Project and Production Management

Module 6

Product and Process Selection

Prof Arun Kanda & Prof S.G. Deshmukh, Department of Mechanical Engineering,Indian Institute of Technology, Delhi

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MODULE 6: Product and Process Selection

1. Introducing New Products and Services

2. Economic Evaluation of Products and Services

3. Product Mix Decisions

4. Product and Process Selection

5. Illustrative Examples

6. Self Evaluation Quiz

7. Problems for Practice

8. Further exploration

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1. Introducing new Products and Services

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SOURCES OF IDEAS FOR NEW PRODUCTS &

SERVICESCustomer need Marketing departmentProduction departmentDesign and DevelopmentVendors and subcontractorsTop managementNew technologiesChanging life styles

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MOTIVATIN IN INTRODUCING NEW PRODUCTS

To satisfy need

For profit

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COONTRIBUTION TO NEW PRODUCT IDEAS

Sales and Marketing (close touch with customer)

Top management (Active listener to visitor and customer feedback)

Production department (limited to production ease and economics)

Research and Development (prompted by new developments in materials & technology)

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GENERATION OF NEW PRODUCT IDEAS

Brain storming (preferably by interdisciplinary team)

Team apprised of Company objectives & long term goals Current economic scenario Preferred field of activity (expertise) Approximate budget for new product

Each one generates ideas which are recorded without criticism or evaluation

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EVALUATION OF NEW PRODUCT IDEAS

The evaluation of the new product ideas could be done on a number of criteria Likely demand and pattern of growth Ease of raw material availability Availability of Production technology Competition and likely market share Likely revenues and costs of operation The product life cycle

An example to illustrate this process is taken up next

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AN EXAMPLE OF SCREENING IDEAS

Idea/

factor

Demand Competition

Ease of Raw Mtl

Cost of processing

Likely profit

Score

Computer peripherals

6 3 6 5 6 26

Fast food 8 6 9 7 5 35

Fashion clothing

4 5 7 4 4 24

Soaps and detergents

9 2 7 6 4 28Each factor evaluated on a scale of 1(least desirable) – 10 (most desirable)

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CUSTOMER NEEDS AND DESIRES

Desires Natural, as hunger,

shelter, love and security

Generated by exposure to circumstances and temptations

(as in advertisements on media, TV,neighbour)

Needs When a desire becomes

strong enough and warrants fulfilment, it becomes a need.

Customer demand is based on real or artificially generated needs

Needs are constantly changing

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MORTALITY OF IDEAS

Screening Economic evaluation Development Testing Commercialization Number

of ideas

Time

35-40 ?

3-24 months ?

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PRODUCT POLICY

Minimum price, whatever the quality

Maximum quality, whatever the cost

Safety/reliability

Precision and prestige

Satisfactory balance between quality & price

Versatility

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PRODUCT ANALYSIS

Marketing aspectProduct CharacteristicsFunctional aspectOperational aspectDurability and dependability aspectAesthetic aspect

Economic aspect Production aspect

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MARKETING ASPECT

Who is the customer?

What are his needs?

How to reach him?Market ResearchForecastingAdvertising

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CUSTOMER NEEDS TO PRODUCT SPECIFICATIONS

Quality Function Deployment

Value Analysis

The Taguchi Method

Computer Aided Design

Design for manufacturability

Design for assembly

Prototyping

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QFD RELATIONSHIP MATRIX FOR A LAPTOP

Light weight 4.5 3 9 3 3 3 3

Small size 3.0 9 3 3 9

Long operation between recharging

3.5 9

Large keys on keyboard 2.0 9

Short time to recharge 1.5 9

Readable screen 3.0 9

Durable 2.0 9 3 3 3

Fast processor /large memory 4.0 9 9

Technical Attributes Customer Requirements wt. a b c d e f

a Case Material b Battery type/size c Screen type/sized Ram capacity e Hard drive type/size f Keyboard type/size

Attribute Importance 31.5 49.5 64.5 118.5 52.5 64.5

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HOUSE OF QUALITY

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VALUE ANALYSIS

Define the function of each component provide support; permit rotation (verb, noun)

Primary and secondary functions

Identify poor value functions and eliminate them

Come up with a design with higher value and lower cost (Value = Quality/Cost)

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TAGUCHI METHODSDevelop a robust designUse a loss function with appropriate range for aimed at target valueIdentify the design parameters of interestDesign experiments to determine which combination of parameters affect quality most(Use of orthogonal arrays limits search)Develop a robust design

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COMPUTER AIDED DESIGN

Use of software permits Development of drawings (Orthographic plus

Isometric views) Rotation and viewing from different angles Visualization of alternative designs Compatibility of assemblies Producing files and drawings for manufacture Easy updation and transfer to needed locations

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DESIGN FOR MANUFACTURABILITY

Uses catalogs of information, guidelines, checklists, charts, tables, diagrams and graphs to Develop a design planDecompose products into components and

assembliesEvaluate the production costs of product

designsSimplify and improve product design

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DESIGN FOR ASSEMBLY

The methodology focuses mainly on `Machining Handling Assembly Design dimensions Clearances Shape OrientationDFM/A developed by Geoffry Boothroyd and Peter Dewhurst. Design for Service DFS is a recent concept

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PROTOTYPING

A prototype provides a feel for the final product.

With increasing competition, it is imperative to reduce cost & lead times

Rapid prototyping machines produce the 3-D part by generating and joining slices

Stereolithography is a commonly used technology for this purpose.

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SUMMARY

The product life cycleIdea generation and screeningMarketing aspectProduct Features Function, Operation,Quality, Durability,

Dependability, Aesthetics, Production aspect

Tools for a Product Designer QFD, Value Analysis, Taguchi, CAD, DMF, DFA,

Prototyping

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2. Economic Evaluation of New Products and Services

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TYPES OF ECONOMIC ANALYSIS

Gross Measures of Cash Flows Return over the life span (NPV,IRR, Payback) Loan disbursement cabability(DSCR) Risk evaluation in probability terms

Annual Measures of Performance Fixed and Variable Costs Break even analysis Profit Volume Charts Changes in demand, profitability Optimal strategy evaluation

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GROSS PERFORMANCE MEASURES

Net Present Value

Payback period

Internal Rate of Return

Financial Ratios - Benefit /Cost Ratio -Debt Service Coverage Ratio

Stream of Cash Flows

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RISK EVALUATION

OptimisticScenario

Most likelyScenario

PessimisticScenario

Uncertain Cash flows

Decision Tree

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THE PROFIT CONSIDERATIONS

Profit

Distribution

Storage

Overhead

Labour

Materials

Set up

TotalCost

Selling Price

Quantity

Profit

A

B

C

A Increase Selling PriceB Increase MarketC Reduce total cost

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COMPETITIVENESS OF PRODUCT

Competitiveness =

Fraction of the market captured by the product = p/P

pP

Ratio of Value/Price determines the Competitiveness of product

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FIXED AND VARIABLES COSTS

Fixed Costs Do not depend on

production volume Costs which must be

incurred no matter whether we produce or not

Rental or cost of land Initial Machinery cost Management & indirect

salaries Warehouse, factory and

office space

Variable Costs Directly depend on

production volumes, such as

Raw materials Utilities Direct labour Packaging cost Shipment cost

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BREAK EVEN ANALYSISRevenue = bV

Total Cost = F+aV

Loss

Profit

Breakeven point Volume of Sales(BEP)

V1

Cost &Revenue At BEP, Revenue = Cost

bV1 = F+aV1

or, V1 = F/(b-a)

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MARGIN OF SAFETY

V1 V2

F

Revenue = bV

Cost = F+ aV

(BEP)

Margin of Safety= (V2- V1)/V1 = (V2/V1) - 1

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PROFIT-VOLUME CHART

V1

Slope = (b-a) = profitability, p

Profit, Z =Revenue - Cost =bV - (F+aV) -F + (b-a)V =-F + p V

Z = -F + pV

Volume

Profit, Z

- F

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AN EXAMPLE

Management Choices

Product A

Product B

Product C

Fixed Unit Likely Sellingcost variable Sales Price cost

zero Rs 100 1000 Rs 150

Rs 10,000 Rs 80 2000 Rs 150

Rs 20,000 Rs 50 5000 Rs 150

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EXAMPLE(CONTD 1)

The Profit functions for the three products A B and C are:

ZA= 0 + (150-100) V = 50V (BEP = zero)ZB = -100,000 + (150-80)V = -100,000 + 70V (BEP = 1429)ZC = -200,000 +(150-50)V = -200,000+ 100V (BEP = 2000)

The breakeven profit values occur as follows:

For A and B Volume = 5000 Profit Value = Rs 250,000For B and C Volume = 3333 Profit Value = Rs 133,310For C and A Volume = 4000 Profit Value = Rs 200,000

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EXAMPLE (CONTD 2)

1 2 3 4 5 6V in 000 s

-1 lac

-2 lac

0

1lac

2 lac

3 lac

For maximum profit:For Volume 0 < V< 4000 Product A V>= 4000 Product C

A

B

C

Profit

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EXAMPLE(CONTD 3)

1 2 3 4 5 6V in 000 s

-1 lac

-2 lac

0

1lac

2 lac

3 lac

Maximum profit is realizedfor Volume ranges as follows 0 <= V<=1000 Product A 1000<= V<=2000 Product B 2000<=V< =5000 Product C

A

B

C

Profit

Assuming Limited Capacities of Products

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MODULAR DESIGN

Products are typically designed and manufactured in modules. This results in Low cost of production Greater product variety at low cost Greater satisfaction for assembly workers A greater choice of subcontractors and vendors for

product manufacture Control of product reliability and cost

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AN EXAMPLE OF MODULAR DESIGN

A B

For the product to function both A and B must function

If there are 3 designs for A And 3 designs for BThere are a total of 3 X 3 =9 designs for the product

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EXAMPLE OF MODULAR DESIGN

Subcomponent

Reliability

.90 0.95

0.98

A Rs 50 Rs 90 Rs 140

B Rs 70 Rs 90 Rs110Required reliability of the product = 0.90

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COST AND RELIABILITY ANALYSIS

Combination

Reliability

A

Cost

A

Reliability

B

Cost

B

Reliability

Product

Cost

Product

1 0.90 50 0.90 70 0.8100 120

2 0.90 50 0.95 90 0.8550 140

3 0.90 50 0.98 110 0.8820 160

4 0.95 90 0.90 70 0.8550 160

5 0.95 90 0.95 90 0.9025 180

6 0.95 90 0.98 110 0.9310 200

7 0.98 140 0.90 70 0.8820 210

8 0.98 140 0.95 90 0.9310 230

9 0.98 140 0.98 110 0.9604 250

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SUMMARY

Financial Evaluation of Products is generally carried out in two phases Gross measures of evaluation eg. NPV,IRR,

Payback, Risk, Financial Ratios Annual cost analysis eg Breakeven analysis, Profit

volume Charts, Profitability, Demand.

P-V charts could be used to determine the optimal strategy when choices are available. Modular Design helps to improve variety, lower costs and greater job satisfaction to workers.

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3. Product Mix Decisions

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WHY INTRODUCE VARIETY?

It may seem that choosing the most profitable product in large quantities would maximize profits. This need not be so due to Demand constraints Commitment to produce multiple products To absorb the risk of producing only one product To expand the customer base Utilization of resources

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Product Dept

I

Dept

II

Dept

III

Inspection

Shipping

Unit Profit

Min

Sales

Max Sales

A 0.14 0.6 0.2 0.04 0.10 42 150 250

B 0.10 0.4 0.2 0.04 0.10 40 200 400

C --- 0.2 0.1 0.04 0.12 36 360 500

Hours of capacity

160 320 160 80 80

Processing Time in Hours per unit

EXAMPLE 1 (LINEAR PROGRAMMING) module 6: Product and Process Selection

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LP FORMULATION FOR PRODUCT MIX

3 Products A, B, and C are to be produced Let X1 be quantity of A to be produced. Let X2 be quantity of B to be produced. Let X3 be quantity of C to be produced.

If the profits from the sales of one unit of each of these products is Rs 42, Rs 40 and Rs 36 respectively , then to maximize Profit Objective function Max. Z = 42 X1 + 40 X2 + 36 X3

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LP FORMULATION FOR PRODUCT MIX

0.14X1 + 0.10 X2 <= 160 0.6X1 + 0.4 X2 + 0.2 X3 <= 320 0.2X1 + 0.2X2 + 0.1X3 <= 160 0.04X1 + 0.04X2 + 0.04X3 <=80 0.10X1 + 0.10X2 + 0.12 X3 < = 80 X1 => 150 X1 <= 250 X2 =>200 X2 <= 400 X3 => 360 X3 <= 500 X1,X2,X3 all non-negative

Constraints

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SOLUTION TO LP

Z = Rs. 28016

X1 = 168

X2 = 200

X3 = 360

Only 3 constraints satisfied as equalities.10x1 + .10x2 + .12x3 <= 80 (Shadow price = 420)

x2 >= 200 (Shadow price = -2)

x3 >= 360 (Shadow price = -14.4)

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PROBLEM 2• Goal Programming to deal with multiple conflicting objectives

1. Ensure a profit of at least 80% of the maximum profit2. Maximize the utilization of Dept I3. Ensure at least 20 hours of idle capacity in Dept II4. Ensure that the utilization of Dept III is exactly 150 hours

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DEVIATIONAL VARIABLES

The GP objective function

is: A function

of only

deviational variablesMinimizationPriority wise, hierarchical

Target

OverachievementVariable d+

Underachievement Variable d-

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GOAL PROGRAMMING

A Goal Programming Problem is an extended version of an LP formulation and the constraints includeGoal Constraints

One for each goal, linking the goal to deviationalVariables

System ConstraintsThese are the original constraints that appear in

the LP formulation

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GOAL PROGRAM FOR MULTIPLE GOALS

Objective Function Min [ P1 d1- + P2 d2 - + P3 d3- + P4 ( d4+ + d4- ) ]

Goal constraints:

(42X1 + 40 X2 + 36 X3 ) – d1 + d1- = 0.80 Z max

0.14 X1 + 0.10 X2 – d2+ + d2 - = 160 0.6X1 + 0.4 X2 + 0.2 X3 - d3+ + d3- = 300 0.04X1 + 0.04 X2 + 0.04 X3 - d4+ + d4- = 150

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SYSTEM CONSTRAINTS 0.14X1 +.10 X2 + <= 160 0.6X1 + 0.4 X2 + 0.2 X3 <= 320 0.2X1 + 0.2X2 + 0.1X1 <= 160 0.04X1+ 0.04X2+0.04X3 <=80 0.10X1 + 0.10X2 + 0.12 X3 <= 80 X1 => 150 X1 <= 250 X2 =>200 X2 <= 400 X3 => 360 X3 <= 500 X1,X2,X3 all non-negative

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SOLUTION TO THE GOAL PROGRAM

X1= 168

X2 = 200

X3 = 360

d1+ = 563

d1- = 0

d2+ = 0

d2- = 116.48

d3+ = 0

d3- = 47.2

d4+ = 0

d4- = 40.4

Profit = Rs 22976

Utilization of I =43.52

Utilization of II =252.80

Utilization of III = 109.6

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PROBLEM 3Unconstrained Stochastic Product Mix

• n different items

•Uncertain sales potential (demand for an item is a random variable)

•Short duration sale, no opportunity to reorder

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NotationXi = initial stock level of item ici = unit procurement cost of item iri = unit selling price of item i if sold during saleri = unit disposal value of item i if not sold during the saleDi = demand of item i during sale, random variable having pdf fi(Di) Z = Contribution to profit and overhead from the sale

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ANALYSIS

For given {Xi} and a given realization {Di}Quantity sold = S (Xi, Di) = min (Xi, Di)Quantity remaining = R (Xi, Di)

= max (Xi – Di, 0)Payoff from the sale = Z =

Sum i=1,n [riS(Xi,Di) + ri’ R(Xi,Di)- ciXi]

If product demands are mutually independent random variables, we can develop a expression for the Expected profit, E(Z) as follows

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ANALYSIS(2)

E(Z) = Sum (i=1,n) { [ri S(Xi, Di) + ri’R(Xi,Di)] fi(Di)dDi – ciXi}

= Sum( i=1,n){ri Difi(Di)dDi + riXi fi(Di)dDi

+ri’ (Xi –Di ) fi(Di)dDi – ciXi}

= Sum (i=1,n){(ri-ci)Xi + (ri-ri’)[ Difi(Di)dDi –XiFi(Xi)]}

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ANALYSIS (3)

E(Z) == Sum (i=1,n){(ri-ci)Xi +

(ri-ri’)[ Difi(Di)dDi –XiFi(Xi)]}

For the maximum E(Z) Xi

= (ri-ci) - (ri-ri’)[Fi(Xi)] = 0

Fi(Xi*) = fi(Di)dDi = (ri- ci)/ (ri-ri’)

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STOCHASTIC PRODUCT MIX

1 10 20 5 150 250

2 20 35 10 0 400

3 30 50 20 100 300

Product Cost Revenue Disposal Demand from sale if not sold Min Max (Rs) (Rs) (Rs) (units)

Assume all demands to be uniformly distributed

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SOLUTION (1)

Xi = ai +(bi-ai)Fi(xi)

cdfFi(xi)

pdffi(xi)

ai xi bi

ai bi

1/(b-a)

xi

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SOLUTION (2)F1(x1) = (20-10)/(20-5) = 10/15 x1 = 150 + 100x10/15 = 216.67F2 (x2) = (35-20)/(35-10) = 15/25 x2 = 0 = 400x15/25 = 240F3 (x3) = (50-30/50-20) = 20/30 x3 = 100 + 200x20/30 = 233.37

Investment = 2166.7 + 4800+ 7000 = 13966.7

SUMMARY

The motivation and considerations behind product mix considered

Some commonly used formulations of Product Mix illustrated with examples Linear Programming Formulation Goal Programming Formulation for

accommodating multiple goals Stochastic product mix for perishable items and

short term sale

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4. Product and Process Selection

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LINK BETWEEN PRODUCT DESIGN AND PROCESS PLANNING

Design Specifications & Requirement

Functional Design

Production Design

Drgs. & Specifications of what to Make

Product Analysis (Assy & Flow Charts)

Make - Buy decision

Process Decisions (Selection from Alternative Processes)

Route Sheets & Operation Sheets. Specification of how to Manufacture

Modification of process Plans due to Layout, Quality Preference and M/c availability

How Many to Make ?(Forecast, Orders)

Work Place& Tools Design

PRODUCTDESIGN

PROCESS PLANNING

MANUFACTURE

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Start up

Rapid growth

Maturity Decline Commodity

Sales Volume

PRODUCT LIFE CYCLE

I II III IV Stages

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Product Variety

Great variety Increasing Standardization

Emergence of a dominant

design

High Standardization “commodity” characteristic

Product Volume

Low Increasing High High

Industry Structure

Small Competitors

Fall out & Consolidation

Few Large Companies

Survivors

Form of Comp

Product Characteristic

Quality & Availability

Price & dependability

Price

PRODUCT LIFE CYCLE

I II III IV module 6: Product and Process Selection

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MANUFACTURING PROCESS TECHNOLOGY

EQUIPMENT,

PEOPLE AND

SYSTEMS

USED TO PRODUCE A FIRM’S PRODUCTS AND SERVICES.

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KEY DECISIONSOrganizing Process Flows

Project / Job shop/ Batch/ Assembly line/ Continuous flow

Choosing appropriate product/ process mix

Adapting process to meet strategic requirements.

Evaluating Automation & high technology processes.

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Product Structure Low Vol.Low Std,

One of a kind

MultipleProducts,Low Vol

Few majorproducts,Low Vol

High vol.High std

Commodity

Jumbledflow

(Job-Shop)

DisconnectLine flow(Batch)

Connected Line flow(Assy Line)

Continuous Flow

Comm.printer

HeavyEqpt.

Auto Assy.

Sugar, Refinery

Void

Void

I II III IV

I

II

III

IV

PROCESS

Product - Process Matrix

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Job-Shop

Batch Assy. Line

Continuous Flow

Man

uf.

Cos

t/un

it

Rapid Growth

Maturity Commodity

The Process Life Cycle

Start up

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AsProducts

Market requirements

Competition

Change

So Must

Equipment

Procedures

Human Resources

Product - Process Matrix helps to understand WHY & HOW companies change their production operations.

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DESIGN OF SERVICES AND SERVICE PROCESSES

SERVICE Design similar to PRODUCT DESIGN

except

Certain services may not require engineering testing components analysis prototype building

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In service design, process technology involves different considerations primarily because

Clients / customers are present in the conversion process.

Services vary in

Amount of Customer Contact

Intensiveness of Labour vs Capital

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MATRIX OF SERVICE PROCESSES

Low Customer Contact

High Customer Contact

Capital Intensive

Quasi-manufacturing Postal services Automated area

housing

Customer shop Services Medical treatment. Chartered travel

Labour Intensive

Mass Services Teaching Live entertainment Cafeteria

Professional Services Legal Counseling Medical diagnosis Tutoring

Rigid Process Technology

Flexible process Technology

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AUTOMATION

Automated banking

Electronic grocery scanners

Office automation

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CHOICE OF PROCESS

Volume

Cost

Job prod. batch production assembly line

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VARIOUS PROCESS FEATURES

Project From objective, identify tasks, plan and

execute, one time activity

Job Shop On general purpose equipment produce a

variety of jobs. Each job chooses its route

J1

J2

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VARIOUS PROCESS FEATURES

Batch Production A batch of similar parts produced by

following a sequence of machines. Savings from common setups.

Assembly Line One product produced in large numbers by

processing on sequential work stations

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VARIOUS PROCESS FEATURES

Continuous ProductionChemical Plants, RefineriesHere the product flows continuously with

characteristics governed by environmental and control conditions such as temperature, humidity, chemical composition, catalyst etc.

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SUMMARY

The Product undergoes varying requirements during its lifecycle

Different processes serve different needs

Product- Process Matrix captures the relationship

Process life cycle gives how processes mature

Service matrix for categories of service

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SUMMARY (CONTD)

Features of different processing modesProjectsJob ProductionBatch ProductionAssembly LinesContinuous Production

Economic Selection of Optimal Process

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