Major Factors affecting Process Design Decisions

Operations managers generally make process-design decisions after taking into consideration several factors. Some of these factors are:

1. Nature of demand

2. Degree of vertical integration

3. Flexibility

4. Degree of automation

5. Quality level and degree of customer contact

A brief description of each of these factors and their influence on the process design decisions of an organization are given below.

Nature of Demand

The main objective of any production system is to produce products or services, according to customer requirements. Therefore, it is essential for an organization to schedule its production in such a way that it can always meet estimated future demand levels.

We have discussed various methods for estimating future demand by using past sales data in detail in chapter 3. These methods can be used to plan for the production capacities needed in each future time period, taking into account factors like seasonality, growth trends and other such demand patterns that affect future demand levels.

Influence of demand patterns

The demand for a product does not follow a fixed pattern over time. The rise or fall of demand over time is influenced by several factors, such as seasonal fluctuations, which affect the design of the production process of the product.

For instance, the demand for products like fans, air conditioners and air coolers exhibit great variation from season to season (higher during summer and lower in winter). Decisions regarding the production process and inventory for such products should be made such that peak season demand can be met comfortably. During the season of sluggish demand too, production should be structured appropriately.

The growth trends of a product also influence process design. The processes should be designed to be flexible enough to expand production easily in order to keep pace with growing demand.

Influence of price level

In most countries, customers are price-sensitive in their purchases. They buy more of a product when the price is set low, but tend to buy lower volumes when the price level is set high. Figure 5.2 illustrates such a relationship between the price level for a product or a service and its sales volume. As prices are reduced, customers tend to buy larger volumes of products/services, till a point, after which, the curve becomes almost horizontal.

The price-volume (demand) curve has many implications in the design of production processes. For instance, managers decide on the application of different designs (for example, customs versus standard designs), inventory and shipping policies at different levels of activities in order to produce the quantities demanded at minimal costs. The design of production processes should take care of all these factors to be effective.              

Degree of Vertical Integration

One of the prime considerations of an operations manager when developing production-process designs is the level of vertical integration. Vertical integration refers to the extent to which the production and the distribution chain (extending from the suppliers of raw materials and components to the delivery of finished products) is brought under the ownership of the organization. In other words, the degree of vertical integration determines the extent to which a product and its components are produced internally.

Figure:  Price - Volume Relationship for a Product/Service

Any organization can integrate its activities vertically in two ways: forward and backward. Forward integration is the expansion of ownership of production to the distribution chain, towards the market. Backward integration expands the ownership of the production and distribution chain backwards, i.e. towards the source of supplies. Decisions on the degree of forward integration required are predominantly based on the ability of the organization to market its products, whereas those on backward integration are influenced by several other factors (see Table).

Table: Factors Affecting the Degree of Backward Integration

The degree of vertical integration that is optimum for a particular firm in an industry may not always be appropriate for another industry. Operations managers have to decide whether to attempt vertical integration. If they decide to do so, they will have to decide to what extent they can integrate, depending on the opportunities and risks associated with the integration.

Vertical integration relieves an organization of a part of its purchasing function and provides flexibility in manufacturing. This can result in an increase in profits due to centralized overheads, pooling of R&D and design efforts, and economies of scale. The return on net assets may rise or fall, depending upon the investment necessary to integrate and the amount of increased profits. If organizations do not integrate backward, they may face the risk of suppliers integrating forward and becoming formidable competitors.

However, vertical integration is not always desirable. Decisions to produce components, instead of buying them, may trap organizations in the use of outdated technology. The economies of scale obtained by vertical integration can as easily be obtained by maintaining long-term relationships with suppliers. By integrating vertically, an organization may diversify its activities so wide that it loses focus, and its overall performance is adversely affected. Operations managers should evaluate all the pros and cons of vertical integration before deciding on its implementation.

Flexibility

An organization is said to be flexible only when it responds quickly to changing customer needs or market conditions. Flexibility is essential for organizations to increase or maintain their market share. Flexibility can be broadly classified into two types: Product/service flexibility and volume flexibility. 

Product/service flexibility

Product/service flexibility is the ability of the production system to shift quickly from producing one product to another. Some business strategies call for the production of many custom-designed products/services, in small lots. Product/service flexibility is required in such cases. To produce different products in small lots, in most cases, general-purpose equipment and multi-skilled employees are used. The employees have to be trained so that they can perform different types of jobs.

Volume flexibility

Volume flexibility is the ability to increase or decrease production volumes rapidly in response to external changes. Volume flexibility is necessary for organizations which manufacture products whose demand fluctuates, because it is not economical to maintain a high level of inventory of such products. The production processes for such organizations must be designed such that increasing or decreasing production levels is easy. The equipment for such organizations should be designed to meet the production requirements that are close to the peak levels of demand. The extra workforce that is required to increase production can be obtained from outside subcontractors, by paying overtime allowance to the existing workforce, by temporary recruitment of part-time workers, or by recalling the workforce previously laid off. The flexibility required in a system affects the design of its production processes significantly.

Degree of Automation

In the past, automating production processes was very costly. It was also difficult to integrate automated processes with other production processes. For these reasons, managers in the past tended to avoid automation. But, today, operations managers have realized that if automation is not made a strategic weapon, it will be a strategic limitation for their operations. Automation has become essential for organizations to become or remain competitive.

Though automation is expensive, it can reduce labor and related costs. By automating their operations, organizations can produce products/services of high quality within a short period and can also shift to other products/services easily. But it is not always advisable for a producer to automate all processes completely, as the savings in labor cost will not always justify the huge investment required for many automation projects. Hence, operations managers should decide on the degree of automation required for their production processes. This decision affects the way production processes are designed to a significant extent.

Quality Level and Degree of Customer Contact

The level of quality of a product or service decides whether it can compete in a market. Decisions taken on the desired quality level of products/services affect the design of the production process at all stages. The desired level of quality has a direct implication on the degree of automation to be built into the production process.

For many products and services, the extent of customer interaction and contact has implications for the production process design. For instance, in systems like clinics and schools, the customer is actively involved in production and the service is directly performed on the customer. In such systems, equipment and employee training should be designed keeping the customer in mind. In some other systems, like firms which make steel or cement, the degree of customer interaction in the production process is negligible. These systems are highly standardized, and cost, price and speed of delivery are the general targets of operations strategies.              

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