PROCESS SELECTION

Process Selection is basically the way goods or services are made or delivered, which
influences numerous aspects of an organization, including capacity planning, layout of
facilities, equipment and design of work systems.
Process selection is primarily used during the planning of new products or services that is
subject to technological advances and competition.
Process selection is dependent on the company's process strategy, which has two main
components: capital intensity and process flexibility.

Capital Intensity - is simply the combination of equipment and labor that an organization uses
to accomplish some objective.
Process Flexibility - is as its name implies: how well a system can be adjusted to meet changes
in processing requirements that are interdependent on variables such as product or service
design, volume of production, and technology.
Facility Layout - is simply the way a facility is arranged in order to maximize processes that
are not only efficient but effective towards the overall organizational goal. It is also dependent
on process selection.

Make-or-Buy Decision
The make-or-buy decision is the action of deciding between manufacturing an item internally
(or in-house) or buying it from an external supplier (also known as outsourcing). Such decisions
are typically taken when a firm that has manufactured a part or product, or else considerably
modified it, is having issues with current suppliers, or has reducing capacity or varying demand.

Another way to define make-or-buy decision that is closely related to the first definition is this:
a decision to perform one of the activities in the value chain in-house, instead of purchasing
externally from a supplier. A value chain is the complete range of tasks – such as design,
manufacture, marketing and distribution of a product / service that businesses must get done to
take a service or product from conception to their customers.

Some companies manage all of the tasks in the value chain from manufacturing raw materials
all through to the ultimate distribution of the completed goods and provision of after-sales
services. Some other companies are happy just to integrate on a smaller scale by buying a lot
of the parts and materials that are required for their finished products. When a business is
involved in more than one activity in the whole value chain, it is vertically integrated. This
kind of integration is quite common.

Vertical integration provides its own set of advantages. An integrated company depends less
on its suppliers and so can be certain of a smoother flow of materials and parts for the
manufacture than a non-integrated company. In addition, some companies believe they can
manage quality better by manufacturing their own parts and materials instead of depending on
the quality control standards of external suppliers. What’s more, an integrated company

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realizes revenue from the parts and material that it is “making” rather than “buying” in addition
to income from its usual operations.

The benefits of vertical integration are counterbalanced by the benefits of using outside
suppliers. By combining demand from different companies, a supplier can enjoy economies of
scale. These economies of scale can cause better quality and lower expenses than would be
possible if the business were to endeavor to manufacture the parts or provide a service by itself.
At the same time, a business should be careful to retain control over those tasks that are
necessary for maintaining its competitive position. Case in point: Hewlett Packard manages the
software for laser printers that it manufactures in collaboration with Canon Inc. of Japan.

In the book “World Class Supply Management” published in 2003, Donald Dobler, Stephen
Starling and David Burt provide a rule of thumb for outsourcing. The rule recommends that
companies outsource all goods that do not fall into one of the following three classes: 1) the
good is critical to the product’s success including customer discernment of key product
attributes 2) the good falls well within the firm’s key competencies, or within those the
company should develop to accomplish future plans, or 3) the item calls for specialized design
and manufacturing equipment or skills.

FACTORS INFLUENCING THE DECISION

To come to a make-or-buy decision, it is essential to thoroughly analyze, all of the expenses

associated with product development in addition to expenses associated with buying the
product. The assessment should include qualitative and quantitative factors. It should also
separate relevant expenses from irrelevant ones and consider only the former. The study should
also look at the availability of the product and its quality under each of the two situations.

Introduction to quantitative and qualitative analysis

Quantitative aspects can be calculated and compared whereas qualitative aspects call for
subjective judgment and, frequently require multiple opinions. In addition, some of the
associated factors can be quantified with sureness while it is necessary to estimate other factors.
The make-or-buy decision calls for a thorough assessment from all angles.

Quantitative aspects are essentially the incremental costs stemming from making or purchasing
the component. Factors of this type to look at may incorporate things such as availability of
manufacturing facilities, needed resources and manufacturing capacity. This may also
incorporate variable and fixed expenses that can be found out either by way of estimation or
with certainty. Similarly, quantitative expenses would incorporate the cost of the good under
consideration as the price is determined by suppliers offering the product for sale in the
marketplace.

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Qualitative factors to look at call for more subjective assessment. Examples of such factors
include control over component quality, the reliability and reputation of the suppliers, the
possibility of modifying the decision in the future, the long-term viewpoint concerning
manufacture or purchase of the product, and the impact of the decision on customers and
suppliers.

Introduction to relevant and irrelevant expenses

As mentioned earlier, distinguishing between these two kinds of expenses is necessary to come
to a make-or-buy decision. Relevant costs for manufacturing the good are all the expenses that
could be avoided by not manufacturing the product in addition to the opportunity cost resulting
from utilizing production facilities to manufacture the good as against the next best alternative
utilization of the manufacturing facilities. Relevant costs for buying the product are all the
expenses relating to purchasing a product from suppliers. Irrelevant costs are the expenses
involved irrespective of whether the good is produced internally or bought externally.

Factors favoring in-house manufacture:

• Wish to integrate plant operations

• Need for direct control over manufacturing and/or quality

• Cost considerations (costs less to make the part)

• Improved quality control

• No competent suppliers and/or unreliable suppliers

• Quantity too little to interest a supplier

• Design secrecy is necessary to protect proprietary technology

• Control of transportation, lead time, and warehousing expenses

• Political, environmental, or social reasons

• Productive utilization of excess plant capacity to assist with absorbing fixed overhead
(utilizing existing idle capacity)

• Wish to keep up a stable workforce (in times when there are declining sales)

• Greater guarantee of continual supply

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Factors favoring purchase from outside:

• Suppliers’ specialized know-how and research are more than that of the buyer

• Lack of expertise

• Small-volume needs

• Cost aspects (costs less to purchase the item)

• Wish to sustain a multiple source policy

• Item not necessary to the firm’s strategy

• Limited facilities for a manufacture or inadequate capacity

• Brand preference

• Inventory and procurement considerations

Costs for the make analysis:

• Direct labor expenses

• Incremental inventory-carrying expenses

• Incremental capital expenses

• Incremental purchasing expenses

• Incremental factory operating expenses

• Incremental managerial expenses

• Delivered purchased material expenses

• Any follow-on expenses resulting from quality and associated problems

Cost factors for the buy analysis:

• Transportation expenses

• Purchase price of the part

• Incremental purchasing expenses

• Receiving and inspection expenses

• Any follow-on expenses associated with service or quality

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Though the cost is rarely the sole criterion utilized to come to a make-or-buy decision, easy
break-even analysis can be a useful way to quickly guess the expense implications within a
decision.

HOW TO ARRIVE AT A MAKE OR BUY DECISION?

Here’s one example of a process of how businesses can make a sensible make-or-buy decision.
Businesses should first carry out an assessment of quantitative aspects before considering
qualitative aspects to finalize their make or buy decisions.

Step 1

Carry out the quantitative analysis by comparing the expenses incurred in each option. The
expense of purchasing products is the price paid to suppliers to purchase them. On the contrary,
the cost of manufacture includes both variable and fixed expenses. For example, a business
requires 10 units of its item in 10 consecutive periods. The company can either buy the units at
$100 per unit or expend $1,000 to set up manufacture facilities and $8 to manufacture each
unit. As the business expends $10,000 to buy the products and $9,000 to manufacture the same
quantity of products, with respect to make-or-buy, the business would do better to manufacture
the goods, on the basis of only quantitative factors.

Step 2

Think about all the qualitative factors that may have a bearing on the decision to manufacture
the products. This incorporates all pertinent factors that cannot be decreased to numbers such
as the quality of the business’ production department and its experience. An example for this
is that it may be possible that the business has zero experience in manufacturing a specific good
and its previous experience in manufacturing other goods cannot be applied.

Step 3

Think about qualitative factors that may have a bearing on the decision to buy the products
from external suppliers. Such factors include: the quality of the suppliers’ management, its
dependability and the quality of its goods. An example for this is that it is probable that the
supplier has considerable experience in manufacturing the item being considered and the
business may want to develop a long-term relationship with a supplier.

Step 4

Factor the qualitative aspects into the quantitative assessment so as to complete it. An example
for this in this case is that: even though it is cheaper for the business to manufacture its products,
there are grounds to believe that its goods would be of a lower grade than those it can buy. In

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addition, as the business desires to forge a long-term relationship with its supplier, it may desire
to purchase its goods from that supplier so as to commence the relationship.

Step 5

Arrive at a final make-or-buy decision after considering both quantitative and qualitative
factors. This would depend on the particular business and what it is doing so as to create profits.
Continuing with the above example, even if it is likely that the business may buy better grade
products than those it can manufacture in-house, the quality of its goods/products may not have
a bearing on its sales on the basis of its business model and what it is putting on the market. If
such is the case, the wish to develop a long-term relationship may or may not be adequate to
prevail over the $1,000 savings in expenses; instead it depends on how strong is the business’
yearning for the relationship and what it hopes to accomplish by starting it.

Also called the outsourcing decision, is a judgment made by management whether to make a
component internally or buy it from the market. While making the decision, both qualitative
and quantitative factors must be considered.

Example of the qualitative factors in make-or-buy decision are :

 Control over quality of the component

 Reliability of suppliers
 Impact of the decision on suppliers and customers

The quantitative factors are actually the incremental costs resulting from making or buying the
component.

Example :

 Incremental production cost per unit

 Purchase cost per unit
 Production capacity available to manufacture the component.

Type of Operation
Operation- an act or instance, process, or manner of functioning or operating.
- a process of a practical or mechanical nature in some form of work or production.

The degree of standardization and the volume of output of a product or a service influence
the way production is organized.

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Standardization- refers to the process of developing and implementing technical standards
and international standard that enables organizations to focus their attention on delivering
excellence in customer service.

1. Continuous Processing.
As the name implies, these processes produce items continuously, usually in a highly
automated process. Examples: chemical plants; refineries, and electric generation facilities. A
continuous processing may have to run 24/7 because starting and stopping it is often difficult.

2. Semi-continuous (repetitive) Processing.

It is a form of mass production that relies on making high numbers of identical units in a
continuous flow. Its important element is where schedules, where production orders are
consolidated into schedules. This type of operation is suited for a number of applications and
is used in factories all over the world. Examples: It is suited to the manufacturing of products
with a continuous and fairly steady demand, such as medical supplies, food products, and
appliances. In special circumstances, manufacturing can be increased or decreased to adjust to
changing market conditions, but in general, this type is very fast and highly efficient.

3. Intermittent Processing.
A manufacturing method of producing several different products using the same production
line. Once an initial production line has run, a second product will be produced which increases
the amount of productivity a company is capable of at one time.

- Batch Processing. These produce periodic batches of the same product. Batch shops
can produce different products, but typically all the products they produce follow the same
process flow. Examples: A facility producing shirts of different sizes and colors or a bakery
preparing different flavors of cakes or types of cookies.
Batch processing usually require some setup time – time required to prepare
resources to produce a different type of product.

- Job Shop Processing. This type of process produces small batches of many different
products. Each batch is usually customized to a specific customer order, and each product may
require different steps and processing times. Examples: Bakery that specializes in baking and
decorating wedding cakes; or a programmer that creates customized websites for his clients.

4. Project
These generally result in an output of one. Examples: Constructing a building or catering a
party. Although the result of a project is one deliverable, the process of creating the item can
be duplicated with modifications for other projects.

5. Automation
It is the use of various control systems for operating equipment such as machinery, processes
in factories, boilers and heat treating ovens, switching in telephone networks, steering and
stabilization of ships, aircraft and other applications with minimal or reduced human
intervention.

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Automation
Automation is machinery that has sensing and control devices that enable it to operate
automatically. A key question in automation is whether to automate and how much to automate.

Advantage:
Decreased overhead costs.
Increases productivity.
Consistency, Reliability. & Accuracy.
High Volume Production.
Increase in safety.

Disadvantage:
Expensive to implement.
Possible adverse effect on moral and productivity.

Generally speaking, there are three kinds of automation: fixed, programmable, and flexible.

1. Fixed Automation (Detroit-type Automation)

- Use high-cost and specialized equipment for a fixed sequence of operations.

- Primary advantages are low cost and high volume.
- Primary limitations are minimal variety and high cost for making major changes in
products or processes.

2. Programmable Automation

It involves the use of high-cost and general-purpose equipments controlled by a

computer program. The program provides both the sequence of operations and specific details
about each operation. Changing the process is easy (or difficult) as changing the computer
program, and there is downtown while program changes are being made.

 Computer-aided Manufacturing (CAM)

CAM refers to the use of computers in process control, ranging from robots to
automated quality control.
- Numerically Controlled (NC) machines. It is popularly known as the NC and is
very commonly used in the machine tools. It is defined as the form of programmable
automation, in which the process is controlled by the number, letters and symbols.
In the case of the machine tools this programmable automation is used for the
operation of the machines. Computers need not be involved.
- Computerized Numerically Controlled (CNC) machines. It refers to the idea of
controlling machine tools programmatically via computer. It allows tremendous
increases in productivity for machine tools because the machine could be run
automatically without requiring constant attention from the operator. Tools that can
be controlled in this manner include lathes, mills, routers and grinders.
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 - Directed Numerical Control (DNC). A common term for networking CNC
machine tools. On some CNC, the available memory is too small to contain the
machining program so in this case the program is stored in a separate computer and
sent directly to the machine, one block at a time. If the computer is connected to the
number of machines it can distribute programs to different machines as required.
- Robots. Is a mechanical or virtual artificial agent, usually an electro-mechanical
machine that is guided by a computer program or electric circuitry.

3. Flexible Automation

Flexible automation evolved from programmable automation. It uses equipment that is

more customized than that of programmable automation. A key difference between the two is
that flexible automation requires significantly less changeover time. This permits almost
continuous operation of equipment and product variety without the need to produce in batches.

- Manufacturing Cell (MC). It is an efficient grouping of all resources required to

manufacture a product.
- Flexible Manufacturing System (FMS). Machines involved in FMS include
supervisory computer control, automatic material handling, and robots or other automated
processing equipments. It appeals to managers who hope to achieve both the flexibility of job
shop processing and the productivity of repetitive processing systems.

Disadvantages:
Handling only a relative narrow range of part variety;
Requiring long planning and development; and
Representing a sizable chunk of technology (not gradual implementation).

- Computer-integrated Manufacturing (CIM). The overall goal of using CIM is to

link various parts of an organization to achieve rapid response to customer orders and/or
product changes to allow rapid production and to reduce indirect labor costs.

CAPACITY PLANNING
Capacity refers to an upper limit or ceiling on the load that an operating unit can handle.

The capacity of an operating unit is an important piece of information for planning purposes:

It enables managers to quantify production capability in terms of inputs or outputs,

and thereby make other decisions or plans related to those quantities. The basic questions

in capacity planning are the following:

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1. What kind of capacity is needed?

2. How much is needed?

3. When is it needed?

Importance of Capacity Planning

1. Capacity decisions have a real impact on the ability of the organization to meet future
demands for products and services; capacity essentially limits the rate of output possible.
Having capacity to satisfy demand can allow a company to take advantage of tremendous
opportunities. When the Quigley (www.quigleyco.com) Corporation’s zinc gluconate
lozenges, sold under the name Cold-Eze™, attracted the public’s interest during the height of
the cold and flu season in 1997, drugstores and supermarkets quickly sold out. The product was
so popular that the company couldn’t keep up with demand. Because of this, the company was
unable to take full advantage of the strong demand.

2. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be
matched, which will tend to minimize operating costs. In practice, this is not always achieved
because actual demand either differs from expected demand or tends to vary (e.g., cyclically).
In such cases, a decision might be made to attempt to balance the costs of over- and
undercapacity.

3. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of
a productive unit, the greater its cost. This does not necessarily imply a onefor- one
relationship; larger units tend to cost proportionately less than smaller units.

4. Capacity decisions often involve long-term commitment of resources and the fact that, once
they are implemented, it may be difficult or impossible to modify those decisions without
incurring major costs.

5. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly
add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can
affect delivery speed, which can be a competitive advantage.

6. Capacity affects the ease of management; having appropriate capacity makes management
easier than when capacity is mismatched.

Measuring Capacity Planning

Even though this seems simple enough, there are subtle difficulties in actually measuring
capacity in certain cases.

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These difficulties arise because of different interpretations of the term capacity and problems
with identifying suitable measures for a specific situation. In selecting a measure of capacity,
it is important to choose one that does not require updating.

Capacity planning is the process of determining the production capacity needed by an

organization to meet changing demands for its products.
In the context of capacity planning, design capacity is the maximum amount of work that an
organization is capable of completing in a given period.
Effective capacity is the maximum amount of work that an organization is capable of
completing in a given period due to constraints such as quality problems, delays, material
handling, etc. The phrase is also used in business computing as a synonym for capacity
management.

Design capacity is the maximum rate of output achieved under ideal conditions. Effective
capacity is usually less than design capacity (it cannot exceed design capacity) owing to
realities of changing product mix, the need for periodic maintenance of equipment, lunch
breaks, coffee breaks, problems in scheduling and balancing operations, and similar
circumstances. Actual output cannot exceed effective capacity and is often less because of
machine breakdowns, absenteeism, shortages of materials, and quality problems, as well as
factors that are outside the control of the operations managers. These different measures of
capacity are useful in defining two measures of system effectiveness: efficiency and utilization.
Efficiency is the ratio of actual output to effective capacity. Utilization is the ratio of actual
output to design capacity.

𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 =
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝐷𝑒𝑠𝑖𝑔𝑛 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦

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Because effective capacity acts as a lid on actual output, the real key to improving capacity
utilization is to increase effective capacity by correcting quality problems, maintaining
equipment in good operating condition, fully training employees, and fully utilizing bottleneck
equipment. Hence, increasing utilization depends on being able to increase effective capacity,
and this requires a knowledge of what is constraining effective capacity.

A discrepancy between the capacity of an organization and the demands of its customers results
in inefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity
planning is to minimize this discrepancy. Demand for an organization's capacity varies based
on changes in production output, such as increasing or decreasing the production quantity of
an existing product, or producing new products. Better utilization of existing capacity can be
accomplished through improvements in overall equipment effectiveness (OEE). Capacity can
be increased through introducing new techniques, equipment and materials, increasing the
number of workers or machines, increasing the number of shifts, or acquiring additional
production facilities.
Capacity is calculated as (number of machines or workers) × (number of shifts) × (utilization)
× (efficiency).

STRATEGIES

 Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy

is an aggressive strategy with the goal of luring customers away from the company's
competitors by improving the service level and reducing lead time. It is also a strategy
aimed at reducing stockout costs. A large capacity does not necessarily imply
high inventory levels, but it can imply in higher cycle stock costs. Excess capacity can also
be rented to other companies.
Advantage of lead strategy: First, it ensures that the organization has adequate capacity to meet
all demand, even during periods of high growth. This is especially important when the
availability of a product or service is crucial, as in the case of emergency care or hot new
product. For many new products, being late to market can mean the difference between success
and failure. Another advantage of a lead capacity strategy is that it can be used to preempt
competitors who might be planning to expand their own capacity. Being the first in an area to
open a large grocery or home improvement store gives a retailer a define edge. Finally many
businesses find that overbuilding in anticipation of increased usage is cheaper and less
disruptive than constantly making small increases in capacity. Of courses, a lead capacity
strategy can be very risky, particularly if demand is unpredictable or technology is evolving
rapidly.

 Lag strategy refers to adding capacity only after the organization is running at full capacity
or beyond due to increase in demand (North Carolina State University, 2006). This is a

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 more conservative strategy and opposite of a lead capacity strategy. It decreases the risk of
waste, but it may result in the loss of possible customers either by stockout or low service
levels. Three clear advantage of this strategy are a reduced risk of overbuilding, greater
productivity due to higher utilization levels ,and the ability to put off large investments as
long as possible. Organizations that follow this strategy often provide mature, cost-
sensitive products or services.
 Match strategy is adding capacity in small amounts in response to changing demand in
the market. This is a more moderate strategy.
 Adjustment strategy is adding or reducing capacity in small or large amounts due to
consumer's demand, or, due to major changes to product or system architecture.

Decision Making in Capacity Planning

Typical capacity planning considerations include the following items:

• Design flexibility into systems for new products, new demand, or phase-out products.

• Take a big picture. When adding rooms in a motel, one should also take into account
probable increased demands for parking, food, entertainment, and housekeeping.

• Prepare to deal with capacity chunks. Capacity increases are often acquired in fairly
large chunks rather than smooth increments.

• Dynamic capacity planning generally makes a system to alternate between under-

utilization and over-utilization. Unfortunately, no simple solutions exist for the problem.
Possible options are

*to identify products or services that have complementary demand patterns,

*to use overtime work,

*to subcontract some work, and

*to replenish inventory during low-demand period.

• Identify the optimal operating level. For low level of output, fixed equipment cost is
shared by very few units. As output is increased, there are more units to absorb the fixed cost.
However, beyond a certain point, unit cost starts to rise due to increasing load to the facility.

• Both optimal operating rate and the amount of the minimum cost tend to be a function
of the general capacity of the operating unit. As the general capacity of a plant increases, the
optimal output increases and the minimum cost for the optimal rate decreases.

Once alternatives of capacity planning are developed, items to evaluate the alternatives are:

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 •economical considerations, including costs of development, operating, and
maintenance,
•availability (when and how soon will they be available),
•public opinions,
•environmental concerns,
•employee relocation, and
•cost-volume and financial analysis

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