Copyright 2006 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Processes, Technology, and Capacity Operations Management - 6 th Edition Chapter 6 Roberta Russell & Bernard W. Taylor, III

Copyright 2006 John Wiley & Sons, Inc.6-2 Process Planning   Process a group of related tasks with specific inputs and outputs   Process design tasks need to be done and coordinated among functions, people, and organizations   Process planning converts designs into workable instructions for manufacture or delivery   Process strategy an organization’s overall approach for physically producing goods and services

Copyright 2006 John Wiley & Sons, Inc.6-3 Process Selection   Projects one-of-a-kind production of a product to customer order   Batch production systems process many different jobs through the system in groups or batches   Mass production produces large volumes of a standard product for a mass market   Continuous production used for very-high volume commodity products

Copyright 2006 John Wiley & Sons, Inc.6-4 PROJECTBATCH Types of Processes Type of product Unique Made-to- order (customized) Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210 Type of customer One-at-a- time Few individual customers MASS Made-to- stock (standardized ) Mass market CONT. Commodity Mass market Product demand InfrequentFluctuatesStableVery stable

Copyright 2006 John Wiley & Sons, Inc.6-5 PROJECTBATCH Types of Processes (cont.) Demand volume Very low Low to medium Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210 No. of different products Infinite variety Many, varied MASS High Few CONT. Very high Very few Production system Long-term project Discrete, job shops Repetitive, assembly lines Continuous, process industries

Copyright 2006 John Wiley & Sons, Inc.6-6 PROJECTBATCH Types of Processes (cont.) Equipment Varied General- purpose Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210 Primary type of work Specialized contracts Fabrication MASS Special- purpose Assembly CONT. Highly automated Mixing, treating, refining Worker skills Experts, crafts- persons Wide range of skills Limited range of skills Equipment monitors

Copyright 2006 John Wiley & Sons, Inc.6-7 PROJECTBATCH Types of Processes (cont.) Advantages Custom work, latest technology Flexibility, quality Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New York:McGraw-Hill, 2001), p. 210 Dis- advantages Non-repetitive, small customer base, expensive Costly, slow, difficult to manage MASS Efficiency, speed, low cost Capital investment; lack of responsiveness CONT. Highly efficient, large capacity, ease of control Difficult to change, far-reaching errors, limited variety Examples Construction, shipbuilding, spacecraft Machine shops, print shops, bakeries, education Automobiles, televisions, computers, fast food Paint, chemicals, foodstuffs

Copyright 2006 John Wiley & Sons, Inc.6-8   Cost Fixed costs constant regardless of the number of units produced Variable costs vary with the volume of units produced   Revenue price at which an item is sold   Total revenue is price times volume sold   Profit difference between total revenue and total cost Process Selection with Break-Even Analysis

Copyright 2006 John Wiley & Sons, Inc.6-9 Process Selection with Break-Even Analysis (cont.) Total cost = fixed cost + total variable cost TC = c f + vc v Total revenue = volume x price TR = vp Profit = total revenue - total cost Z = TR – TC = vp - ( c f + vc v )

Copyright 2006 John Wiley & Sons, Inc.6-10 Process Selection with Break-Even Analysis (cont.) Solving for Break-Even Volume TR= TC vp = c f + vc v vp - vc v = c f v ( p - c v )= c f v = c f p - c v

Copyright 2006 John Wiley & Sons, Inc.6-11 Break-Even Analysis: Example Fixed cost= c f = $2,000 Variable cost= c v = $5 per raft Price= p = $10 per raft Break-even point is v = = = 400 rafts c f p - c v

Copyright 2006 John Wiley & Sons, Inc.6-12 Break-Even Analysis: Graph Total cost line Total revenue line Break-even point 400Units $3,000 — $2,000 — $1,000 —

Copyright 2006 John Wiley & Sons, Inc.6-13 Process Selection Below 2,667, choose A Above 2,667, choose B $2,000 + $5 v = $10,000 + $2 v $3 v = $8,000 v = 2,667 rafts Process AProcess B

Copyright 2006 John Wiley & Sons, Inc.6-14 Process Selection: Graph Example 4.2 |||| Units $20,000 — $15,000 — $10,000 — $5,000 — Total cost of process A Total cost of process B Choose process A Choose process B Point of indifference = 2,667 Units

Copyright 2006 John Wiley & Sons, Inc.6-15 Process Plans   Set of documents that detail manufacturing and service delivery specifications assembly charts operations sheets quality-control check-sheets

Copyright 2006 John Wiley & Sons, Inc.6-16 Capacity Decisions   Capacity maximum capability to produce rated capacity is theoretical effective capacity includes efficiency and utilization   Capacity utilization percent of available time spend working   Capacity efficiency how well a machine or worker performs compared to a standard output level   Capacity load standard hours of work assigned to a facility   Capacity load percent ratio of load to capacity

Copyright 2006 John Wiley & Sons, Inc.6-17 Capacity Utilization  Effective capacity =  Utilization = % of available working time that a worker actually work or machine actually runs  Efficiency = how well a machine or worker performs

Copyright 2006 John Wiley & Sons, Inc.6-18 Capacity Utilization  Load = standard hours of work assigned to facility  Load percent = (load/capacity) x 100%

Copyright 2006 John Wiley & Sons, Inc.6-19 Capacity Expansion Strategies

Copyright 2006 John Wiley & Sons, Inc.6-20 Capacity Decisions (cont.)   Capacity increase depends on volume and certainty of anticipated demand strategic objectives costs of expansion and operation   Best operating level % of capacity utilization that minimizes unit costs   Capacity cushion % of capacity held in reserve for unexpected occurrences

Copyright 2006 John Wiley & Sons, Inc.6-21 Economies of Scale   it costs less per unit to produce high levels of output fixed costs can be spread over a larger number of units production or operating costs do not increase linearly with output levels quantity discounts are available for material purchases operating efficiency increases as workers gain experience

Copyright 2006 John Wiley & Sons, Inc.6-22 Diseconomies of Scale   Occur above a certain level of output Diseconomies of Distribution Diseconomies of Bureaucracy Diseconomies of Confusion Diseconomies of Vulnerability

Copyright 2006 John Wiley & Sons, Inc.6-23 Best Operating Level for a Hotel

Copyright 2006 John Wiley & Sons, Inc.6-24 Diseconomies of Confusion