Chapter 5

1. Chapter 5 Process Selection and Capacity Planning

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 MTSU Management 362

3. Process Selection and System Design Figure 5-1 Capacity planning Forecasting Facilities and Equipment Product and service design Process selection Layout Technologicalchange Work design MTSU Management 362

4. Process Selection and Capacity Planning • Make or Buy? • Available capacity • Expertise • Quality considerations • The nature of demand • Cost MTSU Management 362

5. Type of Operation • Continuous Processing • Repetitive/Assembly • Semicontinuous • Intermittent/Batch Processing • Job Shops • Small runs • Projects • Nonroutine jobs MTSU Management 362

6. Job Shop Batch Repetitive assembly Continuous Flow Table 5-16 Variety, Flexibility, & Volume MTSU Management 362

7. Product-Process Life Cycle Matrix Few Major Products, Higher Volume High Volume, High Standard- ization Multiple Products, Low Volume Low Volume One of a Kind Flexibility- Quality Job Shop Commercial Printer Batch Heavy Equipment Assembly Line Automobile Assembly Continuous Flow Sugar Refinery Dependability Cost Flexibility-Quality Dependability-Cost MTSU Management 362

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 MTSU Management 362

9. Automation (2 of 2) • flexible • manufacturing cells • flexible manufacturing systems (FMS) • computer-integrated manufacturing (CIM) MTSU Management 362

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? MTSU Management 362

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 MTSU Management 362

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. MTSU Management 362

13. Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity MTSU Management 362

14. Efficiency/Utilization Example 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 MTSU Management 362

15. Determinants of Effective Capacity • Facilities • Products or services • Processes • Human considerations • Operations • External forces MTSU Management 362

16. Some Possible Growth Patterns Figure 5-4 Volume Volume Decline Growth 0 0 Time Time Cyclical Stable Volume Volume 0 0 Time Time MTSU Management 362 0

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 MTSU Management 362

18. Optimal Output Rate Figure 5-6 Production units have an optimal rate of output for minimal cost. Average cost per unit Minimum cost 0 Rate of output MTSU Management 362

19. Minimum cost & optimal operating rate are functions of size of production unit. Figure 5-7 Small plant Average cost per unit Medium plant Large plant 0 Output rate MTSU Management 362

20. Evaluating Alternatives • Calculating processing requirements • Cost-Volume analysis • Financial analysis • Decision theory • Waiting line analysis MTSU Management 362

21. Calculating Processing Requirement(Example 2, page 218) MTSU Management 362

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 MTSU Management 362

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 MTSU Management 362

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 MTSU Management 362

25. Amount ($) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) 0 Q (volume in units) Cost-Volume Relationships Figure 5-8a MTSU Management 362

26. Total revenue Amount ($) 0 Q (volume in units) Cost-Volume Relationships Figure 5-8b MTSU Management 362

27. Breakeven Chart Total revenue line Profit corridor Breakeven point Total cost = Total revenue Total cost line Cost in Dollars (Thousands) Variable cost Loss corridor Fixed cost Volume (units/period) MTSU Management 362

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? MTSU Management 362

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? MTSU Management 362

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? MTSU Management 362

31. Crossover Chart Variable cost $ $ $ Variable cost Variable cost Fixed cost Fixed cost Alternative 1 Purchase Alternative 3 Process B Alternative 2 Process A Total cost for Alternative 1 Total cost for Alternative 2 Total cost for Alternative 3 X Volume MTSU Management 362

32. Crossover Chart Variable cost $ $ $ Variable cost Variable cost Fixed cost Fixed cost Alternative 1 Purchase Alternative 3 Process B Alternative 2 Process A Total cost for Alternative 1 Total cost for Alternative 2 Total cost for Alternative 3 Total Cost Line X Volume MTSU Management 362

33. Finding Crossover Volumes At 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) MTSU Management 362

34. A company must choose between two processes. The fixed and variable costs for each alternative are FC1 = $170,000 FC2 = $190,000 VC1 =$9 VC2 =$4 Over what volume ranges would you prefer each alternative? Finding Crossover Volume MTSU Management 362

35. prefer alternative 2 Crossover Chart Variable cost $ $ Variable cost Fixed cost Fixed cost Alternative 1 Alternative 2 Total cost for Alternative 1 Total cost for Alternative 2 $ Total Cost Line prefer alt.1 X Volume MTSU Management 362

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 MTSU Management 362