Process Selection and Capacity Planning
Process Selection
Make or buy Decision Type of processing Level of Automation
Make or Buy
Considerations include: 1. Available capacity 2. Expertise 3. Quality considerations 4. Nature of demand high and steady vs. low and seasonal 5. Cost
Match process and product
Product Variety Equipment Flexibility Low Volume Moderate Volume High Moderate Low Very Low Very low High Moderate Low
Job shop Batch Repetitive Continuous Flow
High Volume
Very High Volume
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 company Cost 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 Capacity
3 useful definitions: 1. Design capacity maximum output that can be achieved 2. 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 output Effective 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:
P Q( R VC) FC P FC FC Q QBEP 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) 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 FC Corresponding range of output 1 2 3 $9,600 15,000 20,000 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?
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:
FV PV (1 i ) n or FV PV n where (1 i )
FV= Future value of the cash flow n periods from today. i = interest rate per period PV= 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)
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.
PV Analysis for Multiple Investments
Calculate the Net Present Value (NPV) for each alternative Choose the one with highest NPV (if its above 0)
Example (i=10%)
YEAR 0 1 2 3 Cash Flows Alternative A -20000 10000 10000 10000 Alternative B -30000 15000 15000 15000
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
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
