Process Selection and Capacity

Planning

Process Selection Make or buy Decision Type of processing Level of Automation

Make or BuyConsiderations include:1. Available capacity2. Expertise3. Quality considerations4. Nature of demand – high and steady vs.

low and seasonal5. Cost

Match process and productProduct Variety

High Moderate Low VeryLow

Equipment Flexibility

High Moderate Low Very low

Low Volume

Moderate Volume

High Volume

Very High Volume

Job shop

Continuous Flow

Repetitive

Batch

Automation The substitution of machinery for human

labor low variability – as opposed to human

labor Elimination of boring tasks But it can be very costly Employment issues -

ex; PNB ATM

Computer Aided Manufacturing

– use of computers in process control, replacing human functions with machine

functions

Levels of Automation

Numerically Controlled Machines – machines that perform operations by following mathematical processing instructions

Robotics

Robot??? Mechanical Arm Power supply Controller

Flexible manufacturing system – group of machines designed to handle

intermittent processing requirements and produce a variety of similar products Re-programmable controllers Can handle intermittent requirements Flexibility with lower capital requirement as

opposed to “hard automation” Can handle quick changeover time But only applicable to family of similar parts

Automation (FMS)

Computer Integrated Manufacturing System of linking a broad range of

manufacturing activities, through an integrating computer system Can link operations of other FMS towards one

synchronized whole Integrates information from other parts of the

organization to manufacturing

Final Note…

Trade off exist with decisions concerning automation and companyCost structure.

Automation may not be needed or called for by the situation. Sometimes, Flexibility itself is unnecessary, especially for mature industries

Capacity Upper limit or ceiling on the load that an

operating unit can handle Inputs or outputs

input: 45 pounds of flour per hour output: 8 castings per hour

no “one method” of defining capacity

Try this… Hospital Theater School Memorial park Bank Water refilling station Bakery Barber shop Restaurant

Considerations??? Ability to meet future demand Capacity and operating costs Initial cost involved

CAPACITY vs

DEMAND PROJECTIONS

Defining and Measuring Capacity3 useful definitions:1. Design capacity – maximum output that

can be achieved2. Effective capacity – maximum possible

output given product mix, scheduling difficulties, machine factors and so on

3. Actual output – rate of output actually achieved. Cannot exceed effective capacity

Efficiency = Actual outputEffective Capacity

Utilization = Actual output Design 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.

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:

VCR

FCQ

VCR

FCPQ

FCVCRQP

BEP

)(

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) 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 $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 Total Annual FCCorresponding range of output

1 $9,600 0 to 300

2 15,000 301 to 600

3 20,000 601 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?

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:

where)1(

or )1(

n

n

i

FVPV

iPVFV

FV= Future value of the cash flow ‘n’ periods from today.i = interest rate per periodPV= 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)

Ni

F

i

F

i

F

i

FPV

N

)1(......

)1(

)1(

)1( 2

210

10

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 it’s above 0)

Example (i=10%)Cash Flows

YEAR Alternative A Alternative B0 -20000 -300001 10000 150002 10000 150003 10000 15000

Example Continued

8.7302

)1.01(

15000

)1.01(

15000

)1.01(

15000 30000

5.4868

)1.01(

10000

)1.01(

10000

)1.01(

10000 20000

32

32

1

1

B

A

NPV

NPV

CHOOSE B

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