Chapter 3 –

Product Design & Process Selection

Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007

© 2007 Wiley
 Learning Objectives
 Define product design and its strategic impact on organization
 Describe steps to develop a product design
 Using break-even analysis as a tool in selecting between product
alternatives
 Identity production process differences and their characteristics
 Understand how to use a process flowchart
 Understand how to use process performance metrics
 Understand current technology advancements and how they impact
process design
 Understand issues impacting the design of service operations

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 Product & Service Design
 Product design – the process of deciding the companies
product/service unique characteristics and features
 Product design must support the business strategy
 Product design defines a product’s characteristics
- Appearance, materials, dimensions, tolerances,
performance standards
 Service industries must define both the service and concept
- Physical elements, aesthetic & psychological
benefits e.g. promptness, friendliness, ambiance
 Product and service design must match the needs and
preferences of the targeted customer group
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 Product & Service Design Steps
 Step 1 - Idea Development
- Someone thinks of a need and a product/service design to satisfy it
e.g. customers, marketing, engineering, competitors,
benchmarking, reverse engineering
 Step 2 - Product Screening
- Every business needs a formal/structured evaluation process
e.g. fit with facility and labor skills, size of market, contribution margin,
break-even analysis, return on sales
 Step 3 – Preliminary Design and Testing
- Technical specifications are developed, prototypes built, testing starts
 Step 4 – Final Design
- Final design based on test results, facility, equipment, material, & labor
skills defined, suppliers identified

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 Break-Even Analysis: Graphical Approach
 Compute quantity of goods
that must be sold to break-
even
 Compute total revenue at
an assumed selling price
 Compute fixed cost and
variable cost for several
quantities
 Plot the total revenue line
and the total cost line
 Intersection is break-even
 Sensitivity analysis can be
done to examine changes in
all of the assumptions made
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 Break-Even Analysis
 Total cost = fixed costs + variable costs (quantity):

TC  F  VC  Q
 Revenue = selling price (quantity)

R   SP  Q
 Break-even point is where total costs = revenue:

TC  R or F  VC  Q   SP  Q
F
or Q
SP  VC © 2007 Wiley
 Example
 A firm estimates that the fixed cost of
producing a line of footwear is $52,000
with a $9 variable cost for each pair
produced. They want to know:
 If each pair sells for $25, how many pairs
must they sell to break-even?
 If they sell 4000 pairs at $25 each, how much
money will they make?

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 Example Solved
 Break-even point:
F $52,000
Q   3,250 pairs
SP  VC $25  $9
 Profit = total revenue – total costs
P   SP  Q   F  VC  Q 
  $25 4,000   $52,000   $9 4,000
 $12,000
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Break-even calculation: A company is planning to establish a chain of movie
theaters. It estimates that each new theater will cost approximately $1 Million. The
theaters will hold 500 people and will have 4 showings each day with average ticket
prices at $8. They estimate that concession sales will average $2 per patron. The
variable costs in labor and material are estimated to be $6 per patron. They will be
open 300 days each year. What must average occupancy be to break even?

 Break Even Point

Total revenues = Total costs @ break-even point Q
Selling price*Q = Fixed cost + variable cost*Q
($8+$2)Q= $1,000,000 + $6*Q
Q = 166,667 patrons (28% occupancy)
 What is the gross profit if they sell 300,000 tickets
Profit = Total Revenue – Total Costs
P = $10*300,000 – (1,000,000 + $6*300,000)
P = $200,000
 If concessions average $.50/patron, what is break-even Q
now? (sensitivity analysis)
($8.50)Q = 1,000,000 - $6*Q
Q = 400,000 patrons (67% occupancy)
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 Other Product Design Factors
 Need to Design for
Manufacturing –
DFM
 Minimize parts
 Design parts for
multiply
applications
 Use modular design
 Avoid tools
 Simplify operations

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 Other Design Factors
 Consider product
life cycle stages
 Introduction
 Growth
 Maturity
 Decline
 Facility & process
investment
depends on life
cycle

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

 Replace with a Concurrent

Engineering process
 All functions form a design
team working together to
develop specifications, involve
customers early, solve potential
problems, reduce costs, &
shorten time to market

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 Process Selection
 Process selection is based on five considerations
 Type of process; range from intermittent to continuous
 Degree of vertical integration
 Flexibility of resources
 Mix between capital & human resources
 Degree of customer contact

 Process types can be:

Project Process
Batch Process
Line Process
Continuous Process
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Underlying Process Relationship
Between Volume and Standardization

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 Volume and Process Choice
 Low Volume typically
means
 Project or Batch processes
 Less vertical integration
 More resource flexibility
 Less capital intensity
 Higher skilled labor
 More customer involvement
 More customized products
 Make or assemble to order
strategy
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 High Volume typically
means
 Line/continuous processes
 More vertical integration
 Less resource flexibility
 More capital intensity
 More specialized labor
 Little to no customer
involvement
 Standardized products
 Make to stock strategy
 Differences between Intermittent
and Continuous Operations
Decision Intermittent Operation Continuous Operation
Product variety Great Small
Degree of standardization Low High
Organization of resources Grouped by Function Line flow
Path of products Varied, depends on product Line flow
Factor driving production Customer orders Forecast of demand
Critical resource Labor Capital
Type of equipment General purpose Specialized
Degree of automation Low High
Throughput time Longer Shorter
Work-in-process inventory More © 2007 Wiley Less
Facility Layouts and Process Choice

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Process Performance Metrics

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 Linking Design & Process Selection
 Organizational Decisions appropriate for different types of operations

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 Process Design Tools
 Process flow analysis is a
tool used to analyze and
document the sequence of
steps within a total process.
Usually first step in Process
Reengineering.
 Process Re-engineering
is a structured approach
used when major business
changes are required as a
result of:
 Major new products
 Quality improvement
needed
 Better competitors
 Inadequate performance
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Intermittent VS. Repetitive Layouts

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Product and Service Strategy Options

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

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

following considerations:
 Strategic impact
 Available capacity
 Expertise
 Quality considerations
 Speed
 Cost (fixed cost + variable cost)make = (fixed cost + Variable cost)buy
 Business are trending toward less backward integration, more
outsourcing
© 2007 Wiley
 Manufacturing Technology Decisions
 Simplify first then apply appropriate technology
 Automation
 Automated Material Handling:
 Automated guided vehicles (AGV)
 Automated storage & retrieval systems (AS/RS)
 Computer-Aided Design (CAD) software
 Robotics & Numerically-Controlled (NC) equipment
 Flexible Manufacturing Systems (FMS)
 Computer-Integrated Manufacturing (CIM)
© 2007 Wiley
 Designing Services
 Service Characteristics
 Pure services

 Quasi-Manufacturing

 Mixed services

 Service Package
 The physical goods

 The sensual benefits

 The psychological benefits

 Differing designs
 Substitute technology for

people
 Get customer involved

 High customer attention

© 2007 Wiley
 Chapter 3 Highlights
 Product and process design must support business and operation
strategy
 Product steps include idea generation, product screening,
preliminary design and testing, and final design
 Break-even analysis is a tool used to screen processes
 Process designs range from project to batch to line to continuous
 Product design and process selection decisions are linked
 Process flow charts can be a useful tool in process re-design
 Product and process design can be significantly enhanced by
proper application of new technology
 Designing service processes produce intangible products with
more customer contact

© 2007 Wiley
 Chapter 3 Homework Hints
 4.a. Calculate break-even point.
 b. Primarily decisions at the company’s

plant(s).
 8.a. Calculate/graph break-even point.
 b. Calculate profit given revenue and cost

data.
 c. Compare profits given sales estimate

differences based on the 2 prices.

 d. Primarily factors at the company’s plant(s).

© 2007 Wiley