Process Selection

Process-Flow CharacteristicsClassifications by Type of Customer Order

Process Selection DecisionsProduct-Process Strategy

Vertical Integration

Process selection decisions determine the type of productive process to be used and the appropriate span of that process. For example, the managers of a fast-food restaurant may decide whether to produce food strictly to customer order or to inventory. The managers must also decide whether to organize the process flow as a high-volume line flow or a low-volume batch-production process. Furthermore, they must decide whether to integrate forward toward the market and/or backward toward their suppliers. All these decisions help define the type of process which will be used to make the product.

Process selection is sometimes viewed as a layout problem or as a series of relatively low-level decisions, but this is a mistake, since process selection is, on the contrary, strategic in nature and of the greatest importance. Process decisions affect the costs, quality, delivery, and flexibility of operations.

Before the process selection decision can be made, the planned volume of product output must be known.

Thus a forecast of demand and a decision on the physical capacity of operations must precede process selection. There are two main types of process classifications. First, a process is classified by type of product flow: line, intermittent, or project. Second, a process is classified by type of customer order: make-to-stock or make-to-order. These dimensions of classifications greatly affect costs, volumes, flexibility, and virtually all aspects of operations.

After the static case is considered, process selection decisions are put into a dynamic context. Process selection is portrayed as a dynamic series of decisions over time, where the product and process evolve together.

PROCESS-FLOW CHARACTERISTICS

The first dimension of process classification is the product flow or sequence of operations. There are three types of flows: line, intermittent (batch), and project. In manufacturing, product flow is the same as material flow, since materials are being converted into a product. In pure service industries, there is no physical product flow, but there is,but, a sequence of operations performed in delivering the service. Sometimes, in service operations there is a customer flow or information flow that defines the sequence of operations. This sequence of service operations is considered as the "product flow" for service industries. Line Flow is characterized by a linear sequence of operations used to make the product or service. Examples are assembly lines and cafeterias. For line-flow operations, the product must be well standardized and must flow from one operation or work station to the next in a prescribed sequence.

The individual work tasks are closely coupled and should be balanced so that one task does not delay the next. Line-flow operations are sometimes divided into two types of production: mass and continuous. "Mass production" generally refers to an assembly-line type of operation, such as that used in the automobile industry. "Continuous production" refers to the so-called process industries such as the chemical, paper, beer, steel, electricity, and telephone industries. Although both types of operations are characterized by linear flow, continuous processes tend to be more highly automated and they produce more highly standardized products. Traditional line operations are extremely efficient but also extremely inflexible. The efficiency is due to substitution of machinery for labor and standardization of the remaining labor into highly routine tasks.

The high level of efficiency requires that a large volume be maintained in order to recover the cost of specialized equipment. This, in turn, requires a standard product line which is relatively stabilized over time. Because of this standardization and the sequential organization of work tasks, it is difficult and expensive to modify the product or volume in line-flow operations; therefore these operations are relatively inflexible.

Recently, new technology is making it possible for assembly lines to be more flexible. This is being done by use of computerized control of equipment and reduction of changeover times. By assigning a product family to a flexible line, it is possible to produce several hundred product types (different sizes and shapes) within the given product family in small or large lot sizes. As a result, substantial flexibility is gained in cases where the new technology can be used.

New technology is making it possible for assembly lines to be more flexible. This is being done by use of computerized control of equipment and reduction of changeover times.

By assigning a product family to a flexible line, it is possible to produce several hundred product types (different sizes and shapes) within the given product family in small or large lot sizes. As a result, substantial flexibility is gained in cases where the new technology can be used.

Of course, line operations can be justified in only a limited number of situations. The general requirements are for high volume and a standardized product or product family. If these conditions are present, competition will usually force the use of a line flow because of its great potential efficiency.

Nevertheless, a firm must carefully analyze the decision to use line operations; this choice should not be based simply on efficiency.

Other factor which should be considered are the risk of product obsolescence, possible labor dissatisfaction due to job boredom, the risk of changing process technology, and low flexibility.

Of course, line operations can be justified in only a limited number of situations. The general requirements are for high volume and a standardized product or product family. If these conditions are present, competition will usually force the use of a line flow because of its great potential efficiency.

Nevertheless, a firm must carefully analyze the decision to use line operations; this choice should not be based simply on efficiency. Other factor which should be considered are the risk of product obsolescence, possible labor dissatisfaction due to job boredom, the risk of changing process technology, and low flexibility.

Intermittent Flow (Job Shop) An intermittent-flow process is characterized by production in batches at intermittent intervals.

In this case, equipment and labor are organized into work centers by similar types of skill or equipment. A product or job will then flow only to those work centers that are required and will skip the rest.

Because they use general-purpose equipment and highly skilled labor, intermittent operations are extremely flexible in changing the product or volume; but they are also rather inefficient.

The jumbled flow pattern and product variety leads to severe problems in controlling inventories, schedules, and quality.

If an intermittent operation is functioning near capacity, high in-process inventories will build up and throughput time for the batches will increase. This is due to job interference when different jobs require the same equip ment or the same labor at the same time, leading to much lower utilization of equipment and labor than in a line type of operation.

Constable and New (1976) have suggested a way to measure this loss of efficiency by a ratio they call throughput efficiency, or TE:

TE = total work involvement time for the job/total time in operations*100%

In the numerator, total work involvement time for the job is the machine hours or labor hours actually spent working on the job. This does not include the time the job waits because of job interference. The denominator is the total time it takes to complete the job in operations, including all waiting time. Intermittent operations typically have a TE of about 10 or 20 percent, rarely higher than 40 percent. In contrast, the TE of a line-flow operation approaches 90 to 100 percent.

One key characteristic of an intermittent process is that similar equipment and work skills are grouped together.

This is also known as a process form of layout. In contrast, the line flow is called a product layout because the various processes, equipment, and labor skills are put into sequence according to the way the product is made.

To further complicate the terminology, intermittent operations are often called job shops. However, sometimes the term "job shop" is reserved for only those intermittent operations that make to customer order. Because of this confusion and the factory connotations of "job shop," we prefer the use of the term "intermittent operation.“

Intermittent operations can be justified when the product lacks standardization or the volume is low. In this case, the intermittent operation is the most economical and involves the least risk. Such forms of operations are common in the early life cycles of all products, for products which are customized in nature, and for products with a low-volume market.

Project. The project form of operation is used to produce a unique product such as a work of art, a concert, a building, or a motion picture. Each unit of these products is produced as a single item. There is no product flow for a project, but there is still a sequence of operations. In this case, all individual operations or tasks should be sequenced to contribute to the final project objectives. A significant problem in project management is the planning, sequencing, and control of the individual tasks leading to completion of the entire project.

The project form of operations is used when there is a great need for creativity and uniqueness. It is difficult to automate projects because they are only done once; nevertheless, general-purpose equipment can sometimes be used to reduce labor requirements. Projects are characterized by high cost and difficulty in managerial planning and control. This is because a project is often hard to define initially, and it may be subject to a high degree of change and innovation.

The characteristics of the processes we have been discussing are summarized in Box 6.2, which makes a direct comparison between process I types for each characteristic.

At this point, examples from the housing industry may help to solidify some of the concepts.

At the project end of the continuum is the custom-built house. A unique plan for it may be drawn up by an architect, or existing plans may be modified for each house built.

Since the construction of the house is customized, planning, sequencing, and control of various j construction activities often become major problems.

The customer is highly involved in all stages of construction, and sometimes the plans are modified while the house is being built. The operation is labor-intensive, time-consuming, and costly, but very flexible.

All three approaches may be used, but then care must be taken to separate these operations because of their different requirements for labor, management, and capital.

If all three types of houses are to be offered, the contractor might form a separate division for each type of process as well as a separate focused operation for each.

CLASSIFICATIONS BY TYPE OF CUSTOMER ORDER

Another critical dimension affecting process choice is whether the product is made to stock or made to order. Each of these processes has its own advantages and disadvantages. While a make-to-stock process will provide fast service at low cost, it offers less flexibility in product choice than a make-to-order process.A make-to-order process essentially responds to the customer's request for a product. At some point in the make-to-order production process, it must be possible to identify a particular customer order. However, in a make-to-stock process individual orders are not assigned to customers during production. One can then tell whether the process is make-to-order or make-to-stock by examining the work orders in the conversion process.

Even though the process is make-to-order, a wide range of order specifications may remain. In some cases, nothing is done until the order is received, and the product is then designed and produced entirely to customer specifications. In other cases, components are built up in advance, and the product is merely assembled at the last minute to meet the customer's choices. In this case, the finished product is standardized but not carried in stock.In a make-to-order process, the processing activities are keyed to individual customer orders. The order cycle begins when the customer specifies the product that he or she wants. On the basis of the customer's request, the producer will quote a price and delivery time. This quotation may be offered immediately if the order is standard, or, for custom orders, it may take a period of time. If the customer accepts the quotation, the product will be either assembled from components or designed and built completely to customer specifications.

If the order is built to customer specifications and special materials are needed, they will be placed on order. When the materials arrive, they will be fabricated and assembled as capacity permits. Finally, the product will be delivered to the customer. This sequence of events is essentially the same whether the product is a good or a service.

The key operations performance measure for a make-to-order process is the delivery time.

Before placing the order, the customer will want to know how long it will take for delivery. If the delivery time is accepted by the customer, then operations should control the order flow to meet the delivery date. This means, of course, that delivery times should be set realistically by operations and marketing working in cooperation. The measures of operations performance will be delivery parameters such as length of delivery time and percentage of orders delivered on time.

A make-to-stock firm has a completely different problem. First, the make-to-stock operation must have a standardized product line. The delivery objective then is to provide the customer with these standard products from inventory at some satisfactory service level. In meeting the service level, the company will build up inventory in advance of demand.

The inventory will then be used to meet demand uncertainty and, possibly, to smooth out capacity requirements.

Therefore forecasting, inventory management, and capacity planning become essential for a make-to-stock operation.

In a make-to-stock company, very little in operations is keyed to actual customer orders; rather, the focus is on replenishment of inventory. With the rare exception of back orders, it will not be possible to identify actual customer orders in the production process.

In a make-to-stock operation, the cycle begins with the producer, rather than the customer, specifying the product. The customer takes the product from stock if the price is acceptable and the product is on hand. Otherwise, a back order may be placed. Quite separately from the actual flow of orders, the production process seeks to replenish inventory. At any particular time, there may be little correlation between actual orders being received and what is being produced. The production system is building stock levels for future orders, not current ones. Current orders are being filled from available stock. This split between the order cycle and the replenishment cycle is illustrated in Figure 6.4. The figure also indicates that such a split does not occur in a make-to-order system, since the production process starts when the order is received.

In summary, a make-to-order process is keyed to delivery time and control of the order flow. The process must be flexible so as to meet customer orders. A make-to-stock process is keyed to replenishment of inventories and efficiency of operations. The process is streamlined to produce only standard products. The essential differences between these processes are summarized in Box 6.3.

BOX 6.3

Make-to-assembly processes are now becoming popular. This process makes assemblies, or components, to forecast, and it makes final product to customer order.

The product is designed so that a few common assemblies can be forecasted, but many final product options can be added, at the last minute, when the customer order is known.

This makes it possible to provide high variety for the customer, with a limited inventory of common assemblies.

The make-to-assembly process is really a hybrid version of the make-to-stock and make-to-order process; assemblies are made to stock and finished products are made to order.

Operations are moving toward a make-to-assembly and make-to-order process, for standardized products, whenever possible by reducing production lead times.

If the standard product can be made quickly, then it need not be placed in finished-goods inventory, but can be made when ordered by the customer.

For example, Allen Bradley can make and ship a motor starter unit in over 300 different configurations in 1 day from when it is ordered. This product, which had previously been made to stock, can now be made to order with large savings in inventory and improved customer service.

A classic example of the three types of processes is the production of diamond rings for the jewelry business. A make-to-stock process is used for rings which are carried in finished-goods inventory by the jewelry store. In this case the customer buys one of the rings from the jeweler's stock.

A make-to-assembly process is used when the customer selects the stone first and then makes a separate selection of a stock ring setting.

The jeweler will then assemble the stone with the setting selected in a make-to-assembly process.

The make-to-order process is illustrated by those jewelers who make custom settings to the customer's design and then order the stone to meet the customer's requirements. The setting and the stone are matched to make a unique ring.