CHAPTER THREE

DESIGN OF OPERATIONS SYSTEM

Outline:
3.1. Product (Service) Design and Development
3.2. Process Selection
3.3. Capacity Planning
3.4. Facility Location
3.5. Facility Layout
3.6. Job Design and Work Measurement
Introduction

Products and services are often the first thing that customers see of a company, so they should
have an impact. And although operations managers may not have direct responsibility for product
and service design, they always have an indirect responsibility to provide the information and
advice upon which successful product or service development depends. But increasingly
operations managers are expected to take a more active part in product and service design. Unless
a product, however well designed, can be produced to a high standard, and unless a service,
however well conceived, can be implemented, the design can never bring its full benefits.

3.1. Product (Service) Design and Development

3.1.1. What is Design?

Design is the process of structuring of component parts /activities of products so that as a unit it
can provide value for the customer. Product is designed in terms of size, colour, shape, content
and other related dimensions. Design greatly affects operation by specifying the products that will
be made and it is the prerequisite for operations to occur.
Who is responsible for design? It is not only operations department but also an interactive decision
of marketing (4P’s), purchasing (what materials are required to produce the products), finance
(return on investment, financial liquidity), engineering, legal (warranty and liability issues), quality
control (conformance with product specifications), government, top management (decision used
for a long period of time) and other stakeholders, etc.
3.1.2. Objectives of Design
The objectives of design may vary from situations to situations and from organization to
organization. An obvious reason includes:
 To be competent (by offering new products or services).
 To reduce cost and increase profit.

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  To develop new products or services as alternatives to downsizing.
 To design products/services that have customer appeal
 To increase quality and level of customer satisfaction
NB: Sometimes product or service design is actually redesign for a number of reasons such as
customer complaints, excessive warranty claims, low demand etc.
3.1.3. Product Design
Product design is the process of defining all the features and characteristics of just about
anything you can think of. 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 is also defined as: ‘a product‘s characteristics, such as its appearance, the
materials it is made of, its dimensions and tolerances, and its performance standards’.
3.1.3.1. Philosophies Towards Product Design and Development
There are three fundamentally different ways to introduce new products.
i. Market pull: the market is the primary basis for determining the products a firm should make
with little regard to the existing technology. Customer’s wants and needs play the primary role
for new product development and design. A firm should make what it can sell. So it is required
to undertake customers’ survey and market research to determine customer’s need.
ii. Technology push philosophy: technology is the primary determinant of the product that the
firm should make with little regard for the market. One should sell what can be produced i.e.
the existing technology determine what kind of product to be produced .The assumption is that
the firm should pursue a technology based advantages by developing superior technology and
products. The products are pushed to the market and the marketing’s job is to create demand
for these superior products.
iii. Inter functional philosophy: stated that product design and development is neither market
pull nor technology push. Rather it is inter functional and interactive process of customers,
marketing, finance, engineering and other related functional areas.

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3.1.3.2. Product Development Process (Phases)
To get to a final design of a product or service, the design activity must pass through several key
stages. These form an approximate sequence, although in practice designers will often recycle or
backtrack through the stages. The basic stages of product/service design are the following
1. Idea generation 5. Prototype Testing
2. Feasibility analysis 6. Final Product Design
3. Initial (Preliminary) Product 7. Product introduction
Design 8. Follow-up evaluation
4. Prototype development
Let’s discuss each of them
1. Concept (idea) Generation
The ideas for new product or service concepts can come from sources outside the organization,
such as customers or competitors, and from sources within the organization, such as staff (for
example, from sales staff and front-of-house staff) or from the R&D department.
a) Ideas from customers: Marketing, the function generally responsible for identifying new
product or service opportunities, may use many market research tools for gathering data from
customers in a formal and structured way, including questionnaires and interviews. Listening to
the customer, in a less structured way, is sometimes seen as a better means of generating new ideas.
Focus groups, for example, are one formal but unstructured way of collecting ideas and
suggestions from customers.
b) Ideas from competitor activity: All market-aware organizations follow the activities of
their competitors. A new idea may give a competitor an edge in the marketplace, even if it is only
a temporary one, then competing organizations will have to decide whether to imitate or
alternatively to come up with a better or different idea.
Sometimes this involves reverse engineering that is, taking apart a product to understand how a competing
organization has made it.
c) Ideas from staff: The contact staff in a service organization or the salesperson in a product-
oriented organization could meet customers every day. These staff may have good ideas about
what customers like and do not like.
d) Ideas from research and development: One formal function found in some organizations
is research and development. Research usually means attempting to develop new knowledge and

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ideas in order to solve a particular problem or to grasp an opportunity. Development is the attempt
to utilize and operationalize the ideas that come from research.
2. Concept Screening (Feasibility Analysis)
Not all concepts which are generated will necessarily be capable of further development into
products and services. The purpose of the concept-screening stage is to take the flow of concepts
and evaluate them. Evaluation in design means assessing the worth or value of each design option,
so that a choice can be made between them. This involves assessing each concept or option against
a number of design criteria. Major criteria are the following:
• Market feasibility: evaluate the new ideas in terms of whether the product has market or not,
• Financial (economic) feasibility: how well the product quality performance and costs confirm
to the design objectives and,
• Technical feasibility: availability of technology and skilled labor.
At last, the most feasible and viable product concept is selected for the next stages.
3. Initial (Preliminary) Product Design
This stage of the product-design process is concerned with developing the best design for the new
product ideas. It is the translation of ideas in to products. Preliminary product design must specify
the product completely. At the end of the product design phase, the firm has a set of product
specifications and engineering drawing (or computer image) specified in sufficient detail that
production prototype can be built and tested. In the preliminary design tradeoffs between cost,
quality and product performances are considered.
4. Prototype Construction
If the preliminary product design is approved, a prototype/s may be built for further testing and
analysis. Several prototypes which closely resembles with the final products may be made by hand
from some artificial materials such as plastics, mud, clay, wood etc. For example, the auto industry
regularly makes clay models of new automobiles.
5. Prototype Testing:
A model is tested for its physical properties or uses under actual operating conditions. Testing of
prototypes is aimed at verifying marketing and technical performance. The purpose of a test market
is to gather quantitative data on customer acceptance of the new product. Prototype is also tested
for technical product performance. In general, such testing is important in uncovering any
problems and correcting them prior to full scale production. For example, auto manufacturer

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perform extensive road tests on new models; similar experiments are performed on tires, airplanes,
and sports equipment.
6. Final Product Design
Prototype testing may indicate certain changes in the preliminary product design. If changes are
made the product may be tested further to ensure final product performance. Market test is used to
determine the extent of consumer acceptance. If this market test is unsuccessful, return to the
design review phase (this phase is handled by marketing). During the final phase these changes
are incorporated in to the design specification. Drawing and specifications for the product are to
be developed at this stage. And go for full scale operations.
7. Product Introduction: this stage is used to promote the product; handled by marketing
8. Follow-up Evaluation: it helps to determines if changes are needed & refine forecasts;
handled by marketing.
3.1.3.3. Issues in Product and Service Design
This sub unit addresses factors (techniques) to be considered while designing the product.

Legal and Ethical Considerations Robust Design

Strategies for product or service life cycle Cultural difference
Degree of standardization Degree of newness
Designing for mass customization Modular Design
Reliability Concurrent Engineering
Group technology (GT) Computer-Aided Design (CAD)
Virtual Reality technology Computer-Aided Manufacturing
Value Analysis & value Engineering (CAM)

Quality Function Deployment QFD

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 Legal and Ethical Considerations
Designers are often under pressure to Speed up the design process and Cut costs. These pressures
force trade-off decisions.
- Product Liability - A manufacturer is liable for any injuries or damages caused by a
faulty product.
- Uniform Commercial Code – Says that products carry an implication of
merchantability and fitness; i.e., a product must be usable for its intended purpose.
Designers Adhere to Guidelines
• Produce designs that are consistent with the goals of the company
• Give customers the value they expect
• Make health and safety a primary concern
• Consider potential harm to the environment
Strategies for product or service life cycle
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.
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.

Figure 3.1: product life cycle

❑ Introduction

▪ Weigh trade-offs between

eliminating ‘defects’ and getting
the product or service to the
market at an advantageous time

▪ Accurate demand forecasts are

important to ensuring adequate
capacity availability

Growth

▪ Demand forecasts are important to

ensuring a continued adequate
capacity availability
▪ Design improvements
▪ Emphasis on improved product or
service reliability and lower cost

❑ Maturity
▪ Relatively few design changes

▪ Emphasis is on high productivity

and low cost

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❑ Decline
▪ Continue or discontinue product or
service
▪ Identify alternative uses for
product or service
▪ Continued emphasis on high
productivity and low cost

Design for Manufacturability (DFM)

DFM is a product development approach that explicitly considers the effectiveness with which an
item can be made during the initial development of the product design. Manufacturability refers to
the ease with which the product can be manufactured. Three concepts are closely related to
designing for easy of production. These are: simplification, specification, and standardization.

• Simplifications: is a design or redesigns strategy that improves the manufacturability,

serviceability, or reliability of a product or service by reducing the complexity of its design.
Specifications: is a detail description of material, parts, or products including physical
dimensions. These specifications profiled production department with precise information
about the characteristics of products to be produced.
• Standardization: refers to a design activity that reduce variety amount a group of product or
parts. Extent to which there is an absence of variety in a product, service or process.
Standardized products are immediately available to customers. Standardization of groups of
products or parts usually results in higher volume for each product or part model which can
leads to lower production costs, higher product quality, greater ease of automation, and lower
inventory investment.
Advantages of Standardization
✓ Fewer parts to deal with in inventory & manufacturing
✓ Design costs are generally lower
✓ Reduced training costs and time
✓ More routine purchasing, handling, and inspection procedures
✓ Orders fillable from inventory

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 ✓ Opportunities for long production runs and automation
✓ Need for fewer parts justify increased expenditures on perfecting designs and
improving quality control procedures.
Designing for mass customization
A strategy of producing standardized goods or services, but incorporating some degree of
customization. Tactics make it possible are:
• Delayed differentiation: is a postponement tactic; producing but not quite completing a
product or service until customer preferences or specifications are known
• Modular Design: is a form of standardization in which component parts are subdivided into
modules that are easily replaced or interchanged. It allows: Easier diagnosis and remedy of
failures, easier repair and replacement, simplification of manufacturing and assembly. It makes
possible to have relatively high product variety and low component variety at the same time.
The basic idea is to develop a series of basic product components (or modules) which can be
assembled in to a large number of different products..
Reliability
Reliability: The ability of a product, part, or system to perform its intended function under a
prescribed set of conditions
Failure: Situation in which a product, part, or system does not perform as intended.
Normal operating conditions: The set of conditions under which an item’s reliability is specified.
Range of Operating Condition
▪ Robust Design: Design that result in products or services that can function over a broad
range of conditions. Product is designed so that small variations in production or assembly
do not adversely affect the product. Typically results in lower cost and higher quality.
▪ Cultural difference: designer must take into account any differences of different country.
▪ Degree of newness: product design change can range from modification of an existing to
an entirely new product.
1. Modification of an existing product/service
2. Expansion of an existing product/service
3. Clone of a competitor‘s product/service
4. New product/service

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 Degree of Design Change

Type of Design Newness to the Newness to the market

Change organization
Modification Low Low
Expansion Low Low
Clone (copy) High Low
New High High
i.e. newness for organization in transition process
✓ Newness to the market degree of acceptance to new product
✓ Their effect on cost and pricing
Concurrent Engineering/ Simultaneous development
It 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. In its narrowest sense, concurrent
engineering means bringing engineering design and manufacturing people together early in the
design phase to simultaneously develop the product and the processes for creating the product.
Using concurrent engineering is preferable than sequential/hierarchical engineering. 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.

Group Technology (GT)

GT is parts or products with similar characteristics in to families, and sets aside groups of
machines for their productions. Families may be based on size, shape, manufacturing, (or routing)
requirement or demand. The goal is to identify a set of products with similar processing
requirements and minimize machine changeovers or setups. For example all bolts might be
assigned to the same family because they all require the same basic processing steps regardless of
the size or shape. GT is an engineering and manufacturing strategy based on the development and
exploitations of commonalities among parts, equipment, or processes.

Value Analysis and Value Engineering

The term VA and VE are used almost interchangeably but they are not identical. Value engineering
focuses on pre- production design improvement while VA (even though is a related techniques)
takes place during the production process when it is clear that a new product is a success. The basic
objective of VE &VA is to achieve equivalent or better performance at a lower cost while

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maintaining all functions and quality requirements. It does this largely by identifying and
eliminating hidden, invisible, and unnecessary cost. VE & VA should not be treated as a mere
cost reduction techniques or cheapening of the product. It is more comprehensive and the
improvement in value is attained without any sacrifices in quality, reliability, maintainability,
availability, aesthetics etc.
Hence, Value Analysis focuses on design improvement during production, examination of the
function of parts and materials in an effort to reduce cost and/or improve product performance
and seeks improvements leading either to a better product or a product which can be
produced more economically.
Computer Aided Design (CAD) & Computer Aided Manufacturing (CAM)
✓ CAD is an electronic system for designing new parts or products or altering existing ones,
replacing drafting traditionally done by hand. The heart of CAD is a powerful computer and
graphics software that allow a designer to manipulate geometric shapes and create visual
display. Using the design data stored in the computer’s memory, manufacturing engineers and
other users can quickly obtain print outs of plan and specifications for a part or product. CAD
cut the cost of product development and sharply reduces the time to market for new products.
Hence Computer-Aided Design (CAD) will have the following benefits: 1) increases
productivity of designers, 3 to 10 times; 2) creates a database for manufacturing information
on product specifications; 3) provides possibility of engineering and cost analysis on proposed
designs.
✓ CAM is an electronic system which is used to design production process and control machine
tools and material flow through programmable automation. CAM is utilizing specialized
computers and program to control manufacturing equipment. CAM is often driven by the CAD
system.
✓ CAD /CAM integrate the design and manufacturing functions by translating final design
specification in to detailed machine instruction for manufacturing an item. CAD/CAM is
quicker, less error prone than human, eliminate duplications between engineering and
manufacturing, allow engineers to see how the various parts of a design interact with each
other without having to build a prototype.

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 Virtual Reality Technology
Computer technology used to develop an interactive, 3-D model of a product from the basic CAD
data. Allows people to see the finished design before a physical model is built. 3- D is Very
effective in large-scale designs such as plant layout.
Quality Function Deployment (QFD)
The key purpose of quality function deployment is to try to ensure that the eventual design
of a product or service actually meets the needs of its customers. It is a technique that was
developed in Japan at Mitsubishi‘s Kobe shipyard and used extensively by Toyota, the motor
vehicle manufacturer, and its suppliers. It is also known as the house of quality‘ (because of
its shape) and the voice of the customer‘ (because of its purpose).
The technique tries to capture what the customer needs and how it might be achieved. The
QFD matrix is a formal articulation of how the company sees the relationship between the
requirements of the customer (what‘s) and the design characteristics of the new product (the
how‘s).

Defining the relationship is the first step in building a world class production system. To build the
house of quality, we perform seven basic steps:

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1) Identify customer wants. (What do prospective customers want in this product?)
2) Identify how the good/service will satisfy customer wants. (Identify specific characteristics,
features, or attributes and show how they will satisfy customer wants).
3) Relate customer wants to product how‘s. (Build a matrix as the following figure shows this
relationship.)
4) Identify relationships between the firm‘s how‘s. (How do our how‘s tie together?)
5) Developing importance ratings. (Using the customer‘s importance ratings and weights for the
relationships in the matrix, compute our importance ratings.)
6) Evaluate computing products. (How well do competing products meet customer wants?)
7) Determine the desirable technical attributes, your performance, and the competitor‘s
performance against this attributes.
3.1.4. Service Design
Service refers to an act; something is done to or for a customer. It provided by service delivery
system.
• Service delivery system: the Facilities, Processes, Skills needed to provide a service.
• Product bundle: combination of goods and services provided to a customer.
• Service package: Service design involves development and refinement of the overall
requirement.
- The physical resources needed
- The goods that are purchased or consumed by the customer
- Explicit services (core /essential feature of it )
- Implicit services(extra features e.g. friendliness )
3.1.4.1. Phases in Service Design
1. Conceptualize: Idea generation, assessment of customer wants /needs, assessment of demand potential
2. Identify service package components
3. Determine performance specifications
4. Translate performance specifications into design specifications
5. Translate design specifications into delivery specifications
3.1.4.2. Service Blueprinting
Service blueprinting is a method used in service design to describe and analyze a proposed service.
It is a useful tool for conceptualizing a service delivery system. It provides a visual model of the
process

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Major Steps in Service Blueprinting
1. Establish boundaries for the process
2. Identify steps involved and describe them
3. Prepare a flowchart of major process steps
4. Identify potential failure points
5. Establish a time frame for service execution & an estimate of variability in process time
requirement
6. Analyze profitability

Figure 3.2: Service blueprint

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 3.2. PROCESS SELECTION AND CAPACITY PLANNING

Introduction

Another major decision for the operation manager is finding the best way to produce. It is clear
that no product can be made and no service provided without a process, and no process can exist
without a product or service. Process selection refers to the way an organization chooses to produce
its goods or provide its service. Essentially it involves choice of technology and related issues, and
it has major implications for capacity planning, layout of facilities, equipment and design of work
systems.
A process strategy is an organization’s approach to transform resources into goods and services.
We use terms, process and transformation, to describe this strategy. The objective of a process
strategy is to find a way to produce goods and services that meet customer requirements and
product specifications within cost and other managerial constraints. The process selected will have
a long term effect on efficiency and production, as well as the flexibility, cost, and quality of goods
produced. This part of the course looks at the ways managers design a process.
3.2.1. Make or Buy Decision

The very first step in process planning is to consider whether to make or buy some or all of a
product or to subcontract some or all of a service. A manufacturer might decide to purchase certain
parts rather than make them; sometimes all parts are purchased, with the manufacturer simply
performing assembly operations. Many firms contract out janitorial services, and some contact for
repair services. If a decision is made to buy or contract, this lessens or eliminates the need for
process selection. In make or buy decisions, a number of factors are usually considered:

Available capacity The nature of demand

Expertise Cost
Quality considerations
In some cases, a firm might choose to perform part of the work itself and let others handle the rest
in order to maintain flexibility and to hedge against loss of a subcontractor. Moreover, this provides
a bargaining tool in negotiations with contractors, or a head start if the firm decides later to take
over the operation entirely. If the organization decides to perform some or all of the processing,
then the issue of process selection is important.

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 3.2.2. Process Choice

One of the first decisions a manager makes in designing a well functioning process is to choose a
process type that best achieves the relative importance placed on quality, time flexibility and cost.
The manager has five process types, which form a continuum, to choose from:

Project Line, and

Job Continuous
Batch
The figure below shows the types of processes found in manufacturing and services organizations
alike. The fundamental message here is that the best choice for a process depends on the volume
and the degree of customization required of the process. A process choice might apply to an entire
process or just one sub process within it.

1. Project Process
A project process deals with one-of-a kind products that are tailored to the unique requirement of
each customer. Projects are set up to handle complex jobs that involve unique sets of activities.
Examples of a project process are building a shopping center, planning a major event, running a
political campaign, doing management consulting work, or developing a new technology or
product. A project process is characterized by a high degree of job customization, the large scope
of each project, and the release of substantial resources once a project is completed. A project

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process lies at the high customization low volume end of the process choice continuum. The
sequence of operations and the process involved in each are unique to the project, creating one-of-
a-kind products or services made specifically to customer orders.

2. Job process
Next in the continuum of process choices is the job process. It is appropriate for manufacturers of
small batches of many different products, each of which is custom designed and, consequently,
requires its own unique set of processing steps, or routing, through the production process.
Examples are providing emergency room care, handling special delivery mail or making
customized cabinets. Customization is relatively high and volume for any one product or service
is low. However, volumes are not as low as for a project process, which by definition does not
produce in quantity. The work force and equipment are flexible and handle various tasks.

As with a project process, companies choosing a job process often bid for work. Typically, they
make products to order and do not produce them ahead of time. A job process primarily organizes
all like resources around itself; equipment and workers capable of certain types of work are located
together. These resources process all jobs requiring that type of work. Because customization is
high and most jobs have a different sequence of processing steps, this process choice creates
jumbled flows through the operations rather than a line flow.

Characteristics of Job process

Small production runs Highly skilled labor

Discontinuous flow of materials Highly competent knowledgeable
Disproportionate manufacturing cycle supervision
time Large work-in-progress
General purpose machines and process Limited functions of production
layout planning and control
3. Batch Process
Batch process is a step up from job process in terms of product standardization, but it is not as
standardized as line process. Example of a batch process are scheduling air travel for a group,
making components that feed an assembly line, processing mortgage loans, and manufacturing
capital equipment. A batch process differs from the job process with respect to volume, variety
and quantity.

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 The primary difference is that volumes are higher because the same or similar products or
services are provided repeatedly.
Another difference is that a narrow range of products and services is provided. Variety is
achieved more through an assemble-to-order strategy than the job process’s make-to-order or
customized services strategy. Some of the components going into the final product or service
may be processed in advance.
A third difference is that production lots or customer groups are handled in larger quantities
(or batches) than they are with job processes. A batch of one product or customer grouping is
processed, and then production is switched to the next one. Eventually, the first product or
service is produced again. A batch process has average or moderate volumes, but variety is
still too great to warrant dedicating a separate process for each product service.
Characteristics of Batch process

• Short runs • Manual materials handling

• Skilled labor in specific trades • Manufacturing cycle time affected
• Supervisor to possess knowledge of a due to queues
specific process • Large work-in-progress
• Limited span of control • Flexibility of production schedules
• General purpose machines and process • Need to have production planning
type of layout and control
4. Line Process
Line Process is characterized by a linear sequence of operations used to make the product or
service. Products created by a line process include automobiles, appliances and toys. Services
based on a line process are fast food restaurants and cafeterias. A line process lies between the
batch and continuous processes on the continuum, volumes are high, and products or services are
standardized, which allows resources to be organized around a product or service. There are line
flows, with little inventory held between operations. Each operation performs the same process
over and over, with little variability in the products or services provided. Production orders are not
directly linked to customer orders, as is the case with project and job process.

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Characteristics of Line process
• Continuous flow of material • Short manufacturing cycle time
• Special purpose machines and • Easy supervision
product type layout • Limited work-in-progress
• Mechanized materials handling • Lesser flexibility in production
• Low skilled labor schedules
5. Continuous Process
Continuous processes systems are sometimes referred to as flow systems because of the rapid rate
at which items move through the system. This form of processing is used when highly standardized
products are involved. Examples are petroleum refineries, chemical plants, and plants making beer,
steel, and food. Firms with such facilities are also referred to as the process industry. A continuous
process is the extreme end of high volume, standardized production with rigid line flows. Its name
derives from the way materials move through the process.

Characteristics of Continuous Process

• Special purpose machines with built-in controls • Low skilled labor

• Highly mechanized/automated materials • Supervisor to be processes specialist
handling • Negligible work-in-progress
• Virtually zero manufacturing cycle time • Limited production planning and
• control functions

3.3. Capacity Planning

After considering the process options, managers still face a number of issues. Because determining
the size of a facility is critical to a firm’s success, we now investigate the concepts and techniques
of capacity planning. Capacity is the maximum output of a system in a given period. It is not
normally expressed as a rate, such as the number of tons of steel that can be produced per week, per
month, or per year. For many companies, measuring capacity can be straight forward. It is the
maximum number of units that can be produced in a specific time. However, for some organization,
determining capacity can be more difficult. Capacity can be measured in terms of beds (a hospital)
or, active members (a church). Other organizations use total work time available as a measure of
overall capacity.

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Design Capacity: the maximum output that can possibly attained.
Effective capacity: It is the maximum output rate that can be sustained under normal
conditions. These conditions 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.
Actual Output: the rate of output actually achieved. It cannot exceed effective capacity and is often
less than effective capacity due to breakdowns, defective output, shortages of materials, and similar
factors.
Capacity utilization: It simply tells us how much of our capacity we are actually using. Capacity
utilization can simply be computed as the ratio of actual output over design capacity:
Designing capacity is the maximum rate of output achieved under ideal conditions. Effective
capacity is usually less than design capacity ( it cannot exceed design capacity) owing to realities of
changing product mix, the need for periodic maintenance of equipment, lunch breaks, coffee breaks,
problems in scheduling and balancing operations, and similar circumstances. Actual output cannot
exceed effective capacity and is often less because of machine breakdowns, absenteeism, and other
problems outside the control of the operations managers. These different measures of capacity are
useful in defining two measures of system effectiveness: efficiency and utilization. Efficiency is the
ratio of actual output to effective capacity. Utilization is the ratio of actual output to design capacity.

It is common for managers to focus exclusively on efficiency, but in many instances, this emphasis
can be misleading. This happens when effective capacity is low compared with design capacity. In
those cases, high efficiency would seem to indicate effective use of resources when it does not.

Example: Given
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Required: Calculate efficiency and capacity utilization and forward your observation on these two
measures of capacity tools?
Solution
𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟑𝟔
𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 = 𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝒄𝒂𝒑𝒂𝒄𝒊𝒕𝒚=𝟒𝟎= 0.90=90%

47
 𝑨𝒄𝒕𝒖𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 𝟑𝟔
Capacity Utilization=𝑫𝒆𝒔𝒊𝒈𝒏 𝑪𝒂𝒑𝒂𝒄𝒊𝒕𝒚 =𝟓𝟎 = 𝟎. 𝟕𝟐 = 𝟕𝟐%

Hence, utilization is much lower than efficiency implies that mangers need to work on closing the
gap as much as possible.

3.3.1. Managing Demand

Option 1: When demand exceeds capacity
✓ Curtail/hold back demand by raising prices, scheduling longer lead time
✓ Long term solution is to increase capacity
Option 2: When capacity exceeds demand
✓ Stimulate market, Product changes, layoffs, plant closings
✓ Adjusting to seasonal demands
✓ Produce products with complementary demand patterns
 Tactics for Matching Capacity to Demand
1. Making staffing changes (increasing or 5. Improving processes to increase
decreasing the number of employees or throughput
shifts) 6. Redesigning products to facilitate more
2. Adjusting equipment throughput
3. Purchasing additional machinery 7. Adding process flexibility to meet
4. Selling or leasing out existing equipment changing product preferences
8. Closing facilities
Steps for Capacity Planning
1. Estimate future capacity requirements 5. Assess key qualitative issues
2. Evaluate existing capacity 6. Select one alternative
3. Identify alternatives 7. Implement alternative chosen
4. Conduct financial analysis 8. Monitor results

Planning Service Capacity

Three important factors in planning service capacity
1. Need to be near customers-Capacity and location are closely tied
2. Inability to store services-Capacity must be matched with timing of demand
3. Degree of volatility of demand-Peak demand periods

48
 3.4. Facility Location and Layout
3.4.1. Facility location
The selection of location is a key-decision as large investment is made in building plant and
machinery. It is not advisable or not possible to change the location very often. So, an improper
location of plant may lead to waste of all the investments made in building and machinery,
equipment. Facility Location is the process of identifying the best geographic location for a
service or production facility. The purpose of the location study is to find an optimum location
one that will result in the greatest advantage to the organization Importance of Location Decisions:

i) Location Decision
The location decision often depends on the type of business. For industrial location decisions, the
strategy is usually minimizing costs, although innovation and creativity may also be critical. For
retail and professional service organizations, the strategy focuses on maximizing revenue.
Warehouse location strategy, however, may be driven by a combination of cost and speed of
delivery. A poor choice of location might result in excessive transportation costs, a shortage of
qualified labor, loss of competitive advantage, inadequate supplies of raw materials, or some
similar condition that is detrimental to operations. For service, a poor location could result in lack
of customers and/or high operating costs. For both manufacturing and services, location decisions
can have a significant impact on competitive advantage.
ii) Need for Location Decisions
Location decisions arise for a variety of reasons:
• As part of a marketing strategy to expand markets
• Addition of new facilities
• Growth in demand that cannot be satisfied by expanding existing facilities
• Depletion of basic inputs/resources (e.g. mining & fishing)
• Cost advantage
iii) Strategic Importance of Location Decisions
Location decisions are strategically important:
• Are closely tied to an organization’s strategies
• Effect capacity and flexibility
• Represent a long-term commitment of resources/costs

49
 • Impact competitive advantage
• Importance to supply chains
• Impact on investments, revenues, and operations
Location and Costs
 Location decisions based on low cost require careful consideration
 Once in place, location-related costs are fixed in place and difficult to reduce
 Determining optimal facility location is a good investment
Location and Innovation
When creativity, innovation, and research and development investments are critical to the
operations strategy, Cost is not always the most important aspect of a strategic decision. Therefore,
there are four key attributes when strategy is based on innovation
• High-quality and specialized inputs
• An environment that encourages investment and local rivalry
• A sophisticated local market
• Local presence of related and supporting industries
iv) General Procedure for Making Location Decisions
The general procedures for making formal approach to location decisions usually consist of the
following steps:
1. Decide The criteria to use for evaluating location alternatives, such as increased revenues or
community service
2. Identify important factors, such as location of markets or raw materials
3. Develop location alternatives
4. Evaluate the alternatives and make a selection

v) Location Options
There are essentially four options that managers can consider in location planning.
1. Expand an existing facility: This option can be attractive if there is adequate room for
expansion, especially if the location has desirable features that are not readily available
elsewhere. Expansion costs are often less than those of other alternatives.
2. Add new locations: while retaining existing ones, as is done in many retail operations. In
such case, it is essential to take into account what the impact will be on the total system.
3. Shut down at one location and move to another: An organization must weigh the costs of
a move and the resulting benefits against the costs and benefits of remaining in an existing

50
 location. A shift in markets, exhaustion of raw materials, and the cost of operations often cause
firms to consider this option seriously.
4. Doing nothing: If a detailed analysis of potential locations fails to uncover benefits that make
one of the previous three alternatives attractive, a firm may decide to maintain the status quo,
at least for the time being.
vi) Factors that Affect Location Decisions

Many factors influence location decisions. However, if often happens that one or a few factors are so
important that they dominate the decision. For example, in manufacturing, the potentially dominating
factors usually include availability of an abundant energy and water supply and proximity to raw materials.
In service organizations, possible dominating factors are market related and include traffic patterns,
convenience, and competitors’ locations, as well as proximity to the market. This section presents you a
brief description of some of these important factors.

a) Regional Factors:
The primary regional factors involve raw materials, markets, and labor considerations.
Location of Raw Materials: Firms locate near or at the source of raw materials for three primary
reasons: necessity, perishability, and transportation costs. Mining operations, farming, forestry, and
fishing fall under necessity. Obviously, such operations must locate close to the raw materials. Firms
involved in canning or freezing of fresh fruit and vegetables, processing of dairy products, baking, and
so on must consider perishability when considering location. Transportation costs are important in
industries where processing eliminates much of the bulk connected with a raw material, making it much
less expensive to transport the product or material after processing.
Location of Markets: Profit-oriented firms frequently locate near the markets they intend to serve as
part of their competitive strategy, whereas nonprofit organizations choose locations relative to the needs
of the users of their services. Other factors include distribution costs or the perishability of a finished
product. Retail sales and services are usually found near the center of the markets they serve. Some
firms must locate close to their markets because of the perishability of their products. Examples include
bakeries, flower shops, and fresh seafood stores. Locations of many government services are near the
markets they are designed to serve.
Labor Factors: Primary labor considerations are the cost and availability of labor, wage rates in an
area, labor productivity and attitudes toward work, and whether unions are serious potential problems.
Skills of potential employees may be a factor, although some companies prefer to train new employees
rather than rely solely on previous experience. Workers attitude toward turnover, absenteeism, and

51
 similar factors may differ among potential locations- workers in large urban centers may exhibit
different attitudes than workers in small towns and rural areas.
Other Factors: Climate and taxes sometimes play a role in location decisions.

b) Community Considerations
Many communities actively try to attract new businesses because they are viewed as potential sources of
future tax revenues and new job opportunities. However, communities do not, as a rule, want firms that will
create pollution problems or otherwise lessen the quality of life in the community. From a company
standpoint, a number of factors determine the desirability of a community as a place for its workers and
managers to live. They include facilities for education, shopping, recreation, transportation, religious
worship, and entertainment; the quality of police, fire, and medical services; local attitudes toward the
company; and the size of the community. Other community-related factors are the cost and availability of
utilities, environment regulations, taxes (state and local, direct and indirect).
c) Site Related Factors:
The primary considerations related to sites are land, transportation, and zoning or other restrictions. Because
of the long-term commitment usually required, land costs may be secondary to other site-related factors,
such as room for future expansion, current utility and sewer capacities- and any limitations on these that
could hinder future growth- and sufficient parking space for employees and customers. In addition, for
many firm’s access roads for trucks or rail spurs are important.
d) Global Locations:
Factors relating to foreign locations are:
Policies of foreign ownership of production facilities (local content requirements, import
restrictions, currency restrictions, environmental regulations and local product standards.
Stability issues
Cultural differences: living circumstances for foreign workers and their dependents
Customer Preferences: possible buy locally sentiment
Labor: level of training and education of workers, work practices, possible regulations limiting number of
foreign employees and etc…
Resources: availability and quality of raw materials, energy, transportation
vii) Evaluating Location Alternatives:
There are a number of techniques that are helpful in evaluating location alternatives: factor rating method,
center of gravity method, Locational cost-profit-volume analysis and transportation model.
1. Factor Rating Method:
A typical location decision involves both qualitative and quantitative inputs, which tend to vary from
situation depending on the needs of each organization. Factor rating is a general approach that is useful for

52
 evaluating a given alternative and comparing alternatives. The process of selecting a new facility location
involves a series of following steps:

Determine which factors are relevant (e.g., location of market, water supply, parking, revenue potential)
Assign a weight to each factor that indicates its relative importance compared with all other factors.
Typically, weights sum to 1.00.
Decide on a common scale for all factors (e.g., 0 to 100)
Score each location alternative
Multiply the factor weight by the score for each factor, and sum the results for each location alternative
Chose the alternative that has the highest composite score
Example: Assume that a small manufacturing firm has recently decided to expand its operations to include
several new lines which it hopes to produce in a separate location because of space limitations in its existing
plant. The following rating sheet illustrates relevant factors and factor weightings for two alternative
locations.

Factors Weight Scores (out of 100) Weighted score

Alternative 1 Alternative 2 Alternative 1 Alternative 2
Nearness to raw materials 0.10 100 60 10 6
Labor costs 0.05 80 80 4 4
Water Supply 0.40 70 90 28 36
Transportation costs 0.10 86 92 8 9.2
Climate 0.20 40 70 8 17
Taxes 0.15 80 90 12 13.5
Total 1 70 85.7
At the weighted score of the two alternatives indicate, alternative 1 =70 and alternative 2 = 85.7.
therefore, based on factor rating method, alternative 2 is selected which has the highest weighted score
value.

2. The Centre of Gravity Method:

The center of gravity method is a method to determine the location of a distribution center that will minimize
distribution costs. It treats distribution cost as a linear function of the distance and the quantity shipped.
The center of gravity method takes into account the locations of plants and markets, the volume of goods
moved, and transportation costs in arriving at the best location for a single intermediate warehouse. The
center of gravity is defined to be the location that minimizes the weighted distance between the warehouse
and its supply and distribution points, where the distance is weighted by the number of tones supplied or
consumed. The first step in this procedure is to place the locations on a coordinate system. The origin of
the coordinate system and scale used are arbitrary, just as long as the relative distances are correctly
represented. This can be easily done by placing a grid over an ordinary map. The center of gravity is determined by
the formula.

53
 ∑ 𝐷𝑖𝑥 .𝑊𝑖 ∑ 𝐷𝑖𝑦 .𝑊𝑖
𝑐𝑥 = ∑ 𝑊𝑖
𝑐𝑦 = ∑ 𝑊𝑖

Where:
C x =x-coordinate of the center of gravity Dix = x-coordinate of location i
C y = y-coordinate of the center of gravity Diy = y-coordinate of location i
Example: A small manufacturing facility is being planned that will feed parts to three heavy manufacturing
facilities. The locations of current plants with their coordinates and volume requirements are given in the
following table.

Plant Location Coordinates (X, Y) Volume (Parts per month)

Modjo 30, 120 2,000
Adama 90, 110 1000
Addis Ababa 130, 130 1,000
Hawassa 60, 40 2,000

Addis Ababa (130, 130)

Modjo (30, 120)

120 –
Adama (90, 110)

90 – + Center of gravity (66.7, 93.3)

60 –
Hawassa (60, 40)

30 –
| | | | | |

30
Arbitrary origin 60 54
90 120 150
 3. Location Break Even Analysis:
Break-Even Analysis - is a technique used to compute the amount of goods that must be sold just to
cover costs. The break-even point is precisely the quantity of goods a company needs to sell to
break even. Whatever is sold above that point will bring a profit. At the break-even point, total cost and
total revenue are equal and the equation will use those to solve for Q, which is the break-even quantity:
𝑃𝑄 = 𝐹 + 𝐶𝑄 𝑄 = 𝐹/𝑃 − 𝐶
Step 1: For Each Location, determine Fixed and Variable Costs. Fixed costs are incurred regardless of
how many units are produced and include items such as overhead, taxes, and insurance. Variable costs
are costs that vary directly with the number of units produced and include items such as materials
and labour. Total cost is the sum of fixed and variable costs.
Step 2: Plot the Total Costs for each Location on one Graph. To plot any straight line we need two points.
One point is Q = 0, which is the y intercept. Another point can be selected arbitrarily, but it is best
to use the expected volume of sales in the future.
Step 3: Identify ranges of output for which each location has the lowest total cost.
Step 4: Solve Algebraically for the Break-Even Points over the Identified Ranges. Select the
location that gives the lowest cost for the range of output required by the new facility
Example: Fixed and variable costs for three potential plant locations are shown below:
If the selling price is = Br. 120 Expected volume = 2,000 unit
Location Fixed cost per year Variable cost per unit Total cost
Hawassa Br. 30,000 Br. 75 Br. 180,000
Dredawa 60,000 45 150,000
Addis Ababa 110,000 25 160,000

From the figure 2 we can understand that up to 1,000 units the best alternative is Hawassa; while from
1,000 to 2,500 units the best alternative is Dredawa and beyond 2, 500 is Addis.

55
 3.4.2. FACILITY LAYOUT DECISIONS

Layout is defined as the most effective physical arrangement of machines, processing equipment, and
service departments to have the best co-ordination and efficiency of man, machine and material in an
organization. It is the spatial arrangement of physical resources used to create the product. It also means
how the space needed for material movement, storage, indirect labor, etc is arranged in a factory. For a
factory which is already in operation, this may mean the arrangement that is already present. However,
for a new factory this means the plan of how the machines, equipment, etc will be arranged in the different
sections or shops. These should be arranged in such a way that material movement cost, cost of storage
in between processes, the investment on machines and equipment etc should be optimal and the product
is as cheap as possible.

The objective of layout strategy is to develop an economic layout that will meet the firm’s competitive
requirements. In any cases, layout design must consider how to achieve the following:

Higher utilization of space, equipment, and people

Improved flow of information, materials, or people
Improved employee morale and safer working conditions
Improved customer/client interaction
Flexibility (whatever the layout is now, it will need to change)
3.4.2.1. Types of layout
i. Fixed Position Layout:
In this, the major part of the product remains in a fixed place. All the tools, machines, workers and smaller
pieces of materials are brought to it and the product is completed with the major part staying in one place.
Very heavy assemblies (e.g. ship, aircraft, cranes, rail coaches, highway, a bridge, a house, an oil well,
etc) requiring small and portable tools are made by this method. The techniques to deal with fixed-
position layout are not well developed and are complicated by three factors:
There is limited space at virtually all sites.
At different stages in the process, different materials are needed; therefore, different items
become critical as the project develops.
The volume of materials needed is dynamic. For example, the rate of use of steel panels for the
hull of a ship changes as the project progresses.
Because problems with fixed-position layouts are so difficult to solve on-site, an alternative strategy is to
complete as much of the project as possible off-site. This approach is used in the ship-building industry
when standard units (e.g., pipe-holding brackets) are assembled on a nearby assembly line (a product-

56
oriented facility). Some ship-buildings are also experimenting with group technology to group
components.

ii. Process-oriented or Functional Layout:

It is a layout that deals with low-volume, high-variety production. In this type, all the machines and
equipment of the same type are grouped together in one section or area or department. For example, all
welding equipment are kept in one section; all drilling machines in other; all lathes in third section, and
so on. It is used in intermittent (discontinuous) type of production. It is most efficient when making
products with different requirements or when handling customers, patients, or clients with different needs.
In this job-shop environment, each product or each small group of products undergoes a different
sequence of operations. When designing a process layout, the most common tactic is to arrange
departments or work centers so that the cost of material handling is minimum. For this, departments with
large flows of parts or people between them should be placed next to one another.
iii. Repetitive or Product-Oriented Layout:

This is also called assembly line layout because it was first used for assembling automobiles in the USA.
This layout is organized around products or families of similar high-volume, low-variety products. In this
type of layout, one product or one type of product is produced in a given area. This is used in case of
repetitive and continuous production or mass production type industries. The machines and equipment
are arranged in the order in which they are needed to perform operations on a product. The raw material
is taken at one end of the line and goes from one operation to the next very rapidly with little material
handling required.

Two types of product layout are fabrication and assembly lines. The fabrication line builds components
on a series of machines. An assembly line puts the fabricated parts together at a series of workstations.
Both are repetitive processes, and in both cases, the line must be ‘balanced’- that is, the time spent to
perform work on one machine must equal or ‘balance’ the time spent to perform work on the next machine
in the fabrication line.

Assembly lines can be balanced by moving tasks from one individual to another. The central problem
then in product layout planning, is to balance the output at each workstation on the production line so that
it is nearly the same, while obtaining the desires amount of output. A well-balanced assembly line has
the advantage of high personnel and facility utilization and equity between employees’ workloads.

57
 Assembly-line Balancing
Line-balancing is done to minimize imbalance between machines or personnel while meeting a required
output from the line. For this, the management must know the tools, equipment, and work methods used.
Then the time needed for each assembly task (e.g. drilling a hole, tightening a nut, or painting a part)
must be determined. Management also needs to know the precedence relationship among the activities
(i.e. the sequence in which different tasks must be performed). The steps in balancing an assembly line
are the following:

Step 1: Specify the sequential relationships among tasks using a precedence diagram.

Step 2: Determine the required workstation cycle time(C), using the formula:

𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟 𝑑𝑎𝑦

𝐶=
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑜𝑢𝑡𝑝𝑢𝑡 𝑝𝑒𝑟 𝑑𝑎𝑦 (𝑖𝑛 𝑢𝑛𝑖𝑡𝑠)

Step 3: Determine the theoretical minimum number of work stations (N)

𝑆𝑢𝑚 𝑜𝑓 𝑇𝑎𝑠𝑘 𝑇𝑖𝑚𝑒𝑠 (𝑇)

𝑁=
𝐶𝑦𝑐𝑙𝑒 𝑇𝑖𝑚𝑒 (𝐶)

Step 4: Select a primary rule by which tasks are to be assigned to workstations, and secondary rule to
break ties.
Step 5: Assign tasks, one at a time, to the first workstation until the sum of the task times is equal to the
work station cycle time
Step 6: Evaluate the efficiency of the balance:
𝑆𝑢𝑚 𝑜𝑓 𝑇𝑎𝑠𝑘 𝑇𝑖𝑚𝑒𝑠 (𝑇)
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 =
𝐴𝑐𝑡𝑢𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑠𝑡𝑎𝑡𝑖𝑜𝑛𝑠(𝑁) 𝑥 𝑊𝑜𝑟𝑘𝑠𝑡𝑎𝑡𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒 𝑇𝑖𝑚𝑒 (𝐶)

Step 7: If the efficiency is unsatisfactory, rebalance using a different decision rule.

iv. Cellular Layouts:

Cellular manufacturing is a type of layout in which machines are grouped into what is referred to as a
cell. Groupings are determined by the operations needed to perform work for a set of similar items, or
part families that require similar processing. The cells can consist of one machine, a group of machines
with no conveyorized movement of parts between machines, or a flow line connected by a conveyer. In
the cellular layout, machines are arranged to handle all of the operations necessary for a group of similar
parts. Thus, all of the parts follow the same route, although minor variations are possible.

v. Office Layout:

58
The main difference between office and factory layouts is the importance placed on information.
However, in some office environments, just in manufacturing, production relies on the flow of material.
Office layout deals with grouping of workers, their equipment, and spaces/offices to provide for comfort,
safety, and movement of information.

vi. Retail Layout:

Retail layouts are based on the idea that sales and profitability vary directly with customer exposure to
products. Thus, most retail managers try to expose customers to as many products as possible. Studies
show that the greater the rate of exposure, the greater the sales and the higher the return on investment.
Once the overall layout of a retail store has been decided, products need to be arranged for sale. Many
considerations go into this arrangement. However, the main objective of retail layout is to maximize
profitability per square foot of floor space (or, in some stores on linear foot of shelf space). Big-ticket, or
expensive, items may yield greater dollar sales, but the profit per square foot may be lower. Computerized
programs are available to assist managers in evaluating the profitability of various merchandising plans.

vii. Warehousing and Storage Layouts:

The objective of warehouse layout is to find the optimum trade-off between handling cost and costs of
warehouse space. So, the management’s task is to maximize the utilization of the ‘cubic space’ of the
warehouse—that is, utilize its full volume while maintaining low material handling costs, which is
defined as all the costs related to the incoming transport, storage, and outgoing transport of materials to
be warehoused. The cost also includes equipment, people, material, supervision, insurance, and
depreciation. Effective warehouse layouts also minimize the damage and spoilage of material within the
warehouse. The variety of items stored and the number of items ‘picked’ affect the optimum layout. A
warehouse storing a few items leads itself to higher density than a warehouse storing a variety of items.

3.4.2.2. Service Layout

The major factors considered for service providers, is an impact of location on sales and customer
satisfaction. Service facility layout will be designed based on degree of customer contact and the
service needed by a customer. These service layouts follow conventional layouts as required.
For example, for car service station, product layout is adopted, where the activities for servicing
a car follows a sequence of operation irrespective of the type of car. Hospital service is the best
example for adaptation of process layout. Here, the service required for a customer will follow
an independent path.
3.4.3. Job design and Work Measurement

59