CHAPTER 5

PROCESS SELECTION
& CAPACITY
PLANNING
6-2 Process Selection and Facility Layout

Introduction

 Process selection
 Deciding on the way production of goods or
services will be organized
 Major implications
 Capacity planning
 Layout of facilities

 Equipment

 Design of work systems

6-3 Process Selection and Facility Layout

Process Selection and System Design

Figure 5.1

Facilities and
Forecasting Capacity Equipment
Planning

Product and Layout

Service Design

Process
Technological Selection Work
Change Design
6-4 Process Selection and Facility Layout

Process Strategy
How an organization approaches process
selection is determined by the organization’s
Process Strategy
•Key aspects of process strategy
-Make or Buy decisions
-Capital intensive – equipment/labor
-Process flexibility
-Adjust to changes
– Design
– Volume
– technology
 6-5 Process Selection and Facility Layout

Make or Buy decision

 A very first step in process planning is to

consider weather to make or buy some or all of
a product or to subcontract some or all of a
service.
 In make or buy decision, a number of factors
are usually considered:
Available capacity
Expertise
Quality consideration
The nature of demand
Cost
6-6 Process Selection and Facility Layout

Process Selection
 If the organization decides to perform some or all of the processing, the
issue of process selection becomes important:

 Variety
 How much
 Flexibility
 What degree
Batch
 Volume
 Expected output

Job Shop Repetitive

Continuous
6-7 Process Selection and Facility Layout

Process Types

 Job shop
 Small scale
 Batch
 Moderate volume
 Repetitive/assembly line
 High volumes of standardized goods or services
 Continuous
 Very high volumes of non-discrete goods
6-8 Process Selection and Facility Layout
Intermittent operations: Processes used to produce a variety of products
with different processing requirements in lower volumes

Designing a custom-made
cake is an example of an
intermittent operation

An assembly line is an
example of a repetitive
operation.
6-9 Process Selection and Facility Layout

Figure 5.2 Product – Process Matrix

Process Type
Job Shop Appliance repair Not
Emergency room feasible
Batch Commercial
bakery
Classroom
Lecture
Repetitive Automotive
assembly
Automatic
carwash
Continuous Not Oil refinery
(flow) feasible Water purification

Dimension
Job variety Very High Moderate Low Very low
Process Very High Moderate Low Very low
flexibility
Unit cost Very High Moderate Low Very low
Volume of Very Low Low High Very high
output
6-10 Process Selection and Facility Layout
6-11 Process Selection and Facility Layout

INDUSRIAL ROBOT
6-12 Process Selection and Facility Layout

Process choice affects numerous

activities/functions
6-13 Process Selection and Facility Layout

Automation

 Automation: Machinery that has sensing and

control devices that enables it to operate
 Fixed automation
 Programmable automation
 Capacity Planning
• Capacity is the upper limit or ceiling
on the load that an operating unit can
handle.
• The basic questions in capacity
handling are:
– What kind of capacity is needed?
– How much is needed?
– When is it needed?
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
 Capacity
• Design capacity
– maximum obtainable output
• Effective capacity
– Maximum capacity given product mix,
scheduling difficulties, and other doses of
reality.
• Actual output
– rate of output actually achieved--cannot
exceed effective capacity.
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day = 72%

Design capacity 50 units/day

Determinants of Effective Capacity
• Facilities
• Products or services
• Processes
• Human considerations
• Operations
• External forces
Some Possible Growth Patterns
Figure 5-1
Volume

Volume
Growth Decline

0 Time 0 Time

Cyclical Stable

Volume
Volume

0 0
Time Time
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 operating level
 Evaluating Alternatives
Figure 5-3
Production units have an optimal rate of output for
minimal cost.
Average cost per unit

Minimum cost

0 Rate of output
 Evaluating Alternatives
Figure 5-4
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate
 Planning Service Capacity
• Need to be near customers
– Capacity and location are closely tied
• Inability to store services
– Capacity must me matched with timing of
demand
• Degree of volatility of demand
– Peak demand periods
Calculating Processing Requirements
Standard
Standard
Annual
Annual processing
processingtime
time Processing
Processingtime
time
Product
Product Demand
Demand per
perunit
unit(hr.)
(hr.) needed
needed(hr.)
(hr.)

#1
#1 400
400 5.0
5.0 2,000
2,000

#2
#2 300
300 8.0
8.0 2,400
2,400

#3
#3 700
700 2.0
2.0 1,400
1,400
5,800
5,800
 Cost-Volume Relationships
Figure 5-5a

F C
+
Amount ($)

VC C)
=
st t (V
s
co co
t al l e
o i a b
T ar
l v
t a
To
Fixed cost (FC)

0
Q (volume in units)
 Cost-Volume Relationships
Figure 5-5b

ue
en
Amount ($)

rev
tal
To

0
Q (volume in units)
 Cost-Volume Relationships
Figure 5-5c

u e
e n fi t
Amount ($)

ev ro
r P
al t
t o s
To t a l c
To

0 BEP units
Q (volume in units)
Break-Even Problem with Step Fixed Costs
Figure 5-6a

= TC
V C
+
FC
= TC
V C
+
FC 3 machines
T C
C =
V
FC
+ 2 machines

1 machine
Quantity
Step fixed costs and variable costs.
 Break-Even Problem with Step Fixed Costs
Figure 5-6b

$
BE
P 3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
Assumptions of Cost-Volume Analysis
• 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
Example: A manager has the option of purchasing one, two or three
machines. Fixed costs and potential volumes are as follows:
  Number of Total annual Corresponding Range
Machine Fixed Costs of Output

1. $ 9,600 0 to 300
2. 15,000 301 to 600
3. 20,000 601 to 900

Variable cost is $ 10 percent, and revenue is $40 per unit.

a) Determine the break-even point for each range.
b) If projected annual demand is between 580 and 660 units, how many
machines should the manager purchase?
Solutions
FC
a) Compute the break-even point for each range using the formula Q BEP  solution
R  VC

$9,600
For one machine QBEP   320 units [not in range]
$40 / unit  $10 / unit

$15,600
For two machines QBEP   500 units
$40 / unit  $10 / unit
$20,000
For three machines QBEP  666.67 units.
$40 / unit  $10 / unit
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 range301
to 600. This means that even if demand is at the low end
of the range (i.e 580), 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 (i.e.660), 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.
 
 Financial 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.