University of Antique

DISTANCE LEARNING
Sibalom, Antique

Module
1

MGT 5
Production & Operations
Management

MRS. DIADEM PEARL G. ADUANA

Module Writer/Tutor

PROF. JOCELYN C. MORALES

Director, Distance Learning

1st Semester, SY 2021-2022

1
 INTRODUCTION TO OPERATIONS MANAGEMENT

Chapter 1 Introduction to Operations Management

Introduction

Operations Management explores the way organizations produce and

distribute goods and services. Everything that we wear, eat, sit on, use or read
comes to us courtesy of the operations managers who organized its production and
distribution. Goods such as automobiles, airplanes, computers and houses, must be
produced, as do the services provided by hospitals, ski resorts, and banks.

This explanation reflects the essential nature of operations management: it is

the central activity in organizing things. Operations Management is the systematic
development and control of the processes that transform inputs into goods and
services. The operations function comprises a significant percentage of the
employees and physical assets in most organizations.

The importance of operations management has increased dramatically in

recent years. Significant competition, shorter product and service life cycles, better
educated and quality-conscious consumers, and the capabilities of new technology
have placed pressures on the operations function to improve productivity while
providing a broader array of high-quality products and services.

Intended Outcome/ Learning Objective/s

1. Define the term operations management

2. Identify the three major functional areas of organization and describe how
they interrelate
3. Explain the transformation process
4. Compare and contrast service and manufacturing operations
5. Understand the process to meet demand
6. Identify the sources of variation
7. Comprehend the scope of operations management

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Inspire Oneself (Motivation)

Before going online for this study session, what did you do? Did you eat or
drink something? Did you take your bath? Change your clothes? Brush your teeth?
Ride a jeepney to go to a place where there is internet connection? In doing so, what
are the goods and/or services that you consumed? Many right? Can you imagine
how these goods and/or services are in your hands for you to consume? How it is
made, how long had it travelled to reach you? Can you imagine how many people all
over the country and even the world uses the same shampoo brand that you are
using? And can you imagine how a company produces these goods/services to be
able to meet the demand of thousand users?

Operations Managemt is the answer to all this unimaginable questions. So let

us now start your amazing journey to operations management.

Inculcate Concepts (Input/Lesson Proper)

Operations is that part of a business organization that is responsible for producing

goods and services. Goods are physical items that include raw materials, parts and
subassemblies. Services are activities that provide some combination of time,
location, form or psychological value.

The ideal situation for a business organization is to achieve a match of supply

and demand. Having excess supply or capacity is wasteful and costly; having too
little means lost opportunity and possible customer dissatisfaction.

Three Functional Areas

Business Organizations have three basic functional areas: finance, marketing,

and operations. Finance is responsible for securing financial resources at favorable
prices and allocating these resources throughout the organization, as well as
budgeting, analyzing investment proposals and providing funds for operations.
Marketing is responsible for assessing consumer wants and needs, and selling and
promoting the organization’s goods and services. Operations is responsible for
producing the goods or providing the services offered by the organization.

Organization

Finance Operations Marketing

Supply Chain

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 These three basic functional areas of a business organization work
harmoniously together to achieve the goals and objectives of the organization.

Supply Chain
Operations and supply chains – are two aspects of OM that are very
important. One couldn’t exist without the other and no business organization could
exist without both.

Supplier’s Direct Final

Producer Distributor
supplier supplier customers

Supply Chain – is the sequence of organization, their facilities, functions and

activities that are involved in producing and delivering a product or service.

The above illustration is an example of supply chain wherein raw materials

in the production of products comes from a supplier but that supplier only buys that
material from another supplier. Then the producer makes the product. Finished
products were then transported for delivery by a distributing entity up to the
customers. This is just an example. Other products might have supply chain longer
than this, or others might have shorter.

The Transformation Process

Inputs
Land Transformatio Outputs
Labor n/ Conversion Goods
Capital process Services
Information

Control

Transformation process – is the conversion of inputs into outputs wherein a process

is applied to convert raw materials into finished products. And in so doing, the value
of the materials converted into a finished product increases.
Take for the example the process of making pork barbeque. How much is
your cost of inputs? The 1 kilo pork, sticks, marinating ingredients and coal is
P300.00. then, you applied the process of cooking and have made 50 sticks of pork
barbeque sold at 10 pesos each. How much is the value that is added?

Value-added – the term used to describe the difference between the cost of inputs

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and the value or price of outputs

Production of Goods versus delivery of Services

Manufacturing and service organizations are often different in terms of what

is done but quite similar in terms of how it is done. They all differ chiefly because
manufacturing is goods oriented and service is act-oriented. Differences can be seen
in the characteristics given in the table below with description of what is it in goods
and in services.

The differences involve the following:

Characteristics Goods Services

1. Customer contact Low High

2. Uniformity of input High Low
3. Labor content Low High
4. Uniformity of output High Low
5. Output Tangible Intangible
6. Measurement of productivity Easy Difficult
6.Opportunity to correct problems before delivery to high Low
customer
7. Inventory Much Little
8. Evaluation Easier More difficult
9. Patentable Usually Not usually

1. Customer contact
Why is customer contact low in goods and high in services? Is the company
that produces the good has contact with the customer? On the other hand, is the
service provider has contact with the customer?
Goods are usually made in factories and consumers bought them in stores,
which means the manufacturer has low contact with customers. While

2. Uniformity of input
In the production of goods, are the inputs used similar or not? What about in
the delivery of service, are the inputs the same?

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3. Labor content
Production of goods by big companies nowadays are usually done using
machines and technology, that is why labor content for goods are low. While for
services, the human labor is the delivery factor of most, that contact is often
necessary.

4. Uniformity of output

5. Output

6. Opportunity to correct problems before delivery to customers

7. Inventory
Services are often produced and consumed simultaneously; there is no stored
inventory. For instance, the beauty salon produces a haircut that is "consumed"
simultaneously, or the doctor produces an operation that is "consumed" as it is
produced.

8. Evaluation

9. patentable

On the other hand:

 Both use technology

 Both have quality, productivity, & response issues
 Both must forecast demand
 Both will have capacity, layout, and location issues
 Both have customers, suppliers, scheduling and staffing issues
 Manufacturing often provides services
 Services often provides tangible goods

Process to meet Demand

The main reason why business organization exist is to earn profit, right? But
how do they earn profit? Yes, by producing producing goods/services that they offer
to the consumers. But the real question is, how may goods/services must a company
produce to be able to earn profit? What will be the basis of production in terms of
how many will be produced?
Business organization produced goods/services based on demand or the
number of customers who wanted to buy the product. Because the most ideal
situation for a business organization is when output = demand or if the number of

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goods/services produced is equal to the number of customers who bought the
goods/service. This means that there is no surplus or shortage, only satisfied
customers and happy business owner.
But what happens if output > demand or if the products produced is greater
than the number of customers who wanted to buy the product? Well, this will be
wasteful in the part of the business owner especially if the products are perishable
goods. Also it would be costly because the business owner will have to lease a
storage place to keep the goods.
What about if output<demand? In this situation, customers will be
dissatisfied because production is low thus, the product will not be available in the
market. It will also be a revenue lost to the business owners because many
customers would want to buy the product/service but it is not available.

Capacity of the process

Output = demand
output> demand – wasteful & costly
output< demand – dissatisfied customers & lost revenue

To be able to achieve the ideal situation which is output = demand, there

must be right capacity which requires having accurate forecasts into capacity
requirements, and a process in place capable of meeting expected demand.

Process Variation

Achievement of a match between process output and demand is difficult due

to process variation and demand variability.

There are four basic sources of variation and these are:

1. The variety of goods or services being offered
The greater the variety of goods and services, the greater the variation
in production or service requirements.
2. Structural variation in demand -
These variations, which include trends and seasonal variations, are
generally predictable.
3. Random variation
This natural variability is present to some extent in all processes, as
well as in demand for services and products, and it cannot generally be
influenced by managers.
4. Assignable variation
These variations are caused by defective inputs, incorrect work
methods, out-of- adjusted equipment, and so on. This type variation can
be reduced or eliminated by analysis and corrective action

The scope of operations of management

The scope of operations management ranges across the organization.

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Operations management involved people in product and service design, process
selection, selection and management of technology, design of work systems, location
planning, facilities planning, and quality improvement of the organization’s products
and services.
The operations function includes many interrelated activities such as
forecasting, capacity planning, scheduling, managing inventories, assuring quality,
motivating employees, deciding where to locate facilities, and more.
Take for example an airline company to illustrate a service organization’s
system. The activities include:
Forecasting such things as weather and landing conditions, seat demand for
flights and the growth in air travel.
Capacity planning essential for the airline to maintain cash flow and make a
reasonable profit. (Too few or too many planes, or even the right number of planes
but in the wrong places, will hurt profits)
Locating facilities according to manager’s decisions on which cities to
provide service for, where to locate maintenance facilities, and where to locate
minor and major centers.
Facilities and layout important in achieving effective use of workers and
equipment
Scheduling of planes for flights and for routine maintenance; scheduling of
pilots and flight attendants; and scheduling of ground crews, counter staff, and
baggage handlers;
Managing inventories of such items as foods and beverages, first aid
equipment, inflight magazines, pillows and blankets, and life preservers.
Assuring quality is essential in flying and maintenance operations, where
emphasis is on safety, and important in dealing with customers, where the main
focus is efficiency and courtesy.
Motivating and training employees in all phases of operations.

Integrate Learning (application phase)

Take note of the important concept in the introduction to operations

management. These will be your foundation in the study of other topics in
operations management.

Forecasting

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Learning Objectives

1. List the elements of a good forecast

2. Outline the steps in the forecasting process
3. Compare and contrast qualitative and quantitative approaches to forecasting
4. Briefly describe the naïve approach and averaging techniques in forecasting

FORECASTING

Forecasting is a statement about the future value of a variable such as

demand. It is a basic input in the decision process of operation management because
they provide information on future demand. The importance of forecasting to
operations management cannot be overstated. The primary goal of operations is too
much supply to demand. Having a forecast to demand is essential for determining
how much capacity or supply will be needed to meet demand.

Forecast Two Important aspects:

1. Expected level of demand
 This can be a function of some structural variation, such as a trend or
seasonal variation.
2. The degree of accuracy that can be assign to a forecast
 Forecasts accuracy is a function of the ability of forecaster correctly
model demand, random variation, and sometimes unforeseen events.

Importance of Forecasting in the planning process:

 They enable managers to anticipate the future so they can plan accordingly.
Some examples of uses of forecasts in business organization:

 Accounting. New product/ process cost estimates, profit projections, cash

management.
 Finance. Equipment/ equipment replacement needs, timing and amount of
funding/ borrowing needs.
 Human resources. Hiring activities, including recruitment, interviewing,
training, lay off planning, including outplacement counselling.
 Marketing. Pricing and promotion, e-business strategies, global competition
strategies.
 MIS. New/ revised information systems, Internet services.
 Operations. Schedules, capacity planning, work assignment and workloads,
inventory planning, make-or – buy decisions, outsourcing, and project
management.
 Product/ service design. Revision of current features, design of new product
or services.
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Two uses of forecasts:
1. To help manager plan the system
 Planning the system generally involves long-range plans about the
types of products and services to offer, what facilities and equipment
to have, where to locate, and so on.
2. To help them plan the use of the system.
 Planning the use of the system refers to short- range and
intermediate- range planning, which involve tasks such as planning
inventory and workplace levels, planning purchasing and production,
budgeting, and scheduling.

Features common to all forecasts

1. Forecasting techniques generally assumes that the same underlying causal

system that existed in the past will continue to exist in the future.
2. Forecasts are not perfect; actual results usually differ from predicted values;
the presence of randomness precludes a perfect forecasts. Allowance should
be made for forecast errors.
3. Forecasts for groups of items tend to be more accurate than forecasts for
individual items because forecasting errors among items in a group usually
have a cancelling effect.
4. Forecasts accuracy decreases as the time period covered by the forecasts –
the time horizon- increases. Generally speaking, short range forecasts must
contend with fewer uncertainties than longer-range forecast, so they tend to
be more accurate.

Elements of a good Forecasts:

A properly prepared forecast should fulfil certain requirements:

1. The forecast should be timely.

2. The forecast should be accurate, and the degree of accuracy should be stated.
3. The forecast should be reliable: it should work consistently.
4. The forecasts should be expressed in meaningful units.
5. The forecasts should be in writing.
6. The forecasts techniques should be simple to understand and use.
7. The forecasts should be cost- effective: the benefits should overweigh the
cost.

Steps in forecasting Process:

1. Determine the purpose of the forecast.

2. Establish a time horizon.
3. Select forecasting technique.
4. Obtain, clean, and analyse appropriate data.
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 5. Make the forecasts.
6. Monitor the forecasts.

Two General Approaches to forecasting:

 Qualitative methods
 Consist mainly of subjective inputs, which often defy precise
numerical description.
 Quantitative methods
 Involves either the projection of historical data or the development of
associative models that attempt to utilize causal (explanatory)
variables to make a forecasts.

Accuracy and Control of Forecasts

Accuracy and control of forecasts is a vital aspect of forecasting. Thus,
minimizing forecast error is every forecasters objective. However, the complex
nature of real-world variables makes it almost impossible to correctly predict future
values of those variables.

When making periodic forecasts, it is important to monitor forecast errors to

determine if the errors are within reasonable bounds.

Forecast Error - difference between the actual value and the value that was
predicted for a given period.

Hence, Error = Actual – Forecasts

Positive errors result when the forecast is too low, negative errors when the
forecasts is too high.

Summarizing Forecast accuracy

Forecast accuracy is a significant factor when deciding among forecasting
alternatives. Accuracy is based on the historical error performance of a forecast.

Three commonly used measures for summarizing historical errors are:

 Mean Absolute Deviation (MAD)

 The average absolute error
 Mean Squared Error (MSE)
 The average of squared errors.
 Mean Absolute Percent Error(MAPE)
 The Average absolute percent error.

Forecasting Techniques:

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  Judgemental forecasts
 Rely on analysis of subjective inputs obtained from various sources,
such as consumer surveys, the sales staff, managers and executives,
and panels of experts.
 Time-series forecast
 Simply attempt to project past experience into the future. These
techniques use historical data with the assumption that the future will
be like the past period.
 Associative models
 Use equation that consist of one more explanatory variables that can
be used to predict demand.

Forecast based on Judgement and Opinion:

 Executive opinions
 Salesforce opinions
 Consumer surveys
 Other approaches

Forecasts based on Time-series Data:

Time- series – is a time-ordered sequence of observations taken at regular
intervals. Forecasting techniques based on time-series data are made on the
assumptions that future values of the series can be estimated from past value.

Analysis of time-series data requires the analyst to identify the underlying

behaviour of the series. These behaviours can be described as follows:

 Trends
o Refers to a long-term upward or downward movement in the
data.
 Seasonality
o Refers to a short term, fairly regular variations generally
related to factors such as the calendar or time of day.
 Cycles
o Are wavelike variations of more than one year’s duration.
 Irregular variations
o Caused by unusual circumstances, not reflective or typical
behaviour.
 Random variations
o Are residual variations that remain after all other behaviors
have been accounted for.

Naïve forecasts
A simple way but widely used approach to forecasting is the naive approach.

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A naive forecast uses a single previous value of a time series as the basis of a
forecast.

The naive approach can be used in the following:

Stable series- the last data point becomes the forecast for the next period
Seasonal variations – forecast for the next “season” is equal to the value of
the series last “season”
Trend – forecast is equal to the last value of the series plus or minus the
difference between the last two values of the series.

Period Actual Change from previous value Forecast

t- 1 50
t- 2 53 +3
(Next) t 53+3= 56

Techniques for Averaging

Averaging techniques smooth fluctuations in a time series because the
individual high and lows in the data offset each other when they are combined into
an average. A forecast based on the average thus tend to exhibit less variability than
the original data.

Averaging techniques generate forecasts that reflect recent values of a time

series (e.g. the average value over the last several periods)

Three techniques for averaging are described as follows:

1. Moving average.
2. Weighted moving average.
3. Exponential smoothing.

Moving average- forecasts uses a number of the most recent actual data values in
generating a forecasts.

Formula:

Ft= MA =∑ⁿἱ= 1 ᴬt -ἱ = ᴬt-n + ᴬt -2 + ᴬt - 1

n n

Where:
Ft = forecast for time period t
MAn= n period moving average
At- 1 =Actual value in period t-1
n= number of periods (data points) in the moving average
For example, MA₃ would refer to a three-period moving average forecasts, and MA₃
would refer to a five- period moving average forecasts.
Compute the three period moving average forecasts given demand for shopping

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carts for the last five periods.

Period Demand
1 42
2 40
3 43
4 40 the 3 most recent demands
5 41

F₆= 43+40+41 = 41.33

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If actual demand in period 6 turns out to be 38, the moving average forecast for
period 7 would be

F₇ = 40+41+38 =39.67
3

Weighted average
 is similar to a moving average, except that it assigns more weight to
the most recent values in a time series. For instancethe most recent value migth
be assign a weight of 40, the next most recent value a weight of 30, the next
after that weight of 20, and the next after that a weight of 10, . Note that the
weights must sum to 1.00, and that the heaviest weight are assign to the most
recent values.

Ft = Wt (At) + Wt-1 (A1-1)+… + Wt- n(At-n)

Where
Wt= weight for the period t,Wt-1 = weigth for period t-1, etc.
At= actual value in period t, At-1= actual value for period t-1, etc.

Example:
a. Compute a weighted average forecast using a weight of .40 for the most
recent period ,.30for the next most recent, 2.0 for the next , and .10 for the
next.
b. If the actual demand for period 6 is 39, forecast demand for period 7 using
the same weigth as in part a.
Period Demand
1 42
2 40
3 43
4 40

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 5 41

a. F₆ = .10(40) + .20(43) + .30(40) +.40(41) =41.0

b. F₇ = .10 (43) + .20(40) +.30(41) +.40(39)=40.2

Exponential smoothing
is a sophisticated weighted averaging method that is still relatively
easy to use and understand. Each new forecast is based on the previous
forecasts plus a percentage of the difference between the forecasts and the
actual value of the series at that point. That is:

Next forecast = previous forecasts + α(actual- previous)

Where (actual- previous forecasts) represent the forecasts error and αis a
percentage of the error. More concisely,
Ft = Ft-1 + α(At-1 – Ft-1)
Where:
Ft = forecasts for period t
Ft -1 = forecast for the previous period (i.e, period t- 1)
α= smoothing constant
At-1 = actual demand or sales for the previous period

The smoothing constant a represent a percentage of the forecasts error. Each

new forecasts is equal to the previous forecasts plus a percentage of the previous
error. For example, suppose the previous forecasts was 42 units, actual demand was
40 units, and α =.10. the new forecsts would be computed as follows:

Ft =42 +.10 (40-42)= 41.8

Then, if the actual demand turns out to be 43, the next forecasts would be
Ft = 41.8 + .10 (43-41.8) = 41.92

University of Antique
DISTANCE LEARNING
Sibalom, Antique

15
 Module
2
MGT 5
Production & Operations
Management

MRS. DIADEM PEARL G. ADUANA

Module Writer/Tutor

PROF. JOCELYN C. MORALES

Director, Distance Learning

2nd Semester, SY 2020-2021

Product & Service Design

Learning Objectives

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 1. Explain the strategic importance of product and service design
2. List key reasons for design or redesign
3. Identify some of the reasons organization become involved with product
and service design.
4. Discuss the importance of legal, ethical and sustainability considerations
in product and service design.
5. Explain life cycle assessment and the phrase “the 3Rs”
6. Briefly discuss the phases in product design and development
7. Name the phases in service design

Product and service design

Product and service design is a key factor in satisfying the customer. To be

successful in product and service design, organization must be continually aware of
what customer want, what the competition is doing, what government regulations
are, and what technologies are available.

What does product and service design do?

The various activities and responsibilities of product and service design include the
following (functional interactions are shown in the parentheses):

1. Translate customer wants and needs into product and service requirements.
(marketing, operations)
2. Refine existing products and services. (marketing)
3. Develop new products and/or services. (marketing, operations)
4. Formulate quality goal. (marketing, operations)
5. Formulate cost targets. (accounting, finance, operations)
6. Construct and test prototypes. (operations, marketing, engineering)
7. Document specifications.
8. Translate product and service specifications into process specifications.
(engineering, operations)

Reasons for product and Service Design or Redesign

Organizations become involved in product and service design or redesign for

a variety of reasons. The main forces that initiate design or redesign are market
opportunities and threats. The factors that give rise to market opportunities and
threats can be one or more changes:

Economics (e.g., low demand, excessive warranty claims, the need to reduce
costs).

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 Social and demographic (e.g., aging baby boomers, population shift).
Political, liability, or legal (e.g., government changes, safety issues, new
regulations).
Competitive (e.g., new or changed product or services, new advertising/
promotions).
Cost or availability (e.g., of raw materials, components, labour).
Technological (e.g., in product components, processes).

Value Analysis
Refers to an examination of the function of parts and materials in an effort to
reduce the cost and/or improve the performance of the product.
Typical questions asked for analysis:
o Could a cheaper part or material be used?
o Is the function necessary?
o Can the function of two or more parts or components be
performed by a single part for a lower cost?
o Can a part be simplified?
o Could standard parts be substituted for nonstandard parts?

Objectives of Products and Service Design

The main focus of product and service design is customer satisfaction.
Measure of design effectiveness:
o Profit
o Development time and cost
o Product or service cost
o Product or service quality
o “High tech” appearance (for electronic products}

Designing for operations – taking into account the capabilities of the

organization in designing goods and services in order to achieve designs that
fit with those capabilities.

Manufacturability- refers to the capability of an organization to produce an

item at an accepted profit.

Serviceability- refers to the capability of an organization to provide a service

at an acceptable cost or profit.

Legal, Ethical, and Environmental Issues

Designers must take into account a wide array of legal and ethical
considerations. If there is a potential to harm the environment, then it becomes
important.
Product Liability – (strong incentive for design improvements) the

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responsibility of a manufacturer for any injuries or damages caused by a faulty
product.

Uniform Commercial Code which says that products carry an implication of

merchantability and fitness; that is, a product must be usable for its intended
purposes.

Organizations generally want designers to adhere to guidelines such as the

following:

 Produce designs that are consistent with the goals of the organization.
 Give customers the value they expect.
 Make health and safety a primary concern.

Sustainability

Product and service design is a focal point in the quest for sustainability. Key
aspects include life cycle assessment, reduction of costs and materials used, reuse of
parts of returned products, and recycling.

Life cycle assessment (LCA), also known as life cycle analysis- is the assessment of
the environmental impact of a product or service throughout its useful life.

The Three Rs: Reduce, Reuse, and Recycle

Reduce: Value Analysis

Value Analysis refers to an examination of the function of parts and materials in an

effort to reduce the cost and/or improve the performance of a product.

Reuse: Remanufacturing

Remanufacturing refers to refurbishing used products by replacing worn-out or

defective components and reselling the products.

Recycle

Recycling means recovering materials for future use.

Companies recycle for a variety of reasons, including:
1. Cost savings.
2. Environment concerns.
3. Environmental regulations.

Design for Recycling (DFR) refers to product design that facilitates the recovery of
materials and components in used products for reuse.

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Other Considerations in Product and Service Design

 Strategies for product or Service Life Stages

Most, but not all, products and services go through a series of stages over
their useful life, sometimes referred to as their life cycle.

Product or services often go through stages over time

Maturity
Decline

Growth
Demand

 Degree of Standardization
Introduction
Standardization refers to the extent to which there is absence of variety in a
product, services, or process.

 Designing for Mass Customization

Mass customization is a strategy of producing basically standardized goods,
but incorporating some degree o customization.
Time
Delayed differentiation is a postponement tactic: the process of producing,
but not quite completing, a product or service until customer preferences are
known.
Modular design is a form of standardization in which component parts are
grouped into modules that are easily replaced or interchanged.

 Reliability

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 Reliability is a measure of the ability of a product, a part, a service, or an
entire system to perform its intended function under a prescribed set of
conditions.
Failure a situation in which a product, part, or system does not perform as
intended.
Normal operating conditions are the set of conditions under which an item’s
reliability is specified

 Robust Design
Robust design refers to the design that results in products or services that
can function over a broad range of conditions.

 Degree of Newness
Product or service design change can range from the modification of an
existing product r service to an entirely new product of service:
1. Modification of an existing product or service.
2. Expansion of an existing product line or service offering.
3. Clone of a competitor’s product or service.
4. New product or service.
5.
 Human Factors
Human factors is used often arise in the design of consumer products.

 Cultural Differences
Product designers in companies that operate globally also must take into
account any cultural difference of different countries or regions related to the
product.

 Global Product Design

Organizations that operate globally are discovering advantages in global
product design, which use the combined efforts of a team of designers who
work in different countries and even on different continents.

Phases in Product Design and Development

Product design and development generally proceeds in a series of phases:

1. Idea Generation. Product development begins with idea generation. Ideas

can come from a variety of sources. They can be:
2. Feasibility analysis entails market analysis (demand), economic analysis

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 (development cost and production cost, profit potential), and technical
analysis (capacity requirements and availability, and the skills needed).
3. Product of specifications this involves detailed descriptions of what is
needed to meet customer wants and requires collaboration between legal,
marketing and operations.
4. Process specifications this involves collaboration between accounting and
operations.
5. Prototype development. With product and process specifications complete,
one or few units are made to see if there are any problems with the product
or process specifications.
6. Design review. Make any necessary changes, or abandon, this involves
collaboration among marketing, finance, engineering design and operations.
7. Market test is used to determine the extent of consumer acceptance. This
phase is handled by marketing.
8. Product introduction. Promote the product and this phase is handled by
marketing.
9. Follow-up evaluation. Determine of changes are needed, and refine
forecasts, it is also handled by marketing.

Designing for production

Concurrent Engineering means bringing engineering design and

manufacturing personnel together early in the design phase.
Computer-Aided Design (CAD) is product design using computer graphics.
Finite Element Analysis (FEA) - its capability can greatly shorten the time to
market new products. It enables developers to perform simultaneously that
aid in the design analysis and commercial of new products.
Product Requirements helps in choosing designs that match capabilities.
Design for Manufacturing (DFM) is used to indicate the designing of products
that are compatible with an organization’s capabilities.
Design for Assembly (DFA) the design that focuses on reducing the numbers of
parts in a product and on assembly methods and sequence
Component commonality. Companies often have a multiple products or
services to offer customers. Often, this product or services have a high degree
of similarity of features and components.

Quality Function Deployment (QFD) –an approach that integrates the “voice of
the customer” into both product and service development

Service Design

Service refers to an act, something that is done to or for a customer.

Service delivery system is the facilities, processes and skills needed to provide a
service.
Product bundle is the combination of good s and services provided to a customer.
Service Package refers to the physical resources needed to perform the service, the

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accompanying goods, and the explicit and implicit services included.

Two key issues in service design:

 The degree of variation in service requirements.

 The degree of customer contact and customer involvement in the delivery
system.

Phases in service design process

 Conceptualized.
 Identifies service package components needed (operations and marketing).
 Determine performance specifications (operations and marketing).
 Translate performance specifications into design specifications.
 Translate design specification into delivery specification.

Characteristics of Well- Designed Service System

1. Being consistent with the organization mission.

2. Being user friendly.
3. Being robust if variability is a factor.
4. Being easy to sustain.
5. Being cost-effective.
6. Having value that is obvious to customers.
7. Having effective linkages between back-of- the-house operations and front-
of- the- house operation. Front operations should focus on customer service,
while back operations should focus on speed and efficiency.
8. Having a single, unifying them, such as convenience or speed.
9. Having design features and checks that will ensure service that is reliable and
of high quality.

Challenges of Service Design

1. Requirements are variable.

2. Services can be difficult to describe.
3. Customer contact is usually much higher in services.
4. Service design must take into account the service-customer encounter.

Strategic Capacity Planning for Products and Services

Learning Objectives

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 1. Explain the importance of capacity planning
2. Discuss ways of defining and measuring capacity
3. Describe the determinants of effective capacity
4. Discuss the major considerations related to developing capacity alternatives

Capacity Planning
-is a key strategic component in designing the system. It encompasses many
basic decisions with long term consequences for the organization.

Capacity
-the number of units a facility can hold, receive, store or produce in a period
of time
-it is the upper limit or ceiling on the load that an operating unit can handle.
It includes equipment, space and employee skills.

Goal of Strategic Planning

 Is to achieve a match between the long term supply capabilities of an
organization and the predicted level of long term demand.
Overcapacity – operating costs that are too high
Under capacity – strained resources and possible loss of customers

Key questions in capacity planning

1. What kind of capacity is needed?
2. How much is needed to match demand?
3. When it is needed?

Capacity Decisions are Strategic

1. Capacity decisions have a real impact on the ability of the organization to
meet future demands for products and services; capacity essentially limits
the rate of output possible.
2. Capacity decisions affect operating costs. Ideally, capacity and demand
requirements will be matched, which will tend to minimize operating costs.
3. Capacity is usually a major determinant of initial cost. The greater capacity
produce the greater the costs.
4. Capacity decisions often involve long term commitment of resources.
5. Capacity decisions can affect competitiveness.
6. Capacity affects the ease of management.
7. Globalization has increased the importance and complexity of capacity
decisions.
8. Because, capacity decisions often involve substantial financial and other
resources, it is necessary to plan in advance.

Defining and Measuring Capacity

Capacity often refers to an upper limit on the rate of output. There are subtle
difficulties in measuring capacity in certain cases. These difficulties arise because of
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different interpretations of the term capacity and problems with identifying suitable
measures for a specific situation.

Two useful definitions of capacity

1. Design capacity
- The maximum output rate or service capacity an operation,
process or facility is design for.
2. Effective capacity
- design capacity minus allowances such as personal time and
maintenance

Actual output cannot exceed effective capacity and is often less because of
machine breakdowns, absenteeism, shortages of materials and quality
problems as well as the factors that are outside the control of the operation
managers.

Different measures of capacity:

Efficiency – the ratioo actual output to effective capacity.
Capacity utilization – the ratio of actual output to design capacity.

Actual output
Efficiency = x 100%
Effective capacity

Actual output
Utilization = x 100%
Design capacity

Determinants of Effective Capacity

1. Facilities. The design of facilities, including size and provision for expansion,
is key. Layout of work area often determines how smoothly work can be
performed and environment factors.
2. Product and Services factors. This can have a tremendous influence on a
capacity. The more the output, the more opportunities there are for
standardization of methods and materials, which leads to greater capacity.
3. Process Factors. The quantity capability of a process is an obvious
determinant of capacity. A more subtle determinant is the influence of
output quality. Productivity also affects capacity. Process improvements that
increase quality and productivity can result increased capacity.
4. Human Factors. The tasks that make up a job, the variety of activities
involved, and the training, skills, and experience required to perform a job all
have impact on the potential and actual output. Also, employee motivation
has a very basic relationship to capacity as do absenteeism and labour turn
over.
5. Policy Factors. Management policy can affect capacity by allowing or not
allowing capacity options.
6. Operational Factors. Scheduling problems may occur when an organization
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 has differences in equipment capabilities among alternatives pieces of
equipment or differences in job requirements.
7. Supply Chain Factors. Supply chain factor must be taken into account in
capacity planning if substantial capacity changes are involved.
8. External Factors. Product standards especially minimum quality and
performance standards can restrict management’s for increasing and using
capacity. Inadequate planning can be a major limiting determinant of
effective capacity.

A. Facilities
E. Policy
1. Design
2. Location F. Operational
3. Layout 1. Scheduling
4. Environment
2. Materials management
B. Product/service
1. Design 3. Quality assurance
2. Product or service mix 4. Maintenance policies
C. Process 5. Equipment breakdowns
Strategy
1. Quantity capabilities
2. Quality capabilities G. Supply chain
D. Human Factors H. External Factors
1. Job content 1. Product standards
2. Job design
2. Safety regulation
3. Training and experience
4. Motivation 3. Unions
5. Compensation Pollution control standards
6. Learning rates
7. Absenteeism and labour turn
over

Formulation
Three primary strategies

1. Leading. This capacity strategy builds capacity in anticipation of future

demand increases. If capacity increases involve a long lead time, this strategy
may be best option.
2. Following. Following strategy builds capacity when demand exceeds current
capacity.
3. Tracking. Tracking strategy is similar to a following strategy, but it adds
capacity in relatively small increments to keep pace with increasing demand.

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An organization typically bases its capacity strategy on assumptions and predictions
about long term demand patterns, technological changes and the behaviour of its
competitors.
1. The growth rate and variability of demand
2. The costs of building and operating facilities of various sizes
3. The rate and direction of technological innovation
4. The likely behaviour of competitors
5. Availability o capital and other inputs

Steps in the Capacity Planning Process

1. Estimate future capacity requirement
2. Evaluate existing capacity and facilities and identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analysis of each alternative
5. Assess key qualitative issues for each alternative
6. Select the alternative to pursue that will be best in the long term
7. Implement the selected alternative
8. Monitor results

 Capacity planning can be difficult at times due to the complex influence of

market forces and technology

Forecasting Capacity Requirements

Capacity planning decisions involve both long term and short term considerations.

 Long-term capacity needs requires forecasting demand over a time horizon

and then converting those forecasts into capacity requirements
 Short-term capacity needs are less concerned with cycles or trends than with
seasonal variations and other variations from average. These deviations are
particularly important because they can place a several strain on a system’s
ability to satisfy demand at some times and yet result in idle capacity at other
times.

Challenges of Planning Service Capacity

Three very important factors in planning service capacity
1. the need to be near customers
2. the inability to store services
3. the degree of volatility of demand

Make or Buy
Once capacity requirements have been determined, the organization must
decided whether to produce a good or provide a service itself, or to outsource from
another organization. Many organizations buy parts or contract out service, for

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variety of reasons. Among the factors are:

1. Availability capacity. If an organization has available equipment, necessary

skills, and time, it often makes sense to produce an item or perform a service
in house. The additional cost would be relatively small compared with those
required to buy items or subcontracts services.
2. Expertise. If a firm lacks the expertise to do a job satisfactorily, buying might
be reasonable alternative.
3. Quality considerations. Firms that specialize can usually offer quality than an
organization can attain itself.
4. The nature of demand. When demand for an item is high and steady, the
organization is often better off doing the work itself.
5. Costs. Any cost savings achieved from buying or making must be weighed
against the preceding factors. Cost savings might come from the item itself or
from transportation cost savings.
6. Risks. Buying goods or services may entail considerable risk. Loss of the
direct control over operations, knowledge sharing, and the possible need to
disclose proprietary information’s are three risks.

Developing Capacity Alternative

Aside from the general considerations about the development of alternative, other
things can enhance capacity management.

1. Design flexibility into systems. The long term nature of many capacity
decisions and the right inherent in long term forecast suggest potential
benefits from designing flexible systems.

2. Take stage of life cycle or services into account. Capacity requirements are
often closely linked to the stage of the life cycle that or product or service is
in.
a. Introduction phase. It can be difficult both the size of the market
and the organization’s eventual share of that market. Therefore,
organizations should be cautious in making large and/or flexible
capacity investments.
b. Growth phase. The overall market may experience rapid growth.
However the real issue is the rich at which is the rate the
organizations market share grows, which may be more or less
than the market rate, depending on the success of the
organization’s strategies.
c. Maturity phase. The size of the market levels off, and organizations
tends to have stable market shares.
d. Decline phase. An organization is faced with underutilization of
capacity due to declining demand. Organization myeliminate the
excess capacity by selling it, or by introducing new product or
services.

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 3. Take a “big picture” approach to capacity changes. When developing capacity
alternatives,it is important to consider how parts of the system interrelate.
Capacity changes inevitably affect an organization’s supply chain.
a. Bottleneck operations- is an operation in a sequence of operations whose
capacity is lower than the capacities of other operation in the sequence.

4. Prepare to deal with capacity “chunks”. Capacity increases often acquired in

fairly charge chunks rather than smooth increments, making it difficult to
achieve a match between desired capacity and feasible capacity.

5. Attempt to smooth out capacity requirements. Unevenness incapacity

requirements also can create problem.

6. Identify the optimal operating level. Production units typically have an ideal
or optimal level of operation in terms of unit cost of output. At the ideal level,
cost per unit is the lowest for the production unit. If the output rate is less
than the optimal level, increasing the output rate will result in decreasing
average costs. This is known as economies of scale. However, if output is
increased beyond the optimal level, average cost would become increasingly
larger. This is known as diseconomies of scale.

Cost-Volume Analysis

Cost-Volume analysis focuses on relationship between cost, revenue, and volume of

output. The purpose of cost-volume analysis is to estimate the income of an
organization under different operating conditions. It is particularly useful as a tool
for comparing capacity alternatives.
FC=Fixed Cost
VC=Total Variable Cost
V=Variable cost per unit
TC=Total Cost
TR=Total revenue
R= revenue per unit
Q=quantity or volume of output
QBEP= Break-even quantity
29 P=profit
TC= FC+VC
VC=Q*v
TR=R*Q
Profit (P) = TR- TC=R*Q- (FC+v*Q)
=Q (R-V) - FC
Q= P+FC
R-v

Break-even point (BEP)

 The volume of output at which total cost and total revenue are equal
QBEP= FC
R-v

The owner of Old fashioned Berry Pies, S. Simon, is contemplating adding a new line
of pies, which will require leasing new equipment for a monthly payment of 6, 000.
Variable cost would be 2 per pie, and pies would retail for 7 each.

a. How many pies must be sold in order to break eve?

b. What would be profit (loss) be if 1, 000 pies are made and sold in a month?
c. How many pies must be sold to realize a profit of 4, 000?
d. If 12, 000 can be sold, and a profit target is 5, 000what price should be
charged per pie?

FC= 6, 000 VC= 2 per pie Rev= 7 per pie

a. QBEP= 6, 000
7-2
b. Q= 1, 000 P= 1, 000(7-2) – 6, 000=1, 000
c. P= 4, 000
Q= 4, 000 + 6, 000 =2, 000
7-2
d. P= Q (R-v)- FC
5, 000= 2, 000 (R-2) – 6, 000
R= 7.50

A manager has the option of purchasing one, two or three machines. Fixed costs and
potential volumes are as follows:
30
No. of machines Total Annual Fixed Costs Corresponding Range of
Output
1 9, 600 0 to 300
2 15, 000 301 to 600
3 20, 000 601 to 900

a. Determine the break-even point for each range.

b. If projected annual demand is between 580 and 660 units, how many
machines should the manager purchase?

a. Computation
For one machine: QBEP=¿ 9 ,600
=320 units ¿
40− 10

For two machines: QBEP= 15 ,000 =5 ,000 units

40− 10

For three machines: QBEP= 40 , 000 =666.67 units

40 −10

b. The manager should choose two machines.

Assumptions of cost-volume analysis

1. One product is involved

2. Everything produced can be sold
3. Variable cost per unit is the same regardless of volume
4. Fixed cost do not change with volume
5. Revenue per unit is the same regardless of volume
6. Revenue per unit exceeds variable cost per unit

Financial Analysis

Cash Flow
 The difference between cash received from sales and other sources, and cash
outflow for labour, material, overhead, and taxes.
Present Value
 The sum, in current value, of all future cash flows of an investment proposal.

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