capacity and process selection

8/10/2019 Capacity and Process Selection

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1

Capacity Planning

Operations Management


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2

Capacity and Strategy

Capacity decisions must be integrated into

the mission and strategy of organization

All 10 OM decisions as well as marketingand finance are impacted by changes in

capacity

Investments in capacity not to be isolated

but a coordinated step to achieve

organizations objective



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3

Types of Planning Over aTime Horizon

Add FacilitiesAdd long lead time equipment

Schedule JobsSchedule PersonnelAllocate Machinery

Sub-ContractAdd EquipmentAdd Shifts

Add PersonnelBuild or Use Inventory

Long RangePlanning

IntermediateRange Planning

Short RangePlanning

Modify Capacity Use Capacity

*

*

*Limited options exist



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Definition and Measures of Capacity

Design

Capacity:

The maximum throughput,or number of units

a facility can produce in a period of time.

Utilization: Actual output as a percent of design capacity.

Effectivecapacity:

Capacity a firm can expect to receive given itsproduct mix, methods of scheduling, maintenance,and standards of quality.

Efficiency: Actual output as a percent of effective capacity.



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Measure of planned or actual capacityusage of a facility, work center, ormachine

UtilizationActual Output

Design Capacity

Planned hours to be usedTotal hours available

=

=

Utilization



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Measure of how well a facility or machine isperforming when used

Efficiency Actual outputEffective Capacity

Actual output in units

Standard output in units

=

=

Efficiency



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Capacity

Facilities

Product and Service Factors

Process Factors Human Factors

Operational Factors

Supply Chain Factors External Factors

Operations Management 7


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Steps in Capacity Planning

Estimate future capacity requirements.

Evaluate existing capacity and facilities and identifygaps.

Identify alternatives for meeting requirements. Conduct financial analyses of each alternative.

Assess key qualitative issues for each alternative.

Select the alternative to pursue that will be best in

the long term. Implement the selected alternative.

Monitor results.



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Approaches to CapacityExpansion

Expected DemandExpected Demand

Expected Demand Expected Demand

Time in Years Time in Years

Time in YearsTime in Years

Demand

Demand

Dem

and

Demand

New Capacity

New CapacityNew Capacity

New Capacity

Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion

Capacity lags demand with an incremental expansionAttempts to have an average capacity, with

an incremental expansion



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Service Capacity Planning


Service capacity planning can present a number ofchallenges related to:

The need to be near customers

Convenience

The inability to store servicesCannot store services for consumption later

The degree of demand volatilityVolume and timing of demandTime required to service individual customers


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Developing Capacity

Alternatives


Things that can be done to enhance capacity management: Design flexibility into systems Take stage of life cycle into account Take a big-pictureapproach to capacity changes Prepare to deal with capacity chunks Attempt to smooth capacity requirements Identify the optimal operating level Choose a strategy if expansion is involved


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Evaluation of Alternatives


Break Even Analysis Cash Flow and NPV Analysis Decision Theory Waiting Line Analysis Simulation


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Breakeven Analysis

Technique for evaluating process &

equipment alternatives

Objective: Find the point ($ or units) atwhich total cost equals total revenue

Assumptions

Revenue & costs are related linearly to volume All information is known with certainty

No time value of money



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Break-Even Analysis

Fixed costs: costs that continue even if

no units are produced: depreciation,

taxes, debt, mortgage payments, salaries,etc

Variable costs: costs that vary with the

volume of units produced: labor wages,

materials, portion of utilities



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Breakeven Chart

Fixed cost

Variable cost

Total cost line

Total revenue line

ProfitBreakeven point

Total cost = Total revenue

Volume (units/period)

CostinDollars

Loss

Profit



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Crossover Chart

Smooth Boards Inc., wants to enter the market quickly with a new finishon its ski boards. It has three choices:

Repair the old equipment at a cost of $800,Make major modifications at the cost of $1,100, orPurchase new equipment at a net cost of $1,800

If the firm chooses to repair the old equipment, materials and labor costwould be $1.10 per board. If it chooses to make modifications, materialsand labor cost would be $0.70 per board. If it buys new equipment,variable costs are estimated at $0.40 per board.

Graph the three total cost lines on the same chart (preferably on graphpaper)Which alternative would be chosen if more than 3,000 ski-boards can besold?Which alternative should the firm use if it thinks the market for boards

would be between 1,000 and 2,000?What are the cross-over points from the graph?


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Crossover Chart

Fixed cost - Process AFixed cost - Process B

Fixed cost - Process C

Process A: low volume, high variety

Process B: Repetitive

Process C: High volume, low variety

Process CProcess BProcess A Lowest cost process


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Decision Theory


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represents a general approach to decision makingwhich is suitable for a wide range of operations

management decisions, including:

product and

service

design

equipment

selection

location

planning

Decision Theory

Capacity

planning


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Decision Theory Elements


A set of possible future conditions existsthat will have a bearing on the results ofthe decision

A list of alternatives for the manager tochoose from

A known payoff for each alternative

under each possible future condition


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Decision Theory Process


Identify possible future conditions:

Develop a list of possible alternatives,one ofwhich may be to do nothing

Determine the payoff associated with eachalternative for every future condition

If possible, determine the likelihood of each

possible future condition

Evaluate alternatives according to some decisioncriterionand select the best alternative


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Decision Theory Process


Bounded RationalityThe limitations on decision making caused by costs,

human abilities, time, technology, and availability ofinformation

Sub-optimization

The result of different departments each attempting toreach a solution that is optimum for that department


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Payoff Table

A table showing the expected payoffs for eachalternative in every possible state of nature

Possible Future Demand

Alternatives Low Moderate High

Small facility $10 $10 $10

Medium facility 7 12 12

Large Facility (4) 2 16

Adecision is being made concerning which size facilityshould be constructed

The present value (in millions) for each alternative undereach state of nature is expressed in the body of the above

payoff tableStudent Slides

Decision Making under


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Decision Making under

Uncertaintity


Decisions are sometimes made under completeuncertainty: No information is available on how likelythe various states of nature are.

Decision Criteria: Maximin

Choose the alternative with the best of the worst possiblepayoffs

Maximax

Choose the alternative with the best possible payoff

Laplace Choose the alternative with the best average payoff

Minimax regret

Choose the alternative that has the least of the worst regrets


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Small Facility $10 $10 $10

Medium Facility 7 12 12


Example Maximin Criterion

The worst payoff for each alternative isSmall facility: $10 millionMedium facility $7 million

Large facility -$4 millionChoose to construct a small facility

Student Slides


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Example Maximax Criterion

The best payoff for each alternative isSmall facility: $10 millionMedium facility $12 million

Large facility $16 millionChoose to construct a large facility

Student Slides5S-30


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Example Laplace Criterion

The average payoff for each alternative isSmall facility: (10+10+10)/3 = $10 millionMedium facility (7+12+12)/3 = $10.33 millionLarge facility (-4+2+16)/3 = $4.67 million

Choose to construct a medium facility

Student Slides5S-31


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Example Minimax Regret

Construct a regret(or opportunity loss) tableThe difference between a given payoff and the bestpayoff for a state of nature

Regrets



MediumFacility

3 0 4

Large Facility 14 10 0Student Slides


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Regrets




Large Facility 14 10 0

Example Minimax Regret

Identify the worst regret for each alternativeSmall facility $6 millionMedium facility $4 millionLarge facility $14 million

Select the alternative with the minimum of the maximumregrets

Build a medium facility

Student Slides5S-33


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Decision Making Under Risk


Decisions made under the condition that theprobability of occurrence for each state of naturecan be estimated

A widely applied criterion is expected monetaryvalue (EMV) EMV

Determine the expected payoff of each alternative,

and choose the alternative that has the best expectedpayoff

This approach is most appropriate when the decisionmaker is neither risk averse nor risk seeking

E l EMV


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Alternatives Low (.30) Moderate (.50) High (.20)




ExampleEMV

EMVsmall = .30(10) +.50(10) +.20(10) = 10EMVmedium = .30(7) + .50(12) + .20(12) = 10.5EMVlarge = .30(-4) + .50(2) + .20(16) = $3

Build a medium facility

Student Slides5S-35

D i i T


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Decision Tree


Decision tree A schematic representation of the available alternatives and

their possible consequences Useful for analyzing sequential decisions Composed of

Nodes Decisions represented by square nodes Chance events represented by circular nodes

Branches Alternativesbranches leaving a square node

Chance eventsbranches leaving a circular node

Analyze from right to left For each decision, choose the alternative that will yield

the greatest return If chance events follow a decision, choose the

alternative that has the highest expected monetaryvalue (or lowest expected cost)

Information


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Information

Expected value of perfect information:thedifference between the expected payoff undercertainty and the expected payoff under risk

Expected value of

perfect information

Expected payoff

under certainty

Expected payoff

under risk=-


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Process Strategy

P St t i


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Process Strategies

Process value creation activities Process strategy organizations

approach for producing goods or

providing services Objective

Meet or exceed customer requirements

Meet cost & managerial goals

Has long-run effects Production efficiency

Product & volume flexibility

Cost & qualityOperations Management

Process


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Process

Job Shop

Batch Processing

Repeat Processing

Continuous Processing


P d t P M t i


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Product-Process Matrix

Process focus

projects, job

shop,(machine, print,

carpentry)

Repetitive

(autos, motorcycles)

Product focus

(commercial baked

goods, steel, glass)

High Variety

One or few units per

run, high variety

(allows customization)

Changes in modules

Modest runs, standardized

modules

Changes in attributes(such as grade, quality,

size, thickness, etc.)

Long runs only

MassCustomization

(difficult to achieve,

but huge rewards)

Poor strategy

Low-Volume

(Intermittent)

Repetitive Process

(Modular)High-Volume

(Continuous)


Process Focused Strategy


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Process-Focused Strategy

Facilities are organized around specificactivities or processes

General purpose equipment and skilled

personnel

High degree of product flexibility

Typically high costs and low equipment

utilization

Product flows may vary considerablymaking planning and scheduling a

challengeOperations Management

Repetitive Focused Strategy


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Repetitive Focused Strategy

Facilities often organized by assemblylines

Characterized by modules

Parts & assemblies made previously

Modules combined for many output

options

Other names

Assembly line

E.g. auto-manufacturing, fast-food, pcs, house-

hold appliances, etcOperations Management

Product Focused Strategy


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Product-Focused Strategy

Facilities are organized by product High volume, low variety

Conversion or further processing of

undifferentiated materials such as petroleum,chemicals, or beer

Follows a predetermined sequence of steps, but

flow is continuous rather than discrete

highlystandardized

Other names

Line flow productionOperations Management

Mass Customization


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Mass Customization

Using technology and imagination to

rapidly mass-produce products that cater

to unique customer desires

Under mass customization the three

process models become so flexible that

distinctions between them blur, makingvariety and volume issues less significant


Process Strategies


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Process Strategies

Rapid throughputtechniques

Mass Customization

Modular techniques

Repetitive FocusModular designFlexible equipment

Product-focusedLow variety, high volume

High utilization (70% - 80%)Specialized equipment

Process-focusedHigh variety, low volume

Low utilization (5% - 20%)General purpose equipment

Effective schedulingtechniques



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Techniques for Improving ServiceP d i i C i d


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Productivity - Continued

Modules

Automation

Scheduling

Training

Modular selection of

service. Modular

production

Separating servicesthatlend themselves toautomation

Precise personnelscheduling

Clarifying the serviceoptions

Explaininghow to avoidOperations Management


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Facility Layout


What is Facility Layout


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What is Facility Layout

Location or arrangement of everything

within & around buildings

Determines long-run efficiency of

operations

Helps achieve a strategy that supportsdifferentiation, low cost or quick

response

OM - location and layout strategy

Basic Objective


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Basic Objective

product or service quality enhancement

To use workers and space efficiently.

To avoid bottlenecks.

To minimize material handling costs.

To eliminate unnecessary movements ofworkers or materials.

To minimize production time or customerservice time.

To design for safety


Types of Layout


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Types of Layout

Product Layout

Process Layout

Fixed Position Layout

Hybrid Layout


Repetitive Processing:

P d t L t


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Product layout Layout that uses standardized processing

operations to achieve smooth, rapid, high-

volume flow

Product Layouts

Used for Repetitive Processing

Repetitive or Continuous

Raw materials

or customer

Finished

item

Station

2

Station

3

Station

4

Material

and/or

labor

Material

and/or

labor

Material

and/or

labor

Material

and/or

labor

Station

1

Student Slides 6-76

Non-repetitive Processing:

P L t


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Process layouts Layouts that can handle varied processing

requirements

Process Layouts

Used for Intermittent processing

Job Shop or Batch

Dept. A

Dept. B Dept. D

Dept. C

Dept. F

Dept. E

Student Slides 6-77

Fixed Position Layouts


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Fixed Position layout Layout in which the product or project remains

stationary, and workers, materials, andequipment are moved as needed

Fixed Position Layouts

Student Slides 6-78

Combination Layouts


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y


Some operational environments use a combination ofthe three basic layout types: Hospitals

Supermarket

Shipyards Some organizations are moving away from process

layouts in an effort to capture the benefits of productlayouts

Cellular manufacturing Flexible manufacturing systems

Line Balancing


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g

Line balancing The process of assigning tasks to workstations in such a

way that the workstations have approximately equal timerequirements

Goal: Obtain task grouping that represent approximately

equal time requirements since this minimizes idletime along the line and results in a high utilization ofequipment and labor

Why is line balancing important?

1. It allows us to use labor and equipment moreefficiently.

2. To avoid fairness issues that arise when one

workstation must work harder than another.Operations Management 80

Designing Process Layouts


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g g y


The main issue in designing processlayouts concerns the relative placement ofthe departments

Measuring effectiveness A major objective in designing process layouts

is to minimize transportation cost, distance, ortime

Information Requirements


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q

In designing process layouts, the followinginformation is required:1. A list of departments to be arranged and their dimensions

2. A projection of future work flows between the pairs of work

centers3. The distance between locations and the cost per unit of

distance to move loads between them

4. The amount of money to be invested in the layout

5. A list of any special considerations

6. The location of key utilities, access and exit points, etc.


capacity and process selection

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