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Chapter 5

Chapter 5. Process Selection and Capacity Planning. Process Selection. How an organization chooses to produce its goods or provide its services Key aspects make or buy decisions capital intensity process flexibility. Process Selection and System Design. Figure 5-1. Capacity planning.

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Chapter 5

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  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

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