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OPERATIONS MANAGEMENT

OPERATIONS MANAGEMENT. Process Selection and Capacity Planning. Process Selection and the Big Picture. Capacity planning. Demand Forecasts. Facilities and Equipment. Process selection. Product and service design. Layout. Technological change. Work design. Learning Objectives.

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OPERATIONS MANAGEMENT

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  1. OPERATIONS MANAGEMENT Process Selection and Capacity Planning

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

  3. 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

  4. 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

  5. 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.

  6. 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

  7. 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.

  8. (Intermittent - Processing)

  9. 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%)

  10. 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

  11. 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

  12. (Continuous-Processing)

  13. 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

  14. 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.

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. Measuring Capacity

  21. Types of Capacity • Design capacity: • Maximum output rate under ideal conditions • Effective capacity: • Maximum output rate under normal (realistic) conditions • Effective Capacity < Design Capacity (Why?).

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

  23. 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.

  24. 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.

  25. (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)

  26. Best Operating Level

  27. Choose Capacity by MatchingForecast & Best Operating Level

  28. 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

  29. 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

  30. 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 - (FC+VC x Q). Rearranging terms, we have:

  31. 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.

  32. 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?

  33. 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?

  34. 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)

  35. 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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