Assignment onSummary of Ch-5: Strategic Capacity Planning for
Products and Servicesand Ch-6: Process Selection and Facility
Layout
Submitted ToDr. Md. Motaher HossainAdjunct FacultyMBA, EMBA
& MBM ProgramsDepartment of Business AdministrationEast West
University
Submitted By Md. Rajib Ahmed ID: 2013-1-95-105Department of
Business AdministrationEast West UniversityCourse code: OPM
501Section: 2
Date of Submission: 17 December, 2013
Chapter: 5Strategic Capacity Planning for Products and
Services
IntroductionThis chapter examines how important strategic
capacity planning is for products and services. The overall
objective of strategic capacity planning is to reach an optimal
level where production capabilities meet demand. Capacity needs
include equipment, space, and employee skills. If production
capabilities are not meeting demand, high costs, strains on
resources and customer loss may result. Capacity refers to a
system's potential for producing goods or delivering services over
a specified time interval. Capacity planning involves long-term and
short term considerations. Long-term considerations relate to the
overall level of capacity; short-term considerations relate to
variations in capacity requirements due to seasonal, random, and
irregular fluctuations in demand.
Capacity PlanningCapacity is the upper limit or ceiling on the
load that an operating unit can handle. Capacity also includes:
Equipment Space Employee skillsThe basic questions in capacity
handling are: What kind of capacity is needed? How much is needed?
When is it needed?
Importance of Capacity Decisions1. Impacts ability to meet
future demands2. Affects operating costs3. Major determinant of
initial costs4. Involves long-term commitment5. Affects
competitiveness6. Affects ease of management7. Globalization adds
complexity8. Impacts long range planning
Defining and Measuring Capacity Design capacity: The maximum
output rate or service capacity an operation, process, or facility
is designed for. Effective capacity: Design capacity minus
allowances such as personal time, maintenance, and scrap. Actual
output: Rate of output actually achieved - cannot exceed effective
capacity.
Efficiency and UtilizationThe two most useful functions of
capacity planning are design capacity and effective capacity.Design
capacityrefers to the maximum designed service capacity or output
rate and theeffective capacityis the design capacity minus personal
and other allowances. These two functions of capacity can be used
to find the efficiency and utilization. These are calculated by the
formulas below:
Efficiency = Actual Output/ Effective Capacity x 100%
Utilization = Actual Output/ Design Capacity x 100%
Design capacity = 50 trucks/dayEffective capacity = 40
trucks/dayActual output = 36 units/day
Determinants of Effective Capacity Facilities:The size and
provision for expansion are key in the design of facilities. Other
facility factors include location factors (transportation costs,
distance to market, labor supply, and energy sources). The layout
of the work area can determine how smoothly work can be performed.
Product and Service Factors:The more uniform the output, the more
opportunities there are for standardization of methods and
materials. This leads to greater capacity. Process Factors:Quantity
capability is an important determinant of capacity, but so is
output quality. If the quality does not meet standards, then output
rate decreases because of need of inspection and rework activities.
Process improvements that increase quality and productivity can
result in increased capacity. Another process factor to consider is
the time it takes to change over equipment settings for different
products or services. Human Factors:the tasks that are needed in
certain jobs, the array of activities involved and the training,
skill, and experience required to perform a job all affect the
potential and actual output. Employee motivation, absenteeism, and
labor turnover all affect the output rate as well. Policy
Factors:Management policy can affect capacity by allowing or not
allowing capacity options such as overtime or second or third
shifts Operational Factors:Scheduling problems may occur when an
organization has differences in equipment capabilities among
different pieces of equipment or differences in job requirements.
Other areas of impact on effective capacity include inventory
stocking decisions, late deliveries, purchasing requirements,
acceptability of purchased materials and parts, and quality
inspection and control procedures. Supply Chain Factors:Questions
include: What impact will the changes have on suppliers,
warehousing, transportation, and distributors? If capacity will be
increased, will these elements of the supply chain be able to
handle the increase? If capacity is to be decreased, what impact
will the loss of business have on these elements of the supply
chain? External Factors:Minimum quality and performance standards
can restrict management's options for increasing and using
capacity.
Strategy FormulationCapacity strategy based on Growth rate and
variability in demand Facilities: Cost of building and operating
facilities Technological changes: Rate and direction of technology
innovation Behavior of competitors Availability of capital and
other inputs
Key Decisions of Capacity Planning Amount of capacity needed
Timing of changes Need to maintain balance Extent of flexibility of
facilities
Steps for Capacity Planning1. Estimate future capacity
requirements2. Evaluate existing capacity3. Identify alternatives4.
Conduct financial analysis5. Assess key qualitative issues6. Select
one alternative7. Implement alternative chosen8. Monitor
results
Forecasting Capacity Requirements Long-term vs. short-term
capacity needs Long-term relates to overall level of capacity such
as facility size, trends, and cycles Short-term relates to
variations from seasonal, random, and irregular fluctuations in
demand
Example for Calculating Processing RequirementsA department
works one 8-hour shift, 250 days a year, and has these figures for
usage of a machine that is currently being considered:Product
Annual Demand Standard Processing Time per Unit (hr.) Processing
Time Needed (hr.)
# 1 400 5.0 2,000
#2 300 8.0 2,400
#3 700 2.0 1,400
5800
Working one 8-hour shift, 250 days a year provides an annual
capacity of 8 x 250 = 2,000 hours per year. We can see that three
of these machines would be needed to handle the required
volume:5,800 hours/2,000 hours = 2.90 machines
Challenges of Planning Service Capacity Need to be near
customers: Capacity and location are closely tied Inability to
store services: capacity must be matched with timing of demand
Degree of volatility of demand: Peak demand periods
Developing Capacity AlternativesGeneral Considerations Conduct a
reasonable search for possible alternatives Consider doing nothing
Take care not to overlook non-quantitative factorsSpecific
Considerations1. Design flexibility into systems Provision for
future expansion Layout of equipment Location Equipment selection
Production planning Scheduling Inventory Policies Product cycle
2. Take a big picture approach to capacity changes3. Prepare to
deal with capacity chunks4. Attempt to smooth out capacity
requirements
Possible solutions:
Allowances can be made in planning and scheduling activities and
inventories Identify products or services that have complementary
demand patterns Use of overtime work Subcontract some of the work
Draw down finished goods inventories during periods of high demand
and replenish them during periods of slow demand
5. Identify the optimal operating level
Evaluating Capacity Alternatives1. Cost-volume analysis Focuses
on relationships between cost, revenue and volume of output
Estimates the income under different operating conditions Requires
the identification of all costs related to the production of a
given product Fixed Cost Variable CostThe assumptions are: One
product is involved. Everything produced can be sold The variable
cost per unit is the same regardless of the volume. Fixed costs do
not change with volume changes, or they are step changes. The
revenue per unit is the same regardless of volume.
Cost-Volume Symbols
FC = Fixed Cost
VC = Variable cost per unit
TC = Total Cost
TR = Total Revenue
R = Revenue per unit
Q = Quantity or volume of output
QBEP = Break-Even Quantity
SP = Specified Profit
Cost-Volume Formulas1. TC = FC + (VC x Q)2. TR = R x Q3.
4.
5.
Cost-Volume Relationships
Example for Cost-Volume AnalysisThe owner of Old-Fashioned
Parrys is contemplating adding a new line of pies, which will
require leasing new equipment for a monthly payment of Rs 6,000.
Variable cost would be Rs 2.00 per pie, and pies would retail for
Rs7.00 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 Rs
4,000?
Solution
2. Financial analysisPayback focuses on the length of time it
will take for an investment to return its original costPresent
Value (PV) summarizes the initial cost of an investment, its
estimated annual cash flows, and any expected salvage value in a
single value called the equivalent current value, taking into
account the time value of money Internal Rate of Return (IRR)
summarizes the initial cost, expected annual cash flows, and
estimated future salvage value of an investment proposal in an
equivalent interest rate
3. Decision Theory Helpful tool for financial comparison of
alternatives under conditions of risk or uncertainty Suited to
capacity decisions
4. Waiting-Line Analysis Useful for designing or modifying
service systems Waiting-lines occur across a wide variety of
service systems Waiting-lines are caused by bottlenecks in the
process Helps managers plan capacity level that will be
cost-effective by balancing the cost of having customers wait in
line with the cost of additional capacity
Chapter: 6Process Selection and Facility Layout
IntroductionProcess selection: Process Selectionis basically the
way goods or services are made or delivered, which influences
numerous aspects of an organization, including capacity planning,
layout of facilities, equipment and design of work systems. Process
selection is primarily used during the planning of new products or
services that is subject to technological advances and competition.
Process selection is dependent on the company's process strategy,
which has two main components: capital intensity and process
flexibility.Major implications Capacity planning Layout of
facilities Equipment Design of work systems
Process Selection and System Design
Process StrategyKey aspects of process strategy Capital
intensive equipment/labor Process flexibility Technology Adjust to
changes Design Volume Technology
TechnologyTechnology: The application of scientific discoveries
to the development and improvement of products and services and
operations processes.Technology innovation: The discovery and
development of new or improved products, services, or processes for
producing or providing them.
Kinds of TechnologyOperations management is primarily concerned
with three kinds of technology: Product and service technology
Process technology Information technologyAll three have a major
impact on: Costs Productivity Competitiveness
Technology as a Competitive AdvantageProducts and services Cell
phones PDAs Wireless computingProcessing technology Increasing
productivity Increasing quality Lowering costs
Process SelectionProcess selection refers to the ways
organizations choose to produce or provide their goods and
services.The decision of process selection is made when new
products or services are being planned. Process selection also
occurs due to technological changes, as well as competitive
pressure.
Process TypesProject: A non-repetitive set of activities
directed toward a unique goal within a limited time frame Unique
Examples: Building a bridge, consultingJob shop: provides unit or
lot production or service with changeable specifications, according
to customer needs Small scale Examples: Machine shop, dentists
officeBatch: Produces many different products in groups (batches)
Low or Moderate volume Examples: Bakeries, movie theaters,
classrooms Repetitive: provides one or a few highly standardized
products or services High volumes of standardized goods or services
Examples: automobiles, computers, cafeteria, car washContinuous:
produces highly uniform products or continuous services, often
performed by machines Very high volumes of non-discrete goods
Examples: refineries, chemical plant, flour, sugar, electricity
supplying and the internet
Process Choice Affects Activities /FunctionsJob Shop Batch
RepetitiveContinuousProjects
Cost estimationDifficultSomewhat routineRoutineRoutineSimple to
complex
Cost per unitHighModerateLowLowVery high
Equipment usedGeneral purposeGeneral purposeSpecial
purposeSpecial purposeVaried
Fixed costsLowModerateHighVery highVery high
Variable costsHighModerateLowVery lowHigh
Labor skillsHighModerateLowLow to highLow to high
MarketingPromote capacitiesPromote capacities; Semi-standard
goods/ servicesPromote standardized goods/ servicesPromote
standardized goods/ servicesPromote capacities
SchedulingComplexModerately complexRoutineRoutineComplex,
subject to change
Work-in-process inventoryHighHighLowLowVaried
AutomationAutomation: Machinery that has sensing and control
devices that enables it to operate automatically Standardized goods
and services Examples: Goods: Automobile factories, semiconductors
Services: Package sorting, e-mail, on-line banking
Automation Types Fixed automation: Fixed automation uses
specialized equipment for a fixed sequence of operations. Low cost
and high volume are its primary advantages; minimal variety and the
high cost of making major changes are its primary limitations.
Programmable automation: Programmable automation is at the opposite
end. It involves the use of high-cost, general-purpose equipment
controlled by computers. This type of automation can produce a wide
variety of low-volume products in small batches. Computer-aided
design and manufacturing systems (CAD/CAM) Numerically controlled
(NC) machines: Machines that perform operations by following
mathematical processing instructions. Robot: A machine consisting
of a mechanical arm, a power supply and a controller Flexible
automation: Flexible automation evolved from programmable
automation. A key difference between the two is that flexible
automation requires significantly less changeover time.
Manufacturing cell Flexible manufacturing systems
Computer-integrated manufacturing (CIM)Flexible Manufacturing
Systems FMS are more fully automated versions of cellular
manufacturing: A computer controls the transfer of parts from
machine to machine as well as the start of work at each machine
Produce a variety of similar products
Facilities LayoutThe arrangement of departments, work centers,
and equipment, with particular emphasis on movement of work
(customers or materials) through the system.
Importance of Layout Decisions Requires substantial investments
of money and effort Involves long-term commitments Has significant
impact on cost and efficiency of short-term operations
Basic Layout Types Product Layouts most helpful to repetitive
processing Process Layouts used for irregular processing
Fixed-position layouts used when projects require layouts Hybrid
layouts combinations of these above types Cellular manufacturing
Group technology Flexible Manufacturing Systems
Product Layouts Product layout: Layout that uses standardized
processing operations to achieve smooth, fast, high-volume flow
Made possible by highly standardized goods or services that allow
highly standardized, repetitive processing The work is divided into
a series of standardized tasks, permitting specialization of
equipment and division of labor The large volumes handled by these
systems usually make it economical to invest substantial sums of
money in equipment and in job design.
Production/Assembly Line
U-Shaped Production Line
Advantages:1. U-Shaped Production Line is more compact; its
length is half the length of a straight line.2. Communication among
workers is increased because workers are clustered.3. Compared to a
straight line, flexibility in work assignments is increased because
workers can handle more stations. 4. Materials entering point is
the same as finished product leaving point, minimize material
handling
Advantages of Product Layouts1. There is a high rate of
output.2. Units costs are low due to high volume; the high cost of
specialized equipment is spread over many units.3. Labor
specialization reduces training costs and time and results in a
wide span of supervision.4. Material-handling costs are low per
unit, and material handling is simplified because units follow the
same sequence of operations.5. There is a high utilization of labor
and equipment.6. Routing and scheduling are encompassed in the
initial design of the system and do not require much attention once
the system is in operation.7. Accounting, purchasing, and inventory
control are fairly routine.
Disadvantages of Product Layouts1. The intensive division of
labor usually creates dull, repetitive jobs, which do not provide
much opportunity for advancement and may lead to morale problems.2.
Poorly skilled workers may exhibit little interest in maintaining
equipment or in quality of output.3. The system is fairly
inflexible in response to either changes in the volume of output or
changes in product or process design.4. The system is highly
susceptible to shutdowns caused by equipment breakdowns or
excessive absenteeism.5. Preventive maintenance, the capacity for
quick repairs, and spare parts inventories are necessary
expenses.6. Incentive plans tied to individual output are
impractical since they would tend to cause variations among outputs
of individual workers that would adversely affect high utilization
of labor and equipment.
Process LayoutsProcess layouts: Layouts that can handle various
processing requirements. The layouts feature departments or other
functional groupings in which similar kinds of activities are
performed. Examples: Machine shops usually have separate
departments for milling, grinding, drilling, and so on.Different
products may present quite different processing requirements and
sequences of operations.
Comparison of Process and Product Layout
Advantages of Process Layouts1. Systems can handle a variety of
processing requirements.2. The system is not particularly
vulnerable to equipment failure.3. 3. General-purpose equipment is
often less costly than the specialized equipment used in product
layouts and is easier and less costly to maintain.4. It is possible
to use individual incentive systems.
Disadvantages of Process Layouts1. In-process inventory costs
can be high if batch processing is used in manufacturing systems.2.
Routing and scheduling pose continual challenges.3. Equipment
utilization rates are low.4. Material handling is slow and
inefficient and more costly per unit than under product layouts.5.
Job complexities often reduce the span of supervision and result in
higher supervisory costs than product layouts do.6. Special
attention for each product or customer (routing, scheduling,
machine setups, and so on) and low volumes result in higher unit
costs than with product layouts.7. Accounting, inventory control,
and purchasing are much more involved than under product
layouts.
Fixed-Position LayoutsFixed-Position Layout: In fixed-position
layouts, the item being worked on remains stationary, and workers,
materials, and equipment are moved about as needed. This is in
marked contrast to product and process layouts. Almost always, the
nature of the product dictates this kind of arrangement: weight,
size, bulk, or some other factor makes it undesirable or extremely
difficult to attempt to move the product.Examples:1. Large
construction projects (buildings, power plants, dams)2.
Shipbuilding, production of large aircraft3. Rockets used to launch
space missions
Combination LayoutsThe three basic layout types may be altered
to satisfy the needs of a particular situationExamples: 1.
Supermarket layouts: primarily process layout, have fixed-path
material-handling devices as well (roller-type conveyors and
belt-type conveyors)2. Hospitals: process layout, fixed-position
layout as well (patient care)3. Off-line reworking (customized
processing) of faulty parts in a product layout
Cellular LayoutsCellular Production: Layout in which machines
are grouped into a cell that can process items that have similar
processing requirementsGroup Technology:The grouping into part
families of items with similar design or manufacturing
characteristics Design characteristics: size, shape and function.
Manufacturing or processing characteristics: type and sequence of
operations required.
Line BalancingLine Balancing is the process of assigning tasks
to workstations in such a way that the workstations have
approximately equal time requirements. Tasks are grouped into
manageable bundles and assigned to workstations with one or two
operators Goal is to minimize idle time along the line, which leads
to high utilization of labor and equipment Perfect balance is often
impossible to achieve
Cycle TimeCycle time is the maximum time allowed at each
workstation to complete its set of tasks on a unit.Example:
Designing Process Layout The main issue in design of process
layouts concerns the relative positioning of the departments
involved. Departments must be assigned to locations. The problem is
to develop a reasonably good layout; some combinations will be more
desirable than others.
Considerations Some departments may benefit from adjacent
locations Sharing expensive tools or equipments. Some departments
should be separated A lab with delicate equipment should not be
located near a department that has equipment with strong
vibrations. Sand blasting department and painting department.
Flammable materials near a furnace.
Measures of Effectiveness One advantage of process layouts:
satisfy a variety of processing requirements Customers or materials
in these systems require different operations and different
sequences of operations One of the major objectives in process
layout is to minimize transportation cost, distance, or time This
is usually accomplished by locating departments with relatively
high interdepartmental work flow as close together as possible
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