Chapter Two

Design of the Operations/production Systems

2.1. Product-Service Design and Development
Design is the process of structuring of component parts/activities of a product so that as a unit it
can provide specified value for the one who purchase it. The product will be designed in terms of
size, color, and other related dimensions.
Thus, product-service design plays a strategic role in the degree to which an organization is able
to achieve its goals. It is a major factor in customer satisfaction, product-service quality, and
production costs. The customer connection is obvious i.e., the product or service is the main
concern of the customer, and becomes the ultimate basis for judging the organization. The
quality connection is twofold. Quality is obviously affected by design, but also, during
production, by the degree to which production conforms to the intent of design. A key factor is
the manufacturability, which refers to the ease with which design features can be achieved by
production. Similarly, design affects cost, both the cost of materials specified by design and the
cost required to achieve the intent of design (e.g., labor and equipment costs).
Objectives of Product-Service Design
The objectives of product-service design may vary somewhat from situation to situation.
Generally, however, the objectives are:
-

To bring new or revised products or services to the market as quickly as possible.

To design products and/or services that have customer appeal

To increase the level of customer satisfaction

To increase quality

To reduce costs

In a competitive environment, getting new or improved products or services to the market ahead
of competitors gives an organization a competitive advantage that can lead to increased profits as
well as increased market share, and can create an image of the organization as a leader. In the
not-for-profit sector, getting new or improved products or services to the market as quickly as
possible enables organizations to increase their level of customer service.

Successful product design must reflect a creative and intimate knowledge of the market
environment. And the processes used to produce or deliver them must make effective use of the
firms resources and available levels of technology.
Notice here that, Production/operations is not the sole responsibility of Operation Department or
Division what to produce is rather an interactive decision of Marketing, Finance, Engineering,
Purchasing/procurement and further involves Customers, Suppliers, Creditors, and other related
parties.
The Design Process
The design process begins with the motivation for design. For a new business or new product,
the motivation may be obvious: to achieve the goals of the organization. For an existing business,
in addition to that general motivation, there are more specific factors to consider, such as
government regulations, the appearance of new technologies that have product or process
applications, competitive pressures, and customer needs.
Ultimately, the customer is the driving force for product-service design. Failure to satisfy
customers can result in customer complaints, returns, warranty claims, and so on. Loss of market
share becomes a potential problem if customer satisfaction is not achieved.
In order for the design process to occur, there must be ideas for new or improved designs. These
can come from a variety of sources. The most obvious source is the customer. Marketing can tap
this source of ideas in a number of ways, such as the use of focus groups, surveys, and the
analysis of buying patterns.
Some organizations have Research and Development (R&D) departments that also generate
ideas for new or improved products and services.
Competitors are another important source of ideas. By studying a competitors products or
services, and how it operates (e.g., pricing policies, return warranties, and so on), an organization

can learn a great deal that can help to achieve design improvements. Beyond that, some
companies buy a competitors newly designed product the moment it appears on the market.
Using a procedure called Reverse Engineering; they carefully dismantle and inspect the product.
This may uncover product improvement that can be incorporated in their own product.
Forecasts of future demand can be very useful, supplying information on the timing and volume
of demand as well as information on demands for new products and services.
The design of a product or service must take into account is cost, its target market, and its
function. Manufacturability is a key concern for manufactured goods: ease of fabrication and/or
assembly is important for cost, productivity, and quality. Similarly, with services, ease of
providing the service, cost, productivity, and quality and great concern.
In general, design, production, and marketing must work closely together, keeping each other
informed and taking into account the wants and needs of the customer. In addition, there can be
legal or regulatory considerations as well as life cycle factors that influence the design function.
Importance of Product Life Cycle Analysis in Product Design
Many new products exhibit a Product Life Cycle (PLC) in term of demand. They are born, live
and die. It may be helpful to think of a products life as divided into four phases. Those phases
are: introduction, growth, maturity and decline. When an item is first introduced, it may be
treated as a curiosity. Demand is generally low because potential buyers are not yet familiar with
the item. Many potential buyers recognize that all of the problems that probably not been worked
out and that the price may drop after the introductory period. With the passage of time during the
growth stage, production and design improvements usually create a more reliable and less costly
product. Demand then grows for these reasons and because of increasing awareness of the
product or service. At the maturity stage in the life cycle, the product reaches maturity: there are
few, if any, design changes, and demand levels off. Eventually, the market becomes saturated,
which leads to a decline in demand. These stages in the cycle are illustrated in Figure 2.1.

Sales
Growth

Maturity

Introduction

Decline

Time
Figure 2.1. Stages in Product Life Cycle
In the last stage of life cycle, some firms adopt a defensive research posture whereby they
attempt to prolong the useful life of a product or service by one or more of the following:
improving the reliability of the item, reducing costs of producing the product (and, hence, the
price), redesigning it, or changing the packaging.
Some products do not seem to go through such a life cycle. Wooden pencils, paper clips, nails,
knives, forks and spoons, drinking glasses, and similar items do not seem to exhibit life cycles,
but most new products do. It is easy to identify the various stages for such items as slide rules,
black-and-white televisions, computers, calculator models, and TV series.
Wide variations exist in the amount of time a particular product takes to pass through a given
phase of its life cycle: some products pass through various stages in a relatively short period;
others take considerably longer. Often it is a matter of the basic need for the item and the rate of
technological change. For instance, a matter of few hours (a newspaper), months (seasonal
fashions), years (video recorders) and decades (slide rules, Beetle Volkswagen).
Regardless of the length of the cycle, the task for the Operations manager is the same: top design
a system that helps introduce new products successfully. If the operations functions cannot
perform effectively at this stage, the firm may be categorized with losers-products that cannot be
produced efficiently and perhaps not at all.

Philosophies towards Product Design and Development

There are three philosophies/strategies for product design and development: Market-pull
approach, Technology-push approach, and Inter-functional approach
1. Market-Pull Philosophy
The market-pull logo is: One should make what can be sold. It implies that one should
produce the market requirement or customer demand irrespective of internal technology or
processes. So it is required to undertake customers survey and market research. Where customer
survey implies the marketing efforts once the product has produced and tries to determine
whether the targeted customers are satisfied or else develops purchasing dissonance with the
product. Market research, on the other hand, is much broader in scope and deals with the
formulation of a firms marketing strategies with regard to the four Ps (Product, Price,
Promotion, and Place) i.e., designing the marketing mix strategy of the firm.
In market pull strategy, new products are determined by the market with little regard given to
existing technology and operations processes. Instead the customers needs and wants play the
primarily role for new product design and development.
2. Technology-Push Philosophy
The technology-push strategy logo is one should sell what can be made. It implies the
existing technology and/or process determines what kind of a product to be produced. So that
customer needs is become a secondary issue. It can be said it is a period of marketing myopia or
marketing shortsightedness.
Under this approach new product will be derived from production technology with little regard
for the market. Marketing is responsible to create a market and sell the products that are already
produced. The view is dominated by vigorous use of technology and simplicity of operations and
the assumption is through aggressive Research and Development and producing superior
products which have an advantage in the market. Therefore, the main issue is undertaking
Research and Development and the implementation of operations efficiency and effectiveness.

3. Inter-functional Philosophy
The inter-functional approach logo is: Product design and development is neither market-pull
nor technology-push. Rather it is inter-functional and interactive processes of customers,
marketing, finance, personnel, engineering, procurement, suppliers and other related functional
areas.
Under this approach a new product has to be developed which considers the existing technology,
needs and wants of the customers, inputs, and enable to use the best marketing efforts of the
company. However, there is a big problem in applying this strategy. It is because there is an interfunctional conflict among different functional areas and parties as a result difference in their
respective outlook. The best solution to overcome such a problem is to form a committee or
taskforce whose members are drawn from various departments of the company.
Generally, in manufacturing settings the process of product development will have the following
important steps.
i. Idea generation from both internal and external sources
ii. Product conception and selection
iii. Conducting feasibility study from three dimensions: market, technical and financial in
order to determine: whether the product has market or not as the market feasibility study
proposed, does the product confirm the design objective as per the technical design, and
how well the product quality performance and costs confirm to the design objectives
iv. Generating initial/preliminary product design in order to avoid costly and impossible
product design
v. Develop prototype model
vi. Conduct product testing and pilot market test in order to generate feedback how well the
prospect customers find and to incorporate their suggestions and complaint into the final
product design.
vii. Final product design; and start production at full-scale and commercialize to the target
market.

Approaches to Product Design and Development

In addition to those philosophies for product design and development discussed in the previous
section, there are specific product design techniques to speed up the design process and create
product-service bundles (i.e., new product development).
a. Concurrent engineering
Concurrent engineering is an approach to product-service design in which the concerns of more
than one function are considered simultaneously such as design for manufacturability; design
procurement; design for environment; and design for disassembly
i. Design for Manufacturability (DFM) is a product development approach that explicitly
considers the effectiveness with which a product can be made during the initial
development of the product-service design. This approach is based on the belief that the
cost of developing and running the value-adding system is as important as the functionality
and aesthetics of the product-service bundle. Three concepts are closely related to
designing for ease of production: specifications, standardization, and simplification.
Specification: is a detailed description of material, part, or product including physical
dimensions. These specifications profiled production Departments with precise
information about the characteristics of the product to be produced. Eli Whitneys
system of interchangeable parts required each part of a rifle to be manufactured to
specific tolerances. Tolerances are stated as a minimum and maximum for each
dimension of a product. For example, a minimum of 3.999 inches and a maximum of
4.0001 inches could be specified as 4.000+- 011 inch. Specifications, including
tolerances, are needed to allow both ease of assembly and effective functioning of the
finished products.
Standardization: refers to the design activity that reduces variety amount of a group
of products or parts. For example, if a product group having 20 models were
redesigned to have only 10 models, we would refer to the new group as more
standardized. Standardization of groups of products or parts usually results in higher
volume for each product or part model, which can lead to lower production costs,
higher product quality, greater ease of automation and lower inventory investment.

 Simplification of product design is the elimination of the complex features so that

the intended function is performed but with reduced costs, higher quality, or more
customer satisfaction. Customer satisfaction may be increased by making a product
easier to recognize, buy, install, maintain, or use. Costs can be reduced through easier
assembly, eliminated operations, less expensive substitute materials, and when less
material is wasted as scrap.
Note: the concepts of specifications, tolerances, standardization, and simplification are all
important in designing products for ease of production. Of particular importance is that
products must be designed to accommodate automated machinery.
ii. Design for procurement: places explicit consideration of component parts supply during
the initial development of a product-service design. What is the supply base for the
required component parts? What is the capacity of that supply base? At what cost can
parts be made and at what levels of conformance quality? Design for procurement
extends the DFM concept to the early stages in the creation of value, before in-house
production begins.
iii. Design for environment: is a product development approach that broadens the concept
of design from the extraction of raw materials to their disposal. This strategy is based on
the concept of sustainable development which encourages companies to meet the needs
of todays consumer without compromising the ability of future generations to meet their
needs.
iv. Design for disassembly: has become increasingly important in the context of the
extensive environmental regulations with which businesses must now comply. More and
more, manufacturers are beginning to understand and accept the fact that they are
responsible for the items they make, from start to finish. Using a design-for-disassembly
philosophy today can help to prevent such environmental liabilities in the future.
b. Robust Design
Some products will perform as designed only within a narrow range of conditions, while other
products will perform as designed over a much broader range of conditions. The latter case
describes a product that has robust design. Consider a pair of fine leather boots-obviously not
made for walking mud or snow. Now consider a pair of heavy rubber boots-just the thing for
mud or snow. The rubber boots have a design that is more robust than the fine leather boots.

The more robust a product (or service) is, the less likely that it will fail due to a change in the
environment in which it is used or in which it performed (in the case of a service). Hence, the
extent to which designers can build robustness into the product or service, the better it should
hold up, and the higher the level of customer satisfaction.
c. Taguchis Approach
Japanese engineer Genichi Taguchis approach is based on the robust design. Its premise is that it
is often easier to design a product that is insensitive to environmental factors, either in
manufacturing or in use, than it is to control the environmental factors. This approach modifies
the conventional statistical methods of experimental design. It involves determining which
factors are controllable, and which are not controllable (or are too expensive to control), and
determining the optimal level of the controllable factors relative to the product performance. The
value of this approach is its ability to achieve major advances in design of a product or a process
fairly quickly, using relatively small number of expectations.
d. Modular Design
Modular design is another form of standardization. Modules represent groupings of component
parts into subassemblies, usually to the point where the individual parts lose their separate
identity. One familiar example of modular design is a television set with easily removed control
panels. Computers, too, have modular parts that can be replaced if they become defective. By
arranging modules in different configurations, different computer capabilities can be obtained.
Generally, it is an approach that allows designers to consider an items components or
subsystems independently. Because these independent modules can be installed and replaced
individually, the concept is beneficial when requirements vary from one customer to the next and
when customer needs may change over time.
One advantage of modular design of equipment is that failures are often easier to diagnose and
remedy because there are fewer pieces to investigate compared with a no modular design.
Similar advantages are found in ease repair and replacement; the faulty module is conveniently

removed and replace with a good one. The manufacture and assembly of modules involves
simplifications: fewer parts are involved, so purchasing and inventory control become more
routine, fabrication and assembly operations become more standardized, and training costs often
are less.
The main disadvantages of modular design stem from the decrease in variety: the number of
possible configurations of modules is much less than the number of possible configurations
based on individual components. Another disadvantages that is sometimes encountered is the
inability to disassemble a module in order to replace a faulty part; the entire module must be
scrapped-usually a more costly procedure.
e. Quality Function Deployment (QFD)/ House of Quality
Quality Function Deployment (QFD) is a structured approach for integrating the voice of the
customer into the product development process. The purpose is to insure that customer
requirements are factored into every aspect of the process, from product planning to the
production floor. Listening to, and understanding the customer is the central feature of QFD.
Once the requirements are known, they must be translated into technical terms related to
production of the product.
f. Computer-Aided Design (CAD)
Computer-Aided Design (CAD) is an approach that uses computer software and hardware
applications to generate digitized models representing a products structural characteristics and
physical dimensions. The models can then be analyzed using special software, represented and
examined from a wide variety of perspectives on a computer screen, and printed out on a
blueprint plotter or some other output device.
When CAD is used, a design engineer starts by developing a rough sketch or, conceivably, just in
idea. The designer then uses a graphic display as a drafting board to construct the geometry of a
design. As a geometric definition is completed, a sophisticated CAD system allows the designer
to determine various kinds of engineering data, such as strength or heat transfer. CAD also

allows the designer to ensure that parts fit together so there will be no interferences when parts
are subsequently assembled.
g. Value Analysis (VA)
Although Value Engineering (VE) focuses on pre-production design improvement; Value
Analysis (VA), a related technique, takes place during the production process, when it is
clear that a new product is a success. VA seeks improvements that led to either a better product or
a product made more economically. The techniques and advantages for VA are the same as for
Vale Engineering, although minor changes in implementation may be necessary because Value
Analysis (VA) is taking place while the product is being produced.
h. Group Technology (GT)
group Technology (GT) is a process by which components be identified by a coding system that
specifies the type of processing (such as drilling) and the parameters of the processing (such as
size). This facilitates standardization of materials, components, and processes as well as the
identification of families of parts. To put in a nut shell, GT is an engineering and manufacturing
strategy based on the development and exploitation of commonalities among parts, equipment, or
processes.
As families of parts are identified, activities and machines can be grouped to minimize setups,
routings and material handling. GT provides a systematic way to review a family of components
to see if an existing component might suffice on a new project. Using existing or standard
components eliminates all the costs connected with the design and development of the new part,
which is a major cost reduction. For these reasons, successful implementation of GT leads to the
following advantages:
-

Improved design (because more design time can be devoted to fewer components) i.e., a
design team can enhance the manufacturability of a design and speed up the design cycle,

Reduced raw materials and purchases

Simplified production planning and control

Improved layout, routing, and machine loading

Reduced tooling setup time, and work-in-process and production time.

The application of GT helps the entire organization, as many costs are reduced.
i. Designing for Quality
A crucial element of product design is its impact on quality. Whether products of superior quality
are received by customers is ultimately determined in large part to the extent that products are
designed for quality. If we build product quality into the product designs, this is the first step in
producing products of superior quality. Quality is determined by the customers perception of the
degree of excellence of the characteristics of products or services.
Considerations in the Design of Service
Much of our discussion so far has focused on what we can call tangible products, that is, goods.
On the other side of the product coin are, of course, services. Service industries include banking,
finance, insurance, transportation, and communication. Designing services is challenging
because they often have unique characteristics. Because of the differences between services and
products, the design of services must take into account different elements than the design of
products. The designer must consider the following differences:
1. Products are generally tangible; services are generally intangible. Consequently, service
design often focuses more on intangible factors (e.g., peace of mind, environmental
setting, mood, etc) than does product design.
2. Services are often produced and received at the same time (e.g., a haircut, a carwash).
Because of this, there is less latitude in finding and correcting errors before the customer
has a chance to discover them. Consequently, training, process design, and customer
relations are particularly important.
3. Services cannot be inventoried. This poses restrictions on flexibility, and makes capacity
design very important.
4. Services are highly visible to consumers, and must be designed with that in mind; this
adds an extra dimension to process design usually not present in product design
5. Some services have low barriers to entry and exit. This places additional burden on
service design to continually be aware of what competitors are offering.

6. Location is often important in service design, with convenience as a major factor. Hence,
design of services and choice of location are often closely linked.
How do we classify services?
It is possible to make a distinction between different types of service delivery systems. These
could be based on:
i. The volume of activity
ii. The degree of professional skills and/or knowledge required
i. The type of the service takers i.e., for who the service is intended to be delivered.
Based on the above classifications, we can identify the services in the following manner:
1. Service factory such as bank, insurance, postal service, etc
2. Service shop such as cafeteria, clinic, gymnastics, etc
3. Mass service such as bus, college, hotel, etc
4. Personal service such as beauty salon, hard dresser, etc
5. Professional service such as pharmacy, consultancy, optician, architect, engineers, doctor
etc
6. Nonprofessional services which do not require special skills and/or knowledge to provide
the services.
Thus, based on volume, services could be classified into service factory and shops. Based on the
type of service takers, services could be classified into mass and personal service, and finally
based on the degree of skills/knowledge required, service could be classified as professional and
nonprofessional services.
Attributes of Service Design
The following attributes of service design helps to identify the type/classification of service that
is being given. The attributes are:
1. Labor intensity: refers to the ratio of labor cost incurred in providing the service. Here,
labor cost implies the function of the number of people and their qualification employed
in the service process. Therefore, there is high labor intensity in service factory but lower
in the case of personal service.

2. Contact: refers to the proportion of the total time to provide the service for while the
customer presents in the system. There is high contact in personal service but low in the
case of professional service.
3. Interaction: refers to the extent which the customer actively interfere in the service
process to change the content of the service. In this sense, there is high interaction in
professional service but low interaction in the case of mass service.
4. Customization: refers to what extent the service could be adapted to the need of a
customer. Interaction and customization have interrelation among themselves. It is to
mean if there is high interaction there will be high adaptation.
5. Identity of the service taker: refers to whether the service is direct on the person or else
direct to the thing. Services direct to the thing include: architect, auditing, etc. services
direct to person may include nursing, cafeteria, bar tendering, etc
Technique for Service Process Design Improvement: Service Blueprinting
Just as is the case with manufacturing process design (which will be discussed in the following
section), the standard tool for service process design is the flowchart. Recently, the service gurus
have begun calling the flowchart a Service Blueprint to emphasize the importance of process
design. A unique feature of the service blueprint is the distinction made between the high
customer contact aspects of the service (the parts of the process that the customer sees) and those
activities that the customer does not see. The distinction is made with a Line of Visibility on
the flowchart.
Using this technique, high customer contact elements can be identified and enhanced to deliver
personal satisfaction to the customer. Low contact elements can be separated from high contact
elements to drive down costs through standardizing prioritizing, and automating.
The customer contact models practical value comes from applying it to existing service
environments to improve performance. Design improvements of existing services can be
conducted through the following four steps:
i.

Blueprint the service: a service blueprint is a visual diagram usually a flowchart that
depicts all of the activities in the service deliver process. These include activities

involving information processing, customer interactions, and employee decisions. The

flowchart is analyzed to identify the fail points in the deliver system. Fail points are
steps in the service delivery process where meeting customer expectations is critical
and perhaps more difficult to achieve. Resource, employee training, and management
attention must be provided to these fail points to ensure that customer need are met.
ii.

Identify customer contact points and reduce contact where appropriate:

customer contact activities are identified by a line of visibility that separates steps
in the service delivery process where customers are present or actively participate.
These contact activities should be examined to determine if some elements may be
removed from the customers presence. For example, perhaps a bank teller conducts
unnecessary data processing activity during each customer transaction. Such
processing activities should be reassigned to backroom areas where they do not
interfere with customer service and where they can be more efficiently completed.

iii.

Improve the quality of contact: where contact is critical to the service, opportunities
to enhance the customers experience should be identified. Some examples include
express lines in grocery stores, weekend and evening hours for dentists and car repair
shops, and hiring and training people to deliver great customer service.

iv.

Improve efficiency in low contact operations: in low contact operations, costs can
be reduced by standardizing work procedures, prioritizing jobs, and adopting
computerized and automated processing systems.

2.2. Process Design and Selection

2.2.1. Process Design
Process design decisions are another strategic concern area of Operations Managers. The term
process refers to the facilities, skills, and knowledge used to produce firms products. Based on
this definition, one can innfer that where product design dictate what to produce where as
process design imply how to produce.
Process flow design, on the other hand, focuses on the specific processes that raw materials,
parts, subassemblies, or people flow as they move through the plant. The most common
Production and Operations Management tools used in planning process design are:

1. Assembly drawing: simply shows an exploded view of the product. An assembly

drawing is usually a three-dimensional drawing, known as an isometric drawing;
the relative locations of components are drawn in relation to each other to show
how to assemble the unit/product.
2. Assembly charts: is a schematic form that show how a product is assembled i.e., a
graphic means of identifying how components flow into subassemblies and
ultimately into a final product. These charts list all major materials, components
(which could be manufactured components, purchased components, or a
combination of both), subassembly operations, inspections, and assembly
operations. Assembly charts, sometimes called gozinto charts (from the words
goes into), are ideal for getting a birds eye view of the process for producing
most assembled products. They are also useful for planning production systems
for services when those services involve processing tangible goods, as in fast-food
restaurants, dry-cleaning shops, and quick tune-up shops for automobiles.
3. Process charts: provides more detail for process planners than do assembly charts.
This chart is a detailed analysis of only one of the operations required to produce
a specific product. This planning tool breakdown the operation into various
elemental steps and segregates them into 5 classes: Operations Transport,
inspection, delay and storage. The frequency of occurrence of each class, distance
traveled, and description and time for each step are recorded. When the heading of
the chart is completed, the method of performing certain assembly operation is
thoroughly documented.
Process charts can be used to compare alternative methods of performing individual operations
or groups of operations. Distance traveled and time to produce products/services can thus be
reduced by examining alternative process charts for different production methods. This processplanning tool can be used for products/services that are produced in either continuous or
intermittent production systems. Additionally, it is equally valuable for process planning when
new products/services are being planned or when existing operations are being analyzed for
improvement as in the case of Business Process Reengineering (BPR).
Notions for the Process Chart:

Operation: something is actually being done. This may be work on a product, some support
activity, or anything that is directly productive in nature.
Transportation: the subject of the study (product, service, or person) moves from one location
to another.
Inspection: the subject is observed for quality and corrections.
Delay: the subject of the study must wait before starting the next step in the process.
Storage: the subject is stored, such as finished products in inventory or completed papers in a
file. Frequently, a distinction is made between temporary storage and permanent storage by
inserting a T or P in the triangle.
Note: Process design is primarily useful to facilitate analysis is asking why each activity is done and whether it can
be improved by eliminating a task, combining tasks, changing the sequence of tasks, or simplifying tasks.
These aids make flow process charts very useful for the analysis of process efficiency.

2.2.2. Process Selection Decisions

Process selection decisions determine the type of productive process to be used and the
appropriate span of the process. For example the Operations Manages of fast-food restaurant
may decide whether to produce food strictly to customer-order (make-to-order) or inventory
(make-to-stock). The managers must also decide whether to organize the process flow as a highvolume line flow or a low-volume batch-production process. Furthermore, they must decide
whether to integrate forward toward the market and/or backward toward their suppliers. All these
decisions help define the type of process which will be used to make product.
Process selection is sometimes viewed as layout problem or as a series of relatively low-level
decisions, but this is mistake, since process selection is, on the contrary, strategic in nature and of
the greatest importance. Process decisions affect the costs, quality, delivery, flexibility of
operations. As one scholar pointed out, process selection decisions tend to bind the firm with
equipment, facilities, and a particular type of labor force. This, in turn, tends to limit strategic
options.
So, in this subsection we will focus on the two main types of process classifications. First, a
process is classified by type of product flow: line/continuous, intermittent/job shop, or project.

Second, a process classified by type of customer order: make-to-stock or make-to-order. These

dimensions of classifications greatly affect costs, volumes, flexibility, and virtually all aspects
operations.

A. Process Classification based on the type of Product Flow

There are three types of flows: line/continuous, intermittent/job-shop, and project. In
manufacturing, product flow is the same as material flow, since materials are being converted
into a product. In pure service industries, there is no physical product flow, but thee is,
nevertheless, a sequence of operations performed in delivering the service. This sequence of
service operations is considered as the product flow for service industries.
i. Continuous Production Process/Line flow
-

Continuous production process is characterized by a linear sequence of operations used to

make the product or service.

The product is well standardized and must flow from one operation or workstation to the
next in a prescribed sequence.

The individual work tasks are closely coupled and should be balanced so that one task
should not delay the next.

Task/workstation

Product flow Side flow

Figure 2.2. Continuous Production Process

-

There may be side-flow which impinges on this line, but they are integrated to achieve a
smooth flow.

It usually yields a lower unit cost for the product or service being produced due to
economies of scale.

Storage costs per unit are usually lower, as the raw materials are stored only briefly and
work-in-progress inventories move through the plant very rapidly

The time required for production is very shorter

Fixed-path materials handling equipments like conveys, chutes and rails are mostly used

It requires large investment, because it uses special purpose machines etc.

The marketing effort focuses on developing distribution channels for the large volume of
output and persuading customers to accept standardized products.

Example: refineries, paper plants, chemical plants, automobile industries, flour milling,
electric utility etc

ii. Intermittent Production Process/Job Shop system

-

It is characterized by production in batches at intermittent intervals

Equipment and labor are organized into work centers by similar types of skills and/or
knowledge or equipment. A product or job will then flow only to those work centers that
are required and will skip the rest. This results in a jumbled flow pattern.

Figure 2.3. Jumbled Production Process

similar eqip. & skills are organized

The storage costs per unit are higher in intermittent production systems due to jumbled flow
pattern and product variety involving serious problems in controlling inventories and
schedules.

The time required for production is usually longer since products in systems are usually in a
state of partial completion for several days or several works.

Variable path materials handling equipments like carts, lift trucks, and cranes are usually
used.

It requires lower investment as it uses general purpose equipment like grinders, drills,
shapers etc. which may involve lower costs.

In this production process, there is much more flexibility as compared to the continuous
production process.

The marketing effort is directed toward getting and filling individual customers for varied
products

Products are not standardized

Intermittent production process is common in the early stages of the product life cycle.
Example: custom cabinet shops, machine shops, furniture, custom jewelers etc.

iii. Project Production process

-

It is used to produce a unique product such as a work of art, a concert, a building or a motion
picture

Each unit of these products is produced as a single item.

Strictly speaking, there is no product flow for a project; but, there is still a sequence of
product operations. In this case, all individual operations or tasks should be sequenced to
contribute to the final project objective.

A significant problem in project management is the planning, sequencing, and controlling of

the individual tasks leading to completion of the entire project.

Start

End
2

Precedence relationship
Task or activity
Figure 2.4. Project production Process
- The project form of operation is used when there is a greater need for creativity and
uniqueness
-

Automation is difficult in the case of projects as they are done only once

Projects involve high cost and difficulty in managerial planning and control as it is hard
to define initially with a great probability of changes in the meantime. Examples include
construction buildings, movies, ships, commercial paintings etc.

B. Process Classification based on the type of Customer Order

Another critical dimension affecting process choice is whether the product is made to stock or
made to order. Each of these processes has its own advantages and disadvantages. While a maketo-stock process will provide fast service at low cost, it offers less flexibility in product choice
than a make-to-order process.
i. Make-to-order
-

It essentially responds to the customers request for a product.

The order cycle does not begin (i.e. nothing is done) until the order is received, and the
product is then designed and produced entirely to customer specifications. In other cases,
components are built up in advance, and the product is merely assembled at the last
minute to meet the customers choices. In this case, the finished product is standardized
but not carried in stock.

On the basis of the customers request, the producer will quote a price and delivery time.
If the customer accepts the quotation, the product will be either assembled from
components or designed and built completely to customer specifications.

The key operations performance measure for make-to-order process is the delivery and
control of the order flow (i.e., the length of delivery time and percentage of orders
delivered on time). Before placing the order, the customer will want to know how long it
will take for delivery. Therefore the process must be flexible to meet customer orders.

ii. Make-to-Stock
-

It must have a standardized product line. The product availability objective then is to
provide the customer with these standard products from inventory at some satisfactory
level.

The firm will build-up inventory in advance of demand. Therefore, forecasting, inventory
management, and capacity planning become essential operation.

In this process flow, very little in operations is keyed to actual customer orders; rather,
the focus is on replenishment of inventory.

The cycle begins with the producer, rather than the customer, specifying the product. The
customer takes the product from stock if the price is acceptable and the product is on
hand.

The production system is building stock levels for future demand, not current ones.

The key performance measures are utilization of production assets (inventory and
capacity) and customer service. These measures might include: inventory turnover,
capacity utilization, use of overtime, and percentage of orders filled from stock.

The objective of the operation is to meet the desired level of customer service at
minimum cost.

Table 2.1. Make-to-stock versus make-to-order

Characteristics
Product

Objectives
Main
problems

Make-to-order
Customer-specified

Make-to-stock
Producer-specified

High variety

Low variety

Expensive
Inexpensive
Manage delivery lead times and Balance inventory, capacity, and
capacity
operations Delivery promises
Delivery time

service
Forecasting
Capacity planning
Control of inventory i.e., inventory
management

Process Selection Decisions

There are six process combinations used in practice. For line-process, it is common to make-tostock, but a line can also be make-to-order. For example, automobile assembly lines put together
specific combinations of options requisition by customers. To be sure, the product is
standardized, but is nevertheless made to order.

Table 2.2. Process Characteristics Matrix

Line flow

Intermittent
flow

Project

Make-to-stock
Oil refining

Make-to-order
Automobile assembly line

Flour milling

Telephone company

Cannery

Electric utility

Cafeteria
Machine shop

Machine shop

Fast food

Restaurant

Glassware factory

Hospital

Furniture
Speculation homes

Jewelry
Buildings

Commercial painting

Movies
Ships
Portraits

It should be noted that all the six processes apply to services as well as goods. A pure service
operation can only produce to order. But most services are delivered with some accompanying
goods. These accompanying goods can be made-to-stock.
The six-cell process classification system can be used for several purposes:
1. It can be used to categorize different types of decision problems encountered in
operations. For example: cost, quality, production volume, delivery time, flexibility, and
inventory control decisions differ greatly among these process types.
2. It is can be used for process selection. Of course, it requires the following six factors
appear to influence process selection from among the process shown in table 2.2 above.
i. Market condition: the line approach requires amass-market for inexpensive
products, the intermittent process requires a low-volume market for medium-priced,
and the project process requires a market for single and expensive product.
ii. Capital: the line-flow process will require a great deal more capital than the project
or intermittent flow.
iii. Availability and Cost of Labor: the project and intermittent process require costly
skilled-labor whereas line approach requires relatively cheap low-skilled labor.

iv. Management Skill: line process requires the most sophisticated management skills
of all. Where as, the project approach can be managed on a small scale without a
great deal of sophistication.
v.Availability and Price of Raw Materials: the project form of process is very flexible
and can adjust to different materials if necessary. The line approach is much less
flexible and may require costly changes if the supply of raw materials is interrupted
e.g., a change from copper to plastic plumbing.
vi. The State of technology for both process and product: innovations are likely to
come along which will make a process obsolete before costs are recovered.
Assessments of these conditions are part of risk evaluation for the process. Generally
speaking, the risk in order of highest to lowest is line, intermittent, and project.
2.3. Capacity Planning
Why a company Needs Capacity Planning
The capacity of the production system defines the firms competitive boundaries. Specifically, it
gets the firms response rate to the market, its cost structure, its work-force composition, its level
of technology, its management and staff supports requirements, and its general inventory
strategy. If capacity is inadequate, a company may lose customers through slow service or by
allowing competitors to enter the market. If capacity is excessive, a company may have to reduce
its prices to stimulate demand, underutilize its work force, carry excess inventory, or seek
additional, less profitable products to stay in business.
What is Capacity?
Important terminologies:
-

Capacity is the rate of output that can be achieved from a process. This characteristic is
measured in units of output per unit of time.

Design capacity it the rate at which a firm would like to produce under normal
circumstances and for which the system was designed.

Maximum capacity is used to describe the maximum output rate that could be achieved
when productive resources are used to their maximum. However, at this maximum level,

utilization of resources may be inefficient (for example, increasing energy costs, the need
for overtime, higher maintenance costs, etc).
Factors Affecting Capacity
Capacity is affected by both external and internal factors. The external factors include
government regulations (working hours, safety, pollution), union agreements, and suppliers
capabilities. The internal factors include product-service design, personnel and jobs (worker
training, motivation, learning, job content, and methods), plant layout and process flow,
equipment capabilities and maintenance, materials management, quality control system, and
management capabilities.
Important Capacity Concepts
1. Best operating level: the best operating level of capacity for which the average unit cost
is at a minimum. As we can see from the following figure, as we move down the curve,
we achieved economies of scale until we reach the best operating level, and we encounter
diseconomies of scale as we exceed this point.

500 units plant

Average unit
cost

700 units plant

900 units plant

1300 units plant

1100 units plant
Best operating level

Volume
Figure 2.5. Best Operating Level
2. Economies of Scale: the basic notion is well known: as a plant gets larger and volume
increases, the average cost per unit of output drops because each succeeding unit absorbs
part of the fixed costs. This reduction in average unit cost continues until the plant gets so
big that coordination of material flows and staffing becomes so expensive that new

sources of capacity must be found. This concept can be related to best operating levels by
comparing the average unit cost of different size plants.
Economics (as well as diseconomies) of scale are found not just between cost curves, but
also within each one. As the output approaches a facilitys best operating level,
economies of scale are realized. Beyond the level, diseconomies set in. although finding
the best size and operating level is illusive, managers often set policies regarding the
maximum-size for anyone facility.
3. Capacity utilization rate: the extent to which a firm uses its capacity is defined by its
capacity utilization rate, which is calculated by dividing capacity used (actual output)
with design capacity. The capacity utilization rate is expressed as a percentage and
requires that both the numerator and the denominator be measured in similar units and
time periods (machine hours/day, Barrels of oil/day, patients/day, Amount of
output/month, etc.
4. Capacity cushions: it is an amount of capacity in excess of expected demand. For
example, if the expected monthly demand on a facility is Birr 1 million worth of products
per month and the design capacity is 1.2 million per month, it has 20 percent capacity
cushion. A 20 percent capacity cushion equates to an 83 percent Capacity utilization rate
(100%/120%).
When a firms design capacity is less than the capacity required to meet its demand, it is said
to have a negative capacity cushion. If, for example, a firm has demand for Birr 1.2 million
products per month but can produce only Birr 1 million per month, it has a negative capacity
cushion of 20 percent.
5. Capacity flexibility: essentially means having the capability to deliver what the customer
wants within a Lead Time (LT) shorter than competitors. Such flexibility is achieved
through:
i.

Flexible plants: perhaps the ultimate in plant flexibility is zero-changeover-time plant.

Using movable equipment, knockdown walls, easily accessible and re-routable
utilities, such a plant can adapt to change in real time- a plant with equipment that is
easy to install and easy to tear-down and move. Typical example is circus in the old
tent-circus days.

ii.

Flexible processes: are characterized by flexible manufacturing systems on the one

hand, and simple, easily set-up equipment on the other, enabling what is sometimes
referred to as economies of scope (by definition, economies of scope exist when
multiple products can be produced at a lower cost in combination than they can
separately.

iii.

Flexible workers: have multiple skills and the ability to switch easily from one kind
of task to another. They require broader training that specialized workers and need
managers and staff support to facilitate quick changes in their work assignments.

iv.

Using external capacity: two common strategies for creating flexibility by using the
capacity of other organizations are subcontracting and sharing capacity. Exchanging
aircraft (suitably repainted) when ones routes are heavily used and the others are
not.

6. Capacity balance: in a perfectly balanced plant, the output of stage 1 provides the exact
input requirement for stage 2, stage 2s output provides the exact input requirement for
stage 3, and so on. In practice, however, achieving such a perfect design is usually both
impossible and undesirable. One reason is that the best operating levels for each stage
generally differ. Another reason is that variability in product demand and the process
themselves generally lead to imbalance except in automated production lines which, in
essence, are just one big machine.
i. One is to add capacity to those stages that are the bottlenecks. This can be done by
temporary measures such as scheduling overtime, leasing equipment, or going
outside the system and purchasing additional capacity and through subcontracting.
ii. A second one is through the use of buffer inventories in front of the bottleneck
stage to assure that it always has something to work on. (This is a central feature of
Synchronous Production approach).
iii. A third approach involves duplicating the facilities of one department on which
another is dependent.
2. Capacity focus: in 1974, Wickham Skinner introduced the concept of the focused
factory,, which holds that a production facility works best when it focuses on a fairly
limited set of production objectives. This means, for example that a firm should not
expect to excel in every aspect of manufacturing performance-cost, quality, flexibility,

new product introductions, reliability, short Lead Times (LT), and low investment. Rather
it should select a limited set of tasks that contribute the most to corporate objectives.
The capacity focus concept can also be oeprationalized through the mechanism of plants
within plants PWPs in Skinners terms. A focused plant may have several PWPs each of
which may have separate sub organizations, equipment and process policies, workforce
management policies, production control methods and so forth for different products even
if they are made under the same roof. This in effect permits finding the best operating level
for each component of the organization and thereby carries the focus concept down to the
operating level.
3. Capacity and complexity: one of the main factors that must be considered in capacity
planning is how much complexity is added to the Operation Managers job as a result of
how that capacity is deployed. This is especially true in multi-site services where the
locations of capacity are, by definition widely dispersed and inherently difficult to
coordinate.

Objectives of Capacity Planning

The objective of capacity planning is to specify which level of capacity will meet market
demands in a cost-efficient way. Capacity planning can be viewed in three time durations i.e.,
long range, intermediate (medium) range, and short range.

Cpacity planning is conerend with defining the long, intermediate and short-term capacity needs
of the organization and determining how those needs will be satisfied. Notice here that, capacity
decisions must merge consumer demands (from the market) with the human, material and
financial resources of the organization.
Table 2.3. Time Frame of Capacity Management Decisions
Time frame
Long-range

Technique and strategy

- Resource planning of land, facilities, equipment,
and human resources. (Usually top management
decision.) Involves strategy of changing capital
facilities and employment levels over long-range.

Applies to
- Corporate objectives

- Resource

(longer)

requirements

planning

of

total

-Aggregate production plan

resources needed to satisfy MPS. (Uses load

(APP)

profiles for each product and simulation of

alternative MPSs). Manage via work-force
relocation,

inventory,

and

back-order

and

subcontracting strategies.

-MPS items

- Medium range
- Capacity requirements Planning (CRP) of labor

MRP items

and equipment in key work centers. (Uses infinite

loading.) Manage via employment and work(Shorter)

force relocation, inventory, and back-order and

subcontracting, make-or-but decisions, alternative
routing and more tooling.

- Short range

Capacity control of input-out and operation

Production

sequencing, (uses finite loading) manage via over

(Control (PAC)

Activity

Time (OT) and Idle Time (IT), work-force

relocation, subcontracting, and alternative routings.

1. Long-range: in the long-range management must plan for the human, material, and
financial resources that will give their organization the capacity appropriate for their
corporate goals. This requires a board-based knowledge of the economic, technological,
and competitive variables that exist in their operating environment.
2. Medium-range: in the medium-range, planners are concerned with having the capacity to
do the work embodied in the APP and in the MPS. This means converting material and
job requirements into standard hours and machine time and developing loads for the
firms work centers that are in balance with the work center capacities.
3. Short-range: in the sort range, the capacities are used to do the jobs assigned by the
Capacity Requirements Plan (CRP). This means controlling the flow (input-output) of
work, comparing results with standards, and taking corrective action when necessary.

Measures of Capacity
-

Design capacity: is the maximum rate of output achieved under ideal condition. In other
words, it is a planned (engineered) rate of output of goods or services under normal or
full-scale operating conditions.

Effective capacity: is the maximum possible given a product mix, problems in scheduling
and balancing operations, machine maintenance, quality factor, and so on. It also includes
lunch breaks and coffee breaks. It is typically les than or equal to the design capacity.

Output capacity: the actual output of a system at a given point in time. It is even less than
effective capacity, for it is affected by short-range factors such as actual demand,
equipment breakdowns, absenteeism, shortage of raw materials, productivity, and other
factors that are outside the control of the Operations Manager.

Derived Measures of Capacity Include:

a. Utilization rate: is simply the percent of actual output to design capacity. It can be
computed from the following formula:
Utilization = Actualoutput
DesignCapacity
b. Efficiency: is a measure of actual output over effective capacity.
Efficiency=

ActualOutput
EffectiveCapacity

Depending on how facilities are used and managed, it may be difficult or impossible to reach
100% efficiency.
c. Rated Capacity: is a measure of the maximum usable capacity of a particular facility. The
equation used to compute rated capacity is:
Rated Capacity= (Design Capacity) (Effective Capacity) (Efficiency)
Rated Capacity will always be less than or equal to effective capacity

Illustration:
The Sara James Bakery has a plant for processing breakfast rolls. The facility has an efficiency
of 90%, and the effective capacity is 80%. Three process lines are used to produce the rolls. The
lines operate 7 days a week and three 8-hours shifts per day. Each line was designed to process
120 standard rolls per hour. What is the rate capacity?

Given
No of lines =3, No. of hours = 168, No of rolls/hr= 120
Therefore, Design capacity = No of lines x No of hours x No of rolls/hr
= 3x168x120 = 60,480 rolls per week
Effective capacity =80%
Efficiency = 90%
Each facility is used 7 days a week, 3 shifts a day = 7x3x8=168
Rated capacity= (capacity) (Effective Capacity) (Efficiency)
= (3x168x120) (.8) (.9) = 43,546 rolls per week
Variables that Affect Capacity
Some factors affecting capacity are more controllable than others
1. Controllable factors: include the amount of labor, facility, machines, tooling, shifts
worker per day, days worker per week, overtime, subcontracting, preventing maintenance
and number of setups.
2. Less controllable factors: include absenteeism, labor performance, machine breakdown
material shortages, scrap and rework and unexpected problems.
Indicators problems may be evidenced in the long Lead Time (LT) for many goods and in the
queues at service facilities such as hospitals, banks and some retail stores. Underutilized facilities
are also part of the capacity problem.

2.4. Facility/Plant Location and Layout Operations Decisions

2.4.1. facility/plant location decisions
2.4.1.1. The Need for Facility/Plant Location Operations Decision
Facility/plant location decisions are among the strategic operations decisions areas. It is the
process of determining a geographical site for a companys operations. Location problem is very
important decision for two basic reasons:
1. Location decision is somewhat irreversible due to its expensiveness or impossibility.

Once a plant location is chose, a company usually remains in that location for many
years. Thus, errors in plant location often lead to long-problems which are very difficult
to overcome.

2. It affects the cost of production (such as cost of resources i.e., direct material, labor,

overhead, energy etc) and on the effectiveness of marketing. If expansion is impossible,

the potential for satisfying the market from this location cannot be fulfilled.
Thus, the plant-location decision is of vital importance in production-system design. It is
because:
a. It affects the costs of shipping raw materials and finished production.
b. It affects the costs of operations, including labor, raw materials, taxes, construction, land,
utilities, power, and many other factors.
c. It affects expansion potential in the future.
d. It affects the marketing effectiveness of the firm.
These effects, in some situations, can spell out the difference between the company's success and
failures in the long-run. Thus, plant location decisions must involve long-range forecasting and
an analysis of the current relationships of the factors involved in the decisions.
The operation Managers of a business firm, when confronted with problems leading to a decision
on plant location, have several alternatives:
i. Continuing operating on the present location and subcontract for the additional demand. It
applies mostly on hotel, warehouse and transportation. It is because the demand is not stable.
ii. Expand the present plant on the present site provided that there is available site.
iii. Keeping the present plant and at the same time build new plant/plants elsewhere.
iv. Sell the present plant and relocate the entire operation.
If the decision is to build new plants elsewhere, then a complex analysis is necessary. Such
analysis should start with the gathering of data concerning the location requirements of the firm.
It includes:
Which market will be served by the firm?
Where are the sources of raw materials used by the firm?
What type labor supply is necessary? Skilled, unskilled, semiskilled
What methods of transportation are necessary? Land, sea, air, etc.
How much land will be needed for the plant and for future expansion?
What types of power will be needed/ required in the production process? Hydro, nuclear,
geothermal gasoline, wind, etc

What particular type of climatic conditions required? Dry, temperate, damp,

climates
2.4.1.2 Steps in Making Location Decisions
The way an organization approaches location decisions often depends on its size and the nature
or scope of its operations. New firms typically locate in a certain area simply because that is
where the owner lives. Similarly,
Managers of small firms often want to keep operations in their own backyard, so they tend to
focus almost exclusively on location alternatives. Large established companies, particularly ones
that already operate in more than one location, then to take a more formal approach. Moreover,
they generally consider a wider range of geographic locations.
The general procedure for making location decisions usually consists of the following steps:
i. Decide on the criteria than will be used to evaluate location alternatives, such as increased
revenues or community services.
ii. Identify the factors than are important, such as lovation of markets or raw materials.
iii. Develop location alternatives:
P Identify the general region for a location
P Identify a small number of community alternatives
P Identify a particular site alternatives
iv. Evaluate the alternatives and make a seletion.
2.4.1.3 Considerations in Facility/plant Location Decisions
The problem of plant/facility location is common to new and existing businesses. This planning
is critical to company's eventual success. There are certain stages to be followed for the initial
phase of the plant-location decision, during which management is involved in selecting the
region or general area, then the community within the region, and finally, the particular site at
which the plant should be located.
A. Regional Considerations/Factors

The following important regional factors must be taken in to account when the operations
Manager would like to make decisions concerning the region where locate a plant.
1. Proximity to markets: possible reasons to locate plants their market can be:
a. When the products to be produced is perishable
b. Fragility of products (risk of long shipment
c. The fact that the product's volume, bulk, fragility, and perish ability increase when it is
processed further. Example, soft drinks
d. The fact that the nature of the product needs large transportation space. Example, barrels,
boxes
e. When the product is a service. Example, restaurants, gasoline stations
f. When the company deals with custom-made products
g. When the product is inexpensive but involves high transportation cost i.e, large percentage of
transportation cost form the total cost Example, bricks, cement etc.
2. Proximity to materials: relates to the location of raw materials, supplies, semi-finished
goods, parts, equipment tools etc. Possible reasons to locate near source of raw materials can
be:
a. When the Wight or bulk of the product largely decreases by further processing. Example,
sugarcane is the raw material but when production process completed, we find crystallized
sugar.
b. When the perish-ability of products decrease by further processing. Example, freezing,
canning, pasteurizing ..
c. If the product needs a number of raw materials, the location decision regarding materials is
made at a place that reduces the cost transporting these materials
3. Adequate transportation facilities: transportation facilities are essential for the economical
operations of production systems. Operation Managers must study the characteristics of the
raw materials and finished products in regard to their transportation need and search for the
location that provides facilities of transportation with a reasonable cost. There are different
types of transportation facilities: water, railroad, road, pipelines, and airlines transports.
4. Labor supply: one of the important inputs in production system is labor. When a firm
considers a new location, several labor-related questions require answers:
a. The availability of potential employees

b. The level of skill and education of potential employees

c. Productivity of potential employees
d. Their unionization
e. Costs of labor (including fringe benefits)
f. Costs of living as related to labor cost
5. Climate: favorable climate is important in order to acquire and maintain productive work
force. Certain industries like agricultural business require specific climatic conditions.
B. Community Considerations/Factors
Choice of community includes the following considerations:
1. Managerial preference: relates to the personal preference of owners and managers.
2. Community facilities: is concerned with the availability of schools, churches, medical
facilities, residential housing, recreational opportunities, police and fire protection, highways,
etc.
3. Community attitudes: in order to assume the long-term existence in that community, it is
mandatory to win the interest, enthusiasm, and cooperation of the society. Otherwise, poor
relations with local government, labor, customers etc. Will result in putting the survival of the
organization under question mark.
4. Community government and taxation: it is important to assess the current situation and
attempt to predict the future situation in regard to the policies of the government. In general,
stable, competent, honest and cooperative government officials are great assets to a newly
located company.
5. Availability and cost of sites: relates to the consideration of the availability of sites and
building. Selecting communities without assessing the availability and costs of sites often
leads to a mistake.
C. Site Considerations/Factors
After identifying the community in the already chosen region, our final step is to screen out the
best site out of the possible ones. The following are some of the considerations:
1. Size of the site: the size of the site must be large enough to satisfy some requirements such as
employee parking requirement, future expansion plan, etc.

2. Drainage and soil condition: poor drainage leads to accumulation of water around the plant
which may be harmful for some organizations. Similarly, if the load bearing capacity of the
soil is low, it will be difficult to establish sound building foundations.
3. Water supply: even though the amount may differ for different organizations, all enterprises
require getting access to safe and pure water. Some organizations like breweries need water
even with some extraordinary quality.
4. Utilities: Costs of acquiring and using utilities like electricity, natural gas, water, etc. must be
analyzed
5. Transportation facilities: relates to getting access to highways, railroads, pipelines, water, and
air transport as the case may be.
6. Land and development costs: costs related to excavation, grading, filling, construction of
roads, siding etc. must also be taken in to consideration.
7. Waste disposal and environmental considerations: as part of discharging some societal
responsibilities a business may shoulder, it has to play its part by preventing and reducing
pollution and environmental degradations and deteriorations. Accordingly it has to take care
while disposing its wastes by going for sites that qualify for "economical" disposal facility.
2.4.1.4 Where do we get such information for plant Location Analysis?
The following institutions can be considered as possible sources of information:
Investment office (both federal and regional), Municipalities, Government sponsored
organizations, Sub cities, Addis Ababa chamber of Commerce (AACC), Ethiopia Chamber of
Commerce (ECC), Commercial banks both governmental and private). Industrial development
corporations, Ethiopian Road authority or Addis Ababa Road Authority Administration,
Ethiopian Electric Power Corporation, Ethiopian water and Sewerages Authority, Ethiopia
Telecommunication Corporation (ETC), etc

2.4.1.5 Approaches to Locational Decision Making

This section contains descriptions of major quantitative and qualitative techniques that are used
to help operations Managers in evaluating location alternatives: Locational break-even analysis,
Factor rating, center of gravity and Transportation method of linear programming.

a. Locational Break-even Analysis

Locational break-even analysis is the use of cost volume analysis to make an economic
comparison of location alternatives. By identifying fixed and variable costs and graphing them
for each location, we can determine which one provides the lowest cost. Locational break-even
analysis can be done mathematically or graphically. The graphic approach has the advantage of
providing the range of volume over which each location is preferable.
The three steps to locational break-even analysis are:
i. Determine the fixed and variable cost for each location.
ii. Plot the costs for each location with costs on the vertical axis of the graph and annual volume
on the horizontal axis.
iii. Select the location that has the total cost for the expected production volume this method
assumes the following:
Fixed costs are constant for the range of probable output.
Variable costs are linear for the range of probable output.
The required level of output can be closely estimated.
Only one product is involved
Illustration 1
An operations Manager has narrowed the search for new facility location to three different
communities. The annual fixed costs (land, property tax, insurance, equipment and buildings)
and the variable costs (labor, materials, transportation, and variable overheads) are given in the
following table for each community respectively:

Community
A
B
C

FC/Yr (in Birr)

10,000
30,000
90,000

Unit VC/yr (in Birr)

60
40
20

Required:
i. plot the cost curves for all the communities on a single graph. Identify on the graph the
approximate range over which each community provides the lowest cost.
ii. Using break-even analysis, calculate the break-even quantities over the relevant ranges.

iii. If the expected demand is 2,000 unit per year, which community will be the best location?
Solution:
i. To plot a community's total cost line, let's compute the total cost for two output levels: when
Q=o and Q=5000 units per year. For Q=o level, the total cost is simply the fixed cost of each
respective community. However, for Q=5,000, the total cost will be the sum of both fixed
costs and variable costs. Thus:
Community

Fixed Costs(in Birr)

Annual costs (000 of Birr)

A
B
C

10,000
30,000
90,000

Total Variable costs (in Birr)

Total costs (in Birr)

60x5000=300000
40x5000=200000
20x5000=100000

310,000
230,000
190,000

Com. A

Com. B

400
BEP. B&C

Com. C

300
200 BEP. (A&B)
100
Com. C
Com. B
Com. A
ii. The
break-even
quantity
between
com.
"A"
and
Com
"B"5lies at the end of the first range,
0
3
4
1
2
where com. ''A" isQauntity
best, and
beginning
(inthe
000
of units)of the second range, where com. "B" is best. We
find it by setting their total cost equations equal to each other solving as indicated below:
10000+60(Q)=30000+40(Q)
60(Q)-40(Q)=30000-10000
20(Q)=20000
Q= 1000 Units

The break-even quantity between Com. "B" and Com. "C" lies at the end of the range over which
Com. "B" is best and the beginning of the final range where com. "C" is best. Thus:
30000_40 (Q) =90000+20(Q)
40 (Q)-20(Q) = 90000-30000
20 (Q) = 60000
Q= 3000 units
iii No other break-even quantities are needed. The break-even point between com. "A" and Com
"C" lies above the shaded area, which does not mark either the start or one of the three relevant
ranges. Thus, the graph shows that 2000 units' lies in the medium of volume range, so
community "B" is the best choice.
Illustration 2
Given the above information in illustration 1, which community is the best for the expected
demand of 2000 units if the selling price per unit is Birr 75, Birr 68, and Birr 80 per unit for
community A, B and C respectively?
Solution:
Community "A"
Profit= TR-TC
= 75 (2000)-[10000+60(2000)]
= 150000-130000
= 20000 Birr
Community "B"
Profit= TR-TC
= 68 (2000)-[30000+40(2000)]
= 136000-110000
= 26000 Birr
Community "C"
Profit = TR-TC
= 80 (2000)-[90000+20(2000)]
= 160000-130000
= 30000 Birr
Community "C" is best one where the profit is higher than community "A" and community "B".

b. Factor-rating Method
There are many factors, both qualitative and quantitative to consider in choosing a location.
Some of these factors are more important than others, so operations managers can use weightings
to make the decision processes more objective. The factor-rating method is popular because a
wide variety of factors from education to recreation to labor skills can be objectively included.
The factor rating method has six steps:
i. Develop a list of relevant factors which could be labor costs, labor availability, proximity to
raw materials and suppliers, proximity to markets, state and local government fiscal polices
(including incentives, taxes, unemployment compensation), environmental regulations,
utilities, site costs, transportation availability, quality-of-life issues in the community, quality
of government etc.
ii Assign a weight to each factor to reflect its relative importance in the company's objectives
iii. Develop a scale for each factor (1-10 or 1-100 points)
iv. Have management score each location for each factor, using the scale in step 3.
v. Multiply the score by the weights for each factor and total score for each location.
vi Make a recommendation based on the maximum point score, considering the results of
quantitative approaches as well.
Illustration:
Etfruit management has decided to expand overseas by opening its first branch in Eastern Africa.
The ratings sheet in the following provides a list of qualitative factors that management has
decided are important; their weightings and their ratings for three possible sites: Nairobi, Kenya,
Khartoum, Sudan and Dareselam, Tanzania.
Factors
Proximity to supplier
state &local government
fiscal policy (tax structure)
Labor
availability
&
altitude
Site costs
Educational and Health
Per capital income

Wt
.20

Nairobi
80

Scores (out of 100)

Khartoum
Dareselam
70
50

Nairobi
.2x80=16

Weighted Score
Khartoum
Dareselam
.2x70=14
.2x50=10

.30
.18

65
80

55
70

70
85

.3x65=20*
.18x70=13*

.3x55=17*
.18x70=13*

.3x70=21
.18x85=15*

.10

70

65

70

.1x65=7*

.1x65=7*

.10x70=7

.14
.08

80
60

80
70

80
50

.14x80=11*
.08x70=6*

.14x80=11*
.08x70=6*

.14x80=11*
.08x50=4

Totals

1.00

68.0

68.0

68.0

* rounded to the next decimal place

Give the option of 100 points assigned to each factor, the Nairobi, Kenya location is preferable.
By changing the points or weights slightly for those factors about which there is some doubt, we
can analyze the sensitivity of the decision.
C. Center of gravity Method
The center of gravity method is a technique for locating single facilities that considers the
existing facilities, the distance between them, and the volumes of goods to be shipped. The
technique is often used to locate intermediate or distribution warehouses. in its simplest form,
this method assume that inbound and outbound transportation cost are equal, and it does not
include special shipping costs for less-than-full-loads.
The center of gravity method begins by placing the existing locations on a coordinate grid
system. The choice of coordinate system is entirely arbitrary. The purpose is to establish relative
distance between locations using longitude and latitude coordinates might be helpful in
international decisions.
The center of gravity is found by calculating the X and y coordinates that result in the minimal
transportation cost. We use the following formulas.
Cx = dixVi
Vi
Cy = diyVi
Vi

Cx is x coordinate of the center of gravity

Cy is y coordinate of the center of gravity
dix is x coordinate of the ith location
diy is y coordinate of the ith location
vi is volume of goods moved to or from the ith location

Illustration:
Consider the case of MOHA soft Drinks Factory, which is engaged in producing and distributing
its pepsi products through out Ethiopia. The factory's store locations are in Gonder, Addis Ababa,
Kombolcha, and Awassa as shown in the following coordinates:
Store location
Gonder
Addis Ababa

dix
30
90

diy
120
110

Kombolcha
Awassa

130
60

130
40

They are currently being supplied out of an old and inadequate warehouse in Addis Ababa, the
site of the factory's first store. Data on demand for each store are shown as follows:
Store location

No. of boxes shipped per week

2000
1000
1000
2000

Gonder
Addis Ababa
Kombolcha
Awassa

The factory has desired to find some "central location" in which to build a new warehouse using
the center of gravity method.
* Kombolcha (130, 130)
* Gonder (30, 120)
120
* Addis Ababa (90, 110)
O Center of Gravity (66.7, 93.3)

90
60
30

* Awassa (60, 40)

30

60

90

120

150

Using the data given in the above tables and figure above for each of the location of the stores,
we can compute the x and y coordinates of the new "central warehouse"
Cx = (30)(2000)+(90) (1000)+(130 (1000) + (60)(2000) = 400000= 66.67
2000+1000+1000+2000
6000
Cy= (120)(2000)+(110)(1000)+(130)(1000)+(40)(2000) = 560000 =93.3
2000+1000+1000+2000
6000

By overlaying the Ethiopian Map grid map, we find this location in near Nazareth. The firm may
well wish to consider nearby towns such as Modjo, Meki, and Debreziet as an appropriate
location.
d. The transportation Model (an overviews)
The transportation problem involves finding the lowest-cost plan for distributing stocks of goods
or supplies form multiple origins to multiple destinations that demand the good. The shipping
(supply) points can be factories, warehouses, departments, or any other place from which goods
are sent. Destinations can be factories, warehouses, departments, or other points that receive
goods. The information needed to use the model consists of the following:
A list of the origins and each one's capacity or supply quantity per period.
A list of the destinations and each one's demand per period.
The unit cost of shipping items form each origin to each destination
The use of transportation mode implies that certain assumptions are satisfied. The major ones
are:
i. The items to be shipped are homogenous (i.e, they are the same regardless of their sources or
destination)
ii. Shipping cost per unit is the same regardless of the number of units shipped.
iii. There is only one route or mode of transportation being used between each sources and each
destination.
The transportation model starts with the development of a feasible solution, which is then
sequentially tested and improved until un optimal solution is obtained. The major steps in the
process are in the following order.
1. Obtaining an Initial Solution
In order to begin the process, it is necessary to develop a feasible distribution plan. There are
number different methods for obtaining such a plan. There are three major widely used
approaches:
a. Northwest-corner Method: is much less efficient, it merely provides a convenient starting
point.

b. Intuitive Approach/Least-cost Method: a heuristic approach that yields an initial solution

that is often optimal or near optimal. With this approach, cell allocations are made according
to cell cost, beginning with the lowest cost.
c. Vogel's Approximation Method (VAM): was developed to obtain a more efficient starting
solution. In fact, in many problems the starting solution is optimal. Although the VAM
method is more complicated than the remaining two, in realistic problems that must be
solved by hand, VAM is much more practical way to obtain starting solution.
Setting up the Initial Tablue
The first in solving a transportation problem is to formal it in a standard matrix, known as initial
tablue. The basic step in setting up an initial table are as follows:
i. Create a row for each plant (existing or new) being considered and a column for each
warehouse.
ii. Add a column for plant capacities and a row for warehouse demands, and then insert their
specific numerical values.
iii. Each cell not in the requirements row or capacity column represents a shipping route from a
plant to a warehouse. Insert the unit cost in the upper right-hands corner of each of the cells.
Note: The initial feasible solution is when the number of occupied cells is equal to the number of rows (m) plus the
number of column (n) minus one i.e (m+n)-1

2. Testing the Solution for Optimality

Testing for optimality and revising suboptimal are the same regardless of how the initial solution
was developed. The process involves analysis of each un used (empty) cell to determine if there
is a potential for reducing the total cost of the solution. This is accomplished by transferring one
unit into an empty cell and noting the impact this has on costs. If analysis reveals a cost decrease
that implies that an improved solution is possible. The test for optimality requires that every
unused cell be evaluated for potential improvement. There are two widely used approaches:
a. Stepping-stone Method: cell evaluation proceeds by borrowing one unit form a full cell and
using it to assess the impact of shifting units in to the empty cell.
b. Modified Distribution Method (MODI) method: involves computing rows and column index
numbers that can be used for cell evaluation. It is simpler than the stepping-stone method for
cell evaluation.

3. Obtaining an Improved Solution

The presence of negative cell evaluation is evidence that an improved solution is possible. By the
same token, if no negatives appear, an optimum has been achieved.
Special Cases
Dummy Plants or Warehouse
The transportation method also required that the sum of capacities equal the sum of demands. In
many real problems, total capacity may exceed requirements, or vice cersa.
a. If the capacity exceeds requirements by r units, we add an extra column (a dummy warehouse)
with a demand of r units and make the shipping costs in the newly created cells Birr Zero.
Shipments are not actually made, so they represent unused plant capacity.
b. If requirements exceed capacity by r units, we add an extra row (a dummy plant) with a
capacity of r units, and then we assign shipping costs equal to the stock out cost of the new
cells. If stock-out costs are unknown or are the same for all warehouses, we simply assign
shipping costs of Birr zero per units to each cell in the dummy row.
Note:
The optimal solution will not be affected because the shortage of r units is required in
all cases.
Adding a dummy warehouse or dummy plant ensures that the sum of capacities equals
the sum of demands.
Summary:
If Demand > Supply: create a dummy supply, and assign a zero transportation cost to it
so that excess demand is satisfied.
If Supply > Demand: create a dummy demand, and assign a zero transportation cost to
it so that excess supply is absorbed.
Note Detail discussions of the procedures and illustrations for transportation problems were
covered in your operations Research (MGt 431) Course which you have taken it just last
semester. Thus, take this opportunity to refresh your mind how a given transportation problem be
solved using the algorithm method.
Virtual Factory as a new trend related to process and Location Decision

The term virtual factory refers to manufacturing activities carried out not in one central plant, but
rather in multiple locations by suppliers and partner firms as part of a strategic alliance. The role
of manufacturing let's say for an auto producer will shift from solely monitoring activities at one
central plant to managing the integration of all steps in the process- no matter where physical
production actually takes place. The implications for process planning are profound: the
manufacturer must have a deep understanding, of the manufacturing capabilities of all parties in
the production network and must excel at the difficult task of coordination.