Ch 4.

Process Selections

Operations Management
 Case: Direct-Sales Model
• Dell is counting on logistics efficiencies generated by its direct-to-customer
sales model to offset high US labor costs
• Dell’s manufacturing, logistics, and shipping strategies make it possible to
customize computers for individual customers at a low cost and for a low
price.
• Dell is the only major PC maker with assembly plants in the US while most
makers manufacture PCs overseas and ship PCs to the US to save labor costs.

Final
Suppliers
customer

Traditional indirect sales model

PC Distribut Final
Suppliers Retailer
Maker ors customer

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 Case: Direct-Sales Model
• The direct-sales model delays assembly until a customer’s order is received
(assemble-to-order system)
• Dell keeps three or four days’ FGI (finished goods inventories)
versus 30 to 45 days at some competitors.

Final
Suppliers
customer

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 What is Process Selection ?
• Determine the type of process used to make the product or service
• Strategic long-term decisions
• Require a great deal of cross-function coordination since marketing, finance,
human resource, and operations are all important to be considered
• Capital intensive and cannot be easily changed

Product flow characteristics Approaches to order fulfillment

• Continuous process • Make-to-Stock (MTS)

• Assembly line • Make-to-Order (MTO)
• Batch flow • Assemble-to-Order (ATO)
• Job shop
• Project

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 Classification by Product Flow Characteristics
Continuous Process

• High capital cost of setting up the process (plant)

• Highly standardized and automated  cost effective if large quantities are
made.
• Flexibility limited
• High volumes of production
• Process industries (chemistries, sugar, paper, oil, electricity, etc.)

• Layout type: product layout

• Shop type: flow shop

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 Classification by Product Flow Characteristics
Assembly Line

• Linear sequence of operations (often paced)

• Large capital investment, use of automation
• Very efficient
• High-volume, standardized products
• Inflexibility in product and volume
• Discrete products (autos, computers, etc.)

• Layout type: product layout

• Shop type: flow shop

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 Classification by Product Flow Characteristics
Batch Flow

• Production of batches or lots

• Batches flow as a unit (set) from one work center to another
• Flow is jumbled and intermittent
• Flexible labor and equipment (general purpose) required
• Low volume, variety of products
• Many types of products (furniture, dishes, boats)

• Layout type: Process layout

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 Classification by Product Flow Characteristics
Job Shop

• Customized to customer order

• Production of small batches or lots
• Flow similar to the batch flow
• Flexible labor and equipment (general purpose)
• Many different types of made-to-order products

• Layout type: Process layout

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 Classification by Product Flow Characteristics
Project

• Production of customized single products

• Labor and materials brought to site
• Planning, scheduling challenges
• Little automation, general purpose equipment
• Highly skilled and flexible labor
• Unique, one of a kind products
(buildings, large aircraft, etc.)

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 Throughput Ratio of Process Types
Throughput Ratio (TR): Process efficiency

TR =Total processing time for the jobx 100%

Total time in operations

Typically, TR is

• 90-100% in continuous process and assembly line

• 10-20% in batch flow and job shop

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Process Characteristics

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 Classification by Approaches to Order Fulfillment
Make to Stock (MTS)

• Produce finished goods and customer buys from inventory

• Advantage: faster fulfillment of customer demand, lower cost,
smooth production rate
• Disadvantage: inventory costs

MTS performance measures

• Service level (orders filled when requested)
• Inventory replenish time
• Inventory turnover (sales/avg. inventory)
• Capacity utilization
• Time to fill back order

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 Classification by Approaches to Order Fulfillment
Make to Order (MTO)

• Start production after customer orders

• No finished goods inventory
• Advantage: higher flexibility to customize order; no FGI costs
• Disadvantage: intermittent production (i.e., lumpy demand pattern)

MTO performance measures

• Lead time
• Orders completed on time (%)

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 Classification by Approaches to Order Fulfillment
Assemble to Order (ATO)

• Produce parts and subassemblies; complete production when customer places

order
• Advantage: less FGI, faster fulfillment of customer order
• Disadvantage: more work-in-process (WIP) inventory

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 MTS and MTO Comparison
Characteristics Make-to-Stock Make-to-Order
• Producer-specified • Customer-specified
Product • Low variety • High variety
• Inexpensive • Expensive

• Balance inventory, • Manage delivery

Objectives
capacity, and service lead times and capacity
• Forecasting
Main • Delivery promises
• Planning production
operations issues • Delivery time
• Control of inventory

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 Order Penetration Point
• There are four possibilities for the placement of the order penetration point.
• For MTS, the customer can only select the product from what is available in
inventory
• For ATO, the customer can specify some customization in terms of the
modules he or she selects
• For MTO, many types of customization are possible, but the lead time to the
customer can be longer and the product is typically more costly.

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 Factors Affecting Process Selection
• Market conditions and competition
 Assembly-line: a mass market for inexpensive products
 Batch process: a lower-volume market for medium-priced products
 Project process: a market for expensive products

• Capital requirements
• Availability and cost of labor
• State of technology

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Case Study 2.
 LG Display
• The world's second largest LCD maker after Samsung Electronics.
• LG Display was originally formed as a joint venture by the Korean electronics
company LG Electronics and the Dutch company Koninklijke Philips
Electronics in 1999 and was formerly known as LG. Philips LCD.
• The company has eight manufacturing plants in Gumi and Paju, South Korea.
It also has a module assembly plant in Nanjing and Guangzhou in China and
Wroclaw in Poland.

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 Production Process of TFT-LCD
Four shops: TFT, Color Filter, Cell, Module shops

3 day 1.5 day 0.5 day

Lead time

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 Situation
• Cell glasses are sold to Chinese LCD manufacturers

• Its existing process type is the MTS system; TFT LCD is stocked after final
assembly at the module shop

• MTS does not generate high inventories of TFT LCD during the high demand
season
• MTS generates high inventories during the low demand season since its
demand is lumpy and low so that forecasting its demand is highly difficult

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 Discussion Questions
1. What are the major problems being faced by LG Display ?

2. What action should the company take to solve his problems ?

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 Simple Capacity Decision of the XYZ Chemical
Estimated annual demand
Thousands of gallons 100 110 120 130 140
Probability 0.1 0.2 0.3 0.3 0.1

• Average annual demand?

• If current capacity is 130,000 gallons, capacity cushion, probability of idle

capacity, average utilization?

• Optimal capacity? when stockout cost: $100,000 and capacity cost: $5000 per
1000 gallons
Capacity cushion = Capacity – Average demand
Total cost = Stockout cost + Capacity cost

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