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Product Design and Process Selection. Based on slides for Chase Acquilano and Jacobs, Operations Management, McGraw-Hill. What is a Product?. A product is a package of : Goods Services Experiences Ongoing Relationships A product has: Tangible attributes Intangible attributes. Examples
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Product Design and Process Selection Based on slides for Chase Acquilano and Jacobs, Operations Management, McGraw-Hill
What is a Product? A product is a package of: Goods Services Experiences Ongoing Relationships A product has: Tangible attributes Intangible attributes Examples Automobile Airplane trip Diamond Ring Restaurant Meal Dishwasher College Education Tax Preparation Basketball Game
Product Design Issues • Value analysis/value engineering • Obtain better performance at lower cost • Two Design Approaches: • Over the Wall Approach vs. Concurrent Engineering • Complexity of design • Implications?? • Reliability • How can it be increased? • Standardization • Advantages & disadvantages? • Modular design • Advantages & disadvantages? • Environmental Implications
Exercise • Pick several products and list some issues that need to be considered in its design and manufacture • Include aesthetic, manufacturability, after-sales service issues among others • Deliverable • List and present to the class
Process Structures Continuous Processing Repetitive (assembly lines) Manufacturing cells Batch processing Job Shops Projects “continuous or semi-continuous” “intermittent”
Break-Even Analysis Some managerial questions: • How much should we produce to break even? • For a specific volume, should we manufacture the product ourselves, or outsource? • For machine alternatives A and B, at what volumes should we use machine A and at what volumes, machine B?
Break-Even Analysis (example) • Sale Price = $300 • Option 1: • Purchase = $200 * Demand • Option 2: • Lathe = $80,000 + $75 * Demand • Option 3: • Machine center = $200,000 + $15 * Demand Purchase vs. Lathe? Lathe vs. Machining Center?
Calculations Purchase versus Lathe: $200 * Demand = $80,000 + $75 * Demand ($200 * Demand) - ($75 * Demand) = $80,000 $125 * Demand = $80,000 Demand = $80,000/$125 = 640 units so – less than 640 units, purchase; 640 of greater, use Lathe Lathe versus Machine Center: $80,000 + $75 *Demand = $200,000 + $15 * Demand Demand = $120,000/$60 = 2,000 units so – less that 2000 units use the Lathe; 2000 or more use the machining center
Break Even Analysis Example • You are starting a new business and your fixed costs are estimated to be $500,000. Your product sells for $100 and costs you $50 to manufacture. What is the breakeven point? If you sell 15,000 units, what will be your profit? • Answer: Break Even Value is 10,000 and Profit is $250,000
Break Even Analysis Formulas • Total Revenue = Total Cost • P x = F + V x implies: • BEP(x) = F/[P-V] • Profit = TR-TC = (P-V) x – F • Breakeven between two machines: • F1 + V1 x and F2 + V2 x --assume F2 > F1 & V2 < V1 • (F2 – F1) / (V1 – V2) Note: F = Fixed Cost; P = Price; V = Variable Cost
Break Even Analysis Example • In your business you are considering two machines. Machine 1 costs $500,000 and has a variable per unit cost of $50 per item. Machine 2 has a fixed cost of $200,000 and has a variable per unit cost of $80 per item. What is the break-even volume for the two machines. If a friend tells you to use Machine 2 if the volume is 5,000 items, is she right or wrong? • Answer: Break Even Value is 10,000
Summary • Production Strategies • Process focused >>> Product focused • Other alternatives: Project, Cellular • Technology • Break-even Analysis