BUS606 Study Guide

Unit 2: Process and Service Design Capacity Management

2a. Explain how economies of scale factor into production system design 

  • What are economies of scale and how do they differ from diseconomies of scale?
  • How do large stores like Costco benefit from the economy of scale?

In economies of scale, we reach a position where the output goes up and the cost per unit goes down.
It's important to remember that, in the short run, operations are running with fixed costs with variable costs allowed to change; in the long run, all costs are variable. A small factory, for example, might have an average cost of $10 to produce 100 units. A medium-sized factory might have an average cost of $8 to produce 200 units that are the same as the small factory. A large factory might have an average cost of $6 to produce 300 units that are the same as the other factories. If you plotted these points, you would have a downward-sloping economy of scale.
Large manufacturing plants and large firms can keep their costs down by using the economy of scale. As costs for labor, for example, go up, these larger entities can replace employees with machines to keep costs lower. The restaurant chain Chipotle has just introduced a robot named "Chippy" that fires the tortilla chips for customers. Chippy joins "Flippy", a robot White Castle (another restaurant chain) uses to make burgers. As the federal minimum wage in the U.S. has increased, organizations are replacing high-cost workers with robots.
Diseconomy of scale occurs if a large plant or firm becomes so large that increasing levels of managers are needed – often resulting in loss of effective communication. In this case, as the level of output increases, the costs increase.
To review, see More on Economies of Scale.

2b. Use Little's Law to analyze production capacity 

  • How do increasing wait times in a manufacturing production queue affect your resources?
  • How can cross-docking save you money?

Queuing theories, like Little's Law, can help us understand why on rainy days, streets and highways are more crowded and why fast-food restaurants need a smaller dining room than regular restaurants with the same customer arrival rate. Little's Law can also help ensure that consumers receive their products on time by optimizing the wait time of the manufacturing system. Increasing wait times affect the entire manufacturing process, potentially leading to lost customers.
Cross-docking enables an organization to reduce or eliminate the need for product storage. Through this technique, which we can determine mathematically, organizations can reduce transportation time, thereby optimizing their operations and serving their customers. To be effective, cross-docking depends on reliability in the supply chain, effective internal and external communication, qualified employees, and strategic management by the leadership in the organization.
To review, see:


2c. Identify where buffers will help flow of production 

  • In dealing with the uncertainty of consumer demand and changing customer preferences, how can safety stock help optimize the supply chain?
  • Can safety stock cause a competitive disadvantage to organizations?
  • How does the need for safety stock affect production planning?

Business operations can use safety stocks to react to changing demand, supply, and manufacturing yield within their production line. Safety stock can help organizations prevent stockouts of their resources, such as raw materials and packaging. Safety stocks can be beneficial for manufacturers, although manufacturers who use lean management to control their operating processes do not like the inventory hold-over that can occur when safety stock numbers are not optimized.
Too much safety stock, or too little safety stock, can affect business operations. Holding too many raw materials, for example, can be costly to an organization. Storage can also result in expired dates, theft, or the breaking down of the raw material. Holding too little safety stock causes its own problems: you may lose sales and thus customers if your order delivery is late or canceled.
We introduced production planning in Unit 1. The forecasting done in production planning can help an organization develop an effective safety stock program. Using technology and collaboration with partners in the supply chain can also help an organization determine the optimal safety stock. Finally, Enterprise Resource Planning (ERP) models can optimize the level of safety stock.
To review, see Safety Stock.

2d. Identify possible bottlenecks in production and propose solutions 

  • How can a production flow analysis help identify bottlenecks in the production process?
  • What effect does the human factor have on production flow analysis and bottlenecks?

Production flow analysis (PFA) provides a visual representation of the production process in an organization – identifying the activity to make each part and the machines used in each activity. The PFA is composed of (1) production flow analysis, (2) company flow analysis, (3) factory flow analysis, (4) group analysis, (5) line analysis, and (6) tooling analysis.
The goal of PFA is to identify bottlenecks in the production process and improve those areas in which the bottleneck occurs. A bottleneck is a congestion in a production system when workloads arrive more quickly than the system can handle them. Once these bottlenecks are identified, organizations might redesign the layout of their factory, look at scheduling activities differently, or cluster machines together.
While robotics and other technologies are increasingly used in production, humans are still involved, and humans are not standardized. Humans exhibit varying operation times for the same task in an assembly line process. What might take one person 10 seconds to tighten two bolts might take another person 13 seconds. These variations in time could affect the quality and the product's reliability; production set-up is essential as a poorly designed assembly line could lead to added costs or lowered profits. Mathematical formulas exist to ensure that human factors do not cause bottlenecks, leading to system failure.
To review, see Multi-layer Network-Based Production Flow Analysis and Designing an Assembly Line for Reliability.

Unit 2 Vocabulary 

This vocabulary list includes the terms that you will need to know to successfully complete the final exam.

  • bottleneck
  • company flow analysis
  • cross-docking
  • diseconomy of scale
  • economy of scale
  • Enterprise Resource Planning (ERP)
  • factory flow analysis
  • group analysis
  • Lean Management
  • line analysis
  • Little's Law
  • Production Flow Analysis (PFA)
  • production planning
  • safety stock
  • stock outs
  • tooling analysis