Process Selection and Capacity Planning

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OPERATIONS MANAGEMENT

• Process Selection and Capacity Planning

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Process Selection and the Big Picture
Capacity planning
Demand Forecasts
Facilities and Equipment
Process selection
Product and service design
Layout
Technologicalchange
Work design
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Learning Objectives

• Define
• Process focus
• Repetitive focus
• Product focus
• Process reengineering
• Define explain capacity planning
• Learn tools of Capacity Planning
• Break-Even Analysis
• Single-Product Case
• Multi-product Case

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Dell Computer Company

• How can we make the process of buying a
  computer better?
• Sells custom-build PCs directly to consumer
• Integrated the web into every aspect of its
  business
• Operates with six days inventory
• Builds computers rapidly, at low cost, and only
  
• when ordered
• Research focus on software, designed to make
• installation and configuration of its PCs
  fast
• and simple

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Process Selection Capacity Planning

• Process Selection strategic decision of choosing
  the way to produce the products or services. It
  addresses issues like
• -- What type of technology to use?
• -- How to arrange the flow of operations?
• Process Selection occurs
• Naturally when a new product / service is planned
  (remember the phases of product development?)
• For existing products / services due to
  technological advances and changes in customer
  needs.

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Process Strategy

• Defines its
• Capital Intensity
• Process Flexibility
• Vertical Integration
• Make or Buy Factors
• Strategic Impact
• Available Capacity
• Expertise
• Quality Consideration
• Nature of Demand
• Cost

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Types of Production Processes (Strategies)

• A. Continuous and Semi-Continuous Processing
• 1. Continuous
• --Highly uniform product or service is produced.
  Output is continuous not discrete.
• --Also called process industries. E.g. processing
  of chemicals, newsprint, oil products etc.
• 2. Semi-continuous or Repetitive or Assembly
  Line
• --Produced in high volume with little or no
  customization. Are produced in discrete units.
• --E.g. assembly line producing cars,
  computers, television sets, shoes etc.
• B. Intermittent Processing
• 1. Projects / Job Shops
• --Represents one of a kind production for an
  individual customer. Tend to involve a large sum
  of money last a long time. Intense customer
  involvement.
• --E.g. shipbuilding, customer tailoring,
  construction.
• 2. Batch
• --Processes are used to produce small quantities
  of products in groups or batches based on
  customer orders or product specifications. Small
  volume but high customization.
• --E.g. bakeries, education, printing press.

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(Intermittent - Processing)
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Process Focused Strategies Pros
Cons

• Advantages
• Greater product flexibility
• More general purpose equipment
• Lower initial capital investment
• Disadvantages
• More highly trained personnel
• More difficult production control
• Low equipment utilization (5 to 25)

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Repetitive Focused Strategy (Semi-Continuous)

• Facilities often organized by assembly lines
• Characterized by modules, parts assemblies
  made previously
• Modules combined for many output options
• Other names
• Assembly line
• Production line

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Repetitive Focused Strategy
Considerations

• More structured than process-focused, less
• structured than product focused
• Enables quasi-customization
• Using modules, it enjoys economic advantage of
• continuous process, and custom advantage of
  low-
• volume, high-variety model

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(Continuous-Processing)
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Product-Focused Strategies Pros Cons

• Advantages
• Lower variable cost per unit
• Lower but more specialized labor skills
• Easier production planning and control
• Higher equipment utilization (70 to 90)
• Disadvantages
• Lower product flexibility
• More specialized equipment
• Usually higher capital investment

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Mass Customization

• Using technology and imagination to rapidly
• mass-produce products that cater to sundry
  unique
• customer desires
• Under mass customization the three process
  models
• become so flexible that distinctions between
  them
• blur, making variety and volume issues less
  significant.

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Process Selection Capacity Planning

• Process selection is closely related to the
  degree of standardization and output volume of
  the product/service.
• Standardization extent to which there is absence
  of variety in the product/service.
• Standardization means that
• There are fewer parts to deal with in inventory
  and manufacturing
• More routine purchasing, materials handling and
  quality control procedures can be used

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Process Selection Capacity Planning

• Standardization can take advantage of risk
  pooling (Aggregation Effect)
• But most importantly, standardization allows for
  long production runs (i.e. high output volume)
  and automation in the processes.

? Closely related to the product life cycle of
the product or service
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Process Reengineering

• The fundamental rethinking and radical redesign
  of business processes to bring about dramatic
  improvements in performance
• Relies on reevaluating the purpose of the
  process and questioning both the purpose and the
  underlying assumptions
• Requires reexamination of the basic process and
  its objectives
• Focuses on activities that cross boundaries

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Attaining Lean Production

• Why?
• Focus on inventory reduction
• Build systems that help employees
• Reduce space requirements
• Develop close relationships with suppliers
• Educate suppliers
• Eliminate all but value-added activities
• Develop the workforce
• Make jobs more challenging

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Capacity Planning

• Capacity is the maximum output rate of a
  production or service facility
• Capacity planning is the process of establishing
  the available capacity
• Strategic-issues Capital expenditures in
  facility equipment
• Tactical issues Workforce inventory levels,
  day-to-day use of equipment

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Measuring Capacity
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Types of Capacity

• Design capacity
• Maximum output rate under ideal conditions
• Effective capacity
• Maximum output rate under normal (realistic)
  conditions
• Effective Capacity lt Design Capacity (Why?).

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Capacity Utilization

• Measures how much of the available capacity is
  actually being used
• Measures effectiveness
• Use either effective or design capacity in
  denominator

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Determinants of Effective Capacity

• Facilities Factors design, location, layout,
  environment.
• Products/Service Factors design, product or
  service mix.
• Process Factors Quantity and Quality
  capabilities.
• Human Factors job content, job design, training
  and experience, motivation, compensation,
  learning rates, absenteeism and labor turnover.
• Operational Factors scheduling, materials
  management, quality assurance, maintenance
  policies, equipment breakdowns.
• External Factors product standards, safety
  regulations, unions, pollution control standards.

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Developing Capacity Alternatives

• Design Flexibility into systems.
• Take a big picture approach to capacity
  changes.
• Prepare to deal with capacity chunks.
• Attempt to smooth out capacity requirements.
• Identify the optimal (best) operating level.

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(Dis)Economies of Scale

• Economies of Scale
• Where the cost per unit of output drops as volume
  of output increases
• Spread the fixed costs of buildings equipment
  over multiple units, allow bulk purchasing
  handling of material
• Operating efficiency increases as workers gain
  experience
• Diseconomies of Scale
• Where the cost per unit rises as volume increases
• Often caused by congestion (overwhelming the
  process with too much work-in-process)

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Best Operating Level
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Choose Capacity by MatchingForecast Best
Operating Level
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Selecting among Alternatives

• Decision Approaches
• Break-Even Analysis
• Financial Analysis Payback, Present Value and
  Internal Rate of Return.
• Decision Tree Analysis
• Simulation Waiting Line Analysis (primarily for
  service systems)
• Linear Programming

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Breakeven Analysis (Cost-Volume)

• Fixed costs costs that continue even if no
  units are produced depreciation, taxes, debt,
  mortgage payments
• Variable costs costs that vary with the
  volume of units produced labor, materials,
  portion of utilities

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Breakeven Point
FC Fixed Cost VC variable cost R revenue
per unit Q output unit. TC total cost FC
VC x Q. TR total revenue R x Q. P total
profit TR - TC R x Q - (FCVC x
Q). Rearranging terms, we have
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Example
The owner of Old-Fashioned Berry Pies, S. Simon,
is contemplating adding a new line of pies, which
will require leasing new equipment for a monthly
payment of 6,000. Variable cost would be 2.00
per pie, and pies would retail for 7.00
each. A) How many pies must be sold in order to
break even? B) What would the profit (loss) be if
1,000 pies are made and sold in a month? C) How
many pies must be sold to realize a profit of
4,000.
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Example
A manager has the option of purchasing one, two
or three machines. Fixed costs and potential
volumes are as follows of Machines Total
Annual FC Corresponding range of
output 1 9,600 0 to 300 2 15,000 301 to
600 3 20,000 601 to 900 Variable cost is 10
per unit, and revenue is 40 per
unit. A) Determine the breakeven point for each
range. B) If projected annual demand is between
580 and 660 units, how many machines should the
manager purchase?
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Example
Travis and Jeff own an adventure company called
Whitewater Rafting. Due to quality and
availability problems, the two entrepreneurs have
decided to produce their own rubber rafts. The
initial investment in plant and equipment is
estimated to be 2,000. Labor and material is
approximately 5 per raft. If the rafts can be
sold at a price of 10 each, what volume of
demand would be necessary to break-even? The
owners of Whitewater Rafting believe demand for
their product will far exceed the break-even
point in the above example. They are now
contemplating a larger initial investment of
10,000 for more automated equipment that would
reduce the variable cost of manufacture to 2 per
raft. Compare the old manufacturing process with
the new process proposed here. For what volume of
demand should each process be chosen?
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Present Value Analysis

• Cash Flow - the difference between cash received
  from sales and other sources, and cash outflow
  for labor, material, overhead, and taxes.
• Present Value - the sum, in current value, of all
  future cash flows of an investment proposal.
• The current value is calculated for a given
  interest rate (discount rate)

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Present Value Analysis

• The basic formula

FV Future value of the cash flow n periods
from today. i interest rate per period PV
Present Value (Worth) of the cash flow to be
received in the future
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PV Analysis for a Single Investment

• Determine the useful life of an investment. (N)
• Estimate the cash flows for each year
• F0, F1, F2, F3 , , FN-1, FN
• Calculate the Present Value (PV)

If PV gt 0, the investment is a viable
alternative. Otherwise, reject.
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PV Analysis for Multiple Investments

• Calculate the Net Present Value (NPV) for each
  alternative
• Choose the one with highest NPV (if its above 0)

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Example Continued
? CHOOSE B
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Limitation of Net Present Value

• Investments with the same present value may
  have significantly different project lives and
  different salvage values
• Investments with the same net present values
  may have different cash flows
• We assume that we know future interest rates
  which we do not
• We assume that payments are always made at the
  end of the period which is not always the case