Chapter 5 PROCESS SELECTION AND CAPACITY PLANNING Process selection refers to the way an organization chooses to produce its

good or provide its service. Essentially it involves choice of technology and related issues, and it has major implications for capacity planning, layout of facilities, equipment, and design of work systems. Make or Buy The very first step in process planning is to consider whether to make or buy some or all of a product or to subcontract some or all of a service. A number of factors are usually considered: 1. Availability capacity. 2. Expertise 3. Quality considerations 4. The nature of demand 5. Cost Types of Processing 1. Continuous processing systems produce large volumes of one highly standardized item. 2. Repetitive/assembly operations can be thought of as semicontinuous because of they tend to involve long runs of one or few similar items. 3. Batch processing is sometimes referred to as an intermittent processing system because many jobs are performed with frequent shifting from one job to another. 4. Job shops are also considered as intermittent processing systems because small quantities are produced. 5. Projects are a special case a type of processing that is employed to handle a nonroutine job encompassing a complex set of activities. Continuous processing. Highly specialized system producing large volumes of one or a few standardized items. Industries that use continuous processing are sometimes referred to as process industries. Products of process industries include plastic, chemicals, petroleum, grain, and steel. Semicontinuous processing systems produce output that allows for some variety; products are highly similar but not identical. Examples include automobiles, televisions, computers, calculators, cameras, and video equipment. These products are produced in discrete units. This form of processing is often referred to as repetitive manufacturing. Intermittent processing. System that produces lower volumes of items or services with a greater variety of processing requirements. One form of intermittent processing occurs when batches, or lots, of similar items are processed in the same manner. Another form of intermittent processing is done by a job shop, which is designed to handle a greater variety of job requirements than batch processing. Projects. Complex jobs consisteing of unique, nonrepetitive sets of activities with limited life spans. Match the Process and the Project A key concept in process selection is the need to match product requirements with process capabilities. The difference between success and failure in production can sometimes be traced to choice of process. Products range from highly customized to highly standardized. Generally, volume requirements tend to increase as standardization increases; customized products tend to be low volume, and standardized products tend to be high volume. These factors should be considered in determining which process to use.

Another consideration in that products and services often go through life cycles that begins with low volume but which increase as products or services become better known. Automation. The substitution of machinery for human labor. Advantage: It has low variability; it is difficult for a human to perform a task in exactly the same way, in the same amount of time, and on a repetitive basis. Disadvantage: Technology is expensive; usually it requires high volumes of output to offset high costs. Computer-aided manufacturing. The use of computers in process control, replacing human functions with machine functions. Advantages: Reducing labor, handling dangerous, dirty or boring tasks; and yielding high, consistent quality. Disadvantage: Very expensive. Numerically controlled machines. Machines that performs operations by following mathematical processing instructions. Individual machines may have their own computer; this is referred to as computerized numerical control (CNC). Or one computer may control a number of N/C machines, which is referred to as direct numerical control (DNC). Robot. A machine consisting of a mechanical arm, a power supply, and a controller. Robots move in one of two ways. Point-to-point robots move to predetermined points and perform a specified operation: they then move on to the next point and perform another operation. Continuous-path robots follow a continuous (moving) path wile performing an operation. Robots can be powered pneumatically (air-driven), hydraulically (fluids under pressure), or electronically. Flexible Manufacturing System (FMS). A group of machines designed to handle intermittent processing requirements and produce a variety of similar products. Flexible manufacturing systems offer reduced labor costs and more consistent quality compared with more traditional manufacturing methods, lower capital investment and higher flexibility than hard automation, and relatively quick changeover time. Flexible manufacturing systems appeal to managers, who hope to achieve both the flexibility of job shop processing and the productivity of repetitive processing systems. A FMS also has certain limitations. One is that this type of system can handle a relatively narrow range of part variety, so it must be used for a family of similar parts, which all require similar machining. Also, a FMS requires longer planning and development times than more conventional processing equipment because of its increased complexity and cost. Furthermore, companies sometimes prefer a gradual approach to automation, and FMS represents a sizable chunk of technology. Computer-integrated manufacturing (CIM). A system for linking a broad range of manufacturing activities through an integrating computer system. The overall of using CIM is to link various parts of an organization to achieve rapid response to customer orders and/or product changes, to allow rapid production and to reduce indirect labor costs. OPERATIONS STRATEGY Process selection often requires engineering expertise. Many US managers charged with selecting a process have a little technical knowledge; their education and experience lie in marketing, finance, and the like. In contrast, many Japanese managers faced with the same decisions have engineering backgrounds. Consequently, Western firms tend to delegate technical decisions to engineers. Engineering white elephants are not uncommon, and neither are systems based on narrow viewpoints of problems and solutions. In the long run, the solution may be to hire and promote managers who have both managerial and technical skills and expertise. In the short run, managers must work with technical experts, asking questions and increasing their understanding of the benefits and limitations of sophisticated processing

equipment and technology, and ultimately make decisions themselves. Thus, there is a real need for management of technology. A key consequence of the increased use of automation in manufacturing is the impact on cost structures in organizations. The proportion of total costs represented by fixed costs is becoming larger, and the proportion of variable costs is becoming smaller. This means that volume of output has a decreasing effect on total cost, a situation that can be particularly burdensome during periods of slow demand. Moreover, automation creates additional requirements for the maintenance and repair of highly specialized equipment. Managers must proceed cautiously with decisions to automate, carefully weighing the benefits and risks before making what are usually long-term commitments. Flexible systems are chosen for either two reasons: demands are varied, or uncertainty exists about demand. The second reason can be overcome through improved forecasting. Capacity. The upper limit or ceiling on the load that an operating unit can handle. The operating unit might be a plant, department, machine, store, or worker. The load can be specified in terms in terms of either inputs or outputs. The capacity of an operating unit is an important piece of information for planning purposes: It enables managers to quantify production capability in terms of inputs or outputs, and thereby make other decisions or plans related to those quantities. The basic questions in capacity planning of any sort are the following: 1. What kind of capacity is needed? 2. How much is needed? 3. When is it needed? Importance of Capacity Decisions 1. The importance of capacity decisions related top their potential impact on the ability of the organization to meet future demands for products and service; capacity essentially limits the rate of output possible. 2. The importance of capacity stems from the relationship between capacity and operating costs. 3. The importance of capacity decisions also lies in the initial cost involved, of which capacity s usually a major determinant. 4. The importance of capacity decisions stems from the often require long-term commitment of resources and the fact line, once they are implemented, it may be difficult or impossible to modify those decisions without incurring major costs. Defining and Measuring Capacity In selecting a measure capacity, it is important to choose one that does not require updating. The preferred alternative in such cases is to use a measure of capacity that refers to availability of inputs. It can be refined into three useful definitions of capacity: 1. Design capacity. The maximum output that can possibly be attained. 2. Effective capacity. The maximum possible output given a product mix, scheduling difficulties, machines maintenance, quality factors, and so on. 3. Actual output. The rate of output actually achieved. These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. Efficiency is the ratio of actual to effective capacity. Utilization is the ratio of actual output to design capacity.

Efficiency = Actual output / Effective capacity Utilization = Actual output / Design capacity Determinants of Effective Capacity 1. Facilities. The design of facilities, including size and provision for expansion, is very important. Locational factors, such as transportation costs, distance to market, labor supply, energy sources, and room for expansion, are also important. 2. Product/Service factors. The more uniform the output, the more opportunities there are for standardization of methods and materials, which leads to greater capacity. 3. Process factors. A more subtle determinant is the influence of output quality. 4. Human factors. The tasks that make up a job, the variety of activities involved, and the training, skill and experience required to perform a job all have an impact on the potential and actual output. 5. Operation factors. Inventory stocking decisions, late deliveries, acceptability of purchased materials and parts, and quality inspection and control procedures also can have an impact on effective capacity. 6. External factors. Product standards, especially minimum quality and performance standards can restrict managements options for increasing and using capacity. Determining Capacity Requirements Capacity planning decisions involve both long-term and short-term considerations. Long-term considerations relate to overall level of capacity, such as facility size; short-term considerations relate to probable variations in capacity requirements created by such things as seasonal, random, and irregular fluctuations in demand. Long-term capacity needs by forecasting demand over a time horizon and then converting those forecasts into capacity requirements. When trends are identified, the fundamental issues are (1) how long the trend might persist, since few things last forever, and (2) the slope of the trend. If cycles are identified, interest focuses on (1) the approximate length of the cycles, since cycles are rarely uniform in duration, and (2) the amplitude of the cycles. Short-term capacity needs are less concerned with cycles or trends than with seasonal variations and other variations from average. Irregular variations are perhaps the most troublesome: They are virtually impossible to predict. They are created by such diverse forces as major equipment breakdowns, freak storms that disrupt normal routines, foreign political turmoil that causes oil shortages, discovery of health hazards, and so on. Developing Capacity Alternatives 1. Design flexibility into systems 2. Take a big picture approach to capacity changes 3. Prepare to deal with capacity chunks. 4. Attempt to smooth out capacity requirements. 5. Identify the optimal operating level. Evaluating Alternatives. A number of techniques are useful for evaluating capacity alternatives from an economic standpoint. 1. Calculating Processing Requirements. When evaluating capacity alternatives, a necessary piece of information is the capacity requirements of products that will be processed with a given alternative. To get this information, one must have reasonably accurate demand forecasts for each product, and know the standard processing time per unit for each product on each alternative machine, the number of work days per year, and the number of shifts that will be used. 2. Cost-Volume Analysis. Cost-volume analysis focuses on relationships between cost, revenue, and volume of output. The purpose of cost-volume analysis is to estimate the

income of an organization under different operating conditions. Fixed costs tend to remain constant regardless of volume of output. Examples include rental costs, property taxes, equipment costs, heating and cooling expenses, and certain administrative costs. Variable costs vary directly with volume of output. The major components of variable costs are generally materials and labor of costs. Total costs associated with a given volume of output is equal to the sum of the fixed cost and the variable cost per unit times volume: TC = FC + VC x Q TR = R x Q P = TR TC P = R x Q (FC + VC x Q) Volume (SP + FC) / (R VC) Break-even point. The volume of output at which total costs and total revenue are equal. QBEP = FC / (R VC) Where 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 P Profit SP Specified profit The assumptions of cost-volume analysis are: a. One product is involved b. Everything produced can be sold c. The variable cost per unit is same regardless of the volume d. Fixed costs do not change with volume changes, or they are step changes e. The revenue per unit is the same regardless of volume An important benefit of cost-volume considerations is the conceptual framework it provides for integrating cost, revenue and profit estimates into capacity decisions. 3. Financial Analysis. A problem that is universally encountered by managers is how to allocate scarce funds. A common approach is to use financial analysis to rank investment proposals. Cash flow. 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 three most commonly used methods of financial analysis: Payback. A crude but widely used method that 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 initial cost, expected annual cash floes, and estimated future salvage value of an investment proposal in an equivalent interest rate. Decision Theory. A helpful tool for financial comparison of alternatives under conditions of risk or uncertainty.

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Waiting Line Analysis. Analysis of waiting lines is often useful for designing service systems. Waiting lines have a tendency to form in a wide variety of service systems.