Chapter 1 - Introduction to

Operations
Management

Operations Management
by

R. Dan Reid & Nada R. Sanders

4th Edition © Wiley 2010

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 Define and explain OM
 Explain the role of OM in business
 Describe the decisions that operations managers make
 Describe the differences between service and manufacturing operations
 Identify major historical developments in OM

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 Identify current trends in OM
 Describe the flow of information between OM and other business functions

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The business function responsible for planning, coordinating, and controlling the resources needed to produce products and services for a company

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 A management function
 An organization’s core function
 In every organization whether Service or Manufacturing, profit or Not for profit

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 OM Transforms inputs to outputs

Inputs
Inputs are
are resources
resources such
such as
as

•People, Material, and Money

Outputs
Outputs are
are goods
goods and
and services
services

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 To add value
Increase product value at each stage

Value added is the net increase between output product value and
input material value

 Provide an efficient transformation

Efficiency – means performing activities well for least possible cost

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 Services:  Manufacturers:
 Intangible product  Tangible product
 Product cannot be  Product is inventoried
inventoried  Low customer contact
 High customer contact  Longer response time
 Short response time  Capital intensive
 Labor intensive

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 Both use technology
 Both have quality, productivity, & response
issues
 Both must forecast demand
 Both can have capacity, layout, and location
issues
 Both have customers, suppliers, scheduling
and staffing issues

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 Manufacturing often provides services
 Services often provides tangible goods
 Some organizations are a blend of service/manufacturing/quasi-manufacturing Quasi-Manufacturing (QM) organizations
 QM characteristics include
Low
Low customer
customer contact
contact &
& Capital
Capital Intensive
Intensive

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  Service sector growing
to 50-80% of non-
farm jobs
 Global competitiveness
 Demands for higher
quality
 Huge technology
changes
 Time based
competition
 Work force diversity

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 All organizations make decisions and follow a similar path
First
First decisions
decisions very
very broad
broad –– Strategic
Strategic decisions
decisions

•Strategic Decisions – set the direction for

the entire company; they are broad in
scope and long-term in nature

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 Following decisions focus on specifics -
Tactical decision
Tactical decisions: focus on specific day-to-day issues
like resource needs, schedules, & quantities to
produce
are frequent
 Strategic decisions less frequent
 Tactical and Strategic decisions must align

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 Industrial revolution Late 1700s
 Scientific management Early 1900s
 Human relations movement 1930s-60s
 Management science 1940s-60s
 Computer age 1960s
 Environmental Issues 1970s
 JIT & TQM* 1980s

*JIT= Just in Time, TQM= Total Quality Management

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 Reengineering 1990s
 Global competition 1980s
 Flexibility 1990s
 Time-Based Competition 1990s
 Supply chain Management 1990s
 Electronic Commerce 2000s
 Outsourcing & flattening of world 2000s
For long-run success, companies must place much importance on their
operations

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 Customers demand better quality, greater
speed, and lower costs
 Companies implementing lean system
concepts – a total systems approach to
efficient operations
 Recognized need to better manage
information using ERP and CRM systems
 Increased cross-functional decision making

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 OM has the most diverse organizational
function
 Manages the transformation process
 OM has many faces and names such as;
V. P. operations, Director of supply chains,
Manufacturing manager
Plant manger, Quality specialists, etc.
 All business functions need information from
OM in order to perform their tasks

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 Most businesses are supported by the functions of operations, marketing, and finance
 The major functional areas must interact to achieve the organization goals

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 Marketing is not fully able to meet customer needs if
they do not understand what operations can produce
 Finance cannot judge the need for capital investments
if they do not understand operations concepts and
needs
 Information systems enables the information flow
throughout the organization
 Human resources must understand job requirements
and worker skills
 Accounting needs to consider inventory management,
capacity information, and labor standards

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 OM is the business function that is responsible for
managing and coordinating the resources needed to
produce a company’s products and services.
 The role of OM is to transform organizational inputs
into company’s products or services outputs
 OM is responsible for a wide range of decisions,
ranging from strategic to tactical.
 Organizations can be divided into manufacturing and
service organizations, which differ in the tangibility of
the product or service

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 Many historical milestones have shaped OM. Some
of these are the Industrial Revolution, scientific
management, the human relations movement,
management science, and the computer age
 OM is highly important function in today’s dynamic
business environment. Among the trends with
significant impact are just-in-time, TQM,
reengineering, flexibility, time-based competition,
SCM, global marketplace, and environmental issues
 OM works closely with all other business functions

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 Copyright © 2010 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United State Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
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and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.

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Chapter 2 - Operations
Strategy and Competitiveness

Operations Management
by
R. Dan Reid & Nada R. Sanders

4th Edition © Wiley 2010

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 Define the role of Business Strategy
 Explain how a Business strategy is developed
 Explain the role of Operations Strategy in
the organization
 Explain the relationship between business
strategy and operations strategy
 Describe how an operations strategy is
developed

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 Identify competitive priorities for of the operations function
 Explain the strategic role of technology
 Define productivity and identify productivity measures
 Compute productivity measures

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 Mission: Dell Computer- “to be the most
successful computer company in the world”
 Environmental Scanning: political trends,
social trends, economic trends, market place
trends, global trends
 Core Competencies: strength of workers,
modern facilities, market understanding, best
technologies, financial know-how, logistics

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 Four Key Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
 All of the above? Some? Tradeoffs?

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
Of fering product at a low price relative t o competition

Ty pi ca lly h igh vo lum e pro duc ts

Of ten li mit pro duc t ra ng e & off er l ittle cu sto m izat ion

Ma y inv est in auto ma tio n to re du ce u nit co st s

Ca n us e lo wer ski ll la bo r

Pr ob ab ly u ses pro du ct foc use d l ayo uts

Lo w co st d oes no t m ea n l owq ua lity

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Hi gh per for manc e desi gn:

 Quality is often subjective

 Quality is defined differently depending on who is defining it
 Two major quality dimensions include

Pr oduct & ser vi ce consi stency :

•Superior features, high durability, & excellent customer service

Pr oduct desi gn quali ty – product/ ser v ice m eets r equi r em ents

•Meets design specifications

•Close tolerances
•Error free delivery
 Quality needs to address

Pr ocess quali ty – err or fr ee pr oducts

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 Time/speed one of most important competition priorities
 First that can deliver often wins the race
 Time related issues involve

R apid d elivery:

•Focused on shorter time between order placement and delivery

O n-tim e d eliv ery:

•Deliver product exactly when needed every time

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 Company environment changes rapidly
 Company must accommodate change by being flexible
Product flexibility:

•Easily switch production from one item to another

•Easily customize product/service to meet specific requirements of a customer

Volume flexibility:

•Ability to ramp production up and down to match market demands

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Whic h prio ritie s a re “ Ord er Qu alif iers ”?


Dec is ions mus t em phas iz e pri orities that s upport busi ness strategy

Dec is ions often requi red trade offs
 Dec is ions mus t foc us on or der qualifier s and order winners

Mu st hav e e xce lle nt qu alit y s inc e e ve ryon e e xp ec ts i t

Whic h prio ritie s a re “ Ord er Wi nne rs” ?

De ll c om pet es on all fou r p riori ties

Sou thwes t Ai rlin es com pe tes on co st

McDona ld ’s c om pe tes on co nsi ste ncy

Fed Ex co mp ete s o n s pee d

Cu st om tai lors co mp ete on fle xib ility

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
Technology should support competitive priorities

Three Applications: product technology, process technology, and information technology

Pr oducts - Teflon, CD’s, fiber optic cable

Pr ocesses – flexible automation, CAD

Information Technology – POS, EDI, ERP, B2B

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 Productivity is a measure of how efficiently inputs are
converted to outputs
Productivity = output/input

 Total Productivity Measure

Total Productivity = $sales/inputs $

 Partial Productivity Measure

Partial Productivity = cars/employee

 Multifactor Productivity Measure

Multi-factor Productivity = sales/total $costs

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 2003 2002 2001
2003 2002 2001
Unit car 2,700,00 2,400,00 2,100,00 Partial Prod. Measure
sales 0 0 0
Unit Car Sales/Employee 24.1 21.2
Employees 112,000 113,000 115,000 18.3

Year-to-year Improvement 13.7% 15.8%

$ Sales $49,000 $41,000 $38,000

Multifactor Prod. Measures
(billions$)

Total Cost Productivity 1.26 1.24 1.19

Cost of $39,000 $33,000 $32,000
Sales
Year-to-year Improvement 1.6% 4.2%
(billions)

Which is the best measurement?

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 Productivity measures must be compared to
something, i.e. another year, a different company
 Raw productivity calculations do not tell the complete
story unless there are no major structure differences.
 In the prior automobile business example, it is
obvious that some major changes were taking place
to yield 15.8% and 13.7% year-to-year
cars/employee productivity improvements. What
changes could improve car sales per employee?
Automation? Out sourcing? Major re-design?

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Is this partial productivity measurem ent enough to make an investm ent decision?

 Other productivity measure questions:

Is the Total Cost Productivity measure a better reflection of year to year productivity at 4.2% and 1.6% . Why?

Should you also look at productivity measures for the two major com petitors for comparison?

 Productivity measure provides information on how the firm is doing relative to what is critical to the firm

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 Productivity is a scorecard on
effective resource use
 A nation’s Productivity
effects its standard of
living
 US productivity growth
averaged 2.8% from
1948-1973
 Productivity growth
slowed for the next 25
years to 1.1%
 Productivity growth in
service industries has
been less than in
manufacturing

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 Business strategy defines long-term plan
 Operations strategy support the business strategy
 Marketing strategy needs to fully understand operations capability
 Financial plans in effect support operations activities.

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 Business Strategy is a long range plan and vision. Each
individual business function develop needs to support
the business strategy
 An organization develops its business strategy by doing
environmental scanning and considering its mission and
its core competencies.
 The role of operations strategy is to provide a long-
range plan for the use of the company’s resources in
producing the company’s primary goods and services.
 The role of business strategy is to serve as an overall
guide for the development of the organization’s
operations strategy.

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 The operations strategy focuses on developing specific
capabilities called competitive priorities.
 There are four categories of competitive priorities: cost,
quality, time, and flexibility
 Technology can be sued by companies to gain a
competitive advantage and should be acquired to support
the company’s chosen competitive priorities
 Productivity is a measure that indicates how efficiently an
organization is using its resources
 Productivity is computed as the ratio or organizational
outputs divided by inputs

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 Operations Management
by
R. Dan Reid & Nada R. Sanders

4th Edition © Wiley 2010

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 Define product design and explain its strategic impact on organizations
 Describe steps to develop a product design
 Using break-even analysis as a tool in selecting between alternative products
 Identify different types of processes and explain their characteristics

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 Understand how to use a process flowchart
 Understand how to use process performance metrics
 Understand current technology advancements and how they impact process and product design
 Understand issues impacting the design of service operations

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Product design – the process of defining all of the companies product
characteristics
Product design must support product manufacturability (the ease
with which a product can be made)
Product design defines a product’s characteristics of:

•tolerances, and
•appearanc
•performance
e, standards.
•materials,
Process Selection – the development of the process
•dimensions
necessary to produce the designed product.
,

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 Service design is unique in that the service and
entire service concept are being designed
must define both the service and concept
- Physical elements, aesthetic & psychological
benefits
e.g. promptness, friendliness, ambiance
Product and service design must match the needs and
preferences of the targeted customer group

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 all products begin with an idea from
Idea development:

customers, competitors, suppliers and

company’s R&D.
Reverse engineering: disassembling of
competitor’s product for complete analysis
Benchmarking: comparing one’s own practices,
performances with that of ‘best-in -class’
Perceptual mapping

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 GOOD
TASTE

Cocoa Puffs

LOW HIGH
NUTRITION NUTRITION

Rice
Rice Cheerios
Cheerios
Krispies
Krispies
Wheaties
Wheaties

Shredded
Shredded
Wheat
Wheat
BAD
TASTE
 Idea developments selection affects
Product
Product quality
quality
Product
Product cost
cost
Customer
Customer satisfaction
satisfaction
Overall
Overall manufacturability
manufacturability –– the
the ease
ease with
with which
which the
the product
product can
can be
be made
made

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Step 1 - Idea Development - Someone thinks of a need and a
product/service design to satisfy it: customers, marketing,
engineering, competitors, benchmarking, reverse engineering
Step 2 - Product Screening - Every business needs a
formal/structured evaluation process: fit with facility and labor
skills, size of market, contribution margin, break-even analysis,
return on sales
Step 3 – Preliminary Design and Testing - Technical specifications
are developed, prototypes built, testing starts
Step 4 – Final Design - Final design based on test results, facility,
equipment, material, & labor skills defined, suppliers identified

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 Idea Feasibility
generation Product or study Performance
service concept specifications

Suppliers Customers Form design

R&D

Marketing Competitors Revising and testing

prototypes

Functional Production
design design
Design Manufacturing
New product or specifications or delivery
service launch specifications
Pilot run
Final design and final tests
& process plans
 Must Design for
Manufacturing – DFM
 Guidelines to produce a
product easily and
profitably
 Simplification -
Minimize parts
 Standardization
 Design parts for
multiply
applications
 Use modular design
 Simplify operations

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 Product life cycle –
series of changing
product demand
 Consider product
life cycle stages
 Introduction
 Growth
 Maturity
 Decline
 Facility & process
investment depends
on life cycle

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Old “over-the-wall” sequential design
process should not be used
 Each function did its work and
passed it to the next function

Replace with a Concurrent

Engineering process
 All functions form a design team
that develops specifications,
involves customers early, solves
potential problems, reduces costs,
& shortens time to market

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Uses components of old products in the production of new ones and has:
Environmental
Environmental benefits
benefits
Cost
Cost benefits
benefits
Good for:
Computers,
Computers, televisions,
televisions, automobiles
automobiles

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 Intermittent processes:
Processes
Processes used
used to
to produce
produce aa variety
variety ofof products
products with
with different
different processing
processing requirements
requirements inin lower
lower volumes.
volumes. (such
(such as
as healthcare
healthcare facility)
facility)
 Repetitive processes:
Processes
Processes used
used to
to produce
produce one
one or
or aa few
few standardized
standardized products
products in
in high
high volume.
volume. (such
(such as
as aa cafeteria,
cafeteria, or
or car
car wash)
wash)

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 Product design considerations must include the process
 Differences between Intermittent & Repetitive Ops:
(1) the
the amount
amount ofof product
product volume
volume produced,
produced, and
and
(2) the
the degree
degree of
of product
product standardization.
standardization.

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 Process types can be:
Project process – make a one-at-a-time product
exactly to customer specifications
Batch process – small quantities of product in
groups or batches based on customer orders or
specifications
Line process – large quantities of a standard
product
Continuous process – very high volumes of a fully
standard product
 Process types exist on a continuum

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 Process selection is based on five considerations
1. Type
Type of
of process;
process; range
range from
from intermittent
intermittent to
to repetitive
repetitive or
or continuous
continuous
2. Degree
Degree ofof vertical
vertical integration
integration
3. Flexibility
Flexibility of
of resources
resources
4. Mix
Mix between
between capital
capital && human
human resources
resources
5. Degree
Degree ofof customer
customer contact
contact

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 Computes the quantity of goods company needs to sell
to cover its costs
F – Fixed costs; VC – Variable cost/unit
SP – selling price/unit
Q- Quantity sold; QBE – Break even quantity
Total cost – sum of fixed and variable cost
Total cost = F + (VC)*Q
Revenue – amount of money brought in from sales
Revenue = (SP) * Q
Break-even quantity, QBE = F/ (SP - VC)
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 Fixed cost = F = $2,000
Variable cost = VC = $5 per raft
Selling Price= SP = $10 per raft

Break-even quantity is
F
Q= = = rafts
SP -VC
Copyright 2009
John Wiley & Sons,
Inc. 6-82
 Dollar
s

Total
$3,000 — cost
line

$2,000 —

$1,000 —
Total
revenue
line
400 Units
Copyright 2009 Break-even point
John Wiley & Sons,
Inc. 6-83
 Process A Process B
$2,000 + $5v = $10,000 + $2v

Copyright 2009
John Wiley & Sons,
Inc. 6-84
 Total cost of
$20,000 — process A

Total cost of
$15,000 — process B

$10,000 —

$5,000 —

| | | |
1000 2000 3000 4000 Units

Example 4.3

Copyright 2009 John Wiley & Sons, Inc. 6-85

Process A Process B Process C
$2,000 + $5v $10,000 + $2v $14,000 + $v

Point of indifference between Processes B and C

$10,000 + $2v = $14,000 + $v
v=

Copyright 2009 Example 4.2

John Wiley & Sons,
Inc. 6-86
 Total cost of
process C
Total cost of
$20,000 — process A

Total cost of
$15,000 — process B

$10,000 —

$5,000 —

| | | |
1000 2000 3000 4000 Units

Copyright 2009 Example 4.3

John Wiley & Sons,
Inc. 6-87
 Below 2667 units,

 Between 2667 and 4000 units,

 Above 4000 units, choose Process C

Copyright 2009
John Wiley & Sons,
Inc. 6-88
Often stages in
the production
process can be
performed in
parallel, as
shown here in
(c) and (d). The
two stages can
produce
different
products (c) or
the same
product (d).
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 Process design tools include
Process flow analysis
Process flowchart
 Design considerations include
Make-to-stock strategy
Assemble-to-order strategy
Make-to-order strategy
See flowcharts for different product strategies at
Antonio’s Pizzeria (next slide)

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A basic process performance
metric is throughput time. A
lower throughput time
means that more products
can move through the
system. One goal of process
improvement is to reduce

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Process performance metrics – defined: Measurement of different process characteristics that tell us how a process is performing
Determining
Determining ifif aa process
process is
is functioning
functioning properly
properly is
is required
required
Determination
Determination requires
requires measuring
measuring performance
performance

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 Product design and process selection are
directly linked
 Type of product selected defines type of
operation required
 Type of operation available defines broader
organizational aspects such as
Equipment required
Facility arrangement
Organizational structure

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 Organizational Decisions appropriate for different types of operations

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Product Design Decisions:
Intermittent and repetitive operations typically focus on producing products in different stages of the product life cycle. Intermittent is best for early in product life; repetitive is better for later when demand is more predicable.

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 Competitive Priorities: decisions of how a company will compete in the marketplace. Intermittent operations are typically less competitive on cost than repetitive operations. (Think “off the rack” vs. custom tailored clothing.)

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 Type of operation is directly related to product and service strategy
 Three basic strategies include
1. Make-to-stock;
Make-to-stock; in
in anticipation
anticipation of
of demand
demand
2. Assemble-to-order;
Assemble-to-order; built
built from
from standard
standard components
components on on order
order
3. Make-to-order;
Make-to-order; produce
produce toto customer
customer specification
specification at
at time
time of
of order
order

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 Vertical integration refers to the degree a firm chooses
to do processes itself- raw material to sales
Backward Integration means moving closer to primary operations
Forward Integration means moving closer to customers

 A firm’s Make-or-Buy choices should be based on the

following considerations:
Strategic impact
Available capacity
Expertise
Quality considerations
Speed
Cost (fixed cost + variable cost)make = Cost (fixed cost + Variable cost)buy
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Information Technology
 Simplify first then apply appropriate technology
 ERP, GPS, RFID
 Automation
 Automated Material Handling: Automated guided vehicles
(AGV), Automated storage & retrieval systems (AS/RS)
 Flexible Manufacturing Systems (FMS)
 Robotics & Numerically-Controlled (NC) equipment

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 Web-based environment creates numerous
business opportunities to include;
Product design collaboration
Process design collaboration
 Computer-aided design – uses computer
graphics to design new products
 Computer-integrated manufacturing –
integration of product design, process
planning, and manufacturing using an
integrated computer system

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 Services are different from manufacturing as they;
Produce
Produce intangible
intangible products
products
Involve
Involve aa high
high degree
degree of
of customer
customer contact
contact
 Type of service is classified according to degree of customer contact

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 Service Characteristics
 Pure services

 Quasi-Manufacturing

 Mixed services

 Service Package
 The physical goods

 The sensual benefits

 The psychological

benefits
 Differing designs
 Substitute technology

for people
 Get customer involved

 High customer attention

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 Strategic and financial of product design and process selection mandates operations work closely across the organization
Marketing
Marketing isis impacted
impacted by
by product
product that
that is
is produced
produced
Finance
Finance is
is integral
integral to
to the
the product
product design
design andand process
process selection
selection issues
issues due
due to
to frequent
frequent large
large financial
financial outlays
outlays

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 Strategic and financial of product design and
process selection mandates operations work
closely across the organization
Information services has to be developed to match
the needs of the production process
Human resources provides important input to the
process selection decisions for staffing needs

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 Product design is the process of deciding on the unique
characteristics and features of a company’s product
Process selection is the development of the process
necessary to produce the product being designed.
 Steps in product include idea generation, product
screening, preliminary design and testing, and final design
 Break-even analysis is a tool used to compute the amount
of goods that have to be sold just to cover costs.
 Production processes can be divided into two broad
categories: intermittent and repetitive operation project to
batch to line to continuous

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 Product design and process selection decisions are
linked
 Process flow charts is used for viewing the flow of the
processes involved in producing the
 Different types of technologies can significantly
enhance product and process design. These include
automation, automated material handling devices,
CAD, NC, FMS, and CIM
 Designing services have more complexities than
manufacturing, because service produce an
intangible product and typically have a high degree of
customer contact.

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Chapter 9– Capacity Planning

& Facility Location

Operations Management
by
R. Dan Reid & Nada R. Sanders
2nd Edition © Wiley 2005

PowerPoint Presentation by R.B. Clough - UNH

 Define capacity planning and location analysis
 Describe relationship between capacity planning and
location, and their importance to the organization
 Explain the steps involved in capacity planning and
location analysis
 Describe the decision support tools used for capacity
planning
 Identify key factors in location analysis
 Describe the decision support tools used for location
analysis
 There is no one best way to measure capacity
 Output measures like kegs per day are easier to understand
 With multiple products, inputs measures work better

Input Measures of Output Measures

Type of Business
Capacity of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Floor space in
Retail store Revenue per foot
square feet
 Design capacity:
Maximum output rate under ideal conditions

A bakery can make 30 custom cakes per day when pushed at holiday time

 Effective capacity:
Maximum output rate under normal (realistic) conditions

On the average this bakery can make 20 custom cakes per day
 Measures how much of the available
capacity is actually being used:
actual output rate
Utilization  100%
capacity

 Measures effectiveness
 Use either effective or design capacity in
denominator
 actual output 28
Utilization effective  (100%)  (100%)  140%
effective capacity 20

actual output 28
Utilization design  (100%)  (100%)  93%
design capacity 30

 The current utilization is only slightly below its design

capacity and considerably above its effective capacity
 The bakery can only operate at this level for a short period
of time
 The Best Operating Level is the output that results in the lowest average unit cost
 Economies
Where of drops
the cost per unit of output Scale:
as volume of output increases

Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material

 Diseconomies of Scale:
Where the cost per unit rises as volume increases

Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity
 Alternative 1: Purchase one large facility, requiring one large
initial investment
 Alternative 2: Add capacity incrementally in smaller chunks as
needed
Small, specialized facilities with limited objectives
 Focused factories:

Segmenting larger operations into smaller operating units with focused objectives
 Plant within a plant (PWP):

Outsource non-core items to free up capacity for what you do well

 Subcontractor networks:

Plan to underutilize capacity to provide flexibility

 Capacity cushions:
 Could do nothing, or expand large now, or expand small now with option to
add later
 Use Decision Trees analysis tool:
A modeling tool for evaluating sequential decisions

Identify the alternatives at each point in time (decision

(decision points),
points), estimate probable consequences of each decision (chance
(chance events)
events) & the ultimate outcomes

(e.g.: profit or loss)

 The likelihood of demand being high is .70
 The likelihood of demand being low is .30
 Large expansion yields profits of $300K(high dem.) or $50k(low dem.)
 Small expansion yields profits of $80K if demand is low
 Small expansion followed by high demand and later expansion yield a profit of
$200K at that point. No expansion at that point yields profit of $150K
 At decision point 2, choose to expand to maximize profits ($200,000 > $150,000)

EV Calculate expected
= 0.30($80,000) + value of small expansion:
0.70($200,000) = $164,000

small


EV Calculate
= 0.30($50,000) +expected value of large expansion:
0.70($300,000) = $225,000

large

 At decision point 1, compare alternatives & choose the large expansion to maximize the expected
profit:
$225,000 > $164,000

Choose large expansion despite the fact that there is a 30% chance it’s the worst decision:
Take the calculated risk!

 Proximity to suppliers:
Reduce transportation costs of perishable or bulky raw materials

 Proximity to customers:
E.g.: high population areas, close to JIT partners

 Proximity to labor:
Local wage rates, attitude toward unions, availability of special skills (e.g.: silicon valley)
 Community considerations:
Local community’s attitude toward the facility (e.g
(e.g.:
.: prisons, utility plants, etc.)

Site considerations:
Local zoning & taxes, access to utilities, etc.


Quality-of-life issues:
Climate, cultural attractions, commuting time, etc.


Other considerations:
Options for future expansion, local competition, etc.

 Potential advantages:
Inside track to foreign markets, avoid trade barriers, gain access to cheaper labor


Potential disadvantages:
Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation


Other issues:
Language barriers, different laws & regulations, different business cultures

Step
Analysis should follow 3 step process:
 1: Identify dominant location factors

Step 2: Develop location alternatives

Step 3: Evaluate locations alternatives

 Factor rating method

 Load-distance model
 Center of gravity approach
 Break-even analysis
 Transportation method
 Calculate the rectilinear distance: dAB  30  10  40  15  45 miles

 Multiply by the number of loads between each site and the four cities
 Computing the Load-Distance Score for Springfield

City Load Distance ld
Cleveland 15 20.5 307.5
Columbus 10 4.5 45
Cincinnati 12 7.5 90
Dayton 4 3.5 14
Total Load-Distance Score(456.5)

Computing the Load-Distance Score for Mansfield

City Load Distance ld
Cleveland 15 8 120
Columbus 10 8 80
Cincinnati 12 20 240
Dayton 4 16 64
Total Load-Distance Score(504)

 The load-distance score for Mansfield is higher than for

Springfield. The warehouse should be located in Springfield.
 This approach requires that the analyst find the center
of gravity of the geographic area being considered
Computing the Center of Gravity for Matrix Manufacturing
Coordinates Load
Location (X,Y) (li) lixi liyi
Cleveland (11,22) 15 165 330
Columbus (10,7) 10 165 70
Cincinnati (4,1) 12 165 12
Dayton (3,6) 4 165 24
Total 41 325 436

 Computing the Center of Gravity for Matrix

Manufacturing
Xc.g. 
 liXi 325
  7.9 ; Yc.g. 
 liYi 436
  10.6
 li 41  li 41
 Is there another possible warehouse location closer to the
C.G. that should be considered?? Why?
Step 1: For each location, determine the fixed and
 Break-even analysis can be used for location analysis especially when the costs of each location are known

variable costs

Step 2: Plot the total costs for each location on one graph

Step 3: Identify ranges of output for which each location

has the lowest total cost

Step 4: Solve algebraically for the break-even points

over the identified ranges

Total cost = F + cQ
 Remember the break even equations used for calculation total cost of each location and for calculating the breakeven quantity Q.

Total revenue = pQ

Break-even is where Total Revenue = Total Cost

Example 9.6 Using Break-Even Analysis
Location Fixed Cost Variable Cost Total Cost
A $350,000 $ 5(10,000) $400,000
B $170,000 $25(10,000) $420,000
C $100,000 $40(10,000) $500,000
D $250,000 $20(10,000) $450,000
 From the graph you can see that the two lowest cost intersections
occur between C & B (4667 units) and B & A (9000 units)
 The best alternative up to 4667 units is C, between 4667 and 9000
units the best is B, and above 9000 units the best site is A
 The transportation method of linear programming
can be used to solve specific location problems
 It is discussed in detail in the supplement to this
text
 It could be used to evaluate the cost impact of
adding potential location sites to the network of
existing facilities
 It could also be used to evaluate adding multiple
new sites or completely redesigning the network
 Capacity planning is deciding on the maximum output
rate of a facility.
 Location analysis is deciding on the best location for a
facility.
 Capacity planning and location decisions are often
made at the same time because they are inter-related.
 The analysis steps for both capacity and location
analysis are assessing needs, developing alternatives,
and evaluating alternatives.
 To choose between capacity planning alternatives
managers may use a modeling tool like decision
trees
 Key factors in location analysis include proximity
to customers, transportation, source of labor,
community attitude, and proximity to supplies.
 Location analysis tools include factor ratings, the
load-distance model, the center of gravity
approach, break-even analysis, and the
transportation method.
 Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United State Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
Chapter 10 – Facility Layout

Operations Management
by
R. Dan Reid & Nada R. Sanders
2nd Edition © Wiley 2005

PowerPoint Presentation by R.B. Clough - UNH

 Define layout planning and its importance
 Identify and describe different types of layouts
 Compare process layouts & product layouts
 Describe the steps involved in designing both
process and product layouts
 Explain the advantages of hybrid layouts
 Define the meaning of group technology & its
importance to cellular layouts
 Process layouts:
Group similar resources together

 Product layouts:
Designed to produce a specific product efficiently

 Hybrid layouts:
Combine aspects of both process and product layouts

 Fixed-Position layouts:
Product is two large to move; e.g. a building
 General purpose & flexible resources
 Lower capital intensity & automation
 Higher labor intensity
 Resources have greater flexibility
 Processing rates are slower
 Material handling costs are higher
 Scheduling resources & work flow is more
complex
 Space requirements are higher
 Specialized equipment
 High capital intensity & wide use of automation
 Processing rates are faster
 Material handling costs are lower
 Less space required for inventories
 Less volume or design flexibility
 Combine elements of both product & process layouts
Maintain some of the efficiencies of product layouts

Maintain some of the flexibility of process layouts

 Examples:
Group technology & manufacturing cells

Grocery stores
 Process Layouts Product Layouts
Products: large #, different small # efficiently

Resources: general purpose specialized

Facilities: more labor intensive more capital intensive

Flexibility: greater relative to market lower relative to market

Processing slower faster

Rates:

Handling costs: high low

Space requirements: higher lower

 Step 1: Gather information:
Space needed, space available, importance of proximity between various units

 Step 2: Develop alternative block plans:

Using trial-and-error or decision support tools

 Step 3: Develop a detailed layout

Consider exact sizes and shapes of departments and work centers including aisles and stairways

Tools like drawings, 3-D models, and CAD software are available to facilitate this process
 Step 1: Gather information like space needed, from-to matrix, and
REL Chart for Recovery First Sports Medicine Clinic (total space
3750 sq. ft.)
 Use trial and error with
from-to and REL Charts as a guide
 Use computer software like ALDEP
or CRAFT
 Warehouse Layout Considerations:
Primary decision is where to locate each department relative to the dock

Departments can be organized to minimize “ld” totals

Departments of unequal size require modification of the typical ld calculations to include a calculation of the “ratio of trips to area needed”

The usage of “Crossdocking” (see Ch.4) modifies the traditional warehouse layouts; more docks, less storage space, and less order picking
 Office Layout Considerations:
Almost half of US workforce works in an office environment


Human interaction and communication are the primary factors in designing office layouts

Layouts need to account for physical environment and psychological needs of the organization

One key layout trade-off is between proximity and privacy

Open concept offices promote understanding & trust

Flexible layouts incorporating “office landscaping” help to solve the privacy issue in open office environments
 Step 1: Identify tasks & immediate predecessors
 Step 2: Determine the desired output rate
 Step 3: Calculate the cycle time
 Step 4: Compute the theoretical minimum number
of workstations
 Step 5: Assign tasks to workstations (balance the
line)
 Step 6: Compute efficiency, idle time & balance
delay
Example 10.4 Vicki's Pizzeria and the Precedence Diagram
Immediate Task Time
Work Element Task Description Predecessor (seconds
A Roll dough None 50
B Place on cardboard backing A 5
C Sprinkle cheese B 25
D Spread Sauce C 15
E Add pepperoni D 12
F Add sausage D 10
G Add mushrooms D 15
H Shrinkwrap pizza E,F,G 18
I Pack in box H 15
Total task time 165
 Step 2: Determine output rate
 Vicki needs to produce 60 pizzas per hour
 Step 3: Determine cycle time
 The amount of time each workstation is

allowed to complete its tasks

available time sec./day  60 min/hr x 60 sec/min
Cycle time (sec./unit)    60 sec./unit
desired output units/hr 60 units/hr

 Limited by the bottleneck task (the

longest task in a process):
available time 3600 sec./hr.
Maximum output    72 units/hr, or pizzas per hour
bottleneck task time 50 sec./unit
 Step 4: Compute the theoretical minimum
number of stations
 TM = number of stations needed to
achieve 100% efficiency (every second is
used)

TM 
 task times   165 seconds
 2.75, or 3 stations
cycle time 60 sec/station

 Always round up (no partial workstations)

 Serves as a lower bound for our analysis
 Step 5: Assign tasks to workstations
 Start at the first station & choose the longest eligible task
following precedence relationships
 Continue adding the longest eligible task that fits without going
over the desired cycle time
 When no additional tasks can be added within the desired cycle
time, begin assigning tasks to the next workstation until finished
Workstation Eligible task Task Selected Task time Idle time
A A 50 10
1
B B 5 5
C C 25 35
2 D D 15 20
E, F, G G 15 5
E, F E 12 48
F F 10 38
3
H H 18 20
I I 15 5
 Step 6: Compute efficiency and balance delay
 Efficiency (%) is the ratio of total productive
time divided by total time

Efficiency (%) 
 t

165 sec.
100  91.7%
NC 3 stations x 60 sec.

 Balance delay (%) is the amount by which the

line falls short of 100%

Balance delay  100%  91.7%  8.3%

 One of the most popular hybrid layouts uses Group
Technology (GT) and a cellular layout
 GT has the advantage of bringing the efficiencies of a
product layout to a process layout environment
 Layout planning is deciding on the best physical
arrangement of resources.
 There are four basic types of layouts: process,
product, hybrid, and fixed position.
 Process layouts provide flexibility to make a
variety of different products. Product layouts
provide greater efficiency for one product.
 The steps for designing process layouts are:
gather space and closeness information, develop
a block plan, and develop a detailed layout.
 The steps for designing an product layout are:
identify tasks and predecessors, determine output
rate, determine cycle time, computing the
theoretical minimum number of work stations,
assigning tasks to workstations, and computing
efficiency and balance delay.
 Hybrids layouts combine elements from both types
of layouts to increase efficiency.
 Hybrid layouts combine GT analysis with cellular
layout concepts .
 Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United State Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.