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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