7 Process Strategy Capacity Planning

Topic VII: Process
Strategy and
Capacity Planning
PowerPoint presentation to accompany

Heizer, Render, Munson
Operations Management, Twelfth Edition
Principles of Operations Management, Tenth Edition
PowerPoint slides by Jeff Heyl
Copyright © 2017 Pearson Education, Inc. 7-1

Outline
► Four Process Strategies
► Process Redesign
► Capacity
► Demand and Capacity Management
► Bottleneck Analysis and Capacity
Analysis
► Break-Even Analysis

Process Strategy
The objective is to create a process

to produce offerings that meet
customer requirements within cost
and other managerial constraints
Pencil Making Process

https://youtu.be/WgiOvepQ6B0

Process Strategies
► How to produce a product or provide a
service that
► Meets or exceeds customer requirements
► Meets cost and managerial goals
► Has long term effects on
► Efficiency and production flexibility
► Costs and quality

Process, Volume, and Variety
Figure 7.1 Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few units Process Focus Mass Customization
per run, projects, job shops (difficult to achieve, but
(allows (machine, print, huge rewards)
customization) hospitals, Dell Computer
restaurants)
Variety (flexibility)
Arnold Palmer
Hospital
Changes in
Modules
modest runs, Repetitive
standardized (autos, motorcycles,
modules home appliances)
Harley-Davidson
Changes in
Attributes (such as Poor Strategy
grade, quality, size, Product Focus
(Both fixed and (commercial baked goods,
thickness, etc.) variable costs
long runs only steel, glass, beer)
are high) Frito-Lay
Process Strategies
Four basic strategies
1. Process focus
2. Repetitive focus
3. Product focus
4. Mass customization
Within these basic strategies there are

many ways they may be implemented
1. Process Focus
► Facilities are organized around specific
activities or processes
► General purpose equipment and skilled
personnel
► High degree of product flexibility
► Typically high costs and low equipment
utilization
► Product flows may vary considerably
making planning and scheduling a
challenge
Process Focus Many inputs
(surgeries, sick patients,
baby deliveries, emergencies)
(low-volume, high-variety,
Many departments and
intermittent processes) many routings
Arnold Palmer Hospital
Figure 7.2(a) Many different outputs

(uniquely treated patients)
2. Repetitive Focus
► Facilities often organized as assembly
lines
► Characterized by modules with parts and
assemblies made previously
► Modules may be combined for many
output options
► Less flexibility than process-focused
facilities but more efficient

Raw materials and
Repetitive module inputs
(multiple engine models,
Focus wheel modules)
Few
modules
(modular)
Harley Davidson
Figure 7.2(b) Modules combined for many

Output options
(many combinations of motorcycles)
Copyright © 2017 Pearson Education, Inc. 7 - 10
3. Product Focus
► Facilities are organized by product
► High volume but low variety of
products
► Long, continuous production runs
enable efficient processes
► Typically high fixed cost but low
variable cost
► Generally less skilled labor

Product Focus Few inputs
(corn, potatoes, water,
seasoning)
(high-volume, low-variety,
continuous process)
Frito-Lay
Output variations in size, shape,

Figure 7.2(c) and packaging
(3-oz, 5-oz, 24-oz package
labeled for each material)
4. Mass Customization
► The rapid, low-cost production of
goods and service to satisfy
increasingly unique customer desires
► Combines the
flexibility of a
process focus
with the efficiency
of a product focus

Many parts and
Mass component inputs
(chips, hard drives,
Customization software, cases)
Many modules
(high-volume, high-variety)
Dell Computer
Figure 7.2(b) Many output versions

(custom PCs and notebooks)
Mass Customization
(Key Success Factors)
► Imaginative product design
► Flexible process design
► Tightly controlled inventory
management
► Tight schedules
► Responsive partners in the supply-
chain

Comparison of Processes
TABLE 7.2 Comparison of the Characteristics of Four Types of Processes
PROCESS FOCUS MASS

(LOW-VOLUME, PRODUCT FOCUS CUSTOMIZATION
HIGH-VARIETY REPETITIVE FOCUS (HIGH-VOLUME, (HIGH-VOLUME, HIGH-
ARNOLD PALMER (MODULAR LOW-VARIETY VARIETY
HOSPITAL) HARLEY-DAVIDSON) FRITO-LAY) DELL COMPUTER)
1. Small quantity 1. Long runs, a 1. Large quantity 1. Large quantity

and large standardized and small and large variety
variety of product from variety of of products
products modules products
2. Broadly skilled 2. Moderately 2. Less broadly 2. Flexible operators

operators trained skilled
employees operators
3. Instructions for 3. Few changes in 3. Standardized 3. Custom orders

each job the instructions job instructions requiring many
job instructions
4. High inventory 4. Low inventory 4. Low inventory 4. Low inventory

relative to the
value of the
product
Comparison of Processes
TABLE 7.2 Comparison of the Characteristics of Four Types of Processes
PROCESS FOCUS MASS

(LOW-VOLUME, PRODUCT FOCUS CUSTOMIZATION
HIGH-VARIETY REPETITIVE FOCUS (HIGH-VOLUME, (HIGH-VOLUME, HIGH-
ARNOLD PALMER (MODULAR LOW-VARIETY VARIETY
HOSPITAL) HARLEY-DAVIDSON) FRITO-LAY) DELL COMPUTER)
5. Finished goods 5. Finished goods 5. Finished goods 5. Finished goods

are made to are made to are made to a are build-to-order
order and not frequent forecast and (BTO)
stored forecasts stored
6. Scheduling is 6. Scheduling is 6. Scheduling is 6. Sophisticated

complex routine routine scheduling
accommodates
custom orders
7. Fixed costs are 7. Fixed costs are 7. Fixed costs are 7. Fixed costs tend
low and variable dependent on high and to be high and
costs high flexibility of the variable costs variable costs low
facility low

http://maaw.info/ArticleSummaries/ArtSumHammer1990.htm
Process Redesign
► The fundamental rethinking 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
► Requires reexamination of the basic process
and its objectives
► Focuses on activities that cross functional
lines
► Any process is a candidate for redesign
Capacity
► The throughput, or the number of units
a facility can hold, receive, store, or
produce in a period of time
► Determines
fixed costs
► Determines if
demand will
be satisfied
► Three time horizons
Planning Over a Time Horizon
Figure S7.1
Options for Adjusting Capacity
Time Horizon
Design new production processes
Long-range
planning Add (or sell existing)
long-lead-time equipment *
Acquire or sell facilities
Acquire competitors
Intermediate-
range Subcontract Build or use inventory
planning Add or sell equipment More or improved training
(aggregate Add or reduce shifts Add or reduce personnel
planning)
Schedule jobs
*
Short-range Schedule personnel
planning Allocate machinery
(scheduling)
Modify capacity Use capacity
* Difficult to adjust capacity as limited options exist
Design and Effective Capacity
► Design capacity is the maximum
theoretical output of a system
► Normally expressed as a rate
► Effective capacity is the capacity a firm
expects to achieve given current
operating constraints
► Often lower than design capacity

TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Design capacity Ideal conditions exist Machines at Frito-Lay are designed to
during the time that produce 1,000 bags of chips/hr., and the
the system is plant operates 16 hrs./day.
available Design Capacity = 1,000 bags/hr. × 16 hrs.
= 16,000 bags/day

Effective capacity Design capacity Frito-Lay loses 3 hours of output per day
minus lost output (= 0.5 hrs./day on preventive maintenance,
because of planned 1 hr./day on employee breaks, and 1.5
resource hrs./day setting up machines for different
unavailability (e.g., products).
preventive Effective Capacity = 16,000 bags/day
maintenance, – (1,000 bags/hr.)
machine (3 hrs./day)
setups/changeovers, = 16,000 bags/day
changes in product – 3,000 bags/day
mix, scheduled = 13,000 bags/day
breaks)

Actual output Effective capacity On average, machines at Frito-Lay are not
minus lost output running 1 hr./day due to late parts and
during unplanned machine breakdowns.
resource idleness Actual Output = 13,000 bags/day
(e.g., absenteeism, – (1,000 bags/hr.)
machine breakdowns, (1 hr./day)
unavailable parts, = 13,000 bags/day
quality problems) – 1,000 bags/day
= 12,000 bags/day

Utilization and Efficiency
Utilization is the percent of design
capacity actually achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective

capacity actually achieved
Efficiency = Actual output/Effective capacity

Design
Bakery Example Capacity
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 shifts per day and 8hr/shift
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Bakery Example Utilization

Utilization = 148,000/201,600 = 73.4%

Bakery Example Efficiency

Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%

Managing Demand
► Demand exceeds capacity
► Curtail demand by raising prices, scheduling
longer lead times
► Long-term solution is to increase capacity
► Capacity exceeds demand
► Stimulate market
► Product changes
► Adjusting to seasonal demands
► Produce products with complementary
demand patterns

Complementary Demand
Figure S7.3
Patterns
Combining the
two demand
patterns reduces
the variation
4,000 –
Sales in units
Snowmobile
3,000 – motor sales
2,000 –
Jet ski
1,000 – engine
sales
JFMAMJJASONDJFMAMJJASONDJ
Time (months)

Tactics for Matching Capacity
to Demand
1. Making staffing changes
2. Adjusting equipment
► Purchasing additional machinery
► Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities

Service-Sector Demand
and Capacity Management
► Demand management
► Appointment, reservations, FCFS rule
► Capacity
management
► Full time,
temporary,
part-time
staff

Bottleneck Analysis
► Each work area can have its own unique
capacity
► Capacity analysis determines the throughput
capacity of workstations in a system
► A bottleneck is a limiting factor or constraint
► A bottleneck has the lowest effective capacity in a
system
► The time to produce a unit or a specified
batch size is the process time

Bottleneck Analysis
► The bottleneck time is the time of the
slowest workstation (the one that takes
the longest) in a production system
► The throughput time is the time it takes
a unit to go through production from start
to end, with no waiting Figure S7.4
A B C
2 min/unit 4 min/unit 3 min/unit

Capacity Analysis
► Two identical sandwich lines
► Lines have two workers and three operations
► All completed sandwiches are wrapped
First assembly line
Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Wrap/
Order
Deliver
30 sec/sandwich
Bread Fill Toaster 37.5 sec/sandwich
15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Second assembly line

Capacity Bread
15 sec
Fill
20 sec
Toaster
40 sec
Analysis
Order Wrap
30 sec
Bread Fill Toaster 37.5 sec
15 sec 20 sec 40 sec
► The two lines are identical, so parallel

processing can occur
► At 40 seconds, the toaster has the longest
processing time and is the bottleneck for
each line
► At 40 seconds for two sandwiches, the
bottleneck time of the combined lines = 20
seconds
► At 37.5 seconds, wrapping and delivery is
the bottleneck for the entire operation
Capacity Bread
15 sec
Fill
20 sec
Toaster
40 sec
Analysis
Order Wrap
30 sec
Bread Fill Toaster 37.5 sec
15 sec 20 sec 40 sec
► Capacity per hour is 3,600 seconds/37.5

seconds/sandwich = 96 sandwiches per
hour
► Throughput time is 30 + 15 + 20 + 40 + 37.5
= 142.5 seconds

Capacity Analysis
► Standard process for cleaning teeth
► Cleaning and examining X-rays can happen
simultaneously
Hygienist
cleaning
Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out
2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam
5 min/unit

Capacity Check
in
Takes
X-ray
Develops
X-ray
Hygienist
cleaning
24 min/unit
Dentist
Check
out
Analysis 2 min/unit 2 min/unit 4 min/unit X-ray

exam
5 min/unit
8 min/unit 6 min/unit
► All possible paths must be compared

► Bottleneck is the hygienist at 24 minutes
► Hourly capacity is 60/24 = 2.5 patients
► X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27
minutes
► Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46
minutes
► Longest path involves the hygienist cleaning
the teeth, patient should complete in 46
minutes
Break-Even Analysis
► Technique for evaluating process and
equipment alternatives
► Objective is to find the point in dollars
and units at which cost equals
revenue
► Requires estimation of fixed costs,
variable costs, and revenue

Break-Even Analysis
► Fixed costs are costs that continue even
if no units are produced
► Depreciation, taxes, debt, mortgage
payments
► Variable costs are costs that vary with
the volume of units produced
► Labor, materials, portion of utilities
► Contribution is the difference between
selling price and variable cost

Break-Even Analysis
► Revenue function begins at the origin
and proceeds upward to the right,
increasing by the selling price of each
unit
► Where the revenue function crosses
the total cost line is the break-even
point

Break-Even Analysis
– Total revenue line
900 –
800 – i d or
Break-even point rr Total cost line
t co
700 –
Total cost = Total revenue
rofi
P
Cost in dollars
600 –
500 –
Variable cost
400 –
300 –
oss or
200 – L rid
r
co
100 – Fixed cost
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
Break-Even Analysis
Assumptions
► Costs and revenue are linear
functions
► Generally not the case in the real
world
► We actually know these costs
► Very difficult to verify
► Time value of money is often
ignored
Break-Even Analysis
BEPx = break- x = number of units
even point in produced
units TR = total revenue =
BEP$ = break- Px
even point in F = fixed costs
dollars V = variable cost
P = price per per unit
unit point
Break-even (after all
occurs when TC = total costs = F
discounts) + Vx
TR = TC F
or BEPx =
P–V
Px = F + Vx

Break-Even Analysis
BEPx = break- x = number of units
even point in produced
units TR = total revenue =
BEP$ = break- Px
even point in F = fixed costs
dollars V = variable cost
P = price per per unit
unit P(after F Profit
all = TRTC = total costs = F
- TC
BEP$ = BEP = P
discounts)P – V
x
= Px +– Vx
(F + Vx)
F
= (P – V)/P = Px – F – Vx
= (P - V)x – F
F
= 1 – V/P
Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)

Break-Even Example
50,000 –
Revenue
40,000 –
Break-even
point Total
costs
Dollars
30,000 –
20,000 –
Fixed costs
10,000 –
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

Break-Even Example
Multiproduct Case
Break-even F
point in dollars = é ù
æ Vö
(BEP$) å êêç1- Pi ÷´ Wi úú ( )
ëè i ø û
where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
expressed as a decimal
i = each product
Multiproduct Example
Fixed costs = $3,000 per month
ANNUAL FORECASTED
ITEM SALES UNITS PRICE COST
Sandwich 9,000 $5.00 $3.00
Drink 9,000 1.50 .50
Baked potato 7,000 2.00 1.00
1 2 3 4 5 6 7 8 9
ANNUAL ANNUAL WEIGHTED
FORECASTED SELLING VARIABLE FORECASTED % OF SALES CONTRIBUTION
ITEM (i) SALES UNITS PRICE (Pi) COST (Vi) (Vi/Pi) 1 - (Vi/Pi) SALES $ (Wi) (COL 6 X COL 8)
9,000 $45,00
Sandwich $5.00 $3.00 .60 .40 0 .621 .248
Drinks 9,000 1.50 0.50 .33 .67 13,500 .186 .125
Baked 7,000
potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,50
0 1.000 .470
MultiproductBEP
Example
=
éæ
F
ö $ ù
Vi
Fixed costs = $3,000 per month å êç1- ÷´ Wi ú
ê ú
( )
ëè Pi ø û
ANNUAL FORECASTED
ITEM SALES UNITS PRICE x 12
$3,000 COST
Sandwich 9,000 = $5.00 = $76,596
$3.00
.47
Drink 9,000 1.50 .50
Baked potato 7,000 Daily $76,596
2.00 1.00
=
sales 312 days = $245.50
1 2 3 4 5 6 7 8 9
ANNUAL ANNUAL WEIGHTED
FORECASTED SELLING VARIABLE FORECASTED CONTRIBUTION
ITEM (i) SALES UNITS PRICE (P) COST (V) (V/P) 1 - (V/P) SALES $ % OF SALES (COL 5 X COL 7)
9,000 $45,00
Sandwich $5.00 $3.00 .60 .40 0 .621 .248
Drinks 9,000 1.50 0.50 .33 .67 13,500 .186 .125
Baked 7,000
potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,50
0 1.000 .470
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Topic VII: Process

PowerPoint presentation to accompany

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education, Inc. 7-1

Copyright © 2017 Pearson Education, Inc. 7-2

The objective is to create a process

Pencil Making Process

Copyright © 2017 Pearson Education, Inc. 7-3

Copyright © 2017 Pearson Education, Inc. 7-4

Within these basic strategies there are

Figure 7.2(a) Many different outputs

Copyright © 2017 Pearson Education, Inc. 7-9

Focus wheel modules)

Figure 7.2(b) Modules combined for many

Copyright © 2017 Pearson Education, Inc. 7 - 11

Output variations in size, shape,

Copyright © 2017 Pearson Education, Inc. 7 - 13

Customization software, cases)

Figure 7.2(b) Many output versions

Copyright © 2017 Pearson Education, Inc. 7 - 15

PROCESS FOCUS MASS

1. Small quantity 1. Long runs, a 1. Large quantity 1. Large quantity

2. Broadly skilled 2. Moderately 2. Less broadly 2. Flexible operators

3. Instructions for 3. Few changes in 3. Standardized 3. Custom orders

4. High inventory 4. Low inventory 4. Low inventory 4. Low inventory

PROCESS FOCUS MASS

5. Finished goods 5. Finished goods 5. Finished goods 5. Finished goods

6. Scheduling is 6. Scheduling is 6. Scheduling is 6. Sophisticated

Copyright © 2017 Pearson Education, Inc. 7 - 17

Copyright © 2017 Pearson Education, Inc. 7 - 21

Copyright © 2017 Pearson Education, Inc. 7 - 22

Copyright © 2017 Pearson Education, Inc. 7 - 23

Copyright © 2017 Pearson Education, Inc. 7 - 24

Efficiency is the percent of effective

Copyright © 2017 Pearson Education, Inc. 7 - 25

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Copyright © 2017 Pearson Education, Inc. 7 - 26

Actual production last week = 148,000 rolls

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Copyright © 2017 Pearson Education, Inc. 7 - 27

Actual production last week = 148,000 rolls

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

Copyright © 2017 Pearson Education, Inc. 7 - 28

Copyright © 2017 Pearson Education, Inc. 7 - 29

Copyright © 2017 Pearson Education, Inc. 7 - 30

Copyright © 2017 Pearson Education, Inc. 7 - 31

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2 min/unit 4 min/unit 3 min/unit

Copyright © 2017 Pearson Education, Inc. 7 - 34

Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Second assembly line

Copyright © 2017 Pearson Education, Inc. 7 - 35

► The two lines are identical, so parallel

► Capacity per hour is 3,600 seconds/37.5

Copyright © 2017 Pearson Education, Inc. 7 - 37

Takes Develops 24 min/unit Check

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

Copyright © 2017 Pearson Education, Inc. 7 - 38

Analysis 2 min/unit 2 min/unit 4 min/unit X-ray