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Measuring and Managing

Process Performance

Chapter 7

Facility Layout Systems

 There are three general types of facility designs:
– Process Layouts
– Product Layouts
– Group Technology
 Regardless of the type of facility design, a central
goal of the design process is to streamline
operations and thus increase the operating income
of the system

Process Layouts
 All similar equipment or functions are grouped together
 Production of unique products is done in small batches
 Product follows a serpentine path, usually in batches
 High inventory levels
 Products might travel for several miles within a factory
during the production process

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WIP Accumulation
 Work-in-process inventory accumulates at processing
stations in a conventional organization for three reasons:
– Handling work in batches
– If the rate at which each processing area handles work
is unbalanced, work piles up at the slowest processing
station
– If processing area managers are evaluated on their
ability to meet production quotas

Product Layouts
 In a product layout, equipment is organized to
accommodate the production of a specific product
 Product layouts exist primarily in companies with high-
volume production
 The product moves along an assembly line beside which
the parts to be added to it have been stored
 Placement of equipment or processing units is made to
reduce the distance that products must travel

Group Technology
 The organization of a plant into a number of cells
 Within each cell all machines required to manufacture
a group of similar products are arranged in close
proximity to each other
 The machines in a cellular manufacturing layout are
usually flexible and can be adjusted easily or even
automatically to make different products

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Group Technology
 The shape of a cell is often a U shape
 The number of employees needed to produce a product
can often be reduced due to the new work design
 U shape also provides better visual control of the work
flow

Problems with Batch Production

 Creates inventory costs
 Creates delays associated with storing and moving
inventory
– These delays increase cycle times, thereby reducing
service to customers
 Delays may even happen before manufacturing begins

The Theory of Constraints (TOC)

 TOC maintains that operating income can be increased
by carefully managing the bottlenecks in a process
– A bottleneck is any condition that impedes or constrains the
efficient flow of a process
– A bottleneck can be identified by determining points at which
excessive amounts of work-in-process inventories are
accumulating
– The buildup of inventories also slows the cycle time of
production

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Theory of Constraints
 The theory of constraints relies on the use of three
measures
1. Throughput contribution is the difference between
revenues and direct materials for the quantity of
product sold
2. Investments equal the materials costs contained in
raw materials, work-in-process, and finished goods
inventories
3. Operating costs are all other costs, except for direct
materials costs, that are needed to obtain throughput
contribution

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Theory of Constraints
 Emphasis is on the short-run optimization of
throughput contribution
 Assumes that operating costs are difficult to alter in
the short run
 ABC focuses on longer term cost optimization

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Contribution Margin
 When faced with a bottleneck it can be helpful to
determine what the contribution margin is “per unit” of the
bottleneck.
 The total contribution is limited by the quantity available,
so the goal is to maximize the CM for the amount of
bottleneck.
 This may result in producing an item with a lower CM per
unit, because the bottleneck limits production

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Inventory-Related Costs
 Demands for inventory lead to huge costs in
organizations, including the cost of moving, handling,
storing, obsolescence, and damage

 Factory layouts and inefficiencies that create the need to

hold work-in-process inventory may hide other problems
leading to excessive costs of rework

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Processing time
 Processing time—time expended for the product to be
made
 Processing cycle efficiency (PCE)—measure of the
efficiency of the manufacturing process
 PCE = Processing Time
Processing Time + Moving Time
+ Storage Time + Inspection Time

 Processing time is the only value adding time

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Cost of Nonconformance and Quality Issues

 Cost reduction has become a significant factor in the
management of most organizations
 The premise underlying cost reduction efforts today is to
decrease costs while maintaining, or improving
product quality in order to be competitive
 If the quality of products and services does not conform
to quality standards, then the organization incurs a cost
known as the cost of nonconformance (CONC) to
quality standards

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Quality
 Quality usually may be viewed as hinging on two major
factors:
– Satisfying customer expectations regarding the
attributes and performance of the product
– Ensuring that the technical aspects of the product’s
design and performance conform to the
manufacturer’s standards

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Quality Standards
 Global competition has led to the development of
international quality standards
 Company certification under these standards indicates to
customers that management has committed their
company to follow procedures and processes that will
ensure the production of the highest-quality goods and
services

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Costs Of Quality Control

 Classification of quality costs:
1. Prevention costs
2. Appraisal costs
3. Internal failure costs
4. External failure costs
 Experience shows that it is much less expensive to
prevent defects than to detect and repair them after they
have occurred

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1. Prevention Costs
 Prevention costs are incurred to ensure that companies
produce products according to quality standards:
– Quality engineering
– Training employees in methods designed to maintain
quality
– Statistical process control
– Training and certifying suppliers so that they can
deliver defect-free parts and materials and better,
more robust, product designs

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2. Appraisal Costs
 Appraisal costs relate to inspecting products to make
sure they meet both internal and external customers’
requirements
 Inspection costs of purchased parts and materials

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3. Internal Failure Costs

 An internal failure occurs when the manufacturing
process detects a defective component or product before
it is shipped to an external customer
 Reworking defective components or products is a
significant cost of internal failures
 The cost of downtime in production is another example
of internal failure

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4. External Failure Costs

 External failures occur when customers discover a
defect
 All costs associated with correcting the problem
 For many companies, this is the most critical quality
cost to avoid

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Cost-of-Quality Report
 This information is compiled in a cost-of-quality (COQ)
report, developed for several reasons
 The report illustrates the financial magnitude of quality
factors
 Cost-of-quality information helps managers set priorities
for the quality issues and problems they should address
 The cost of quality report allows managers to see the big
picture of quality issues
 It allows them to try to find the root causes of their quality
problems

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Kaizen Costing
 Also focused on cost-reduction
 Focuses on reducing costs during the manufacturing
stage of the total life cycle of a product
 Kaizen is the Japanese term for making improvements to
a process through small, incremental amounts rather
than through large innovations

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Concerns About Kaizen Costing

 The system places enormous pressure on employees to
reduce every conceivable cost
 Kaizen costing leads to incremental rather than radical
process improvements
– This can cause myopia as management tends to focus
on the details rather than the overall system

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Benchmarking
 A way for organizations to gather information regarding
the best practices of others
 Often highly cost effective
 Selecting appropriate benchmarking partners is a critical
aspect of the process

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