by delivering orders from available stock and at lower costs than a make-to-order (MTO) process.

Chapter 4 Process Selection 69

But the MTO process has higher flexibility for product customization. An assemble-to-order (ATO) process is like a hybrid of these, enabling relatively fast service to customers because there is limited work to complete once the customer order is received. It is also flexible because the customer can specify some types of customization.

In the MTO process, individual orders can be identified during production. As each order is made to the customer's specification, each job in the process is asso- ciated with a particular customer. In contrast, the MTS process is building prod- ucts for inventory, and the jobs in process are not identified for any particular customer. Thus, one can always identify an MTO or MTS process simply by look- ing at the jobs in production.

In the MTO process, the cycle of production and order fulfillment begins with the customer order. After the order has been received, the design must be completed, if it is not already done, and materials are ordered that are not already on hand or on order. Once the materials begin to arrive, the order can be processed as materials and labor are added until the order is completed. Then the order is delivered to the customer. Once the customer pays for the order, the cycle is completed.

The key performance measures of an MTO process are the lengths of time it takes to design, make, and deliver the product. This is often referred to as the lead time. Another measure of performance in an MTO environment is the percentage of orders completed on time. This percentage can be based on the delivery date the customer originally requested or the date that was promised to the customer. The date requested by the customer provides, of course, a stricter criterion.

In contrast, the MTS process has a standard product line specified by the pro- ducer, not by the customer (see Figure 4.3). The products are carried in inventory to fulfill customer demand immediately. Everything in operations is keyed to producing inventory in advance of actual demand in order to have the proper products in stock when the customer calls. The critical management tasks are fore- casting, inventory management, and production planning.

The MTS process begins with the producer specifying and producing the product. The customer then requests a product from inventory. If the product is available in inventory, it is delivered to the customer. If it is not available, a back order may be placed or the order can be lost to the firm. A back order allows the firm to fill the or- der at a future date but requires the customer to wait for the order. Ultimately, once the order is received, the customer pays for the product and the cycle is completed.

As was noted above, in an MTS process customer orders cannot be identified during production. The production cycle is being operated to replenish stock. Cus- tomer orders follow a completely separate cycle of stock withdrawal. What is be- ing produced at any point in time may bear little resemblance to what is being ordered. Production is geared to future orders and replenishment of inventory. See the differences in the production cycles in Figure 4.3.

Performance measures for an MTS process include the percentage of orders filled from inventory. This is called the service level or fill rate and is typically targeted in the range of 90 to 99 percent. Other measures are the length of time it takes to replenish inventory, inventory turnover, capacity utilization, and the time it takes to fill a back order. The objective of an MTS process is to meet the desired service level at minimum cost.

The MTS process is keyed to replenishment of inventory with order fulfillment from inventory, whereas the MTO process is keyed to customer orders. An MTO process can provide higher levels of product variety and has greater flexibility.

70 Part Two Process Design

FIGURE 4.3 MTS, MTO,andATO comparison.

Product

Make-to-Stock

Forecast orders

Finished Goods

Inventory

Production

Product

Make-to-Order

Product

Production

Assemble-to-Order

order

Pro

~ Assembly

of the order

Forecast orders

.... Inventory

of Subassemblies

~

Production of

Subassemblies

embly

The performance measures of these two processes are completely different. The MTS process is measured by service level and efficiency in replenishing inventol)~ however, the MTO process is measured by its response time to customers and the efficiency in meeting its customer orders (see Table 4.2).

Assemble-to-order (ATO) processes are a hybrid of MTO and MTS. The subas- semblies are made-to-stock, but the final assembly is made-to-order. The ATO pro- cess builds subassemblies in advance of demand. When the customer order is received, the subassemblies are taken from inventory and assembled together to fill the customer order. Figure 4.3 shows how the subassemblies are built to a fore- cast and placed in inventory. The product must be designed in a modular fashion for ATO to be used. The Operations Leader box describes how SUBWAY uses an assemble-to-order process.

~ABLE 4.2 _ lake-to-Stock

ersus Make-to- Drder

Characteristics

Product

Objectives

Main Operations Problems

Make-to-Stock

Producer-specified Low variety Inexpensive

Balance inventory, capacity, and service

Forecasting Planning production Control of inventory

Chapter 4 Process Selection 71

Make-to-Order

Customer-specified High variety Expensive

Manage delivery lead t imes and capacity

Delivery promises Delivery t ime

Many operations are moving toward assemble-to-order and make-to-order processes for standardized products, whenever possible, by reducing produc- tion lead times . If the standard product can be made quickly, it need not be placed in finished-goods inventory; instead, it can be made or quickly assem- bled w hen ordered by the customer. For example, Allen Bradley can make and ship a motor starter unit in over 300 different configurations in one day from when it is ordered. This product, which previously had been m ade-to-stock, can be assembled-to-order w ith large savings in inventory and improved cus- tomer service. Allen Bradley assembles the product with a fast and flexible assembly line.

An example of the three types of processes involves the production of diamond rings for the jewelry business. A make-to-stock process is used for rings that are

Operations Leader SUBWAY Uses Assemble~to~Order

here are more than 36,000 SUBWAY restau- rants in 97 countries around the world. The

ay they produce and serve food is an exam- :::~ l e of how a firm uses an assemble-to-order orocess.

Some sandwich in- gredients, such as the

read, meatballs, and sauces, are made to s-ock as subassemblies.

ese items are pro- :: ced either at individ- _al SUBWAY restaurants or by suppliers and then held -stock at the restaurants. Batch processes are used to - ake these items as efficiently as possib le while en- :~ ing that standards of quality are met.

When a customer comes in to order a sand- wich, an ATO process is used. The customer spec- ifies the type of bread to use as well as each of the sandwich ingredi- ents. Each sandwich can be custom ized to meet customer requests ex- actly. This is the advan- tage of an ATO process.

Using an ATO process ensures that SUBWAY operates both efficiently and effectively. Some

food is produced in batches, but the final product- the sandwich the customer receives-is produced one at a time.

Source: www.subway.com, 2012.

72 Part Two Process Design

FIGURE 4.4 Order penetration point. MTO MTO ATO MTS

~--.- .... -.. -.. -.-T T T _...

Supplier .. ') Fabrication I Assembly ') Distribution I I I

carried in finished-goods inventory by the jewelry store. In this case, the customer buys one of the rings from the jeweler 's stock. An assemble-to-order process is used when the customer selects the stone and then makes a separate selection of a stock ring setting. The jeweler will then assemble the ring components in an assemble-to-order process. The make-to-order process is illustrated by jewelers who make custom settings to the customer's design. The setting and the stone are matched to make a unique ring.

The type of customer order, whether MTS, MTO, or ATO, determines the order penetration point in the supply chain where the product is linked to a specific customer order.1 There are four possibilities for the placement of the order penetra- tion point, as shown in Figure 4.4. For MTS operations the point is after final assem- bly is completed; therefore, the customer can only select the product from what is available in inventory. For ATO the order penetration point is after fabrication and before final assembly. Since the product is assembled after the order is placed, the customer can specify some customization in terms of the modules he or she selects. For MTO operations the order penetration point is either before fabrication or before ordering materials from the supplier in cases in which unique materials or compo- nents are needed. For MTO, many types of customization are possible, but the lead time to the customer can be longer and the product is typically more costly.

4.3 PROCESS SELECTION DECISIONS

~ "Burton

Snow boards. Manufacturing

Design/' Vol. XIV

We have been discussing two dimensions that can be used for process classification purposes: product flow and approaches to order fulfillment. These dimensions are used to construct the six-cell matrix shown in Table 4.3. 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. However, if more than one process is used in a single facility, the plant-within-a-plant concept may be employed to maintain focus, as described later in this chapter.

All six combinations are encountered in industry. Although it is common for an assembly-line operation to make-to-stock, it can also assemble-to-order. For ex- ample, 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. Similarly, a project form of process commonly is used to make-to- order. However, a construction company can build a few speculation houses to stock that are sold later.

Also, note that all six combinations apply to service operations. Pure service operations produce only to customer order, but a service may be provided with

1 Sometimes also cal led the customer order decoupling point.

TABLE 4.3 Process Characteristics ~atrix

Continuous and Assembly Line

Batch and Job Shop

Project

Make-to-Stock

Automobile assembly Oil refin ing Cannery Cafeteria

Machine shop Wine Glassware factory Costume jewelry

Speculation homes Commercial paintings Noncommissioned art

Chapter 4 Process Selection 73

Make-to-Order/ Assemble-to-Order

Automobile assembly Dell computers Motorola pager Fast food

Machine shop Restaurant Hospital Custom jewelry

Buildings Movies Ships

facilitating goods that are produced to stock. For example, at McDonald's some food is made-to-stock-for example, french fries- while fulfilling the customer order is made-to-order or assemble-to-order.

In discussing the process selection decision, we shall begin with an example and generalize from there. Let us consider the contracting company mentioned in Section 4.1, which can choose to build houses using the project, batch, or assembly-line process. With any of these processes, the company can also choose to make the houses to stock or to order. What, then, are the factors that should be considered in making this choice?

First, the company should consider market conditions. The assembly-line ap- proach requires a mass market for inexpensive houses, the batch process requires a lower-volume market for medium-priced houses, and the project process re- quires a market for expensive houses. Which one of these is chosen will require discussions between marketing and operations, which are cross-functional in na- ture. Competition in the market must be considered. Can the company enter the market at the right time and gain an advantageous position? This will depend on competitors' plans and how they react to the company's process choice. In the end, matching the process to the market will be a key strategic decision, as was discussed in Chapter 2.

Second, the company should consider capital requirements. The assembly-line process will require a great deal more capital than will the project or batch flow. The assembly line requires capital to equip the factory and finance the partially com- pleted houses. If the houses are built to stock in advance of customer orders, more capital is required to finance finished-goods inventories. By contrast, construction of custom project houses requires much less capital since only one house or a few houses are being built at any one time and no factory is needed. The finance func- tion will be intimately involved with operations in making these capital decisions.