Chapter Four

INFOLINK UNIVERSITY COLLEGE

HAWASSA CAMPUS

PROCESS SELECTION AND CAPCITY PLANNING

Dr. Sintayehu Assefa (Ph.D.)

Time allotted: 4hrs.

1
 PROCESS SELECTION AND CAPCITY
PLANNING
2

After completing this chapter, you should be able to:

OBJECTIVES

 Elucidate the process selection

 Discuss strategic capacity planning

LEARNING
Process selection

 Process: Is any part of an organization that takes inputs and

transforms them into outputs.

Types of processes
 All processes can be grouped into two broad categories:
intermittent operations and repetitive operations.

Intermittent Operations
 Intermittent operations are used to produce a variety of
products with different processing requirements in lower
volumes.
Conti…
4

 Think about a healthcare facility. Each patient, “the product,”

is routed to different departments as needed.

 One patient may need to get an X-ray, go to the lab for

blood work, and then go to the examining room. Another
patient may need to go to the examining room and then to
physical therapy.

 To be able to produce products with different processing

requirements, intermittent operations tend to be labor
intensive rather than capital intensive.
Example of an intermittent operation
5
Repetitive Operations
6

 Repetitive operations are used to produce one or a few

standardized products in high volume.

 Examples are a typical assembly line, cafeteria, or

automatic car wash.

 Resources are organized in a line flow to efficiently

accommodate production of the product.

 To efficiently produce a large volume of one type of

product, these operations tend to be capital intensive rather
than labor intensive.
Example of a repetitive operation
7
Conti…
8

 The most common differences between intermittent and

repetitive operations relate to two dimensions:

(1) The amount of product volume produced, and

(2) The degree of product standardization

Conti…
9

 Product volume can range from making a unique product

one at a time to producing a large number of products at the
same time.

 Product standardization refers to a lack of variety in a

particular product. Examples of standardized products are
white undershirts, calculators, and television sets.
Conti…
10
Types of processes
11

 Dividing processes into two fundamental categories of

operations is helpful in our understanding of their general
characteristics.

 To be more detailed, we can further divide each category

according to product volume and degree of product
standardization.

 Intermittent operations can be divided into project processes

and batch processes. Repetitive operations can be divided
into line processes and continuous processes.
Conti…
12

o Project processes are used to make one-of-a-kind products

exactly to customer specifications.

o These processes are used when there is high customization

and low product volume, because each product is different.

o Examples can be seen in construction, ship building, medical

procedures, and creation of artwork, custom tailoring, and
interior design.

o The artistic baker you hired to bake a wedding cake to your

specifications uses a project process.
Conti…
13

 Batch processes are used to produce small quantities of

products in groups or batches based on customer orders or
product specifications.

 They are also known as job shops. The volumes of each

product produced are still small, and there can still be a high
degree of customization.

 Examples can be seen in bakeries, education, and printing

shops. The classes you are taking at the university use a
batch process.
Conti…
14
Conti…
15

 Line processes are designed to produce a large volume of a

standardized product for mass production.

 They are also known as flow shops, flow lines, or assembly lines.

 With line processes the product that is produced is made in high

volume with little or no customization.

 Think of a typical assembly line that produces everything from

cars, computers, television sets, shoes, candy bars, even food
items.
Conti…
16

 Continuous processes operate continually to produce a very high

volume of a fully standardized product.

 Examples include oil refineries, water treatment plants, and

certain paint facilities. Continuous services include air
monitoring, supplying electricity to homes and businesses, and
the Internet.

 The products produced by continuous processes are usually in

continual rather than discrete units, such as liquid or gas. They
usually have a single input and a limited number of outputs.
Also, these facilities are usually highly capital intensive and
automated.
Conti…
17
Conti…
18
Other Types of Processes
19

 Make-to-order
 Only activated in response to an actual order

 Both work-in-process and finished goods inventory kept

to a minimum

 Make-to-stock
 Process activated to meet expected or forecast demand

 Customer orders are served from target stocking level

Process performance metrics
20
Conti…
21

 Example 1. Zehara Dry Cleaners has collected the following

data for its processing of dress shirts: It takes an average of
3.5 hours to dry clean and press a dress shirt, with value-
added time estimated at 110 minutes per shirt. Workers are
paid for a 7-hour workday and work 5.5 hours per day on
average, accounting for breaks and lunch; labor utilization
is 75 percent in the industry. The dry cleaner completes 25
shirts per day, with an industry standard of 28 shirts per
day for a comparable facility.

 Determine process velocity, labor utilization, and efficiency

for the company
Conti…
22

Solution
 Process velocity = Throughput time ÷ value added time

= 210 minutes/shirt ÷ 110 minutes/shirt

= 1.90
 Labor utilization = 5.5 hours/day ÷ 7 hours/day

= 0.786 or 78.6%
 Efficiency = 25 shirts/day ÷ 28 shirts/day

= 0.89 or 89%

 Process velocity shows room for process improvement, as

throughput time is almost twice that of value-added time.
Labor utilization is just above the industry standard, though
overall efficiency is below.
Strategic capacity planning
23

 Capacity can be defined as the maximum output rate that can be

achieved by a facility. (Or) Capacity is the upper limit or ceiling
on the load that an operating unit can handle.

 Planning for capacity in a company is usually performed at two

levels, each corresponding to either strategic or tactical decisions.

 The first level of capacity decisions is strategic and long-term in

nature. The second level of capacity decisions is more tactical in
nature, focusing on short-term issues that include planning of
workforce, inventories, and day-to-day use of machines.
Process of capacity planning
24

 Capacity planning is concerned with defining the long-term and

the short-term capacity needs of an organization and
determining how those needs will be satisfied.

 Capacity planning decisions are taken based upon the consumer

demand and this is merged with the human, material and
financial resources of the organization.
Importance of capacity decisions

 Impacts ability to meet future demands

 Affects operating costs
 Major determinant of initial costs
 Involves long-term commitment
 Affects competitiveness
 Affects ease of management
 Globalization adds complexity
 Impacts long range planning
Measuring Capacity
26

 The most common measures of capacity are:

 Design capacity is the maximum output rate that can be

achieved by a facility under ideal conditions. (Or),

 It is the maximum output rate or service capacity an operation,

process, or facility is designed for

 A company achieves this output rate by using many

temporary measures, such as overtime, overstaffing,
maximum use of equipment, and subcontracting.
Conti…
27

 Effective capacity is the maximum output rate that can be sustained

under normal conditions. (or) Design capacity minus allowances
such as personal time, maintenance, and scrap

 These conditions include realistic work schedules and breaks,

regular staff levels, scheduled machine maintenance, and none of
the temporary measures that are used to achieve design capacity.

 Note that effective capacity is usually lower than design capacity.

Measures of capacity
28
Measuring Effectiveness of Capacity
29

 Capacity utilization simply tells us how much of our capacity we

are actually using.

 Example 1: Given the information below, compute the efficiency

and the utilization of the vehicle repair.

Department: Design capacity = 50 trucks per day

Effective capacity = 40 trucks per day
Actual output = 36 trucks per day
Conti…
30

Solution

Example 2: The design capacity for engine repair in our

company is 80 trucks per day. The effective capacity is 40
engines per day and the actual output is 36 engines per day.

Q1. Calculate the utilization and efficiency of the operation. If

the efficiency for next month is expected to be 82%,
Q2. What is the expected output?
 Conti…
31

Solution

Utilization = Actual output ÷ Design capacity = 36/80 = 45%

Efficiency = Actual output ÷ Effective capacity = 36/40 = 90%

Expected output = (Effective capacity) (Efficiency)

= (40)(0.82)
= 32.8 engines per day
 Determinants of Effective Capacity
32
 Steps for Capacity Planning Process
33

 Estimate future capacity requirements

 Evaluate existing capacity

 Identify alternatives

 Conduct financial analysis

 Assess key qualitative issues

 Select one alternative

 Implement alternative chosen

 Monitor results

 Capacity planning can be difficult at times due to the complex

influence of market forces and technology.
Forecasting Capacity Requirements
34

 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
Calculating Processing Requirements
Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400

5,800

If annual capacity is 2000 hours, then we need three machines to handle the
required volume: 5,800 hours/2,000 hours = 2.90 machines

5-35
 Developing Capacity Strategies
36

 There are a number of ways to enhance development of

capacity strategies:

 Design flexibility into systems

 Take stage of life cycle into account

 Take a “big picture” approach to capacity changes

 Prepare to deal with capacity “chunks”

 Attempt to smooth out capacity requirements

 Identify the optimal operating level

 Choose a strategy if expansion is involved

 Evaluating Alternatives
37

 Cost-volume analysis
 Break-even point
 Financial analysis
 Cash flow
 Present value
 Decision theory
 Waiting-line 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. It is particularly useful as a
tool for comparing capacity alternatives.
 Assumptions of Cost-Volume
Analysis
 Cost–volume analysis can be a valuable tool for comparing
capacity alternatives if certain assumptions are satisfied:

 One product is involved

 Everything produced can be sold
 Variable cost per unit is the same regardless of volume
 Fixed costs do not change with volume
 Revenue per unit constant with volume
 Revenue per unit exceeds variable cost per unit

5-38
 Cost-Volume Analysis
39

 Example: The owner of Old-Fashioned Berry Pies, is

contemplating adding a new line of pies, which will require
leasing new equipment for a monthly payment of $6,000.
Variable costs would be $2 per pie, and pies would retail for $7
each.

 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?
 How many pies must be sold to realize a profit of $4,000?
 If 2,000 can be sold, and a profit target is $5,000, what price
should be charged per pie?
 Conti…
40
 Cost-Volume Analysis
41
 Conti…
42

 b. Comparing the projected range of demand to the two ranges

for which a break-even point occurs, you can see that the break-
even point is 500, which is in the range 301 to 600. This means
that even if demand is at the low end of the range, it would be
above the break-even point and thus yield a profit. That is not
true of range 601 to 900. At the top end of projected demand,
the volume would still be less than the break-even point for that
range, so there would be no profit. Hence, the manager should
choose two machines.
43