5.3 Process planning

	Process planning determines how a product will be produced or a service provided.
	It decides which components will be made in-house and which will be purchased from a supplier, selects processes, and develops and documents the specifications for manufacture and delivery.
	In this section, we discuss outsourcing decisions, process selection, and process plans.

Outsourcing

	A firm that sells the product, assembles the product, makes all the parts, and extracts the raw material is completely vertically integrated. But most companies cannot or will not make all of the parts that go into a product. A major strategic decision, then, is how much of the work should be done outside the firm. The decision involves questions of dependence, competency-building, and proprietary knowledge, as well as cost.
	On what basis should particular items be made in-house? When should items be outsourced? How should suppliers be selected? What type of relationship should be maintained with suppliers- arm's length, controlling, partnership, alliance? What is expected from the suppliers? How many suppliers should be used? How can the quality and dependability of suppliers be ensured? How can suppliers be encouraged to collaborate?
	For process planning, we need to decide which items will be purchased from an outside supplier and which items will be produced in our own factories.

5.3 Process planning

	More advanced sourcing decisions on whom to buy from are discussed later.
	The outsourcing decision rests on an evaluation of the following factors:

Cost.

			Would it be cheaper to make the item or buy it?
			To perform the service in-house or outsource it?
			The cost of buying the item from a supplier includes price, transportation costs, and various tariffs, taxes, and fees.
			The cost of coordinating production over long distances and increased inventory levels should also be considered.
			The cost of making the item includes labor, material, and overhead.
			In some situations a company may decide to buy an item rather than make it (or vice versa) when, from a cost standpoint, it would be cheaper to do otherwise.
			The remaining factors in this list represent noneconomic factors that can influence or dominate the economic considerations.

5.3 Process planning

Capacity.

			Companies that are operating at less than full capacity may elect to make components rather than buy them, especially if maintaining a level workforce is important.
			Sometimes the available capacity is not sufficient to make all the components, so choices have to be made.
			Typically, it is better to produce more customized or volatile products in-house, and to outsource steady products with high volume/high standardization.

Quality.

			The capability to provide quality parts consistently is an important consideration in the outsourcing decision.
			In general, it is easier to control the quality of items produced in your own factory.
			However, standardization of parts, supplier certifications, and supplier involvement in design can improve the quality of supplied parts.

5.3 Process planning

Speed.

			The savings from purchasing an item from a far-off vendor can be eaten up by the lengthy transit time of offshore shipments.
			At other times, a supplier can provide goods sooner than the manufacturer.
			The smaller supplier is often more flexible, too, and can adapt quickly to design and technology changes.
			Of course, speed is useful only if it is reliable.

Reliability.

			Suppliers need to be reliable in both quality and the timing of what they supply.
			Unexpected delays in shipments or partially filled orders because of quality rejects can wreak havoc with the manufacturing system.
			Many companies today are requiring that their suppliers meet certain quality and delivery standards to be certified as an approved supplier.

Expertise.

Companies that are especially good at making or designing certain items may want to keep control over their production.

5.3 Process planning

			A well-known soft-drink company would not want to release its formula to a supplier, even if there were guarantees of secrecy.
			Although automakers might outsource many of their component parts, they need proprietary control over major components such as engine, transmissions, and electronic guidance systems.
			Japanese, Taiwanese, and Korean firms are currently learning U.S. expertise in aircraft design and manufacture by serving as suppliers of components parts.
			Chinese markets are often flooded with cheap knockoffs of goods manufactured by suppliers in that country.
			The protection of intellectual property is a major concern in expanded supply chains.
			Thus, the decision of whether to share your expertise with a supplier for economic gains is a difficult one.

	The outsourcing decision is not a simple one.
	Rather, choices can be made along a continuum from a single purchasing decision to a joint venture.

5.3 Process planning

	Production processes can be classified into projects, batch production, mass production, and continuous production.
	Projects

		Take a long time to complete, involve a large investment of funds and resources, and produce one item at a time to consumer order.
		Examples include construction projects, shipbuilding, new-product development, and aircraft manufacturing.

Batch production

		Processes many different jobs through the production system at the same time in groups or batches.
		Products are typically made to customer order, volume (in terms of customer order size) is low, and demand fluctuates.
		Examples of batch production include printers, bakeries, machine shops, education, and furniture making.

Mass production.

		Produces large volumes of a standard product for a mass market.
		Product demand is stable, and product volume is high.

5.3 Process planning

Goods that are mass produced include automobiles, televisions, personal computers, fast food, and most consumer goods.

Continuous production.

		Is used for very high-volume commodity products that are very standardized.
		The system is highly automated and is typically in operation continuously 24 hours a day.
		Refined oil, treated water, paints, chemicals, and foodstuffs are produced by continuous production.

	The process chosen to create the product or service must be consistent with product and service characteristics.
	The most important product characteristics (in terms of process choice) are degree of standardization and demand volume.
	Figure 5-4 shows a product-process matrix that matches product characteristics with process choice.
	The best process strategy is found on the diagonal of the matrix.
	Companies or products that are off the diagonal have either made poor process choices or have found a means to execute a competitive advantage.

5.3 Process planning

	For example, technological advancements in flexible automation allow Motorola to mass produce customized pagers.
	Volvo and Rolla Royce occupy a special market niche by producing cars in a crafted, customized fashion.
	Examples of poor process choice include Texas Instruments' attempt to produce consumer products for mass markets by the same process that had been successful in the production of scientific products for specialized markets, and Corning's production of low-volume consumer items, such as range covers, with the same continuous process used for other items formed from glass.

Figure 5.4: The product-process matrix.

5.3 Process planning

	Table 5.2 summarizes the characteristics of each type of process.
	As we move from projects to continuous production, demand volume increases; products become more standardized; systems become more capital-intensive, more automated, and less flexible; and customers become less involved.

Process selection with breakeven analysis

	Several quantitative techniques are available for selecting a process.
	One that bases its decision on the cost trade-offs associated with demand volume is breakeven analysis (see Topic 4 for details).
	The components of breakeven analysis are volume, cost, revenue, and profit.

Table 5.2: Types of processes.

5.3 Process planning

		Fixed costs remain constant regardless of the number of units produced, such as plant and equipment and other elements of overhead.
		Variable costs vary with the volume of units produced, such as labor and material.
		The total cost of a process is the sum of its fixed cost and its total variable cost (defined as volume times per unit variable cost).

Revenue

On per-unit basis is simply the price at which an item is sold. Total revenue is price times volume sold.

Profit

Is the difference between total revenue and total cost.

5.3 Process planning

These components can be expressed mathematically as follows: Total cost = fixed cost + total cost
TC = cf + vcv
Total revenue = volume x price
TR = vp
Profit = total revenue – total cost
Z = TR – TC
= vp – (cf + vcv) Where:
    C f = fixed cost
    V = volume (i.e. number of units produced and sold)
    C v = variable cost per unit
    P = price per unit (as motioned above see its application in Topic 4)

Process plans

Process plans are a set of documents that detail manufacturing and service delivery specifications.

5.3 Process planning

They begin with detailed drawings of product design (usually from CAD system) and include assembly charts or bills of material (showing the parts and materials needed and how they are to be assembled together), operations sheets or routing sheets (listing the operations to be performed with details on equipment, tools, skills, etc.) and quality-control checksheets (specifying quality standards and quality data to be recorded).

Process plans are used in both manufacturing and service settings. Figure 5.5 shows an operations sheet for a plastic model vacuum cleaner attachment.

Figure 5.5: An operations sheet for a plastic part.

		Is the level of production, usually expressed as the number of units produced and sold.
		We assume that the number of units produced can be sold.