How do managers choose which process structures to use, and when to change processes? One quantitative tool that they can use in decision making is indifference analysis , an approach based on estimates of total costs. Other operations and supply chain decisions such as select-ing locations, evaluatselect-ing new products, and makselect-ing insourcselect-ing/outsourc- insourcing/outsourc-ing decisions can be supported by indifference analysis. One drawback is that indifference analysis focuses only on costs without considering other important factors.
The indifference point for a given process structure occurs at the sales volume where total cost (fixed plus variable costs) for two processes is equal. To do an indif-ference analysis, set the total costs of each process equal to each other, then solve for sales volume.
Indifference analysis can compare an automated process to a more labor-intensive process. Automated processes are generally capital intensive and have high fixed costs.
Fixed costs include equipment depreciation, maintenance, and engineering costs. Labor-intensive processes have lower fixed costs because of less investment in equipment, but have higher variable costs because of the wages of employees. At lower volumes, labor-intensive processes are typically more profitable, but as volume increases, capital-labor-intensive processes become more profitable.
Example 2
Let’s examine how indifference analysis is used for process selection using an example of Pollyeyes Pizza. The company currently mixes and shapes all of its pizza dough by hand.
This is a labor-intensive process. The variable costs (VC) for this process are $3.00 per pizza, and the fixed costs (FC) are $30,000 per year. The average selling price is $8.00 per pizza. Pollyeyes’ owner Pat Polly is considering investing in an automated process to make and shape the dough. With the new process, fixed costs increase to $42,000 per year but variable costs decrease to $2.00 per pizza.
Pat can determine the sales volume needed to make the more capital-intensive pro-cess a good investment. This is calculated by determining the sales volume where the total cost between the two processes is equal; this is called the indifference point. Above this sales volume, investing in the capital-intensive process is a good decision. Below this sales volume, Pat should stay with the current, more labor-intensive process.
Total Cost process 1 5 Total Cost process 2
($30,000 1 ($3.00/pizza 3 V)) 5 ($42,000 1 ($2.00/pizza 3 V)) ($3.00/pizza 3 V) 2 ($2.00/pizza 3 V) 5 ($42,000 2 $30,000)
$1.00/pizza 3 V 5 $12,000 V 5 12,000 pizzas
The use of indifference analysis for process selection needs to be repeated when situ-ations change. For example, many organizsitu-ations have used lean and quality improvement programs to reduce fixed and variable costs. These changes can move the indifference point for a process.
indifference analysis A cost-based quantitative deci-sion-making tool that identifies the production volume at which the total costs of two processes are equal.
Prepare
How is Indifference analysis used to exam-ine profits and costs in process selection decisions?
Organize
Selecting Processes with Indifference Analysis
LO5-6 Use indifference analysis in process selection decisions.
Confirming Pages
159 This chapter describes some of the key decisions about manufacturing and service process
structures that impact an organization’s capabilities.
1. The product-process matrix classifies processes based on output volume and variety.
The process types are: project, job shop, batch, repetitive process, and continuous process. Two contemporary process structures are mass customization and cellular manufacturing.
2. Services can be categorized based on customization/customer interaction and labor/
capital intensity. A framework shows four classifications: professional service, ser-vice factory, serser-vice shop, and mass serser-vice.
3. The front office of a service process that is in contact with the customer has different requirements than the back office of a process that is not visible to the customer. Decou-pling often creates efficiencies in both the front-office and the back-office processes.
4. Layout is the physical arrangement of resources in a process. The type of layout is closely related to the type of process. Layout types are product, functional, cellular, and fixed-position.
5. Advances in information and communications technologies have enabled new busi-ness models and supply chain improvements. Process automation can reduce varia-tion, increase efficiency, and reduce direct labor costs. However, automation requires a high capital investment and highly skilled support staff, and may not be able to adapt to major product changes.
CHAPTER
SUMMARY
KEY
TERMS
assemble to order (ATO) 146
back-office processes 148 batch process 144
cellular manufacturing 145 continuous process 144 customer contact 147 engineer to order
(ETO) 145
fixed-position layout 150
flexible manufacturing sys-tem (FMS) 145 front-office processes 148 functional layout 150 indifference analysis 158 job shop 144
line balancing 152 make to order (MTO) 145 make to stock (MTS) 146 mass customization 145
precedence
relationships 152 product families 153 product layout 151
product-process matrix 142 project 143
repetitive process 144 service blueprinting 148 service process matrix 147 takt time 152
1. Airlines allow customers to purchase tickets, select seats, and check in online. How does this process differ from a check-in process at an airline ticket counter?
2. Think of two companies in the same industry that use different process structures. Why is this the case? Is one process structure a better choice than the other? Why, or why not?
DISCUSSION
QUESTIONS
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SOLVED
PROBLEMS
1. Using the information in Table 5-5, balance the assembly line for the Tourist T-Shirt Company. The operations run continuously for eight hours per day. Each day, 80 T-shirts must be produced to meet customer demand.
a. Draw the precedence diagram.
b. What is the takt time?
c. What are the theoretical number of workstations?
d. Assign tasks to workstations using the longest task time rule.
e. What is the efficiency of the balanced line?
TABLE 5-5
Precedence Relationships for Making a T-ShirtTask Predecessors Time (minutes)
A Put the pattern on the material None 5
B Cut out the pattern A 3
C Hem the neck slit opening B 2
D Sew the sleeve seams B 1
E Hem the sleeves D 2
F Sew the side seams of the tunic C 3
G Sew the sleeves to the tunic E, F 4
H Hem the bottwom of the shirt F 5
Total Time 25
3. Consider several members of the supply chain of a company that makes plastic toy cars and trucks. Which of the processes described in the product-process matrix is likely to be used by the following supply chain members? Why?
a. The company that assembles the toys.
b. The company that produces the parts that go into the toys.
c. The company that produces the plastic.
4. Provide an example of how technology has made it possible to use processes that are not on the diagonal of the product-process matrix.
5. Are some process structures inherently safer or more environmentally friendly than others?
6. In which of the service categories would you put a large state university? Why? Would a small private university be in the same category? Why, or why not?
7. Some upscale restaurants have their kitchens visible to their customers, changing the traditional view of front-office and back-office processes. What are the benefits and drawbacks to this approach?
8. Think about three of your favorite fast-food restaurants. What type of layout is used in the food preparation area of each? Are these layouts a good fit with the organization?
Why, or why not? Should the layout be changed and if so, how?
9. Provide an example of technology that enhances customer service and one that reduces customer service. Why is this the case?
Confirming Pages
161 Solution
a. Precedence diagram.
b. Takt time (T) 5 Production time per day/output needed per day.
Takt time (T) 5 480 minutes/(80 T-shirts/day) 5 6 minutes/workstation c. Theoretical minimum number of stations (N) 5 Total of all task times/takt time.
N 5 (25 minutes)/(6 min./station) 5 4.2 so 5 stations
d. The tasks are assigned to each station in order of precedence, assigning as many tasks as possible to each station. When you can choose among multiple tasks, for example, C or D, choose the task with the longest operating time.
Workstation
Tasks in Order
Workstation Time (Min.)
Idle Time (Min.)
1 A 5 1
2 B, C, D 6 0
3 F, E 5 1
4 H 5 1
5 G 4 2
e. Efficiency 5 [Sum of all task times/(Actual workstations 3 takt time)] 3 100.
Efficiency 5 [(25 minutes)/(5 stations 3 6 min./station)] 3 100 5 83%
2. A small manufacturer that produces outdoor furniture is considering increasing the automation on the production line that makes its most popular metal patio chairs. The current process has fixed costs of $150,000 per year and variable costs of $20 per chair. The more automated process that is being considered will increase fixed costs to
$250,000 annually but variable costs will decrease to $10 per chair.
a. What sales volume is the indifference point between these two processes?
b. If the estimated annual sales volume for metal chairs is 18,000 chairs, should the owner invest in the new process? Why, or why not?
Solution
a. To determine the sales volume that is the indifference point, set the total cost for the two processes equal to each other and solve for sales volume (V).
TCprocess 1 5 TCprocess 2
Fixed Costprocess 1 + Variable Costprocess 1 5 Fixed Costprocess 2 1 Variable Costprocess 2 ($150,000 1 ($20/chair 3 V)) 5 ($250,000 1 ($10/chair 3 V))
($20/chair 3 V) 2 ($10/chair 3 V) 5 ($250,000 2 $150,000)
$10/chair 3 V 5 $100,000 V 5 10,000 chairs
A B
C
D
F
E
H
G
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b. Since the expected volume of 18,000 chairs exceeds the indifference point, the company should implement the new, more automated process. The total costs will be lower for the automated process when sales volumes exceed 10,000 chairs.
PROBLEMS
1. An assembly line currently has five workstations, and the time required for each is shown below.
a. What is the current cycle time?
b. What is the efficiency of the process?
c. Customer demand is 80 units per hour. What is the hourly production rate of the current process?
d. What does the cycle time need to be to be able to meet demand (what is the takt time)?
e. What changes to the process are needed?
2. An insurance company uses the following tasks to process paperwork. Forty claims need to be processed in an eight-hour work day.
a. What is the takt time?
b. What is the theoretical number of workstations?
c. Assign the tasks to the workstations to balance the line using the longest operat-ing time rule.
d. What is the efficiency of the balanced line?
3. Swoosh Snowboard Company must set up an assembly line for snowboards. Forecasts show that 600 units per day should be produced. The plant operates two eight-hour shifts each da y and runs the line continuously during both shifts. The tasks required, task times, and precedence relationships are as follows:
Task Time (seconds) Predecessors
A 40 –
B 27 A
C 30 A
1 45 sec.
2 32 sec.
3 38 sec.
4 50 sec.
5 42 sec.
A 3 min.
B 5 min.
C 6 min.
E 2 min.
D 4 min.
F 2 min.
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163
D 35 –
E 30 B
F 40 D
G 55 C, E, F
H 39 G
a. Draw the precedence diagram.
b. What is the takt time?
c. What is the theoretical number of workstations?
d. Assign the tasks to the workstations to balance the line using the longest operat-ing time rule.
e. What is the efficiency of the balanced line?
4. The Carry-on Luggage Company must set up an assembly line for a wheeled carry-on bag. Forecasts show that 60 units per hour should be produced. The tasks required, task times, and precedence relationships are as follows:
Task Time (seconds) Predecessors
A 30 –
B 50 A
C 25 A
D 10 B
E 25 B
F 15 B
G 10 C, E, F
H 30 D, G
a. Draw the precedence diagram.
b. What is the takt time?
c. What is the theoretical number of workstations?
d. Assign the tasks to the workstations to balance the line using the longest operat-ing time rule.
e. What is the efficiency of the balanced line?
5. Wild Widget must set up an assembly line for widgets. Forecasts show that 50 units per hour should be produced. The tasks required, task times, and precedence relation-ships are as follows:
Task Time (seconds) Predecessors
A 10 –
B 30 A
C 15 A
D 35 C, B
E 25 D
F 10 D
G 35 E, F
a. Draw the precedence diagram.
b. What is the takt time?
c. What is the theoretical number of workstations?
d. Assign the tasks to the workstations to balance the line using the longest operat-ing time rule.
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e. What is the efficiency of the balanced line?
f. If demand decreased to 40 units per day, what changes would be needed, if any?
6. Golf Carts Inc. must set up an assembly line for golf carts. Forecasts show that 10 units per day should be produced. The plant operates one eight-hour shif t each day and runs the line continuously during the shifts. The tasks required, task times, and precedence relationships are as follows:
Task Time (minutes) Predecessors
A 12 –
B 10 –
C 16 –
D 24 A, B
E 14 C
F 30 D
G 15 E, F
a. Draw the precedence diagram.
b. What is the takt time?
c. What is the theoretical number of workstations?
d. Assign the tasks to the workstations to balance the line using the longest operat-ing time rule.
e. What is the efficiency of the balanced line?
f. If demand increased to 12 units per day, what changes would be needed, if any?
7. Williams Motor Manufacturing assembles small motors for sale to major appliance manufacturers around the world. Average demand for its best-selling motor is 600 units per day. The assembly line operates continuously during a single eight-hour shift. The tasks required, task times, and precedence relationships are:
Task Time (seconds) Predecessor
A 12 –
B 22 –
C 20 –
D 20 A
E 18 C
F 30 B, D
G 17 E
H 25 F, G
I 20 H
a. Draw the precedence diagram.
b. What is the takt time?
c. What is the theoretical number of workstations?
d. Assign the tasks to the workstations to balance the line using the longest operat-ing time rule.
e. What is the efficiency of the balanced line?
f. If demand increased to 650 motors per day, what changes would be needed, if any?
Confirming Pages
165 8. A privately owned company manufactures metal seat frames that are used to make
automobile seats. Its customer, the seat manufacturer, forecast that 50,000 frames will be needed next year. The seat frame manufacturer must determine which process to install. One process is more labor-intensive with fixed costs of $400,000 and variable costs of $90 per frame. The second process has fixed costs of $850,000 and variable costs of $75 per frame. Which process do you recommend? Why?
9. An insurance company is evaluating a new software system designed to reduce the time for claims processing. The fixed costs with the new system are $120,000 per year. The average variable costs with the new system are $20 per claim. The current system being used by the company has fixed costs of $80,000 and variable costs of
$35 per claim. What is the indifference point between these two processes? If the company expects to process 3,500 claims per year, which process would you recom-mend? Why?
10. Party Pools LLC assembles pool pumps for residential in-ground swimming pools.
Fixed costs to produce model P07 pump are $75,000 per year. Variable costs per pump for this model are $40. The company is evaluating a new process that would increase fixed costs to $150,000 per year but will reduce variable costs to $15/pump. What sales volume is needed to justify this investment?
11. The Jazzy Java Company is considering upgrading its espresso machine to reduce the time to make each cup of coffee. The current machine has fixed costs of $3,000 per year and variable costs of $.75 per cup of coffee. With the new machine, fixed costs increase to $7,000 per year and variable costs are $.40 per cup of coffee.
a. What is the indifference point between the two processes?
b. If the forecast is for 12,500 cups of coffee to be sold each year, which process should be used? Why?
12. The process used by the Gourmet Food Company to produce dressings has annual fixed costs of $240,000 and variable costs of $0.50 per bottle. The company just entered into an agreement with a major national grocery store chain to sell its dressings. Sales volumes are expected to increase. Two new processes are being explored. The first has a fixed cost of $320,000 per year and variable costs of
$.30 per bottle. The second has fixed costs of $400,000 per year and variable costs of $.25 per bottle.
a. What are the indifference points between the processes?
b. If sales are expected to be 1,000,000 bottles, which process should be used?
CASE
Once considered a commodity product, many small bou-tique coffee companies are luring customers with promises of high quality and unique flavors. How do the processes used by the small companies compare with those of the major coffee processors? Coffee producers purchase green coffee beans, which have been processed through several steps. At the manufacturer, green coffee beans are screened to remove debris, and then roasted for up to 30 minutes.
A roaster is typically a rotating drum in which the beans are heated. The length of time spent in the roaster impacts coffee flavor. The longer the time spent in the roaster, the richer the coffee flavor. Following roasting, beans are
sprayed with water, cooled, and screened to remove any remaining debris. Once roasted, coffee is ground to the size required for the brewing process and packaged.
Ohori’s Coffee is an example of a boutique coffee company. Established in 1984, Ohori’s Coffee is located in Santa Fe, New Mexico. This privately owned business microroasts 32 types of coffee from Africa, the Saudi pen-insula, Indonesia, the Pacific Rim, and North and South America. In batch sizes of 30 pounds or less, coffee beans are roasted in natural gas-fired rotating drum roasters carefully monitored by highly skilled “master roasters.”
To maintain quality, Ohori’s depends on humans, not Coffee Roasters
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CASE
Sonnie’s Gourmet Sandwich Café, a popular new fast casual restaurant, serves high-quality, made-to-order sandwiches.
Located in a local outdoor shopping center, parking in front of Sonnie’s is limited. However, there are many parking spaces available behind the café within a five-minute walk.
The café has an inviting, bright, and open interior with deli cases, blackboards listing specials, and oak tables and chairs.
The café’s popularity at lunch is a concern for Son-nie. During the prime lunch time between 11:30 a.m. and 1:30 p.m. Monday through Friday, the waiting line is often out the door. On average Sonnie would like to serve 40 customers per hour at lunch. Working professionals, who typically spend more than other customers at lunch, are on busy schedules, and do not have time to wait in line.
Sonnie estimates that currently some customers go to other restaurants because of the line.
The menu at Sonnie’s includes nine standard sand-wiches such as roast beef, pastrami and rye, and a B.L.T.
Many customers choose to build their own sandwiches, selecting from eight types of bread, 25 meats, 12 cheeses, and 20 different vegetables. Sandwiches are served with chips or a choice of four types of salad.
Order Placement
When customers enter the café, they walk past a large deli counter displaying meats and cheese on their left and stop in front of a counter to place their orders. An employee
greets the customer, asks for each customer’s name, then takes his or her order by filling out a two-part paper form.
Because of the number of choices, customers take, on average, 1 minute and 20 seconds to place their orders.
However, those ordering standard sandwiches complete the order in about 1 minute. The employee gives the top part of the order form to the customer (10 seconds) to take to the cashier and the other is handed to the next employee in line, who starts working on the order. The employee who took the order then fills the customer’s beverage order and hands it to the customer (30 seconds). The customer then walks about 15 feet to the cashier and pays, which on average takes 1 minute and 30 seconds. Then the customer selects a table and waits for his or her name to be called when the order is complete.
However, those ordering standard sandwiches complete the order in about 1 minute. The employee gives the top part of the order form to the customer (10 seconds) to take to the cashier and the other is handed to the next employee in line, who starts working on the order. The employee who took the order then fills the customer’s beverage order and hands it to the customer (30 seconds). The customer then walks about 15 feet to the cashier and pays, which on average takes 1 minute and 30 seconds. Then the customer selects a table and waits for his or her name to be called when the order is complete.