Process selection in operations management

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.

The third factor that should be considered is the availability and cost of labor. The project and batch processes require costly skilled labor such as plumbers, elec- tricians, and carpenters. The factory line approach requires relatively inexpensive, low-skilled labor. Unionization may affect both the supply and the cost of labor. The human resources function will be involved in these decisions with operations because of the employee selection, training, and compensation issues involved.

Finally, the company should consider the state of technology for both process and product. Are innovations likely to come along that will make a process obsolete before the costs are recovered? Assessment of these conditions is part of risk

74 Part Two Process Design

evaluation for the process. Generally speaking, the risk in order from highest to lowest is assembly line, batch, and project.

In summary, four factors appear to influence process selection from among the processes shown in Table 4.3:

1. Market conditions 2. Capital requirements 3. Labor

4. Technology

4.4 PRODUCT-PROCESS STRATEGY

~ "The

Product-Process Matrix," Vol. XI

To this point, we have been treating process decisions as static, as if the organiza- tion makes the decision one time and then uses the selected process forever. Actu- ally, process decisions are dynamic, since processes evolve over time. Furthermore, process decisions are closely related to product decisions.

Hayes and Wheelwright (1979) have proposed a product-process matrix that describes the dynamic nature of product and process choices (see Figure 4.5). On the product dimension (horizontal) of the matrix is the life cycle of a typical product, ranging from a unique, one-of-a-kind product to a high-volume,

FIGURE 4.5 Product-process matrix. Source: Adapted from Hayes and Wheelwright (1979) .

Project

Job Shop

Batch

Assembly Line

Continuous

Unique, one-of-a-kind product

Low volume, low standardization

Low volume, multiple products

Higher volume, few major products

High volume, high standardization, commodity

Chapter 4 Process Selection 7 5

standardized product. A product typically evolves from the left side to the right side of the matrix.

On the process dimension (vertical) of the matrix the various processes are rep- resented, ranging from the project to a continuous process. The process has a life cycle similar to the product life cycle, evolving from a unique project type of pro- duction at the top of the matrix to a continuous process at the bottom. Many prod- ucts have followed the product and process life cycle. Automobiles were made in a job shop environment in the early 1900s before Henry Ford invented the moving assembly line. Electronics often are produced in batches until the volume becomes sufficient to support an assembly-line process. Most product life cycles will not require processes to evolve from project all the way to continuous, but processes often do need to change one category or more among those listed in Figure 4.5.

Most organizations should position themselves on the diagonal of the matrix. This means that a low-volume product with high variety would be produced by a project or job shop, but a highly standardized product with high volume would be produced by an assembly-line or continuous process. The diagonal of the matrix represents a logical match between the product and the process.

Research conducted by McDermott, Greis, and Fischer (1997) shows that some companies can move to a middle ground that occupies more space on the product- process matrix by adopting flexible manufacturing and modular product design. These companies can simultaneously produce both low-volume and high-volume products using the same process. More on how this is done is in Section 4.6 on mass customization.

The product-process matrix represents the strategic choices available to firms in both product and process dimensions. Often, strategy is represented as consisting only of product choice. But the process can provide a unique capability that helps the firm compete in the market. Thus, a position on the matrix represents a strategic combinatio~ of both product and process. This type of strategic position requires cross-functional cooperation between marketing and operations to ensure that both product and process choices have been considered. For example, if a firm typically produces standard beverages in high volume, moving into a new market that re- quires small batches of a large variety of flavors may be at odds with its current production capabilities. The firm may need to invest in new equipment, alter exist- ing equipment, or reconsider whether it is capable of competing in this new market.

Many scholars have studied the nature of product and process choices and have concluded that changes rarely occur simultaneously. Alternating vertical and hor- izontal moves on the matrix are common. For example, the firm may choose to increase the volume and standardization of the product, thus moving horizontally to the right and possibly off the diagonal of the matrix. However, if this product move to the right is not accompanied by a corresponding change in process, the unit cost of the product may be too costly, and the competitors may exploit this to force the firm to move back to its original position on the diagonal or to change the process and move down the diagonal.

Carrying this example one step fur ther, a firm might be tempted to move down the diagonal ahead of its competitors and thus gain competitive advantage. This can be a good idea if the customer is ready to accept a more standardized and higher-volume product. If the customer prefers more customization, the firm may be forced to move back up the diagonal to remain competitive.

All firms in the industry, however, do not occupy the same spot on the diagonal of the product-process matrix. Some firms may choose to stay in the upper

76 Part Two Process Design

left-hand corner of the matrix; others may move down the diagonal. One example of this behavior is the hand-held calculator business. Hewlett-Packard has chosen to stay with low-volume, high-variety, and high-priced calculators while the rest of the industry has moved down the diagonal toward highly standardized, high- volume, and low-priced calculators .. The Hewlett-Packard calculators, which are suited to various specialized market niches such as accounting, surveying, and electrical engineering, can command high prices at relatively low volumes.

4.5 FOCUSED OPERATIONS

Often a company will have products that are produced in a variety of volumes and with various levels of standardization. When a company mixes all these prod- ucts in the same factory, it can lead to disaster. Skinner (1974), who originated the idea of the focused factory, tells the story of an electronic instrument company that made low-volume custom automatic-pilot instruments and high-volume standardized fuel gauges in the same plant. After years of losing money on the fuel gauges, management decided as a last resort to separate the fuel gauge pro- duction from the automatic-pilot production by building a wall down the center of the plant. They also assigned separate quality control and materials management staff to each product as well as separate direct labor, supervision, and equipment. As a result of these changes, the fuel gauges became profitable in four months and the auto-pilots also improved their profitability.

The problem essentially resulted from two different missions being mixed in operations: one of low cost for the fuel gauges and one of superior product per- formance and innovation for the auto-pilot. Previously, the auto-pilot production needed more stringent requirements in quality, materials, and skills than did the fuel gauges. As a result, the fuel gauge costs were inflated and efforts could not be directed to each product separately. When their production processes were separated, and thus the specific production needs of each product were sepa- rated, each production process could respond to its particular customer and mar- ket requirements.

Services also can lose their focus by trying to "be all things to all people." A service operation should have a well-defined mission such as low cost or innova- tion, not both. For example, Walmart is clearly focused on the low cost of its sup- ply chain to support its "save money, live better" marketing strategy. Low cost is achieved at Walmart through economies of scale in purchasing, an efficient and well-managed supply chain, and economical store operations. For a time Kmart tried to attack Walmart by offering lower prices, but its costs were too high, sub- sequently forcing Kmart into bankruptcy. Kmart is an example of loss of focus in which operations strategy and capability did not match its marketing strategy.

Lack of focus in manufacturing plants and service operations has resulted from attempting to accomplish too many different goals with the same facility or operation. In some cases, product proliferation in the markets served by the com- pany has led to incompatible products being produced together in the same facil- ity. The solution may be to arrange each product as a plant-within-a-plant (PWP), which entails setting up a process for one product or product line separately from other processes within the same facility. The firm may sacrifice some economies of scale while doing a better job of meeting market requirements and improving profitability.

Chapter 4 Process Selection 77

Several types of focus can be considered. They include the following:

1. Product focus.

2. Process type.

3. Technology. 4. Volume of sales. 5. Make-to-stock and make-to-order. 6. New products and mature products.

Several of these dimensions can be combined when focusing operations. For ex- ample, a refrigeration company used the concept of focused operations by organiz-

ing two PWPs inside the same building. It separated compressor production for high-volume, standardized, and mature products from compressor production for low-volume and customized products. In this case, one factory was di- vided into two separate focused factories, with consequent improvements in all measures of operations performance.

Service operations also can be focused by assigning dif- ferent types of service products to different facilities. For ex- ample, in an insurance business selling both high-priced, service-intensive policies and low-priced, commodity-style policies, using the same set of workers to serve both could

- - eywell uses focused factories to compete cause trouble. The high-priced policies might get too little - · sing several PWPs within one building. service while the low-priced policies receive too much ser-

vice. The solution to this problem is to segment these policies into two different facilities or two different PWPs with separate workforces and appropriate service levels for each type of policy .

•

- .6 MASS CUSTOMIZATION

To this point we have been discussing traditional forms of production processes. However, with the advent of flexible manufacturing, mass customization is now possible. Mass customization is a strategy to provide products in lot sizes of one in high volume. At first blush, mass customization appears to be an oxymoron, two words that are incompatible, like jumbo shrimp or a deafening silence. But this dichotomy between mass production and customization can be overcome by using modern technologies, including computers, robotics, modular design, and the Internet.

Traditional mass production is built on economies of scale by means of a high- volume standardized product with few options. With economies of scale, the more production the lower the average unit cost. By contrast, mass customization de- pends on economies of scope- that is, a high variety of products from a single pro- cess. Economies of scope also reduces the average unit cost due to production of several products by the same process. Consequently, mass customization comes from a different economic basis, a common process rather than a common product.

Customization refers to making a different product for each customer. But mass customization is providing customized products at approximately the same cost as mass production. This is a stringent requirement and means that some products cannot be mass-customized because the cost would be higher.

78 Part Two Process Design

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One of the early examples of mass customization is the Motorola pager. Face with stiff offshore competition, Motorola decided to mass-customize its pagers by making them in lot sizes of one. That is, each pager would be produced to the spe- cific requirements of the customer. To ·accomplish this, Motorola put together a cross-functional team that designed a completely computer-integrated assembly line. They reduced the number of parts in the pager and used robots that could be changed over quickly from one pager to the next. This permitted 29 million pos- sible variations, and total manufacturing time was reduced to only two hour from receipt of the customer order to shipment.

The order-entry process was also streamlined for mass customization. Sale representatives in the field entered customer orders directly into laptop computer that sent an order immediately to the factory. Within a few hours, the customer ' pager had been ordered, manufactured, and shipped by overnight mail. Thi example illustrates the potential for mass customization.

There are three forms of mass customization:

1. Modular production and assemble-to-order (ATO).

2. Fast changeover (zero setup time between orders).

3. Postponement of options.

Modular production can provide a variety of opti<;ms by using an assemble-to- order process. For example, when Dell receives a computer order by phone or over the Internet, the company assembles standard modules or components rap- idly to meet the customer's order. The order is then shipped by overnight mail so that the customer receives it in as little as five days. But this requires modular de- sign, which was discussed in Chapter 3.

Fast changeover is the form of mass customization Motorola uses for its pager. In this case, it is critical that production is computer controlled and each order is uniquely identified by a bar code that specifies the customer's options. It is also essential to have nearly zero changeover time on equipment so that a lot size of one can be produced economically.

Postponement is used to defer a portion of the production until the point of delivery. For example, customized T-shirt shops can put a unique design on a cus- tomer's T-shirt at the point of purchase. Hewlett-Packard printers receive their fi- nal configuration for various voltages and power supplies at U.S. or overseas

warehouses before delivery. Postponement makes it possible to ship standard units anywhere in the world and customize them at the last minute.

Mass customization is not for everyone. Automobile makers have struggled to mass-customize cars.

From a manufacturing point of view, mass customization has changed the dynamics of the product-process matrix. Flexible automation makes it possible to make small lot sizes along with large lot sizes without a great cost penalty. Thus, with mass customization a firm can operate over a wider range of product choices without ma- jor changes to its process. This amounts to a wider horizontal operating position on the matrix. Nev- ertheless, mass customization does not make it possible to competitively make all volumes with all amounts of customization. There are limits to mass customization, too, but not as many limits as

Chapter 4 Process Selection 79

Operations Leader Mass Customization at New Balance

New Balance offers customized athletic shoes that can be ordered online and shipped to the customer in five days. The customer can select from a pallet of 24 different colors for the base, upper pan- els, heel, and accent parts of the shoe. Then colored laces, logo, and personal- ized text can be added. The customer can

choose any combination of colors to design a unique shoe.

New Balance produces over 7000 pairs of shoes each day from its U.S. factory in New England. This is only possible through use of the mass customization approach.

Source: www.shopnewbalance.com/US574

with the traditional forms of production. The Operations Leader Box describes how New Balance is using mass customization to offer men's and women's cus- tomized athletic shoes.

As some early mass customizers discontinue their customized products, there is disagreement on whether mass customization is a viable strategy for most firms. For example, Land's End was a widely cited mass customizer when it introduced its customized jeans. By 2011, however, it had discontinued this product line.

Automobile producers have also struggled to make mass customization a real- ity. While they have successfully modularized the design of their cars and reduced changeover times, they have been less successful in linking customer preferences to the production process. For example, in most states, manufacturers cannot sell directly to customers, and so the factory must communicate with customers via the dealership network. Also, customers like to choose the color of the car, but painting occurs early in the production process and in batches, both characteristics that are at odds with mass customization.

Recent research by Ahmad, Schroeder, and Mallick (2010) shows that cross- functional integration is a key enabler of mass customization. Modular production alone does not result in mass customization, but rather modularity requires cross- functional cooperation in order to achieve mass customization. Modularity creates the increased need for information exchange and cooperation among R&D, manu- facturing, and marketing functions . As a result, modularity will only result in mass customization if cross-functional integration is also present. This illustrates once again that contingencies are present when using new practices such as mass customization. Most new practices are successful only in certain situations and conditions.

· .7 ENVIRONMENTAL CONCERNS

"Green Manufacturing

at Xerox/' Vol. XIV

More than any other area of the firm, operations affects the natural environment. From the selection of inputs into the transformation process to the process outputs and by-products, decisions about the production process can have a great environ- mental impact. With increasing regulation and consumer scrutiny, firms are con- tinuously considering how to meet the demands of these stakeholders.

When firms are making process selection decisions, they must consider the environmental impact. We can think about three areas of decisions that affect environmental impact.

80 Part Two Process Design

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First, there are technologies for pollution prevention. These structural invest- ments reduce or eliminate pollutants from the production process. Process choice decisions, for example, using solar power versus coal-based power, determine the types of pollution output the process will create. Pollution prevention investments might include designing the process to waste fewer raw materials or investing in updated process equipment that requires less energy input. Both are instances of preventing pollution from occurring.

Second, pollution control technologies are also structural investments. They differ from pollution prevention technologies in that they are used to treat or dis- pose of pollutants and harmful by-products that are outputs from the process. These technologies most commonly are added to existing processes that were de- signed and purchased in the past, perhaps when environmental regulations were less stringent. Pollution control extends an existing process by adding another step to deal with the waste by-products from the process.

The third category of process decisions related to environmental impact is pol- lution practices that affect the way processes are used. Such practices include retraining workers to use the existing process in a new manner and increasing cross-functional coordination to seek creative and innovation improvements in environmental impact. These practices also include monitoring and reporting systems related to the way processes operate. Other practices may involve changes in the supply chain, for example, selecting new suppliers who certify their materi- als are obtained using sustainable methods. •

Many processes have been improved greatly over the years to lessen their impact on the environment. From changes in process inputs-for example, us- ing consumer waste paper rather than trees to manufacture new paper-to in- novative use of used materials-for example, making park benches out of recycled plastic bottles-operations plays a major role in managing environ- mental issues.

Examples of firms employing these process decisions are abundant. In 2008, the U.S. Environmental Protection Agency recognized Toyota and Ford with ENERGY STAR awards for their sustained progress in reducing energy con- sumption in their production plants. Since 2002, Toyota has reduced energy consumption per vehicle produced by more than 24 percent. These energy sav- ings provide a cost savings of $26 million for Toyota. Toyota also performs " treasure hunts" with 60 of its suppliers to search for further energy savings. Ford has reduced its production process energy consumption by 30 percent since 2000. Further, in a partnership with Hewlett-Packard to reduce the impact of global data centers, Ford expects to reduce energy use in this area by 90 percent.

Other environmental concerns related to process choice include the following:

1. Recycling outputs-finding uses for process by-products. Example: Public schools send food waste to pig farms.

2. Recycled inputs-using materials from other processes as inputs into a process. Example: Andersen Windows uses wood shavings that are by-products of one process as input together with a thermoplastic polymer to form Fibrex, a com- posite material used to make window frames and other products.

3. Remanufacturing-restoring and reusing some product components in the prod- uction of new products. Example: Caterpillar salvages and reuses many parts in its industrial equipment.

Chapter 4 Process Selection 81

4.8 CROSS-FUNCTIONAL DECISION MAKING

There are many cross-functional interactions in process selection decisions. In this section, we expand on those notions by discussing cross-functional decision mak- ing, starting with marketing and operations interactions.

Marketing has a large stake in process selection decisions. Process choices require large capital investments and thus make it difficult to change the pro- cess quickly. In many cases, the markets the firm faces may be changing faster than the firm can recover the capital investment from process choices. Thus, marketing should work closely with operations in these decisions to ensure that both current and future market demands can be met, along with environmental impacts.

The critical role of marketing in estimating and managing future demand is ap- parent. Although forecasting is always an inexact science, some scenario planning should be done to estimate the appropriate product and process response for dif- ferent demand scenarios. This will make it possible to manage the risk inherent in process choices and the associated capital investment. Marketing should also be aware of the process choice implications by managing demand to support the pro- cess choices that are made.

Another role for marketing is in stimulating demand in market segments that marketing and operations have already chosen. Selected segments must be culti- vated through promotion, advertising, and sales to create a sufficient volume of work to ensure profitability from the process cost structure already in place. This requires careful selection, development, and maintenance of a target market to fit the p rocess choice.

Finance has a key role in process selection decisions because of the capital in- vestment .t:equired. Process selection choices should be subjected to standard cash- flow and present value analysis. This will ensure that any contemplated process choices will provide the required returns on capital at an acceptable risk. Finance will also be required to raise the capital once the process selection decision is made and to provide capital for future investments as the product, process, and environ- mental challenges evolve over time.

The human resources function plays a key role in providing the human capital that is consistent with the process selection choices. As we have noted, the skill level of the workforce for job shops and batch processes is typically much higher than for assembly lines and continuous processes.2 Also, assembly lines require workers who can accept highly repetitive and routine jobs. The human resources function must hire, train, and guide management of the workforce so that it is coordinated with the process choices made by operations.

Information systems and accounting professionals should be aware that dif- ferent processes have different performance measures and different data require- ments. The information and accounting system designed for a make-to-order process will not work in a make-to-stock operation; a job shop information sys- tem will not work in an assembly-line environment, since the methods used for scheduling and inventory control depend on the type of process selected. The information/ accounting system needs to evolve with the process chosen. Because large investments are required in hardware and software, information

2 W ith the exception of highly trained maintenance workers in operations.

82 Part Two Process Design

systems and accounting decisions must be closely coordinated with proc~ selection choices.

We have shown that process selection choices affect all parts of the firm. The:- are strategic decisions that determine the future capabilities of the firm and th'-E involve all functional areas along with general management. With proper eros~ functional coordination, the processes selected can offer competitive advantage the firm and will be supported by all functions.

4.9 KEY POINTS AND TERMS

This chapter has emphasized two key dimensions for process classification: proc- uct flow and order fulfillment type. The product-process matrix provides a bass for matching product choices made by marketing with process choices made t-_ operations. These key points have been made in the chapter:

• There are five types of processes: continuous, assembly line, batch, job sho:- and project. The continuous and assembly-line processes are suited r high-volume standardized products that are produced at low cost wi2- limited flexibility. The batch process and job shop processes are suited to lo,,-_ to moderate-volume products that are customized or produced in a high varc- ety. The disadvantage of these processes is •the jumbled flow, w hi-'- reduces throughput and efficiency. The project process is best for unique or cre- ative products that are made one at a time. It requires intensive planning ar.- scheduling and generally results in costly products or services.

• The second dimension of process is the type of order fulfillment: make-to-ste>G make-to-order, or the hybrid assemble-to-order. With MTS, the replenishmer:.- cycle for inventory is separate from the customer order cycle. In contrast, tr..;: MTO process is set in motion by customer orders and geared to delivery perfc:- mance. The MTS process provides standard products, whereas the MTO p cess is suited to custom orders. The ATO process makes subassemblies _ advance for inventory and assembles them into a final product when orden-- by the customer.

• The order penetration point determines the point at which the customer m enters the production process. This is related to whether the process is designe· to be MTS, ATO, or MTO.

• The combination of product flow and type of order fulfillment provides s types of processes. Selection from among these six requires consideration ~ market conditions, capital requirements, labor, and technology. Taking into a-- count these factors, the process selection decision is always strategic and eros,.. functional in nature.

• The product-process matrix provides a dynamic view of the process selecti decision by considering the life cycle of both products and processes. Strate,:c is defined by a position on the matrix for the firm's product and process. r: matrix helps provide coordination between marketing decisions about prod and operations decisions concerning the process.

• Focused operations are used to separate products and processes that have - ferent requirements in terms of the production process or the markets sen ·-- Each type of process or product family should be assigned to a different fac:i.ll or plant-within-a-plant.

Key Terms

STUDENT INTERNET EXERCISES

~ ~I

Chapter 4 Process Selection 83

• Mass custornization is the ability to make a customized product at approximately the same cost as a mass-produced product. This can be done for some products by using flexible automation, robotics, modular design, and information systems. There are three types of mass customization: modular production/assemble-to- order, fast changeover, and postponement.

• Environmental concerns are a major challenge related to process design. When making decisions about processes, firms must consider whether they will de- velop structural processes to prevent or control pollution or pollution practices to manage these matters. Process decisions must account for plans to recycle and remanufacture products.

• Process selection decisions are highly cross-functional in nature because they affect human resources, capitat information systems, and the ability of the firm to deliver products to the market. Therefore, all functions should be knowl- edgeable about process choices and the impact of process selection on their par- ticular functional area and the environment.

Continuous process 63 Make-to-stock 68 Plant-within-a-plant 76 J\ssemblyline 63 Make-to-order 68 Mass customization 77 Batch 65 Lead time 69 Economies of scale 77 General-purpose Back order 69 Economies of

equipment 65 Service level 69 scope 77 Jumbled flow 66 J\ssemble-to-order 70 Modular production 78 Process layout 66 Order penetration Fastchangeover 78 Product layout 66 point 72 Postponement 78 Job shop 66 Product-process Pollution prevention 78 Project 66 matrix 75 Pollution control 80 Throughput ratio 67 . Focused factory 76 Pollution practices 80

1. Jelly Belly Tour http:/ /www.jellybelly.comNirtual_ Tour/virtual_tour.aspx

Take the Jelly Belly plant tour and describe the process used. Is it a continuous, line, batch, job shop, or project form of process, and how much automation is used?

2. Beachbeat Surfboards http://www.beachbeatsurfboards.co.uk/factory/index.html

Take a tour of Beachbeat surfboard manufacturing. Describe the process used and the method of order fulfillment.

3. BMW Manufacturing in South Carolina, U.S.A. http://www.bmwusfactory.com/manufacturing/production-process/

assembly/

Review the process of assembly line manufacturing for BMW and describe it in your own words. Why do you think BMW is manufacturing cars in America? Give your reasons.