Topic 6

1. Process Selection
Process-Flow Characteristics
Classifications by Type of Customer Order
Process Selection Decisions
Product-Process Strategy
Vertical Integration

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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 equipment or the same labor at the
same time, leading to much lower utilization of equipment and
labor than in a line type of operation.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

21. 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.

22. BOX 6.3

23. 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.

24. 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.

25. 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.