CHAPTER THREE

PRODUCT AND SERVICE DESIGN

Have you ever been with a group of friends and decided to order pizzas? One person wants pizza
from Pizza Hut because he likes the taste of stuffed-crust pizza made with cheese in the crust.
Someone else wants Donatos pizza because she likes the unique crispy-thin crust. A third wants
pizza from Spagio’s because of the wood-grilled oven taste. Even a simple product like a pizza
can have different features unique to its producer. Different customers have different tastes,
preferences, and product needs. The variety of product designs on the market appeals to the
preferences of a particular customer group. Also, the different product designs have different
processing requirements. This is what product design and process selections are all about.
We can all relate to the product design of a pizza just from everyday life. Now consider the
complexities involved in designing more sophisticated products. For example, Palm, Inc.
(www.palm.com) is a leading provider of handheld computers whose slogan is “different people,
different needs, and different handhelds.” The company designs different products with differing
capabilities, such as personal information management, wireless Internet access, and games,
intended for different types of customers. The company also has to decide on the best process to
produce the different types of handhelds.
These examples illustrate that a product design that meets customer needs, although challenging,
can have a large impact on a company’s success. For example, in 2009 Sony released cameras
that include intelligent auto mode that give users picture-perfect shots without fumbling with
settings. This type of innovative product design can give a company a significant competitive
advantage.
Product design and process selection affect product quality, product cost, and customer
satisfaction. If the product is not well designed or if the manufacturing process is not true to the
product design, the quality of the product may suffer. Furthermore, the product has to be
manufactured using materials, equipment, and labor skills that are efficient and affordable;
otherwise, its cost will be too high for the market. We call this the product’s manufacturability
—the ease with which the product can be made. Finally, if a product is to achieve customer
satisfaction, it must have the combined characteristics of good design, competitive pricing, and
the ability to fill a market need.
I. PRODUCT DESIGN
Product design is the process of defining all of the product’s characteristics. Product design is
the process of defining all the features and characteristics of just about anything you can think of,
from Starbucks’ cafe latte or Jimmy Dean’s sausage to GM’s Saturn or HP’s DeskJet printer.
Product design also includes the design of services, such as those provided by Salazar’s Beauty
Salon, La Petite Academy Day Care Center, or FedEx. Consumers respond to a product’s
appearance, color, texture, and performance. All of its features, summed up, are the product’s
design. Someone came up with the idea of what this product will look like, taste like, or feel like
so that it will appeal to you. This is the purpose of product design. Product design defines a
product’s characteristics, such as its appearance, the materials it is made of, its dimensions and
tolerances, and its performance standards.

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The Product Design Process
Certain steps are common to the development of most product designs: idea generation, product
screening, preliminary design and testing, and final design.
A. Idea Development
All product designs begin with an idea. The idea might come from a product manager who
spends time with customers and has a sense of what customers want, from an engineer with a
flare for inventions, or from anyone else in the company. To remain competitive, companies
must be innovative and bring out new products regularly. In some industries, the cycle of new
product development is predictable. We see this in the auto industry, where new car models
come out every year, or the retail industry, where new fashion is designed for every season.
Ideas from Customers, Competitors, and Suppliers The first source of ideas is customers, the
driving force in the design of goods and services. Marketing is a vital link between customers
and product design. Market researchers collect customer information by studying customer
buying patterns and using tools such as customer surveys and focus groups. Management may
love an idea, but if market analysis shows that customers do not like it, the idea is not viable.
Analyzing customer preferences is an ongoing process; customer preferences next year may be
quite different from what they are today. For this reason, the related process of forecasting future
consumer preferences is important, though difficult.

Figure 3.1

Competitors are another source of ideas. A company learns by observing its competitors’
products and their success rate.
Benchmarking refers to finding the best-in-class product or process, measuring the
performance of your product or process against it, and making recommendations for
improvement based on the results. The benchmarked company may be in an entirely different
line of business. For example, American Express is well known for its ability to get

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 customers to pay up quickly; Disney World, for its employee commitment; Federal Express,
for its speed; McDonald’s, for its consistency; and Xerox, for its benchmarking techniques.
Reverse engineering refers to carefully dismantling and inspecting a competitor’s product to
look for design features that can be incorporated into your own product. Ford used this
approach successfully in its design of the Taurus automobile, assessing 400 features of
competitors’ products and copying, adapting, or enhancing more than 300 of them, including
Audi’s accelerator pedal, Toyota’s fuel-gauge accuracy, and BMW’s tire and jack storage.
Perceptual maps compare customer perceptions of a company’s products with competitors’
products. Consider the perceptual map of breakfast cereals in terms of taste and nutrition
shown in Figure 4.2. The lack of an entry in the good-taste, high-nutrition category suggests
there are opportunities for this kind of cereal in the market. This is why Cheerios introduced
honey-nut and apple cinnamon versions while promoting its “oat” base. Fruit bits and nuts
were added to wheat flakes to make them more tasty and nutritious. Shredded Wheat opted
for more taste by reducing its size and adding a sugar frosting or berry filling. Rice Krispies,
on the other hand, sought to challenge Cocoa Puffs in the “more tasty” market quadrant with
marshmallow and fruit-flavored versions.

Figure 3.2

Suppliers are another source of product design ideas. To remain competitive, more companies
are developing partnering relationships with their suppliers to jointly isfy the end customer.
Suppliers participate in a program called early supplier involvement (ESI), which involves
them in the early stages of product design.

B. Product Screening
After a product idea has been developed, it is evaluated to determine its likelihood of success.
This is called product screening. The company’s product screening team evaluates the product
design idea according to the needs of the major business functions. In their evaluation,
executives from each function area may explore issues such as the following:
● Operations
What are the production needs of the proposed new product, and how do they match our
existing resources?

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 Will we need new facilities and equipment?
Do we have the labor skills to make the product? Can the material for production be
readily obtained?
● Marketing
What is the potential size of the market for the proposed new product?
How much effort will be needed to develop a market for the product, and
What is the long-term product potential?
● Finance
The production of a new product is a financial investment like any other.
What is the proposed new product’s financial potential, cost, and return on investment?
Unfortunately, there is no magic formula for deciding whether or not to pursue a particular
product idea. Managerial skill and experience, however, are key. Companies generate new
product ideas all the time, whether for a new brand of cereal or a new design for a car door.
Approximately 80 percent of ideas do not make it past the screening stage. Management
analyzes operations, marketing, and financial factors and then makes the final decision.

C. Preliminary Design and Testing

Once a product idea has passed the screening stage, it is time to begin preliminary design and
testing. At this stage design engineers translate general performance specifications into technical
specifications. Prototypes are built and tested. Changes are made based on test results, and the
process of revising, rebuilding a prototype, and testing continues. For service companies this
may entail testing the offering on a small scale and working with customers to refine the service
offering. Fast-food restaurants are known for this type of testing, where a new menu item may be
tested in only one particular geographic area. Product refinement can be time-consuming, and the
company may want to hurry through this phase to rush the product to market. However, rushing
creates the risk that all the “bugs” have not been worked out, which can prove very costly.
D. Final Design
Following extensive design testing, the product moves to the final design stage. This is where
final product specifications are drawn up. The final specifications are then translated into specific
processing instructions to manufacture the product, which include selecting equipment, outlining
jobs that need to be performed, identifying specific materials needed and suppliers that will be
used, and all the other aspects of organizing the process of product production.
Factors Impacting Product Design
Here are some factors that need to be considered during the product design stage.
A. Design for Manufacture (DFM)
When we think of product design, we generally first think of how to please the customer.
However, we also need to consider how easy or difficult it is to manufacture the product.
Otherwise, we might have a great idea that is difficult or too costly to manufacture.
Design for manufacture (DFM) is a series of guidelines that we should follow to produce a
product easily and profitably.

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Guidelines for DFM
1. Minimize the number of parts and subassemblies.
2. Avoid tools, separate fasteners, and adjustments.
3. Use standard parts when possible and repeatable, well-understood processes.
4. Design parts for many uses, and modules that can be combined in different ways.
5. Design for ease of assembly, minimal handling, and proper presentation.
6. Allow for efficient and adequate testing and replacement of parts.
DFM guidelines focus on two issues:
1. Design simplification and Value Analysis /engineering/
Design simplification means reducing the number of parts and features of the product
whenever possible. A simpler product is easier to make, costs less, and gives higher
quality.
Value Analysis (also known as value engineering) was developed by General Electric in
1947 to eliminate unnecessary features and functions in product designs. It has reemerged
as a technique for use by multifunctional design teams. The design team defines the
essential functions of a component, assembly, or product using a verb and a noun.
Updated versions of value analysis also assess the environmental impact of materials,
parts, and operations.
2. Design standardization refers to the use of common and interchangeable parts. By using
interchangeable parts, we can make a greater variety of products with less inventory and
significantly lower cost and provide greater flexibility.

Figure 3.3-Design Simplification

An example of the benefits of applying these rules is seen in the above figure. We can see the
progression in the design of a toolbox using the DFM approach. All of the pictures show a
toolbox. However, the first design shown requires 20 parts. Through simplification and use of
modular design, the number of parts required has been reduced to 2. It would certainly be much
easier to make the product with 2 parts versus 20 parts. This means fewer chances for error,
better quality, and lower costs due to shorter assembly time.
B. Product Life Cycle

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Another factor in product design is the stage of the life cycle of the product. Most products go
through a series of stages of changing product demand called the product life cycle. There are
typically four stages of the product life cycle: introduction, growth, maturity, and decline. These
are shown in Figure 3-4.

Products in the introductory stage are not well defined, and neither is their market. Often all the
“bugs” have not been worked out, and customers are uncertain about the product. In the growth
stage, the product takes hold and both product and market continue to be refined. The third stage
is that of maturity, where demand levels off and there are usually no design changes: the product
is predictable at this stage and so is its market. Many products, such as toothpaste, can stay in
this stage for many years. Finally, there is a decline in demand because of new technology, better
product design, or market saturation.
The first two stages of the life cycle can collectively be called the early stages because the
product is still being improved and refined and the market is still in the process of being
developed. The last two stages of the life cycle can be referred to as the later stages because here
both the product and market are well defined.
Understanding the stages of the product life cycle is important for product design purposes, such
as knowing at which stage to focus on design changes. Also, when considering a new product,
the expected length of the life cycle is critical in order to estimate future profitability relative to
the initial investment. The product life cycle can be quite short for certain products, as seen in
the computer industry. For other products it can be extremely long, as in the aircraft industry. A
few products, such as paper, pencils, nails, milk, sugar, and flour, do not go through a life cycle.
However, almost all products do, and some may spend a long time in one stage.
C. Concurrent Engineering
Concurrent engineering is an approach that brings many people together in the early phase of
product design in order to simultaneously design the product and the process. This type of
approach has been found to achieve a smooth transition from the design stage to actual
production in a shorter amount of development time with improved quality results.

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The old approach to product and process design was to first have the designers of the idea come
up with the exact product characteristics. Once their design was complete they would pass it on
to operations, who would then design the production process needed to produce the product. This
was called the “over-the-wall” approach because the designers would throw their design “over-
the-wall” to operations, who then had to decide how to produce the product.
There are many problems with the old approach. First, it is very inefficient and costly. For
example, there may be certain aspects of the product that are not critical for product success but
are costly or difficult to manufacture, such as a dye color that is difficult to achieve. Since
manufacturing does not understand which features are not critical, it may develop an
unnecessarily costly production process with costs passed down to the customers. Because the
designers do not know the cost of the added feature, they may not have the opportunity to change
their design or may do so much later in the process, incurring additional costs. Concurrent
engineering allows everyone to work together so these problems do not occur.’
The third problem is that the old approach does not create a team atmosphere, which is important
in today’s work environment. Rather, it creates an atmosphere where each function views its role
separately in a type of “us versus them” mentality. With the old approach, when the designers
were finished with the designs, they considered their job done. If there were problems, each
group blamed the other. With concurrent engineering, the team is responsible for designing and
getting the product to market. Team members continue working together to resolve problems
with the product and improve the process.

Figure: 3-5- Concurrent engineering and the “over-the-wall” approach

The first illustration shows sequential design with walls between functional areas. The second
illustration shows concurrent design with walls broken down. A second problem is that the
“over-the-wall” approach takes a longer amount of time than when product and process design
are performed concurrently. As you can see in Figure 3-5, when product and process design are
done together, much of the work is done in parallel rather than in sequence. In today’s markets,

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new product introductions are expected to occur faster than ever. Companies do not have the
luxury of enough time to follow a sequential approach and then work the “bugs” out. They may
eventually get a great product, but by then the market may not be there!
Major considerations to be included in designing a product through concurrent engineering are:
Design for Manufacture
 Considering the effectiveness with which an item can be made during initial development.
Design for procurement
 Considering component parts supply during initial periods of product design
Design for environment
 Considering environmental impact of product design from extraction of RM to their disposal.
Design for Robustness
 A Product has to be designed to withstand variations in environmental/operational conditions.
Design for Assembly
 The ease which product component parts can be dismantled or disassembled.
D. Remanufacturing
Remanufacturing is a concept that has been gaining increasing importance as our society
becomes more environmentally conscious and focuses on recycling and eliminating waste.
Remanufacturing uses components of old products in the production of new ones. In addition to
the environmental benefits, there are significant cost benefits because remanufactured products
can be half the price of their new counterparts. Remanufacturing has been quite popular in the
production of computers, televisions, and automobiles.

Quality Function Deployment (QFD): A critical aspect of building quality into a product is
to ensure that the product design meets customer expectations. This typically is not as easy as it
seems. Customers often speak in everyday language. For example, a product can be described as
“attractive,” “strong,” or “safe.”However, these terms can have very different meaning to
different customers. To produce a product that customers want, we need to translate customers’
everyday language into specific technical requirements. However, this can often be difficult. A
useful tool for translating the voice of the customer into specific technical requirements is
quality function deployment (QFD). Quality function deployment is also useful in enhancing
communication between different functions, such as marketing, operations, and engineering.
II. DESIGNING SERVICES
Most of the issues discussed in this chapter are as applicable to service organizations as they are
to manufacturing. However, there are issues unique to services that pose special challenges for
service design.

How Are Services Different from Manufacturing?

In the first chapter we learned about two basic features that make service organizations different
from manufacturing. These are the intangibility of the product produced and the high degree of
customer contact.
a. Intangible Product: Service organizations produce an intangible product, which cannot be
touched or seen. It cannot be stored in inventory for later use or traded in for another model.
The service produced is experienced by the customer. The design of the service needs to
specify exactly what the customer is supposed to experience. For example, it may be

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 relaxation, comfort, and pampering, such as offered by Canyon Ranch Spa. It may be
efficiency and speed, such as offered by FedEx. Defining the customer experience is part of
the service design. It requires identifying precisely what the customer is going to feel and
think and consequently how he or she is going to behave. This is not always as easy as it
might seem.
b. High Degree of Customer Contact: Service organizations typically have a high degree of
customer contact. The customer is often present while the service is being delivered, such as
at a theater, restaurant, or bank. Also, the contact between the customer and service provider
is often the service itself, such as what you experience at a doctor’s office. For a service to be
successful, this contact needs to be a positive experience for the customer, and this depends
greatly on the service provider.

The Service Design Process

Services that are allowed to just happen rarely meet customer needs. World-class services that
come to mind—McDonald’s, Nordstrom, Federal Express, and Disney World—are all
characterized by impeccable design. McDonald’s plans every action of its employees (including
49 steps to making perfect french fries); Nordstrom creates a pleasurable shopping environment
with wellstocked shelves, live music, fresh flowers in the dressing rooms, and legendary
salespersons; Federal Express designs every stage of the delivery process for efficiency and
speed; and Disney World in Japan was so well designed that it impressed even the zero-defect
Japanese.
Service design is more comprehensive and occurs more often than product design. The inherent
variability of service processes requires that the service system be carefully designed. Figure 3.6
shows the service design process beginning with a service concept and ending with service
delivery.

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Figure 3.6: The service design process
The service concept defines the target customer and the desired customer experience. It also
defines how our service is different from others and how it will compete in the marketplace.
Sometimes services are successful because their service concept fills a previously unoccupied
niche or differs from the generally accepted mode of operation.
From the service concept, a service package is created to meet customer needs. The package
consists of a mixture of physical items, sensual benefits, and psychological benefits. For a
restaurant the physical items consist of the facility, food, drinks, tableware, napkins, and other
touchable commodities. The sensual benefits include the taste and aroma of the food and the
sights and sounds of the people. Psychological benefits are rest and relaxation, comfort, status,
and a sense of well-being.
Effective service design recognizes and defines all the components of a service package. Finding
the appropriate mix of physical items and sensual and psychological benefits and designing them
to be consistent with each other and the service concept is also important. A fast-food restaurant
promises nourishment with speed. The customer is served quickly and is expected to consume
the food quickly. Thus, the tables, chairs, and booths are not designed to be comfortable, nor
does their arrangement encourage lengthy or personal conversations. The service package is
consistent. This is not the case for an upscale restaurant located in a renovated train station. The
food is excellent, but it is difficult to enjoy a full-course meal sitting on wooden benches in a
drafty facility, where conversations echo and tables shake when the trains pass by.

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From the service package, service specifications are developed for performance, design, and
delivery. Performance specifications outline expectations and requirements for general and
specific customers. Performance specifications are converted into design specifications and,
finally, delivery specifications (in lieu of manufacturing specifications).
Design specifications must describe the service in sufficient detail for the desired service
experience to be replicated for different individuals at numerous locations. The specifications
typically consist of activities to be performed, skill requirements and guidelines for service
providers, and cost and time estimates. Facility size, location, and layout, as well as equipment
needs, are also included. Delivery specifications outline the steps required in the work process,
including the work schedule, deliverables, and the locations at which the work is to be
performed.
Table 3.1: Differences in Design for High-Contact Services

PROCESS SELECTION
A process is a group of related tasks with specific inputs and outputs. Processes exist to create
value for the customer, the shareholder, or society.
Process design defines what tasks need to be done and how they are to be coordinated among
functions, people, and organizations. Planning, analyzing, and improving processes is the
essence of operations management. Processes are planned, analyzed, and redesigned as required
by changes in strategy and emerging technology.
Process strategy is an organization’s overall approach for physically producing goods and
providing services. Process decisions should reflect how the firm has chosen to compete in the
marketplace, reinforce product decisions, and facilitate the achievement of corporate goals.
A firm’s process strategy defines its:
Vertical integration: The extent to which the firm will produce the inputs and control the
outputs of each stage of the production process.
Capital intensity: The mix of capital (i.e., equipment, automation) and labor resources
used in the production process.

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 Process flexibility: The ease with which resources can be adjusted in response to changes
in demand, technology, products or services, and resource availability.
Customer involvement: The role of the customer in the production process.
Process planning determines how a product will be produced or a service provided. It decides
which components will be made in-house and which will be purchased from a supplier, selects
processes, and develops and documents the specifications for manufacture and delivery.

Types of production Processes

Production processes can be classified into projects, batch production, mass production, and
continuous production.
A. Project
Projects are used to make one-of-a-kind products exactly to customer specifications. These
processes are used when there is high customization and low product volume, because each
product is different. Examples can be seen in construction, shipbuilding, medical procedures, and
creation of artwork, custom tailoring, and interior design. With project processes the customer is
usually involved in deciding on the design of the product. Project take a long time to complete,
involve a large investment of funds and resources, and produce one item at a time to consumer
order.
B. Job-Shop Production
Job-shop productions are characterized by manufacturing one or few quantity of products
designed and produced as per the specification of customers within prefixed time and cost. The
distinguishing feature of this is low volume and high variety of products. A job-shop comprises
of general-purpose machines arranged into different departments. Each job demands unique
technological requirements, demands processing on machines in a certain sequence.
Job-shop Production is characterized by
High variety of products and low volume.
Use of general purpose machines and facilities.
Highly skilled operators who can take up each job as a challenge because of uniqueness.
Large inventory of materials, tools, parts.
Detailed planning is essential for sequencing the requirements of each product, capacities
for each work centre and order priorities.
C. Batch Production
Batch productions are used to produce small quantities of products in groups or batches based on
customer orders or product specifications. They are also known as job shops. The volumes of
each product produced are still small, and there can still be a high degree of customization.
Examples can be seen in bakeries, education, and printing shops furniture making. The classes
you are taking at the university use a batch process. Batch production processes many different
jobs through the production system at the same time in groups or batches. Products are typically
made to customer order, volume (in terms of customer order size) is low, and demand fluctuates.
Batch Production is characterized by:
Shorter production runs.
Plant and machinery are flexible.

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 Plant and machinery set up is used for the production of item in a batch and change of
set up is required for processing the next batch.
Manufacturing lead-time and cost are lower as compared to job order production.
D. Mass Production
These are designed to produce a large volume of a standardized product for mass production.
They are also known as flow shops, flow lines, or assembly lines. With line processes the
product that is produced is made in high volume with little or no customization. Think of a
typical assembly line that produces everything from cars, computers, television sets, shoes,
candy bars, even food items. The machines are arranged in a line or product layout. Product and
process standardization exists and all outputs follow the same path. Product demand is stable,
and product volume is high. Goods that are mass produced include automobiles, televisions,
personal computers, fast food, and most consumer goods.
Mass Production is characterized by
Standardization of product and process sequence.
Dedicated special purpose machines having higher production capacities and output rates.
Large volume of products.
Shorter cycle time of production.
Lower in process inventory.
Flow of materials, components and parts is continuous and without any back tracking.
Production planning and control is easy.
Material handling can be completely automatic.
E. Continuous processes
Continuous production operates continually to produce very high volume of fully standardized
commodity products. The system is highly automated and is typically in operation continuously
24 hours a day. Examples include oil refineries, water treatment plants, and certain paint
facilities. The products produced by continuous processes are usually in continual rather than
discrete units, such as liquid or gas. They usually have a single input and a limited number of
outputs. Also, these facilities are usually highly capital intensive and automated. Continuous
processes are more extreme cases of high volume and product standardization than are line
processes.
Continuous production is characterized by:
Dedicated plant and equipment with zero flexibility.
Material handling is fully automated.
Process follows a predetermined sequence of operations.
Component materials cannot be readily identified with final product.
Planning and scheduling is a routine action.

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Figure 3.7

CAPACITY PLANNING
Capacity can be defined as the maximum output rate that can be achieved by a facility. The
facility may be an entire organization, a division, or only one machine. Planning for capacity in a
company is usually performed at two levels, each corresponding to either strategic or tactical
decisions, as discussed in Chapter 1. The first level of capacity decisions is strategic and long-
term in nature. This is where a company decides what investments in new facilities and
equipment it should make. Because these decisions are strategic in nature, the company will have
to live with them for a long time. The second level of capacity decisions is more tactical in
nature, focusing on short-term issues that include planning of workforce, inventories, and day-to-
day use of machines.
Measuring Capacity
Although our definition of capacity seems simple, there is no one way to measure it. Different
people have different interpretations of what capacity means, and the units of measurement are
often very different.
Note that each business can measure capacity in different ways and that capacity can be
measured using either inputs or outputs. Output measures, such as the number of cars per shift,
are easier to understand. However, they do not work well when a company produces many
different kinds of products. For example, if we operate a bakery that bakes only pumpkin pies,
then a measure such as pies per day would work well. However, if we made many different kinds
of pies and varied the combination from one day to the next, then simply using pies per day as
our measure would not work as well, especially if some pies took longer to make than others.
Suppose that pecan pies take twice as long to make as pumpkin pies. If one day we made 20
pumpkin pies and the next day we made 10 pecan pies, using pies per day as our measure would
make it seem as if our capacity was underutilized on the second day, even though it was equally
utilized on both days.
Types of Capacity

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Design /Theoretical Capacity: is the maximum output rate that can be achieved by a facility
under ideal conditions. In our example, this is 30 pies per day. Design capacity can be sustained
only for a relatively short period of time. A company achieves this output rate by using many
temporary measures, such as overtime, overstaffing, maximum use of equipment, and
subcontracting.
Effective/System Capacity: is the maximum output rate that can be sustained under normal
conditions considering operational constraints. These constraints that need to be considered
include realistic work schedules and breaks, regular staff levels, scheduled machine maintenance,
and none of the temporary measures that are used to achieve design capacity. Note that effective
capacity is usually lower than design capacity. In our example, effective capacity is 20 pies per
day.
Actual /Operating Capacity: The actual output that the company has already produced or
achieved. In our example, actual output is 10 pies per day.
These different measures of capacity are useful in defining two measures of system
effectiveness: efficiency and utilization. Utilization refers to the percentage of available working
time that a worker actually works or a machine actually runs. Efficiency refers to how well a
machine or worker performs compared to a standard output level.

Example: The design capacity for engine repair in our company is 80 trucks per day. The
effective capacity is 40 engines per day and the actual output is 36 engines per day. Calculate the
utilization and efficiency of the operation. If the efficiency for next month is expected to be 82%,
what is the expected output?

More examples will be given in a separate work sheet. So you may go through them to
follow.
Economies of Scale: Every production facility has a volume of output that results in the lowest
average unit cost. This is called the facility’s best operating level. Figure 3-7 illustrates how the
average unit cost of output is affected by the volume produced. You can see that as the number
of units produced is increased, the average cost per unit drops. The reason is that when a large
amount of goods is produced, the costs of production are spread over that large volume. These
costs include the fixed costs of buildings and facilities, the costs of materials, and processing
costs. The more units are produced, the larger the number of units over which costs can be
spread—that is, the greater the economies of scale. It basically states that the average cost of a
unit produced is reduced when the amount of output is increased.

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You use the concept of economies of scale in your daily life, whether or not you are aware of it.
Suppose you decide to make cookies in your kitchen. Think about the cost per cookie if you
make only five cookies. There would be a great deal of effort—getting the ingredients, mixing
the dough, and shaping the cookies—all for only five cookies. If you had everything set up,
making five additional cookies would not cost much more. Perhaps making even ten more
cookies would cost only slightly more because you had already set up all the materials. This
lower cost is due to economies of scale.
Figure 3-8

Diseconomies of Scale: What if you continued to increase the number of cookies you chose to
produce? For a while, making a few more cookies would not require much additional effort.
However, after a certain point there would be so much material that the kitchen would become
congested. You might have to get someone to help because there was more work than one person
could handle. You might have to make cookies longer than expected, and the cleanup job might
be much more difficult. You would be experiencing diseconomies of scale. Diseconomies of
scale occur at a point beyond the best operating level, when the cost of each additional unit made
increases.
When expanding capacity, management has to choose between one of the following two
alternatives:
Alternative 1: Purchase one large facility, requiring one large initial investment.
Alternative 2: Add capacity incrementally in smaller chunks as needed.
The first alternative means that we would have a large amount of excess capacity in the
beginning and that our initial costs would be high. We would also run the risk that demand might
not materialize and we would be left with unused overcapacity. On the other hand, this
alternative allows us to be prepared for higher demand in the future. Our best operating level is
much higher with this alternative, enabling us to operate more efficiently when meeting higher
demand. Our costs would be lower in the long run, since one large construction project typically
costs more than many smaller construction projects due to startup costs. Thus, alternative 1
provides greater rewards but is more risky.
Alternative 2 is less risky but does not offer the same opportunities and flexibility. It is up to
management to weigh the risks versus the rewards in selecting an alternative.

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Capacity Expansion Strategies

Capacity Expansion
Strategies

A. Capacity lead strategy.

Capacity is expanded in anticipation of demand growth. This aggressive strategy is used to lure
customers from competitors who are capacity constrained or to gain a foothold in a rapidly
expanding market. It also allows companies to respond to unexpected surges in demand and to
provide superior levels of service during peak demand periods.
B. Average capacity strategy
Capacity is expanded to coincide with average expected demand. This is a moderate strategy in
which managers are certain they will be able to sell at least some portion of expanded output, and
endure some periods of unmet demand. Approximately half of the time capacity leads demand,
and half of the time capacity lags demand.
C. Capacity lag strategy
Capacity is increased after an increase in demand has been documented. This conservative
strategy produces a higher return on investment but may lose customers in the process. It is used
in industries with standard products and cost-based or weak competition. The strategy assumes
that lost customers will return from competitors after capacity has expanded.
D. Incremental or one step expansion
Concentrated on two issues including: when a company needs to breakthrough or bring a radical
change in its current capacity and when it expands its capacity gradually through time

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 FACILITY LAYOUT
WHAT IS LAYOUT PLANNING?
Facility layout decision entails determining the placement of departments, workstations,
machines and stockholding points within a productive facility. General objective of facility lay
out is to arrange these elements in the way that ensures a smooth workflow (in a factory) or a
particular traffic pattern (in service organization.)
Arrangement of areas within a facility is important to:
 Minimize material handling costs  Reduce manufacturing cycle time
 Utilize space efficiently  Reduce customer service time
 Utilize labor efficiently  Eliminate redundant movement
 Eliminate bottlenecks  Incorporate safety and security measures
 Facilitate comm. and interaction  Increase capacity etc.
TYPES OF LAYOUTS
There are four basic layout types: process, product, hybrid, and fixed position. In this section we
look at the basic characteristics of each of these types. Then we examine the details of designing
some of the main types.
A. Process Layouts
Process layouts are layouts that group resources based on similar processes or functions. This
type of layout is seen in companies with intermittent processing systems. You would see a
process layout in environments in which a large variety of items are produced in a low volume.
Since many different items are produced, each with unique processing requirements, it is not
possible to dedicate an entire facility to each item. It is more efficient to group resources based
on their function. The products are then moved from one resource to another, based on their
unique needs.
Process layouts are very common. A hospital is an example of process layout. Departments are
grouped based on their function, such as cardiology, radiology, laboratory, oncology, and
pediatrics. The patient, the product in this case, is moved between departments based on his or
her individual needs. A university is another example. Colleges and departments are grouped
based on their function. You, the student, move between departments based on the unique
program you have chosen.
Characteristics of process layout
 Resources used are general purpose. The resources in a process layout need to be capable
of producing many different products.
 Facilities are less capital intensive. Process layouts have less automation, which is
typically devoted to the production of one product.
 Facilities are more labor intensive. Process layouts typically rely on higher-skilled workers
who can perform different functions.
 Resources have greater flexibility. Process layouts need to have the ability to easily add or
delete products from their existing product line, depending on market demands.
 Processing rates are slower. Process layouts produce many different products, and there is
greater movement between workstations.

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  Material handling costs are higher. It costs more to move goods from one process to
another.
 Scheduling resources is more challenging. Scheduling equipment and machines is
particularly important in this environment.
 Space requirements are higher. This type of layout needs more space due to higher
inventory storage needs.
Improper design of process layouts can result in costly inefficiencies, such as high material
handling costs. A good design can help bring order to an environment that might otherwise be
very chaotic.
B. Product Layouts
Product layouts are layouts that arrange resources in a straight-line fashion to promote efficient
production. They are called product layouts because all resources are arranged to meet the
production needs of the product. This type of layout is used by companies that have repetitive
processing systems and produce one or a few standardized products in large volume.
Examples of product layouts are seen on assembly lines, in cafeterias, or even at a car wash. In
product layouts the material moves continuously and uniformly through a series of workstations
until the product is completed. The challenge in designing product layouts is to arrange
workstations in sequence and designate the jobs that will be performed by each station in order to
produce the product in the most efficient way possible. For example, at a car wash you cannot
perform drying before you have performed washing.
Characteristics of product layout
 Resources are specialized. Product layouts use specialized resources designed to produce
large quantities of a product.
 Facilities are capital intensive. Product layouts make heavy use of automation, which is
specifically designed to increase production.
 Processing rates are faster. Processing rates are fast, as all resources are arranged in
sequence for efficient production.
 Material handling costs are lower. Due to the arrangement of work centers in close
proximity to one another, material handling costs are significantly lower.
 Space requirements for inventory storage are lower. Product layouts have much faster
processing rates and less need for inventory storage.
 Flexibility is low relative to the market. Because all facilities and resources are specialized,
product layouts are locked into producing one type of product.
C. Hybrid Layouts
Hybrid layouts combine aspects of both process and product layouts. This is the case in facilities
where part of the operation is performed using an intermittent processing system and another part
is performed using a continuous processing system. For example, Winnebago, which makes
mobile campers, manufactures the vehicle itself as well as the curtains and bedspreads that go
into the camper. The vehicles are produced on a typical assembly line, whereas the curtains and
bedspreads are made in a fabrication shop that uses a process layout.
Hybrid layouts are often created in an attempt to bring the efficiencies of a product layout to a
process layout environment. To develop a hybrid layout, we can try to identify parts of the
process layout operation that can be standardized and produce them in a product layout format.

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D. Fixed-Position Layouts
A fixed-position layout is used when the product is large and cannot be moved due to its size.
All the resources for producing the product—including equipment, labor, tools, and all other
resources—have to be brought to the site where the product is located. Examples of fixed-
position layouts include building construction, dam or bridge construction, shipbuilding, or large
aircraft manufacture. The challenge with a fixed-position layout is scheduling different work
crews and jobs and managing the project.

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