Production Processes

Garrett J. van Ryzin

Copyright °2000
c by Gar ret t J. van Ryzin. All rights reserved. December 2000
Process Flow Analysis i

Contents

1 Introduction 1

2 The process view of production and service delivery 1

3 Production and service delivery processes 1

3.1 Typical stages of a manufacturing process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

3.2 Service delivery processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4 Process characteristics 4
4.1 E±ciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

4.2 Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.3 Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.4 Throughput time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.5 Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

4.6 The interrelationship of process characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Process Flow Analysis 1

1 Introduction 3 Production and service deliv-

ery processes
Manufacturing and service delivery processes typi-
cally consist of a complex organization of technol-
Production and service delivery processes are diverse,
ogy, people and practices. Developed and operated
but at their heart contain four basic elements:
e®ectively, they can provide a ¯rm with signi¯cant
competitive advantage; if poorly conceived and mis-
managed, they can saddle a ¯rm with ine±ciencies ² Inputs - Inputs are either consumed or trans-
and performance problems that are di±cult to over- formed by a process. Automakers require sheet
come. This note provides an overview of production steel, airlines require fuel, hospitals need med-
processes. ical supplies and energy, schools need students,
news services need content (wire stories, photos,
First, we discuss why it is important to view pro-
video), etc.
duction activities as a process - an integrated whole
consisting of inputs, outputs, resources and activities ² Outputs - Outputs are the end product of the
- and examine some generic stages in a typical manu- process (or service performed by the process).
facturing and service process. We then examine their The completed car, the transported passenger,
basic characteristics and performance measures. the cured patient, the educated student, the
completed news story, etc.

² Resources - Resources are the means by which

2 The process view of produc- inputs are converted into outputs. Resources in-
tion and service delivery clude assets such as land, facilities, equipment,
and also people, technology and knowledge. The
auto plant, the airport gates, the specialized
In this note, and throughout the course, we will view knowledge of a physician, the classrooms, the
production and service delivery not as a collection network of local reporters, etc.
of isolated activities, but as a process; that is, as a
system of interrelated components that must be un- ² Activities - Activities involve a speci¯c use of
derstood and managed as a single entity. resources to help convert inputs into outputs.
Bolting a bumper onto a car, loading an airplane
The implications of this point of view are subtle with passengers, performing an operation, teach-
but signi¯cant: As a uni¯ed system, processes have ing a class, dispatching a reporter to cover an
their own characteristics, such as capacity, e±ciency, election, etc.
speed, °exibility, consistency, etc., that can be quite
independent of the product or service they produce
and often depends in complex ways on the inter- While all this may seem painfully obvious, it is of-
actions between all the various components of the ten clarifying to explicitly identify these four basic
process. As a single system, the process itself must elements when analyzing a ¯rm's operations. Ask
be designed, developed and improved over time to yourself: What exactly are the inputs to the process?
achieve the mix of characteristics necessary to sup- What are the outputs? What resources does the ¯rm
port the business objectives of the ¯rm. Processes use or have available to it? Which activities does it
also have their own process technology distinct from perform - or not perform? At its core, operations
the product technology of the product or service they management is about managing these four compo-
produce. Finally, the activities of a production or ser- nents of production and service delivery - identify-
vice process span many functions of an organization ing the outputs that are required to be competitive,
{ purchasing, manufacturing, human resources, ¯- sourcing and e±ciently utilizing inputs, assembling
nance, sales, marketing { and thus adopting a process the right mix of resource and then de¯ning, organiz-
view implies taking a point of view that spans tradi- ing and managing the activities required to make the
tional functional boundaries. process operate e±ciently and e®ectively.
Process Flow Analysis 2

While there is almost a limitless variety of types ci¯c examples of fabrication processes in many of the
of production and service processes, most follow a cases we look at throughout the course.
few generic stages. We ¯rst examine the basic stages
of a manufacturing process and then examine service Again, the degree to which a ¯rm engages in fab-
delivery processes. rication varies widely. For some ¯rms, such as an
automotive parts supplier, it may be the primary ac-
tivity. Other ¯rms do no fabricating of parts at all.
For example, a company like Dell Computer makes a
3.1 Typical stages of a manufacturing point of doing little more than designing and assem-
process bling. We will examine reasons for each approach to
fabrication later on in the course.
Manufacturing, at its most basic level, involves trans-
forming raw materials and/or components (inputs)
into products (outputs) that provide value to a ¯rm's Assembly
customers. This transformation usually involves ¯ve
major stages: procurement, fabrication, assembly, Assembly is the process of putting together compo-
test and distribution. We discuss each of these in
nents to produce more complex intermediate compo-
turn.
nents (called subassemblies) or to produce the ¯nal
product (called a ¯nal assembly). In assembly, parts
are snapped, bolted, welded, glued, etc. together to
Procurement
produce the required subassembly or product. As
distinguished from fabrication, an assembly process
Procurement is the act of acquiring the basic inputs usually does not alter the form of incoming parts.
required to manufacture a product. Procurement ac-
tivities may involve securing mineral rights and leases The classic example of an assembly process is an
for natural resources, purchasing components and automotive assembly line, in which body panels are
raw materials, developing supplier networks, oversee- spot welded together to form a shell, the shell is
ing the component design activities of one's suppliers, painted and dried, major subassemblies, such as the
certifying supplier quality, coordinating inbound lo- engine, transmission, suspension system and steer-
gistics, etc. In some industries such as oil and gas, ing column are bolted to the shell, wiring harnesses,
coal and forest products, procurement is the cen- windows and seats are installed, etc., the ¯nal re-
tral operations activity; in others, e.g. semiconduc- sult being a ¯nished automobile ready for distribu-
tor manufacturing, it is much less important. As we tion to dealer lots. Indeed, many automobile plants
shall see later in the course, however, clever man- do very little \manufacturing" { in the sense of fabri-
agement of the procurement function is increasingly cating parts { at all, and serve merely as points where
being viewed as an important means to achieving op- components are consolidated and combined to form
erational advantages. a ¯nished automobile. Other examples of assembly
processes include sewing garments, assembling tele-
visions and the ¯nal stage of assembling hamburgers
Fabrication at a fast food restaurant.

Fabrication refers to the basic processes used to form

parts, components and materials required in later Test
stages of production. Fabrication processes are usu-
ally among the ¯rst steps required in making a prod- Testing of some sort is usually part of any manufac-
uct. Examples of fabrication processes include mold- turing process. Sometimes only testing of the ¯nal
ing plastic parts from resins, stamping automobile product is performed. More often, testing is per-
body panels from sheet metal, die casting aluminum formed at a variety of stages within both fabrication
valve covers, weaving and dyeing fabric, extruding and assembly. In some industries, testing is a sig-
molten steel into bars or rods, etc. We will see spe- ni¯cant and time consuming part of the entire pro-
Process Flow Analysis 3

duction process. For example, complex semiconduc- Again, we will discuss the variety of issues that
tors, such as microprocessors, require extensive tests arise in managing the distribution function in some
of their basic functionality, which are time consum- detail later on in the course.
ing owing to the tremendous complexity of these de-
vices. Military electronic parts often require a \burn
in" period at high temperatures and/or extreme volt- 3.2 Service delivery processes
ages, to eliminate parts that are sub ject to early
failures (infant mortality). By law, pharmaceutical Services too are provided through a production
companies must test and certify each batch (lot) of process. For example, when your car has trouble
drugs produced, which again can consume signi¯cant starting you may take it to an auto repair shop, where
amounts of time. the problem will be diagnosed, a repair estimate will
be made, and you will decide whether to proceed with
the repair. If you proceed, parts will be ordered, the
repair performed and ¯nally the car will be returned
Packaging and distribution
to you. While the stages of a service process tend
to be more diverse than those of a manufacturing
Packaging involves placing products into boxes, bot- process, there are some generic features worth point-
tles, cans, pallets 1 or other containers for delivery to ing out.
customers. In some operations, such as the produc-
tion of household cleaners, cosmetics and many food The most important feature of service operations is
products, packaging is a critical part of the process. that the output { or service o®ering { and the delivery
For example, in a mineral water or soft drink bottling process that provides it are often indistinguishable {
operation packaging is the core production activity. in a sense, the service is the process.
In other cases, e.g. automobile production, it may be
Consider the automobile repair example above.
a relatively minor activity, involving only a few sim-
What, exactly, is the service o®ering? Essentially, it
ple steps to ready a product for shipment.
is the process we described above: visiting the shop,
Distribution { the shipment of ¯nal products to getting an estimate, waiting for the repair and taking
a ¯rm's customers { is usually the ¯nal stage of a delivery. The entire sequence { the service experience
manufacturing process. Distribution is often a com- { really de¯nes a ¯rm's service o®ering. Similarly,
plex process in itself, involving processing customer consider a trip on a commercial airline. The service
orders, managing distribution centers, controlling in- is the entire transportation experience: arriving at
ventories, picking and assembling orders for ship- the gate, checking in baggage, boarding the aircraft,
ment, selecting shipment modes, routing and schedul- in-°ight service and meals, connecting through a hub,
ing trucks, and increasingly due to \green" laws, han- retrieving your bags. Again, the service o®ering is re-
dling return °ow of product and packaging waste. ally the process of transporting you from one location
to another. What distinguishes one airline's service
Some ¯rms choose to outsource many of these dis- from another is not so much the transportation part
tribution activities, either by selling only to large (moving you from A to B), but all the design choices
wholesalers or by subcontracting distribution to a and execution surrounding your experience from the
third party. However, for many ¯rms it is a vital time you make a reservation to the time you pick up
activity. For example, for grocery store chains and your bag upon arrival. Contrast this with the case
many other retailing businesses it is a central activ- of a clothing manufacturer, where you as a customer
ity. Indeed, operationally retailing is essentially a experience only the result of the production process
business of procurement and distribution. (the ¯nished garment and its various characteristics)
1A pallet is a standardized, square wood platform on which
and not the process of making the garment itself.
products, boxes, drums, etc. are stacked for shipping. The The consequences of this di®erence are signi¯cant.
cargo is usually wrapped with steel bands or plastic (shrink
It means that in service operations, managers have
wrap), to secure it to the platform. Pallets allow fork-lift trucks
and other material handling equipment to easily lift and move to pay attention to attributes such as the cleanliness
products in and out of warehouses, trucks, etc. of facilities, the perceived order and e±ciency of the
Process Flow Analysis 4

process, the courteousness and appearance of employ- activity, which is important information for making
ees, etc. that would be relatively unimportant in a good economic decisions. Such cost allocation is the
manufacturing process. As a result, careful attention domain of managerial accounting, and in this course
to details in the design and management of the pro- we will depend on your knowledge of this discipline
duction process can be even more critical in service in making proper assessments of costs.
businesses.
A second di±culty in measuring e±ciency is that
Of course there may be other activities that take di®erent ¯rms (or di®erent operating units of a sin-
place behind the scenes in order to provide a ser- gle ¯rm) may use di®erent mixes of inputs and re-
vice. The parts of a service delivery process that sources to produce the same output. For example,
customer's experience directly are often referred to some ¯rms may use lots of equipment and minimal la-
as front o±ce operations, while those that are largely bor, while others may use less equipment but more la-
hidden from customers are referred to as back o±ce bor. To talk only of a single ratio (labor-hrs./output
operations. It is in a ¯rm's front o±ce operations or machine-hrs./output) in such cases can be mislead-
that the di®erences between manufacturing and ser- ing, since a ¯rm (or operating unit) may be economiz-
vice processes are most acute; back o±ce operations ing on the use of one resource but wasteful in its use of
are, to a large extent, more like the operations of a other resources. Converting everything to monetary
manufacturing ¯rm. units might appear to solve the problem, but such an
accounting measure of e±ciency risks obscuring the
true technical e±ciency of the process. For exam-
ple, a producer in a low-cost labor market may look
4 Process characteristics \e±cient" in accounting terms (e.g. have low cost)
compared to a producer in a high-labor-cost market,
What characteristics of a particular process are im- when in fact they may be using much more labor per
portant to a ¯rm? In this section, we de¯ne ¯ve im- unit of output.
portant characteristics: e±ciency, capacity, quality,
Both cost and technical e±ciency are important.
throughput time and °exibility. Speci¯c techniques
Technical e±ciency matters because it shows which
for measuring these quantities are discussed later.
methods and processes make the best use of inputs
and resources - regardless of their cost. Understand-
ing it helps pinpoint the best organization of produc-
4.1 E±ciency tion, best work methods and technologies, etc. But
even the most e±cient use of an input or resource
E±ciency, in the simplest terms, is a measure of how may result in an unpro¯table business if its cost is too
much input is required to generate a unit of output high. Conversely, a technically ine±cient process may
- the input/output ratio. If one measures inputs in be pro¯table provided its input and resource costs are
monetary terms, for example by converting the labor, low enough. Thus, one needs to keep an eye on both
material, energy, etc. to their monetary equivalent, technical e±ciency and cost.
then e±ciency is a measure of the cost of producing
a unit of output.
4.2 Capacity
For obvious reasons, e±ciency is an important
characteristic of a production process. Unfortu-
Capacity is a measure of the maximum output a
nately, e±ciency can be somewhat di±cult to mea-
process is capable of sustaining. It is usually ex-
sure. Why? First, a good measure depends on a
pressed as a rate, such as the number of parts per
proper allocation of costs to the various activities of
hour a machine can produce, the number of kilowatts
a ¯rm. In this course, we will primarily be concerned
per hour an electric plant can provide, or the number
with identifying which costs are ¯xed, i.e. they do not
of passengers per trip that a plane can transport.
increase with the output volume, and those that are
variable, i.e. they increase with the level of output. The capacity of a process is important for a variety
This separation helps identify the marginal cost of an of reasons. First, insu±cient capacity can limit the
Process Flow Analysis 5

total demand that a ¯rm is able to satisfy, resulting in 4.4 Throughput time
lost sales if demand is high. On the other hand, excess
capacity, that is capacity that exceeds the current An important characteristic of almost and manufac-
demand rate, is wasteful because it often means a ¯rm turing and service process is the time it takes to
is incurring extra costs for idle equipment, building provide a product or service. Most customers value
space, labor, etc. that are not needed for its current speedy service and fast delivery times - and many
level of output. The output expressed as a fraction of are willing to pay a premium to ¯rms that provide
capacity de¯nes the utilization of a process. (Often speed. Indeed, entire industries, such as fast food and
expressed as a percentage.) Utilization is a carefully overnight package delivery, have evolved precisely to
watched measure in most operations. meet consumers' desires for the speedy provision of
Generally, ¯rm's like to maintain high utilization goods and services.
to spread ¯xed costs over the largest number of units Throughput time is de¯ned as the elapsed time ex-
possible; however, high utilization can degrade other perienced by a order, product or customer between
measures of operating performance such as product entering and exiting a given process (or part of a
availability and delivery time. Managing capacity process). Think of throughput time as being mea-
and these various performance trade-o®s is one of the sured by spray-painting a widget red, putting it in
key responsibilities of operations managers. the process and measuring the elapsed time until the
Again, however, capacity is often not an easy quan- red widget appears as output. For example, the order
tity to measure, since it can depend on the mix of throughput time of an on-line retailer is the elapsed
products or services that a process produces. We dis- time you experience between submitting an order on
cuss capacity measurement in more detail later in the the web site and receipt of the goods at your home.
course. The manufacturing throughput time of an auto plant
is the time it takes for a car to work its way - start
to end - through the plant. Transportation through-
put time is the time it takes to move something from
4.3 Quality location A to location B, etc.
Throughput time is important at intermediate
Another important characteristic of a production stages of production as well. We will see later in
process is the quality of its output. Poor quality can the course that shortening supplier throughput times
signi¯cantly a®ect production costs, due to scrap, re- can signi¯cantly reduce the operating costs of a man-
work and warranty costs. It also a®ects both the ufacturer. Thus, speedy suppliers are able to charge
price customers are willing to pay for a ¯rm's output a premium, even though their throughput times may
and their long-term loyalty. As we will see later in have a negligible e®ect on the throughput time expe-
the course, quality refers to a broad range of char- rienced by the ¯nal consumer.
acteristics that are often di±cult to precisely de¯ne,
measure and control.

A basic de¯nition of quality, and one that will suf- 4.5 Flexibility
¯ce for now, is that it is a measure of conformance
with a product's design standards. Taking this view- Flexibility is a characteristic that is sometimes dif-
point, one is often interested in the fraction or per-
¯cult to de¯ne precisely, but is nevertheless critical
centage of defective parts or products (those that do
to understand and manage. Roughly speaking, a
not meet the design standards) as a measure of the
process is said to be °exible if its operating cost and
output quality of a process. The fraction of out-
performance is not adversely a®ected by changes in
put that is acceptable is referred to as the yield of
the outputs it produces.
a process. In a service operation, one may de¯ne
service standards and hence measure the quality of The two main dimensions to °exibility are volume
a service delivery process in terms of the fraction of °exibility and product mix °exibility. Volume °exi-
customers who are served within these standards. bility refers to the ability of a process to change its
Process Flow Analysis 6

output rate without having signi¯cant negative ef- ness of the process. Services too can be modularized,
fects on other characteristics such as e±ciency, qual- for example banks can often con¯gure di®erent ac-
ity, throughput time, etc. The more volume °exibil- count features for di®erent customers within a com-
ity a process has, the easier it is to match short-term, mon information and reporting system.
erratic changes in demand. Volume °exibility is es-
pecially valuable in businesses that have volatile and
uncertain demand (e.g. fashion apparel) or strongly 4.6 The interrelationship of process
seasonal demand (e.g. agricultural chemicals). characteristics
Volume °exibility implies roughly constant aver-
age unit costs of production (no economies or disec- If all these ¯ve characteristics were independent, then
onomies of scale), so that cost and pro¯t per unit managing production processes would be consider-
remain the same regardless of the level of output. ably simpli¯ed; one would simply choose to make a
But it further implies that other performance mea- process as good as possible along each dimension, i.e.
sures - such as quality and throughput time - remain make a cost e±cient, high quality, fast and °exible
the same at di®erent levels of output as well. Of- process of unlimited capacity. In practice, of course,
ten, a volume-°exible process will not be the most this is not possible. Indeed, there are often very clear
cost-e®ective one at any given volume, but may still { and sometimes not so clear { tradeo®s that must
be preferred because volumes change frequently. For be made among the various attributes of a production
example, a process based on manual labor may be process.
more expensive at high volumes than an automated For example, we already mentioned that a process
process. However, when sales volumes drop, the labor with extra capacity is often not very cost e±cient
force can be reduced proportionately while it is often because it incurs many unnecessary ¯xed costs. We
di±cult to reverse a big investment in automation. shall see shortly that a heavily utilized process typ-
Product mix °exibility refers to the ability to ically has longer throughput times owing to the ef-
switch production among a range of products or ser- fects of congestion, so that throughput time and uti-
vices { again without detrimental impact on operat- lization are often at odds. Similarly, as mentioned,
ing costs and performance. A process with high prod- a °exible process that can produce a wide variety of
uct mix °exibility makes it possible to o®er a wide products is often less cost e®ective than a process that
range of product types and to customize products or is specialized to one product only. Finally, achieving
service o®erings to satisfy small market niches. Prod- high quality may mean sacri¯cing some cost e±ciency
uct mix °exibility also allows a ¯rm to introduce new and/or °exibility, though a more contemporary view
products more easily and to quickly adapt to changes suggests that improving quality often decrease costs
in consumer preference. owing to savings in scrap, rework, warranty costs, lost
capacity, etc.
Mix °exibility implies unit costs that are largely in-
dependent of the which product variant is produced. Understanding the interrelationships among these
Again, a mix-°exible process may not be the most various process characteristics and developing and
cost-e®ective one for producing any one product vari- managing a process to deliver an e®ective mix of
ant. For example, a computer can be produced at characteristics for the particular competitive environ-
lower cost if a ¯xed number of memory chips are ment in which a ¯rm operates is a major management
installed on the mother board. Adding connectors challenge. Further, new production technologies and
and making the memory modular { so that di®er- methods continually rede¯ne the \e±cient frontier"
ent amounts can be installed on the same board { of these various trade-o®s, meaning that ¯rms are
increases cost but allows the computer to be con¯g- increasingly able to achieve world-class performance
ured with di®erent amounts of memory. Such modu- on several dimensions simultaneously. As a result,
lar design is typically more costly for a given product these trade-o®s have to be actively managed, keep-
con¯guration, but allows a ¯rm to produce many vari- ing a keen eye on new technologies and management
ations of the product and change variations without trends both inside and outside one's own industry.
adversely a®ecting either the cost, quality or timeli-