OPERATIONS MANAGEMENT

Process Selection and Capacity Planning

Process Selection and the Big Picture

Demand Forecasts Process selection

Capacity planning

Facilities and Equipment

Layout Work design

Product and service design Technological change

Learning Objectives

Define:

Process focus Repetitive focus Product focus Process reengineering

Define & explain capacity planning Learn tools of Capacity Planning

Break-Even Analysis Single-Product Case Multi-product Case

Dell Computer Company

How can we make the process of buying a computer better? Sells custom-build PCs directly to consumer Integrated the web into every aspect of its business Operates with six days inventory Builds computers rapidly, at low cost, and only when ordered Research focus on software, designed to make installation and configuration of its PCs fast and simple

Process Selection & Capacity Planning

Process Selection: strategic decision of choosing the way to produce the products or services. It addresses issues like:
-- What type of technology to use? -- How to arrange the flow of operations?

Process Selection occurs:

Naturally when a new product / service is planned (remember the phases of product development?) For existing products / services due to technological advances and changes in customer needs.

Process Strategy
Defines its:
Capital Intensity Process Flexibility Vertical Integration Make or Buy: Factors

Strategic Impact Available Capacity Expertise Quality Consideration Nature of Demand Cost

Types of Production Processes (Strategies)

A. Continuous and Semi-Continuous Processing
1. Continuous: --Highly uniform product or service is produced. Output is continuous not discrete. --Also called process industries. E.g. processing of chemicals, newsprint, oil products etc. 2. Semi-continuous or Repetitive or Assembly Line:

--Produced in high volume with little or no customization. Are produced in discrete units.
--E.g. assembly line producing cars, computers, television sets, shoes etc.

B. Intermittent Processing
1. Projects / Job Shops: --Represents one of a kind production for an individual customer. Tend to involve a large sum of money & last a long time. Intense customer involvement. --E.g. shipbuilding, customer tailoring, construction. 2. Batch: --Processes are used to produce small quantities of products in groups or batches based on customer orders or product specifications. Small volume but high customization. --E.g. bakeries, education, printing press.

(Intermittent - Processing)

Process Focused Strategies Pros & Cons

Advantages
Greater product flexibility More general purpose equipment Lower initial capital investment

Disadvantages
More highly trained personnel

More difficult production & control

Low equipment utilization (5% to 25%)

Repetitive Focused Strategy (Semi-Continuous)

Facilities often organized by assembly lines

Characterized by modules, parts & assemblies made previously

Modules combined for many output options Other names:

Assembly line
Production line

Repetitive Focused Strategy Considerations

More structured than process-focused, less structured than product focused Enables quasi-customization Using modules, it enjoys economic advantage of continuous process, and custom advantage of lowvolume, high-variety model

(Continuous-Processing)

Product-Focused Strategies Pros & Cons

Advantages
Lower variable cost per unit Lower but more specialized labor skills Easier production planning and control Higher equipment utilization (70% to 90%)

Disadvantages
Lower product flexibility More specialized equipment Usually higher capital investment

Mass Customization

Using technology and imagination to rapidly mass-produce products that cater to sundry unique customer desires Under mass customization the three process models become so flexible that distinctions between them blur, making variety and volume issues less significant.

Process Selection & Capacity Planning

Process selection is closely related to the degree of standardization and output volume of the product/service. Standardization: extent to which there is absence of variety

in the product/service.
Standardization means that There are fewer parts to deal with in inventory and manufacturing More routine purchasing, materials handling and quality control procedures can be used

Process Selection & Capacity Planning

Standardization can take advantage of risk pooling (Aggregation Effect) But most importantly, standardization allows for long production runs (i.e. high output volume) and automation in the processes. Closely related to the product life cycle of the product or service

Process Reengineering
The fundamental rethinking and radical redesign of business processes to bring about dramatic improvements in performance

Relies on reevaluating the purpose of the process and questioning both the purpose and the underlying assumptions

Requires reexamination of the basic process and its objectives

Focuses on activities that cross boundaries

Attaining Lean Production

Why?

Focus on inventory reduction Build systems that help employees Reduce space requirements Develop close relationships with suppliers Educate suppliers Eliminate all but value-added activities Develop the workforce Make jobs more challenging

Capacity Planning

Capacity is the maximum output rate of a production or service facility Capacity planning is the process of establishing the available capacity:

Strategic-issues: Capital expenditures in facility & equipment Tactical issues: Workforce & inventory levels, & day-to-day use of equipment

Measuring Capacity
Type of Business Car manufacturer Hospital Pizza parlor Retail store Input Measures of Output Measures Capacity of Capacity Labor hours Available beds Labor hours Floor space in square feet Cars per shift Patients per month Pizzas per day Revenue per foot

Types of Capacity

Design capacity:

Maximum output rate under ideal conditions

Effective capacity:

Maximum output rate under normal (realistic) conditions

Effective Capacity < Design Capacity (Why?).

Capacity Utilization

Measures how much of the available capacity is actually being used:

Measures effectiveness Use either effective or design capacity in denominator

actual output rate 100% Utilizatio ndesign Design Cap acity Utilizatio neffective Efficiency actual output rate 100% Effective Capacity

Determinants of Effective Capacity

Facilities Factors: design, location, layout, environment. Products/Service Factors: design, product or service mix. Process Factors: Quantity and Quality capabilities. Human Factors: job content, job design, training and experience, motivation, compensation, learning rates, absenteeism and labor turnover. Operational Factors: scheduling, materials management, quality assurance, maintenance policies, equipment breakdowns. External Factors: product standards, safety regulations, unions, pollution control standards.

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 (best) operating level.

(Dis)Economies of Scale

Economies of Scale:

Where the cost per unit of output drops as volume of output increases Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material Operating efficiency increases as workers gain experience

Diseconomies of Scale:

Where the cost per unit rises as volume increases Often caused by congestion (overwhelming the process with too much work-in-process)

Best Operating Level

Choose Capacity by Matching Forecast & Best Operating Level

Selecting among Alternatives

Decision Approaches:

Break-Even Analysis Financial Analysis: Payback, Present Value and Internal Rate of Return. Decision Tree Analysis Simulation & Waiting Line Analysis (primarily for service systems) Linear Programming

Breakeven Analysis (Cost-Volume)

Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments Variable costs: costs that vary with the volume of units produced: labor, materials, portion of utilities

Breakeven Point
FC= Fixed Cost; VC = variable cost; R = revenue per unit; Q = output unit. TC = total cost = FC + VC x Q. TR = total revenue = R x Q. P =total profit = TR - TC = R x Q - (FC+VC x Q). Rearranging terms, we have:

P Q ( R VC ) FC P FC FC Q Q BEP R VC R VC

Example
The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable cost would be $2.00 per pie, and pies would retail for $7.00 each. A) B) How many pies must be sold in order to break even? 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 $4,000.

Example
A manager has the option of purchasing one, two or three machines. Fixed costs and potential volumes are as follows:
# of Machines 1 2 3 Total Annual FC $9,600 15,000 20,000 Corresponding range of output 0 to 300 301 to 600 601 to 900

Variable cost is $10 per unit, and revenue is $40 per unit.
A) Determine the breakeven point for each range.

B) If projected annual demand is between 580 and 660 units, how many machines should the manager purchase?

Example
Travis and Jeff own an adventure company called Whitewater Rafting. Due to quality and availability problems, the two entrepreneurs have decided to produce their own rubber rafts. The initial investment in plant and equipment is estimated to be $2,000. Labor and material is approximately $5 per raft. If the rafts can be sold at a price of $10 each, what volume of demand would be necessary to break-even? The owners of Whitewater Rafting believe demand for their product will far exceed the break-even point in the above example. They are now contemplating a larger initial investment of $10,000 for more automated equipment that would reduce the variable cost of manufacture to $2 per raft. Compare the old manufacturing process with the new process proposed here. For what volume of demand should each process be chosen?

Present Value 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. The current value is calculated for a given interest rate (discount rate)

Present Value Analysis

The basic formula:
FV PV (1 i ) or FV PV n where (1 i )
n
FV= Future value of the cash flow n periods from today. i = interest rate per period PV= Present Value (Worth) of the cash flow to be received in the future

PV Analysis for a Single Investment

Determine the useful life of an investment. (N) Estimate the cash flows for each year F0, F1, F2, F3 , , FN-1, FN Calculate the Present Value (PV)

F0 F1 F2 FN PV ...... 0 1 2 N (1 i) (1 i) (1 i) (1 i)
If PV > 0, the investment is a viable alternative. Otherwise, reject.

PV Analysis for Multiple Investments

Calculate the Net Present Value (NPV) for each alternative Choose the one with highest NPV (if its above 0)
Example (i=10%)
YEAR 0 1 2 3 Cash Flows Alternative A -20000 10000 10000 10000 Alternative B -30000 15000 15000 15000

Example Continued

10000 10000 NPV A 20000 1 (1 0.1) 2 (1 0.1) 3 (1 0.1) 4868.5 15000 15000 15000 NPV B 30000 1 (1 0.1) 2 (1 0.1) 3 (1 0.1) 7302.8
CHOOSE B

10000

Limitation of Net Present Value

Investments with the same present value may have significantly different project lives and different salvage values

Investments with the same net present values may have different cash flows

We assume that we know future interest rates which we do not

We assume that payments are always made at the end of the period which is not always the case