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Capacity planning
Learning Objectives
Define:
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
--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)
Advantages
Greater product flexibility More general purpose equipment Lower initial capital investment
Disadvantages
More highly trained personnel
Assembly line
Production line
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)
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.
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 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
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:
Effective capacity:
Capacity Utilization
actual output rate 100% Utilizatio ndesign Design Cap acity Utilizatio neffective Efficiency actual output rate 100% Effective Capacity
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)
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
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)
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?
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.
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
Investments with the same net present values may have different cash flows
We assume that payments are always made at the end of the period which is not always the case