Assignment on

Summary of
Ch-5: Strategic Capacity Planning for Products and Services
and Ch-6: Process Selection and Facility Layout


Submitted To
Dr. Md. Motaher Hossain
Adjunct Faculty
MBA, EMBA & MBM Programs
Department of Business Administration
East West University


Submitted By
Md. Rajib Ahmed
ID: 2013-1-95-105
Department of Business Administration
East West University
Course code: OPM 501
Section: 2


Date of Submission: 17 December, 2013


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Chapter: 5
Strategic Capacity Planning for Products and Services









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Introduction
This 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 Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle. Capacity also
includes:
Equipment
Space
Employee skills
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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Importance of Capacity Decisions
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. 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.






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Efficiency and Utilization
The two most useful functions of capacity planning are design capacity and effective
capacity. Design capacity refers to the maximum designed service capacity or output rate and
the effective capacity is 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/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day






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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.

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Strategy Formulation
Capacity 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 Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results



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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 Requirements
A 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





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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 Alternatives
General Considerations
Conduct a reasonable search for possible alternatives
Consider doing nothing
Take care not to overlook non-quantitative factors
Specific Considerations
1. 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 changes
3. Prepare to deal with capacity chunks
4. Attempt to smooth out capacity requirements




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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



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Evaluating Capacity Alternatives
1. 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 Cost
The 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.












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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
Q
BEP
= Break-Even Quantity
SP = Specified Profit

Cost-Volume Formulas
1. TC = FC + (VC x Q)
2. TR = R x Q
3.

4.

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5.


Cost-Volume Relationships


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Example for Cost-Volume Analysis
The 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






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2. Financial analysis
Payback focuses on the length of time it will take for an investment to return its original cost
Present 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









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Chapter: 6
Process Selection and Facility Layout










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Introduction
Process selection: Process Selection is 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


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Process Strategy
Key aspects of process strategy
Capital intensive equipment/labor
Process flexibility
Technology
Adjust to changes
Design
Volume
Technology

Technology
Technology: 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 Technology
Operations management is primarily concerned with three kinds of technology:
Product and service technology
Process technology
Information technology
All three have a major impact on:
Costs
Productivity
Competitiveness

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Technology as a Competitive Advantage
Products and services
Cell phones
PDAs
Wireless computing
Processing technology
Increasing productivity
Increasing quality
Lowering costs

Process Selection
Process 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.





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Process Types
Project: A non-repetitive set of activities directed toward a unique goal within a limited time
frame
Unique
Examples: Building a bridge, consulting
Job shop: provides unit or lot production or service with changeable specifications, according to
customer needs
Small scale
Examples: Machine shop, dentists office
Batch: 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 wash
Continuous: 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








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Process Choice Affects Activities /Functions

Job Shop Batch Repetitive Continuous Projects
Cost estimation Difficult Somewhat
routine
Routine Routine Simple to
complex
Cost per unit High Moderate Low Low Very high
Equipment
used
General
purpose
General
purpose
Special purpose Special purpose Varied
Fixed costs Low Moderate High Very high Very high
Variable costs High Moderate Low Very low High
Labor skills High Moderate Low Low to high Low to high
Marketing Promote
capacities
Promote
capacities;
Semi-standard
goods/
services
Promote
standardized
goods/ services
Promote
standardized
goods/ services
Promote
capacities
Scheduling Complex Moderately
complex
Routine Routine Complex,
subject to
change
Work-in-
process
inventory
High High Low Low Varied






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Automation
Automation: 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)
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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 Layout
The 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




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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.







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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.
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4. Materials entering point is the same as finished product leaving point, minimize material
handling

Advantages of Product Layouts
1. 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 Layouts
1. 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.
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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 Layouts
Process 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.





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Comparison of Process and Product Layout


Advantages of Process Layouts
1. 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 Layouts
1. 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.
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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 Layouts
Fixed-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 aircraft
3. Rockets used to launch space missions

Combination Layouts
The three basic layout types may be altered to satisfy the needs of a particular situation
Examples:
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

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Cellular Layouts
Cellular Production: Layout in which machines are grouped into a cell that can process items that have
similar processing requirements
Group 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 Balancing
Line 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







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Cycle Time
Cycle 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.




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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