1. Process Selection and Capacity Planning
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
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3. Process Selection and System Design
Figure 5-1
Capacity
planning
Forecasting
Facilities and
Equipment
Product and
service design
Process
selection
Layout
Technological change
Work
design
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4. Process Selection and Capacity Planning
Make or Buy?
Available capacity
Expertise
Quality considerations
The nature of demand
Cost
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5. Continuous Processing Repetitive/Assembly
Type of Operation
Continuous Processing
Repetitive/Assembly
Semicontinuous
Intermittent/Batch Processing
Job Shops
Small runs
Projects
Nonroutine jobs
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6. Variety, Flexibility, & Volume
Table 5-16
Variety, Flexibility, & Volume
Job
Shop
Batch
Repetitive
assembly
Continuous
Flow
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7. Product-Process Life Cycle Matrix
Few
Major
Products,
Higher
Volume
High
Volume,
Standard-
ization
Low
Volume
One of a
Kind
Multiple
Products,
Low
Volume
Flexibility-
Quality
Job
Shop
Commercial
Printer
Batch
Heavy
Equipment
Assembly
Line
Automobile
Assembly
Continuous
Flow
Sugar
Refinery
Dependability
Cost
Flexibility-Quality
Dependability-Cost
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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
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9. Automation (2 of 2) flexible manufacturing cells
flexible manufacturing systems (FMS)
computer-integrated manufacturing (CIM)
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10. The basic questions in capacity handling are
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?
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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
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12. Types of Capacity Design capacity Effective capacity Actual output
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.
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13. Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Utilization =
Design capacity
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14. Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day = 72%
Design capacity units/day
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15. Determinants of Effective Capacity
Facilities
Products or services
Processes
Human considerations
Operations
External forces
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16. Some Possible Growth Patterns
Figure 5-4
Volume
Volume
Growth
Decline
Time
Time
Cyclical
Stable
Volume
Volume
Time
Time
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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
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18. Production units have an optimal rate of output for minimal cost.
Figure 5-6
Optimal Output Rate
Production units have an optimal rate of output for minimal cost.
Average cost per unit
Minimum
cost
Rate of output
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19. Figure 5-7
Minimum cost & optimal operating rate are functions of size of production unit.
Small
plant
Average cost per unit
Medium
plant
Large
plant
Output rate
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20. Evaluating Alternatives
Calculating processing requirements
Cost-Volume analysis
Financial analysis
Decision theory
Waiting line analysis
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21. Calculating Processing Requirement (Example 2, page 218)
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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
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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
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24. Crossover charts (see page 224)
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
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25. Cost-Volume Relationships
Figure 5-8a
Amount ($)
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)
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26. Cost-Volume Relationships
Figure 5-8b
Amount ($)
Q (volume in units)
Total revenue
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27. Breakeven Chart Volume (units/period) Total revenue line
Breakeven point
Total cost = Total revenue
Profit corridor
Total cost line
Cost in Dollars (Thousands)
Variable cost
Loss corridor
Fixed cost
Volume (units/period)
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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?
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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?
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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?
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31. Total cost for Alternative 1 Total cost for Alternative 3
Crossover Chart
Variable
cost $ $ $
Variable
cost
Variable
cost
Fixed cost
Fixed cost
Alternative 1
Purchase
Alternative 2
Process A
Alternative 3
Process B
Total cost for Alternative 1
Total cost for Alternative 2
Total cost for Alternative 3 X
Volume
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32. Total cost for Alternative 1 Total cost for Alternative 3
Crossover Chart
Variable
cost $ $ $
Variable
cost
Variable
cost
Fixed cost
Fixed cost
Alternative 1
Purchase
Alternative 2
Process A
Alternative 3
Process B
Total cost for Alternative 1
Total cost for Alternative 2
Total cost for Alternative 3
Total Cost Line X
Volume
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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)
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34. Finding Crossover Volume
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?
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35. Total cost for 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
prefer alternative 2
Volume X
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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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