Unit 2: Process and Service Design Capacity Management
This unit deals with a fundamental problem for managers of either a production process or service delivery, namely, how to meet changes in demand. As demand for a product or service increases (decreases), production must also increase (decrease). Designing the capacity to scale up (or down) quickly and efficiently is key to successfully meeting demand.
Completing this unit should take you approximately 11 hours.
Upon successful completion of this unit, you will be able to:
- explain how economies of scale factor into production system design;
- use Little's Law to analyze production capacity;
- identify where buffers will help the flow of production; and
- identify possible bottlenecks in production and propose solutions.
2.1: Evaluating Production and Service Systems
Production systems require resources to coordinate the complex series of moving parts. These can include raw materials, physical equipment, and human resources to maintain production control. Specifically, there are two critical aspects in the production which are routing and scheduling. As previously mentioned, the customer is driving much of the supply chain process. From a business perspective, efficiently managing this process is also working to successfully manage external customer expectations, internal time frames, and associated relationships. Supply chains fulfill a dual role of acknowledging customer demands as an input while also moving goods and services to market as an output
Read this chapter on the basics of statistical process control (SPC). SPC is a standard tool for monitoring whether a process is performing as expected and, if not, where problems occur. While reading, consider how this kind of tool factors in process capacity management.
Read this article researching the challenges in the fashion industry to respond to ever-changing consumer tastes. While reading, think about industries other than fashion where managing production capacity is an ongoing task.
2.2: System Design and Economies of Scale
For a range of output levels, as output quantity increases, the cost per unit decreases. This is the definition of Economies of Scale. The proposition is that a company can experience substantial growth if it can expand its audience base and capture greater market share. Doing so generates a unique competitive advantage for an organization, whether a manufacturer or service-based organization. This competitive advantage allows the company to scale its production to meet demand while strengthening its brand to offer new products to existing customers. Successful companies that have been able to scale their business over time may eventually experience diminishing profits. It is at this point in a product life cycle that it becomes a challenge for supply to keep up with demand, and internally the human behavior dynamic emerges as its force. Here leaders and managers must channel the human component with its business model to diversify their offerings to the public to maintain their market share.
Read this book section describing Netflix's journey from a startup company to a worldwide brand. Pay particular attention to how Netflix was able to leverage its technology to gain customers and very quickly beat its competition - specifically Blockbuster. Their continuing evolution from DVD, to streaming service, to content developer has created a unique competitive advantage. The article speaks to Netflix's economies of scope, where they could have diversified in many different directions. However, their specific focus directed their strategy to a few key areas. How did their strategic revenue streams generate money for the company?
2.2.1: More on Economies of Scale
Manufacturers are looking to scale or increase production beyond local markets. However, interestingly enough, a single city, under certain circumstances, can also exhibit economies of scale. In essence, both manufacturers and cities strive to group activities together in closer proximity instead of spreading them out to increase speed and efficiency. Variable costs associated with manufacturing are a function of production levels. Consequently, leaders and managers constantly seek alternate production technologies to lower variable costs. New and emerging processes help in the continuous effort to reduce costs and boost profits. However, every new process or technology which reduces costs in the short term will eventually reach a point of increasing marginal returns where per-unit costs rise as production increases. All costs vary over time. While short-run costs for factories such as land and machinery are fixed, in the long run, all inputs are variable. Because of this dynamic, manufacturers must manage daily operations and constantly look for ways to improve long-term viability.
Read this section. It describes how warehouse stores such as Costco and Sam's Club can sell at low prices. Study the economies of scale curves, specifically the long-run average cost curve and the short-run average cost curves.
Read this chapter. As you read and begin to understand what economies of scale are, create your own definition and see how it is similar or different from the text. In addition, focus on the diseconomies of scale to see what happens when a factory grows too quickly and becomes increasingly difficult to manage.
Watch this video. It presents a case study on the dairy industry in the U.S. Think about what this industry can do to effectively manage its short-run average total cost. Are economies of scale positive and negative for consumers?
2.2.2: Priorities and the Role of Buffers
Historically, stocking inventory in anticipation of shortages was a common practice for many firms. Price stabilization is a relatively new phenomenon that promotes and maintains market equilibrium. One global example is the crude oil industry. Physical inventories are maintained to act as a buffer to meet the uncertainties of supply and demand. Specifically, safety stocks are extra inventory to absorb variability in customer demand. However, a buffer stock is meant for storage in an attempt to stabilize prices. Both are intended to essentially hold excess inventory.
Read this article. The researchers studied buffer capacity and the effects of holding on to extra buffer inventory. Do you agree or disagree with the concluding analysis and why?
Read the introduction and first section of this article. We will go over inventory models in more detail in Unit 6. For now, focus on the role of safety stock to help deal with differences in producer supply and consumer demand.
2.3: Little's Law
Little's Law is a queueing theory that refers to the relationship between the time to produce a job, the time it spends in a queue, and the amount of time an item takes to be processed. It looks at entire systems to analyze resource shortages, competing priorities, and addressing too much work in process. When work is introduced into the system faster than the current throughout, queue times will eventually increase. Increasing queue times in regard to logistics could potentially mean the customer will not get their order on time or, worse, a lost sale altogether. From an operational perspective, organizations want the least amount of wait time possible in every part of the process. Increasing wait times means wasted resources and time, affecting many downstream activities.
Read this article. The researchers studied the capacity of queueing models specific to Little's Law. How is the law expressed, and what does it mean?
Read this research article about a cross-docking problem, which proposes a nonstationary queuing model to speed up logistics timeframes. As you read, try to think about your next online order and how your order is fulfilled, packaged, transported, sorted, and delivered. Which part of this process had the longest queue time?
2.4: Flow Analysis
Material flow analysis, or flow analysis, can be understood as a systematic assessment of materials flowing in and out of a particular entity. This analysis works to increase performance, reduce operational costs, and eliminate waste. By quantifying workflows, a business can understand its capacity balance through measurements or statistical analyses.
Read this article. The intent is to explore production technologies in relation to flow analysis. Pay attention to how production flow analysis is defined. Do you agree or disagree?
2.4.1: Flow Diagrams
Flow diagrams, also commonly known as flowcharts, are a visual representation of a process flow. While there are many different uses, these diagrams are utilized to bring order to a complex system and reveal how all the parts are connected to the whole.
Read this article. Think about how flow diagrams in different parts of a business improve the respective area. Study the essential components of a diagram and the associated symbols. While doing so, create in your mind a flowchart of the series of events that take place when you purchase at your local pharmacy.
2.4.2: Capacity, Throughput Time, and Cycle Time
Capacity, as it relates to production, can be thought of as the amount or volume a manufacturer can produce with its available resources. Furthermore, throughput is generally defined as the rate of production at which an item is processed. Finally, cycle time refers to strategic planning efforts such as initiation, planning, executing, monitoring, and closing.
Read this article. It highlights the Toyota Production System as a process set up to understand its potential capacity, minimize its product throughput, and reduce cycle time. Analyze the Traditional Operational Availability Model for areas that could produce the greatest bottleneck.
2.4.3: Product and Process Layouts – Line Balancing
While a product layout requires repetitive production on an assembly line, a process layout arranges the workflow around the overall production. Meaning similar tasks are grouped together and then moved on down the line for the next set of steps. Line balancing is also commonly known as assembly line balancing, which deals with minimizing cycle time while maximizing smoothness.
Read this article. It deals with production efficiency and human behavior. Despite advanced technology and automation, systems are still dependent on human interaction. How can the human component enhance performance, and conversely, how does this human interaction contribute to system failure?
2.4.4: Bottlenecks
Bottlenecks exist in production systems and cause serious problems within the system. By examining the source of a bottleneck, a facility can begin to understand why it is being constrained in this particular area. Furthermore, once identified, upstream and downstream activities can be modified to allow for a more efficient flow.Read this article. It describes an example-generic production process and seeks to identify bottlenecks within the overall process. Focus on the Theory of Constraints, its uses, and its approach to production efficiency.
2.4.5: Process Analysis and Gantt Charts
A Gantt chart is a bar chart used to visually map out a project timeline. In general, it can list critical tasks to be performed along with deadlines. Gantt charts are helpful in communicating goals, objectives, progress, and upcoming activities that could possibly impede progress.
Watch this video on Gantt charts. Project managers utilize this tool as a shopping list of sorts, and it has become useful for project continuity, breaking down content, and identifying vital activities to complete a particular subject. Can you identify some advantages and disadvantages of using a Gantt chart?
2.4.6: Throughput and Bottleneck Factors
A bottleneck refers to a congestion point in a production process. The overall intent of identifying a bottleneck is to ensure throughput is not adversely affected. It is assumed that virtually every system contains some production- or human-related bottleneck.- Read this article. It details a bottleneck analysis and proposes a bottleneck management process. From the reading, can you describe why bottlenecks occur in a production process?
Study Guide: Unit 2
We recommend reviewing this Study Guide before taking the Unit 2 Assessment.
Unit 2 Assessment
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Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.