BU247 Chapter Notes - Chapter 6: Kaizen, Advantageous, Batch Production

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BU247 Chapter 5: Measuring and Managing Process Performance
Process Perspective and the Balanced Scorecard
-Process perspective of Balanced Scorecard identifies key operations management, customer
management, innovation, and regulatory and social processes in which organization must excel
to achieve its customer, revenue growth, and profitability objectives
-Objectives include streamlining operations through lean manufacturing, improving cost,
quality, and cycle times of processes, and using benchmarking as a way to obtain info for
competitive purpose
Facility Layout Systems
-Consider amount of space required, demand for g/s, and number of operations needed
-3 types of facility designs: Process layouts, Product layouts, and Group Technology
-Central goal of design process is to streamline operations and increase operating income of
system
-Theory of Constraints (TOC): Operating income can be increased by carefully managing the
bottlenecks in a process
Bottleneck is any condition that impedes or constrains efficient flow of a process
oIdentified by determining points at which excessive amounts of work-in-process
inventories are accumulating
-TOC relies on 3 measures:
1. Throughput contribution: Difference between revenues and direct materials for
quantity of product sold
2. Investments: The materials costs contained in raw materials, work-in-process, and
finished goods inventories
3. Operating costs: All other costs, except for direct materials costs, needed to obtain
throughput contribution (e.g. depreciation, salaries, utility costs)
-TOC emphasizes short-run optimization of throughput contribution (typically one month) 
almost all organization’s costs will be fixed and unavoidable (max. short-run contribution
margin)
Contrary to ABC, but its planning horizon is quarterly, annually, and longer
oManagers can adjust resource capacity to meet current and future demands 
resource capacity costs are relevant for decisions about products and customers
TOC and ABC are compatible with TOC providing insights for short-run profit
optimization and ABC providing managers with signals of how to optimize performance
TOC and ABC can be used simultaneously and productively by organizations
Process Layouts
-Process Layout: All similar equipment or functions are grouped together (aka job shop or
functional layout)
-Exist in organizations where production’s done in small batches of unique products
-High inventory levels b/c it’s necessary to store work in process in each area while it awaits
next operation
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-Work-in-process inventory (e.g. loan application) accumulates at processing stations for 3
reasons:
1. Handling work in batches – use batches to reduce setting up, moving, and handling
costs; but batch processing increases inventory levels b/c at each processing station, all
items in batch must wait while employees process entire batch before moving to next
station
2. If rate at each processing area handles work is unbalanced (b/c one area is slower, or
stopped working because of problems), work piles up at slowest processing station 
scheduling delays cause inventory levels increase in process layout system
3. Supervisors evaluate processing area managers on ability to meet production quotas =
managers avoid risk of having idle facilities; they purposely maintain large stocks of
incoming work in process so they continue to work even if area feeding them is shut
down; managers may also store finished work so they can forward to supply stations
further down line when stations are shut down
Product Layouts
-Product Layout: Equipment organized to accommodate production of specific product (aka
flow-shop layout) (e.g. automobile assembly line)
-Exist primarily in companies with high-volume production
-Product moves along assembly line beside which parts to be added to it have been stored
-Goal is to reduce setup costs to zero and reduce processing time to as close to zero as possible
so system can produce and deliver individual products as they’re needed
Group Technology
-Group Technology: The organization of a plant into a number of cells so within each cell all
machines required to manufacture a group of similar products are arranged in proximity to
each other (aka cellular manufacturing)
-Shape of a cell is often U shape – allows workers convenient access to required parts
-Machines are flexible and can be adjusted easily to automatically to make different products
-Number of employees needed to produce product can be reduced
-Reduce waiting time and increase visual control
Inventory Costs and Processing Time
Inventory and Processing Time
-Batch production creates inventory costs, and creates delays associated with storing and
moving inventory  increase cycle time = reduce service to customers
-E.g. manufacturer may require that product be manufactured in some minimum batch size
Inventory-Related Costs
-Demands for inventory = huge costs for moving, handling, and storing work in process + costs
from obsolescence or damage
-Factory layouts and inefficiencies that create need to hold work-in-process inventory hide
other problems = excessive costs of rework
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-In batch operations, workers downstream (end of production) often find batch-size problems
resulting from upstream workers
Costs and Benefits of Changing to a New Layout: An Example Using Group Technology
-Manufacturing Cycle Time: Time from receipt of raw materials from supplier to delivery of
finished goods to distributors and customers
-Processing Time: Time expended for product to be made
-Processing Cycle Efficiency (PCE):
PCE = Processing Time/(Processing Time + Moving Time + Storage Time + Inspection Time)
Reorganization
-Primary objective of reorganization of Pinsky plant layout was to reduce the production cycle
time
-Significant improvement in efficiency over previous layout comes from eliminating the need
for work-in-process inventory between many of the manufacturing operations
Analysis of Costs and Benefits
-3 types of benefits resulting from plant reorganization:
1. Increase in sales b/c of decrease in production cycle time
2. Reduction in inventory-related costs b/c of decrease in amount and handling of work-in-
process inventory
3. Improvement in quality since defective processes are detected faster before many
defective items were produced
-Lean Manufacturing: Any resource spending that doesn’t create value for the end customer is
wasteful and must be eliminated
Value: Any action or process for which a customer would be willing to pay
Cost of Nonconformance and Quality Issues
-Continuous Quality Improvement (CQI): Takes a systems view of quality and focuses on how to
improve both internal and external processes related to customers using objective data
Quality Standards
-Cost of Nonconformance (CONC) to Quality Standards: If quality of g/s doesn’t conform to
quality standards, then company incurs CONC
-Quality hinges on 2 major factors:
1. Satisfying customer expectations regarding attributes and performance of the product,
such as functionality and features
2. Ensuring that the technical aspects of the product’s design and performance, such as
whether it performs to the standard expected, conform to manufacturer’s standards
Costs of Quality Control
-Less expensive to prevent defects than to detect and repair them after they have occurred
-Prevention Costs: Incurred to ensure that companies produce products according to quality
standards
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Document Summary

Bu247 chapter 5: measuring and managing process performance. Process perspective of balanced scorecard identifies key operations management, customer management, innovation, and regulatory and social processes in which organization must excel to achieve its customer, revenue growth, and profitability objectives. Objectives include streamlining operations through lean manufacturing, improving cost, quality, and cycle times of processes, and using benchmarking as a way to obtain info for competitive purpose. Consider amount of space required, demand for g/s, and number of operations needed. 3 types of facility designs: process layouts, product layouts, and group technology. Central goal of design process is to streamline operations and increase operating income of system. Theory of constraints (toc): operating income can be increased by carefully managing the bottlenecks in a process. Bottleneck is any condition that impedes or constrains efficient flow of a process: identified by determining points at which excessive amounts of work-in-process inventories are accumulating.

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