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CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
Chapter 5
Process Selection and Capacity Planning
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-2
Process Selection
• How an organization chooses to produce its goods or provide its services
• Key aspects– make or buy decisions– capital intensity– process flexibility
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-3
Forecasting
Product and service design
Capacity planning
Facilities andEquipment
Layout
Work design
Processselection
Figure 5-1
Technologicalchange
Technologicalchange
Process Selection and System Design
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-4
Process Selection and Capacity Planning
• Make or Buy?– Available capacity– Expertise– Quality considerations– The nature of demand– Cost
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-5
Type of Operation
• Continuous Processing
• Repetitive/Assembly– Semicontinuous
• Intermittent/Batch Processing
• Job Shops– Small runs
• Projects– Nonroutine jobs
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-6
ProductVariety
High Moderate Low Very Low
Equipmentflexibility
High Moderate Low Very Low
LowVolume
ModerateVolume
HighVolume
Very highVolume
JobShop
Batch
Repetitiveassembly
ContinuousFlow
Table 5-16 Variety, Flexibility, & Volume
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-7Flexibility-Quality Dependability-Cost
ContinuousFlow
AssemblyLine
Batch
JobShop
LowVolumeOne of a
Kind
MultipleProducts,
LowVolume
FewMajor
Products,HigherVolume
CommercialPrinter
HeavyEquipment
AutomobileAssembly
SugarRefinery
Flexibility-Quality
DependabilityCost
Product-Process Life Cycle MatrixHigh
Volume,High
Standard-ization
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-8
Automation (1 of 2)
• Processes that have sensing and control devices that enable it to operate automatically
• Three kinds– fixed– programmable
• computer-aided design and manufacturing systems (CAD/CAM)
• numerically controlled (NC) machines• robot
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-9
Automation (2 of 2)
– flexible• manufacturing cells
• flexible manufacturing systems (FMS)
• computer-integrated manufacturing (CIM)
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-10
Capacity Planning
• Capacity is the upper limit or ceiling on the load that an operating unit can handle
• The basic questions in capacity handling are– What kind of capacity is needed?– How much is needed?– When is it needed?
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-11
Importance of Capacity Decisions
• Impact the ability of the firm to meet future demands for products and services
• Affect operating costs
• Usually a major determinant of initial cost
• Involves long-term commitment of resources and difficult to modify
• Affect competitiveness
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-12
Types of Capacity
• Design capacity– maximum obtainable output
• Effective capacity– Maximum capacity given product mix,
scheduling difficulties, and other doses of reality.
• Actual output– rate of output actually achieved--cannot
exceed effective capacity.
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-13
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Efficiency and Utilization
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-14
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = 36 units/day Efficiency = = 90%
Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day = 72%
Design capacity 50 units/day
Efficiency/Utilization Example
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-15
Determinants of Effective Capacity
• Facilities
• Products or services
• Processes
• Human considerations
• Operations
• External forces
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-16
Vo
lum
e
Vo
lum
e
Vo
lum
e
Vo
lum
e
0 0
0 0
Time Time
Time Time
Growth Decline
Cyclical Stable
Figure 5-4Some Possible Growth Patterns
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-17
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 operating level
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-18
Minimumcost
Av
era
ge
co
st
per
un
it
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5-6 Optimal Output Rate
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-19
Av
era
ge
co
st
per
un
it
0
Smallplant Medium
plant Largeplant
Output rate
Figure 5-7
Minimum cost & optimal operating rate are functions of size of production unit.
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-20
Evaluating Alternatives
• Calculating processing requirements
• Cost-Volume analysis
• Financial analysis
• Decision theory
• Waiting line analysis
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-21
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
Calculating Processing Requirement(Example 2, page 218)
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-22
Calculating Processing Requirements - Example 2
• One eight shift/day 250 days a year
= 8 hr/day x 250 days/yr
= 2000 hr/machine/yr
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-23
Break-Even Analysis (1 of 2)
• Objective is to find the point, in dollars and units, at which costs equal revenues
• Costs– Fixed - continue even if no units are produced– Variable - vary with the volume of units produced
• labor
• material
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-24
Break-Even (2 of 2)
• Revenue function - begins at the origin and increases by the selling price of each unit
• Crossover charts (see page 224)– uses cost-volume relationships to identify
which alternative has the lowest total cost for a particular volume range
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-25
Cost-Volume Relationships
Am
ou
nt
($)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (V
C)
Fixed cost (FC)
Figure 5-8a
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-26
Cost-Volume Relationships
Am
ou
nt
($)
Q (volume in units)0
Total r
evenueFigure 5-8b
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-27
Breakeven Chart
0
1
0 200 400 600 800 1000
Fixed cost
Variable cost
Total cost line
Total revenue line
Profit corridorBreakeven pointTotal cost = Total revenue
Volume (units/period)
Co
st in
Do
llars
(T
ho
usa
nd
s)
Loss corridor
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-28
Example - 3
• Equipment lease = FC = $6,000.00• Cost per pie = VC = $2.00• Revenue per pie = Rev = $7.00
– How many pies must be sold in order to break even?
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-29
Example - 3
• Equipment lease = FC = $6,000.00• Cost per pie = VC = $2.00• Revenue per pie = Rev = $7.00
– What would be the profit (loss) be if 1,000 pies are made and sold in a month?
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-30
Example - 3
• Equipment lease = FC = $6,000.00• Cost per pie = VC = $2.00• Revenue per pie = Rev = $7.00
– How many pies must be sold to realize a profit of $4,000?
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-31
Crossover Chart
Fixed cost
$Variable
cost
$
Variablecost
Fixed cost
$Variable
cost
Alternative 1Purchase
Alternative 2Process A
Alternative 3Process B
Volume
Total cost for Alternative 3
Total cost for Alternative 1Total cost for Alternative 2
X
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-32
Crossover Chart
Fixed cost
$Variable
cost
$
Variablecost
Fixed cost
$Variable
cost
Alternative 1Purchase
Alternative 2Process A
Alternative 3Process B
Volume
Total cost for Alternative 3
Total cost for Alternative 1Total cost for Alternative 2
Total Cost Line
X
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-33
Finding Crossover VolumesAt a crossover volume, X, the total cost of
one alternative equals the total cost of another alternative. Thus
TC1 = TC2
FC1+VC1(X) = FC2+VC2(X)
VC1(X) = FC2+VC2(X)-FC1
VC1(X)-VC2(X) = FC2-FC1
(VC1-VC2)(X) = FC2-FC1
X = (FC2-FC1)/(VC1-VC2)
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-34
Finding Crossover VolumeA company must choose between two
processes. The fixed and variable costs for each alternative are
FC1 = $170,000 FC2 = $190,000
VC1 =$9 VC2 =$4Over what volume ranges would you
prefer each alternative?
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-35
Crossover Chart
Fixed cost
$Variable
cost
Alternative 1
Fixed cost
$Variable
cost
Alternative 2
Volume
Total cost for Alternative 2
Total cost for Alternative 1
Total Cost Line
Xprefer alternative 2 prefer alt.1
$
CHAPTER FIVEPROCESS SELECTION AND CAPACITY PLANNING
MTSU Management 362 5-36
Other Evaluation Approaches• Financial 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
• Decision theory• Waiting line analysis
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