TOPIC TWO: PROCESS ANALYSIS AND CHOICE

Definition and meaning of Process Analysis

Process analysis explains how to do something, how to make something, or how something
happens. Specifically, it explains a sequence of actions with a specified result (the process) by
dividing it into its component steps (the analysis). Basically, it answers the question how
something happens.

Process – is any part (or set of activities) of an organization that takes inputs and transforms
them into outputs that, it is hoped, are of greater value to the organization than the original
inputs. It is rare for processes to be designed in isolation of the products or services they are
intended to manufacture or deliver.

A process is essentially any procedure that converts inputs into outputs. For example, in a
bank loan approval process, bank staff and computer systems process information about a loan
applicant and return either an approval or a rejection of the loan application.

In an airport security check process, security personnel use equipment to inspect passengers
and their luggage, and either deem them as fit for boarding or detain them for further inspection.
In a car assembly process, workers and equipment convert car components into assembled
vehicles.

Organizations create value by providing either manufactured products or services. These, in

turn, are the output of processes. For example, Federal Express uses a set of processes to
speedily deliver parcels from point A to point B. Disneyworld creates entertainment
experiences via another set of processes. Nike supplies shoes to stores via a set of processes,
which include obtaining raw materials, manufacturing, and distributing shoes.

Clearly, the way in which a process is managed impacts its performance, and this, in turn,
impacts process output. This makes process management crucial to an organization’s ability
to create and deliver value.

Basic Concepts

➢ Buffering – refers to storage area between stages where the output is placed prior to
being used in a downstream stage. Buffering allows stages to operate independently.
➢ Blocking – occurs when the activities in the stage must stop because there is no place
to deposit the item just completed.
➢ Starving – occurs when the activities in a stage must stop because there is no work.
➢ Bottleneck – a resource that limits the capacity or maximum operation of the process.

Categories of Processes
Processes often at times are categorized based on their physical configuration, material and
product flow, flexibility and volume expectation. The major categories include:

➢ Job
➢ Batch
➢ Continuous
 ➢ Project
Note that a production system may be made up of several subsystems, each of which may have
different process structure. The selection of a process structure is determined by:

➢ The expected volume and demand pattern for the products

➢ The number of different products to be made by the system and types of process each
requires.
➢ The customer order type, which defines whether the product is made to stock (product’s
characteristics are set by the producer, and the product is normally made in advance of
orders), or made to order (the product is made on receiving a customer’s order, and
characteristics may be specified by customer).
➢ The physical characteristics of the product and the specific technologies required to
produce them.

Job Processes

Consider any job which is processed from start to end by the same person or group of people.
Work is organized in such a way that all operations required to make a product is performed
by the same person, who completes one item before starting on the next. Work could be
organized so because it is economically worthwhile and practical to do so. Examples include
hairdresser, special hire taxi, small bespoke tailor

Features of Job-Processes

➢ Simple to organize
➢ Low fixed costs
➢ Work completed rapidly
➢ Highly customized and therefore easy to handle variety
➢ Requires diversity of skills
➢ Tends to be a one-off, purpose built
It has the following disadvantages:
• Low resource utilization
• No skill specialization benefits
• High training costs
• Duplication of facilities

Batch Processes

The task is divided into parts or operations and work is completed on the entire set (or batch)
before passing the set on to the next operation. As companies grow and volumes increase, it
may necessitate organizing the conversion process using batch methods. The method aims at
concentrating skills and obtaining high plant utilization.

Feature

➢ Different sections handling different processes

➢ Ability to make priority changes
➢ Higher utilization of equipment
➢ Specialization possible; especially of operational tasks and supervision
Limitations
 • High working capital
• Work completed slowly
• Possibility of poor workflow – substantial planning and control required
• In-process storage required
• Frequent set ups
• Long delivery lead times

Continuous Processes

If all the products to be produced by a production system require the same type of processing
in the same sequence, it is usually most efficient to structure the process according to the ‘flow’
of products or sequence of tasks/operations that must be performed to make them.

Features

➢ Process where work content is added in a virtually continuous sequence

➢ As work is completed at one stage it is passed on immediately to the next stage where
work starts at once.
➢ The overall production process is decomposed into tasks or operations that must be
performed.
➢ Aims at improving work/material flow, reduced skills and faster work completion.

Limitation
• The overall capacity of the production or assembly line has to be determined, so that
there is subsequently no specific problem relating to individual machine loading;
overall capacity should match demand
• Demand for the product should be continuous and significant because it is usually
expensive to set up a flow line.

Hence it is important to observe the following:

➢ Material requirement: materials should arrive precisely as they are needed; this
requires close co-operation with suppliers and a well-organized logistics operation.
➢ Keep minimal inventory: large amounts of stock are processed very quickly, and
should backlog occur the space and cost requirements soar rapidly.
➢ Keep the line running: this requires planned maintenance, because the effect of an
abrupt halt is often catastrophic; felt both ahead and behind where the stop has occurred.
➢ Ensure every job is carefully assessed and defined: balance stages to reduce idle
time; use of work-study methods is vital.
➢ Correct plant and equipment must be provided: This must be done at each stage of
the flow so that the sequence is not disrupted.
➢ Work to quality standards: ensure that levels of quality are specified and adhered to.
➢ Ensure that design changes are carefully controlled and minimal: This will ensure that
there is very little disruption to the line for long periods.
➢ Standardize task or product: flow line is inflexible and cannot accommodate
variations.
 Advantages

➢ Easier control and handling – scheduling

➢ Throughput time is reduced
➢ Work is completed faster
➢ Work in progress is reduced
➢ Space utilization is achieved
➢ Possibility of using semi/un-skilled workers; low training costs
➢ Equipment can be specialized to perform a narrow range of functions very efficiently
➢ Quality conformance is easier to achieve because with the narrow range of products;

Disadvantages
• Sensitive to break down i.e., one section affects entire system
• Inflexible to change i.e., new models, volumes
• Possibility of low morale due to tedious work, boredom etc.
• Low productivity in case of low volumes
• Initial costs high i.e., design, set-up, equipment, balancing line etc.

Assembly Line

This is suitable for facilities that produce a narrow range of standardized products. Laundry
appliances are a representative example. Since the product designs are relatively stable,
specialized equipment, human skills, and management systems can be developed and dedicated
to the limited range of products and volumes. Beyond this range, the system is inflexible.

Project

Some organizations specialize in producing one-of-a-kind products such as construction,

consulting services.
Although such an organisation is likely to use similar skills and equipment for all products it
makes, the process itself often has to be customized: unique skills, and equipment may be
required and/or combined in new ways.

Operations managers address such issues as;

 How to coordinate the wide variety of resources that are needed for the current
project, as well as for other projects of the organization
 How to complete the project on schedule and within budget.

Summary of Characteristics of Process Technologies

Characteristics Project Job shop Batch Assembly line Continuous
Equipment and physical layout characteristics
Typical size of Varies Usually moderate Often large large
facility small
Process flow No pattern Several A few Rigid Pattern Inflexible,
dominant dominant dictated by
patterns pattern technology
Speed varies slow moderate Fast Very fast
Run lengths Very short short moderate Long Very Long
 Rate of change slow Slow moderateModerate to Moderate to
high High
Direct Labour and Workforce Characteristics
Labour High Very High Varies Low Very Low
Intensiveness
Worker skills High high Mixed Low very low
level
Worker Very high High Moderate Low Very low
Training
Requirements
Materials and Information Control Characteristics
Material Varies Difficult to More Predictable Very
requirements predict predictable predictable
Production Very high High Varies Moderate Low
information
requirement
Scheduling Uncertain, Uncertain, Varies, Fixed Inflexible,
frequent frequent frequent dictated by
Changes changes expediting technology
Market
Type of One-at-a Very few Few Mass Market Mass
customer time individual Individual Market
customers
Type of Product Unique Very Made to Made to Stock Commodity
customized order (Standardized)
(Customized)
Demand Very Low Low Low to High Very high
volume Medium
Product Infrequent Fluctuate Fluctuate Stable Very Stable
demand

Process Selection with Break-Even Analysis

We can use break even analysis as a quantitative technique for choosing an appropriate process
technology for a given volume of output, price of output, fixed costs incurred, and unit variable
cost. Break even analysis is always used when evaluating different degrees of automation.
More automated processes have higher fixed costs but lower variable costs. The best process
depends on the anticipated level of demand and the trade off between variable costs and fixed
costs
Given the total cost function:

TC = FC + 𝑉𝑐 Q 1

Where:
TC = Total Cost
FC = Fixed Costs
𝑉𝑐 = Variable Cost Per Unit
Q = Volume of output produced

The Total Revenue function is given by:

 TR = PQ 2
At the break-even point, Total Revenue (TR) = Total Costs (TC), we therefore equate equations
1 and 2

PQ = FC + 𝑉𝑐 Q 3
After simplifying equation 3:
𝐹𝐶
𝑄𝑒 = 4
𝑃−𝑉 𝑐
Where
𝑄𝑒 = Break even quantity

Example 1
The selling price of a company’s product is estimated at $100 per unit. The fixed costs for
equipment and space will be $2,000 and material and labour costs will run $50 per unit. What
volume of demand will be necessary for the company to break even?

Solution
Using equation 4
𝐹𝐶
𝑄𝑒 =
𝑃−𝑉𝑐

2,000
𝑄𝑒 = 100−50

𝑄𝑒 = 40 units

Comparing Two Processes - Example 2

The management of the above company in example 1 thinks that demand will be more than the
break-even quantity of 40 units computed above. They propose spending $10,000 fixed costs
to acquire a more automated process that will reduce material and labour cost to $30 per unit.
The final product will sell for $100 regardless of which process technology is chosen. Compare
the processes and determine for what level of demand each process would be preferred:

Solution
The cost functions for the processes are:

For Automated Process (A) : TC = 10,000 + 30Q

Non-Automated Process (B) : TC = 2,000 + 50Q
We are interested in the output level where the total costs for the processes will be the same.
It is called the point of indifference:

We Equate the two cost functions:

10,000 + 30Q = 2000 + 50Q

20Q = 8,000

Q = 400 Unit
When production volume is 400 units, the two processes will provide the same cost.
Management will be indifferent in choosing either the automated process or non-automated
process.

Illustration
Cost
55,000
50,000
45,000
40,000
35,000 B A
30,000
25,000
20,000
15,000
10,000 Choose B Choose A
5`000
0 200 400 600 800 Units

Decision: When Production volume is less than 400, choose B, the process with lower fixed
costs and When production volume is more than 400 units, choose A, the process with less
variable costs per unit

Example three
Consider the following processes and their cost structure
Process A Process B Process C
Fixed Cost ($) 10,000 40,000 70,000
Variable costs per unit ($) 5 2 1
For what volume of demand would each process be desirable?

Solution
The Cost functions are:
A: TC = 10,000 + 5Q
B: TC = 40,000 + 2Q
C: TC = 70,000 + 1Q
Solution

Begin with any two pairs which have the lower fixed costs: Specifically, start with the process
that has the lowest fixed costs and compare with the one with the second lowest fixed costs and
so on. For this example, it means we shall compare A to B, then B to C. We begin with process
A and Process B. So equate those two cost functions to obtain the point of indifference:

10,000 + 5Q = 40,000 + 2Q
3Q = 30,000
Q = 10,000 Units

Therefore, when production is less than 10,000, choose process A, because it has the lowest
fixed costs. When production volume is greater than 10,000 units, choose process B because it
has the lower variable cost per unit
We now move to Process B and Process C:

40,000 + 2Q = 70,000 + 1Q
Q = 30,000 units
Decision: When production volume is less than 30,000 units and greater than 10,000 units
(from part 1) choose B
Illustration
Costs
Illustration 130,000 A B C
120,000
110,000
100,000
90,000
80,000
70,000 Choose C
60,000
50,000
40,000 Choose B
30,000
20,000 choose A
10,000
0 10000 20000 30000 40000 Units

Decision: When production is less than 10,000 units, choose A, when production is between
10,000 units and 30,000 units, chooses B, when production is more than 30,000 units chose C

The End