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5-1 Capacity Planning

MODULE 3

06 Hours

Facility, Capacity, Location and Layout: Manufacturing facility planning, Long range capacity planning, Facility location and Facility layout (Problems in Facility Location, Layout and Capacity Planning)

5-2 Capacity Planning

Facility Planning
Long range capacity planning, Facility location Facility layout

5-3 Capacity Planning

CHAPTER

Capacity Planning For Products and Services

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

5-4 Capacity Planning

Chapter 9

Strategic Capacity Planning


Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level Economies & Diseconomies of Scale The Experience Curve Capacity Focus, Flexibility & Planning Determining Capacity Requirements Decision Trees Capacity Utilization & Service Quality

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Strategic Capacity Planning Defined

Capacity can be defined as the ability to hold, receive, store, or accommodate. Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size.

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Capacity Utilization

Capacity utilization rate = Capacity used


Best operating level

Capacity used

rate of output actually achieved capacity for which the process was designed

Best operating level

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Best Operating Level

Average unit cost of output Underutilization Overutilization Best Operating Level

Volume

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Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plants capacity utilization rate? Answer:
Capacity utilization rate = Capacity used . Best operating level

= 83/120 =0.69 or 69%

5-9 Capacity Planning

Economies & Diseconomies of Scale

Economies of Scale and the Experience Curve working

Average unit cost of output

100-unit plant 200-unit plant 300-unit plant 400-unit plant

Diseconomies of Scale start working Volume

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The Experience Curve


As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

Cost or price per unit

Total accumulated production of units

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Capacity Focus
The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives. Plants Within Plants (PWP) (from Skinner)

Extend focus concept to operating level

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Capacity Flexibility
Flexible plants

Flexible processes

Flexible workers

5-13 Capacity Planning

Capacity Planning: Balance


Stage 1 Units per month 6,000 Stage 2 7,000 Stage 3 4,500

Maintaining System Balance

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Capacity Planning
Frequency of Capacity Additions

External Sources of Capacity

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Determining Capacity Requirements

Forecast sales within each individual product line. Calculate equipment and labor requirements to meet the forecasts. Project equipment and labor availability over the planning horizon.

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Requirements

A manufacturer produces two lines of mustard, FancyFine and Generic line. Each is sold in small and family-size plastic bottles. The following table shows forecast demand for the next four years.
Year: FancyFine Small (000s) Family (000s) Generic Small (000s) Family (000s) 1 50 35 100 80 2 60 50 110 90 3 80 70 120 100 4 100 90 140 110

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Requirements: The Product from a Capacity Viewpoint


Question: Are we really producing two different types of mustards from the standpoint of capacity requirements? Answer: No, its the same product just packaged differently.

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Requirements: Equipment and Labor Requirements


1 150 115 2 170 140 3 200 170 4 240 200

Year: Small (000s) Family (000s)

Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine.

Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.

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19

Question: What are the Year 1 values for capacity, machine, and labor?

Year: Small (000s) Family (000s)

1 150 115

2 170 140

3 200 170

4 240 200 6 6

Small Mach. Cap. 300,000 Labor Family-size Mach. Cap. 240,000 Labor 150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000 Small Percent capacity used 50.00% Machine requirement 1.50 Labor requirement 3.00 At 2 operators for Family-size 100,000, it takes 3 Percent capacity used 47.92% operators for 150,000 Machine requirement 0.96 Labor requirement 2.88

The McGraw-Hill Companies, Inc., 2001

5-20 Capacity Planning

20

Question: What are the values for columns 2, 3 and 4 in the table below?

Year: Small (000s) Family (000s) Small Family-size Small Percent capacity used Machine requirement Labor requirement Family-size Percent capacity used Machine requirement Labor requirement

1 150 115 Mach. Cap. Mach. Cap.

2 170 140 300,000 240,000

3 200 170 Labor Labor

4 240 200 6 6

50.00% 56.67% 1.50 1.70 3.00 3.40 47.92% 58.33% 0.96 1.17 2.88 3.50

66.67% 2.00 4.00 70.83% 1.42 4.25

80.00% 2.40 4.80 83.33% 1.67 5.00

The McGraw-Hill Companies, Inc., 2001

5-21 Capacity Planning

Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: A) Arrange for subcontracting, B) Construct new facilities. C) Do nothing (no change) The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as .10, .50, and .40.

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Example of a Decision Tree Problem: The Payoff Table


The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These profits, in thousands of dollars are presented in the table below:

A B C

0.1 Low 10 -120 20

0.5 Medium 50 25 40

0.4 High 90 200 60

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Example of a Decision Tree Problem: Step 1. We start by drawing the three decisions

A B C

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Example of Decision Tree Problem: Step 2. Add our possible states of nature, probabilities, and payoffs
High demand (.4) Medium demand (.5) Low demand (.1)

$90k $50k $10k $200k $25k -$120k

A B C

High demand (.4) Medium demand (.5)

Low demand (.1)


High demand (.4) Medium demand (.5) Low demand (.1)

$60k $40k $20k

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Example of Decision Tree Problem: Step 3. Determine the expected value of each decision
High demand (.4) Medium demand (.5)

$62k
A

Low demand (.1)

$90k $50k $10k

EVA=.4(90)+.5(50)+.1(10)=$62k

5-26 Capacity Planning

Example of Decision Tree Problem: Step 4. Make decision


High demand (.4) Medium demand (.5)

$62k
A B C

Low demand (.1) High demand (.4) Medium demand (.5)

$90k $50k $10k $200k $25k -$120k

$80.5k

Low demand (.1)


High demand (.4)

$46k

Medium demand (.5) Low demand (.1)

$60k $40k $20k

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility.

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Planning Service Capacity


Time

Location

Volatility of Demand

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Capacity Utilization & Service Quality


Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do you think happens to service quality?

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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?

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Importance of Capacity Decisions

1. Impacts ability to meet future demands 2. Affects operating costs 3. Major determinant of initial costs 4. Involves long-term commitment 5. Affects competitiveness 6. Affects ease of management 7. Globalization adds complexity 8. Impacts long range planning

5-31 Capacity Planning

Capacity
Design capacity

maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap rate of output actually achieved--cannot exceed effective capacity.

Effective capacity

Actual output

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Efficiency and Utilization


Actual output Efficiency =

Effective capacity
Actual output

Utilization =
Design capacity
Both measures expressed as percentages

5-33 Capacity Planning

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

Actual output

36 units/day = 40 units/ day

Efficiency =
90% Effective capacity

Utilization =
72%

Actual output Design capacity

36 units/day 50 units/day =

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Determinants of Effective Capacity

Facilities Product and service factors Process factors Human factors Operational factors Supply chain factors External factors

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Strategy Formulation
Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities
Cost of building and operating

Technological changes
Rate and direction of technology changes

Behavior of competitors Availability of capital and other inputs

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Key Decisions of Capacity Planning 1. Amount of capacity needed


2. Timing of changes 3. Need to maintain balance 4. Extent of flexibility of facilities

Capacity cushion extra demand intended to offset uncertainty

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Steps for Capacity Planning


1. Estimate future capacity requirements 2. Evaluate existing capacity 3. Identify alternatives 4. Conduct financial analysis 5. Assess key qualitative issues 6. Select one alternative 7. Implement alternative chosen 8. Monitor results

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Make or Buy
1.Available capacity 2.Expertise 3.Quality considerations 4.Nature of demand 5.Cost 6.Risk

5-39 Capacity Planning

Developing Capacity Alternatives

1.Design flexibility into systems 2.Take stage of life cycle into account 3.Take a big picture approach to capacity changes 4.Prepare to deal with capacity chunks 5.Attempt to smooth out capacity requirements 6.Identify the optimal operating level

5-40 Capacity Planning

Economies of Scale
Economies of scale
If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs

Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

5-41 Capacity Planning

Figure 5.3

Evaluating Alternatives
Average cost per unit

Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit

Minimum cost

Rate of output

5-42 Capacity Planning

Figure 5.4

Evaluating Alternatives
Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit

Small
plant

Medium plant

Large plant

Output rate

5-43 Capacity Planning

Planning Service Capacity


Need to be near customers
Capacity and location are closely tied

Inability to store services


Capacity must be matched with timing of demand

Degree of volatility of demand


Peak demand periods

5-44 Capacity Planning

Figure 5.5a

Cost-Volume Relationships
Amount ($)

Fixed cost (FC) 0 Q (volume in units)

5-45 Capacity Planning

Figure 5.5b

Cost-Volume Relationships
Amount ($)

Q (volume in units)

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Figure 5.5c

Cost-Volume Relationships
Amount ($) 0

BEP units Q (volume in units)

Break-Even Problem with Step Fixed Costs Figure 5.6a

5-47 Capacity Planning

3 machines

2 machines 1 machine Quantity


Step fixed costs and variable costs.

Break-Even Problem with Step Fixed Costs Figure 5.6b


$
BEP2
TC 3 BEP
3

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TC

TC
2 1

Quantity Multiple break-even points

5-49 Capacity Planning

Assumptions of Cost-Volume Analysis

1.One product is involved 2.Everything produced can be sold 3.Variable cost per unit is the same regardless of volume 4.Fixed costs do not change with volume 5.Revenue per unit constant with volume 6.Revenue per unit exceeds variable cost per unit

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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.

5-51 Capacity Planning

Calculating Processing Requirements


Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.)

Product

#1 #2 #3

400 300 700

5.0 8.0 2.0

2,000 2,400 1,400 5,800

5-52 Capacity Planning

CHAPTER

Location Planning and Analysis

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

5-53 Capacity Planning

Need for Location Decisions


Marketing Strategy Cost of Doing Business

Growth
Depletion of Resources

5-54 Capacity Planning

Nature of Location Decisions


Strategic Importance

Long term commitment/costs Impact on investments, revenues, and operations Supply chains
Profit potential No single location may be better than others Identify several locations from which to choose Expand existing facilities Add new facilities

Objectives

Options

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Making Location Decisions


Decide on the criteria Identify the important factors Develop location alternatives Evaluate the alternatives Make selection

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Location Decision Factors


Regional Factors

Community Considerations

Multiple Plant Strategies

Site-related Factors

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Regional Factors
Location of raw materials Location of markets Labor factors Climate and taxes

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Community Considerations
Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support

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Site Related Factors


Land Transportation Environmental Legal

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Multiple Plant Strategies


Product plant strategy Market area plant strategy Process plant strategy

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Comparison of Service and Manufacturing Considerations


Service/Retail
Revenue focus Demographics: age,income,etc Population/drawing area Competition Traffic volume/patterns

Table 8.2 Manufacturing/Distribution


Cost Focus Transportation modes/costs Energy availability, costs Labor cost/availability/skills Building/leasing costs

Customer access/parking

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Trends in Locations
Foreign producers locating in U.S.

Made in USA Currency fluctuations

Just-in-time manufacturing techniques Microfactories Information Technology

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Table 8.3
Foreign Government a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards b. Stability issues Living circumstances for foreign workers / dependents Religious holidays/traditions Possible buy locally sentiment

Cultural Differences Customer Preferences Labor

Resources

Level of training and education of workers Work practices Possible regulations limiting number of foreign employees Language differences Availability and quality of raw materials, energy, transportation

5-64 Capacity Planning

Evaluating Locations
Cost-Profit-Volume Analysis

Determine fixed and variable costs Plot total costs Determine lowest total costs

5-65 Capacity Planning

Location Cost-Volume Analysis


Assumptions
Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved

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Example 1: Cost-Volume Analysis

Fixed and variable costs for four potential locations


L o c a tio n A B C D F ix e d C ost $ 2 5 0 ,0 0 1 0 0 ,0 0 1 5 0 ,0 0 2 0 0 ,0 0 0 0 0 0 V a r ia b le C ost $11 30 20 35

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Example 1: Solution
Fixed Costs A B C D $250,000 100,000 150,000 200,000 Variable Costs $11(10,000) 30(10,000) 20(10,000) 35(10,000) Total Costs $360,000 400,000 350,000 550,000

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Example 1: Solution
$(000) 800 700 600 500 400 300 200 100 0 0 D B C A
A Superior C Superior B Superior

10

12

14

16

Annual Output (000)

5-69 Capacity Planning

Evaluating Locations
Transportation Model

Decision based on movement costs of raw materials or finished goods Decision based on quantitative and qualitative inputs Decision based on minimum distribution costs

Factor Rating

Center of Gravity Method

5-70 Capacity Planning

CHAPTER

Facility Layout

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

5-71 Capacity Planning

Facilities Layout
Layout: the configuration of departments, work centers, and equipment, with particular emphasis on movement of work (customers or materials) through the system

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Importance of Layout Decisions


Requires substantial investments of money and effort Involves long-term commitments Has significant impact on cost and efficiency of short-term operations

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The Need for Layout Decisions


Inefficient operations
For Example:

High Cost Bottlenecks

Changes in the design of products or services

Accidents
The introduction of new products or services

Safety hazards

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Basic Layout Types


Product layouts Process layouts Fixed-Position layout Combination layouts

5-75 Capacity Planning

Basic Layout Types


Product layout

Layout that uses standardized processing operations to achieve smooth, rapid, highvolume flow Layout that can handle varied processing requirements Layout in which the product or project remains stationary, and workers, materials, and equipment are moved as needed

Process layout

Fixed Position layout

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Figure 6.4

Product Layout
Station 1 Material and/or labor

Raw materials or customer


Material and/or labor

Station 2
Material and/or labor

Station 3
Material and/or labor

Station 4

Finished item

Used for Repetitive or Continuous Processing

5-77 Capacity Planning

Advantages of Product Layout


High rate of output Low unit cost Labor specialization Low material handling cost High utilization of labor and equipment Established routing and scheduling Routing accounting and purchasing

5-78 Capacity Planning

Disadvantages of Product Layout


Creates dull, repetitive jobs Poorly skilled workers may not maintain equipment or quality of output Fairly inflexible to changes in volume Highly susceptible to shutdowns Needs preventive maintenance Individual incentive plans are impractical

5-79 Capacity Planning

Figure 6.6

A U-Shaped Production Line


1 2 3 4 5
Workers

In

6
Out

10

5-80 Capacity Planning

Figure 6.7

Process Layout
Process Layout (functional)
Dept. A Dept. B Dept. C Dept. D Dept. E Dept. F

Used for Intermittent processing Job Shop or Batch

5-81 Capacity Planning

Figure 6.7 (contd)

Product Layout
Product Layout (sequential)

Work Station 1

Work Station 2

Work Station 3

Used for Repetitive Processing Repetitive or Continuous

5-82 Capacity Planning

Advantages of Process Layouts


Can handle a variety of processing requirements Not particularly vulnerable to equipment failures Equipment used is less costly Possible to use individual incentive plans

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Disadvantages of Process Layouts


In-process inventory costs can be high Challenging routing and scheduling Equipment utilization rates are low Material handling slow and inefficient Complexities often reduce span of supervision Special attention for each product or customer Accounting and purchasing are more

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Cellular Layouts
Cellular Production

Layout in which machines are grouped into a cell that can process items that have similar processing requirements The grouping into part families of items with similar design or manufacturing characteristics

Group Technology

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Table 6.3

Functional vs. Cellular Layouts


Dimension
Number of moves between departments Travel distances

Functional
many longer few

Cellular

shorter

Travel paths
Job waiting times Throughput time Amount of work in process Supervision difficulty Scheduling complexity Equipment utilization

variable
greater higher higher higher higher lower

fixed
shorter lower lower lower lower higher

5-86 Capacity Planning

Other Service Layouts


Warehouse and storage layouts Retail layouts Office layouts

5-87 Capacity Planning

Design Product Layouts: Line Balancing


Line Balancing is the process of assigning tasks to workstations in such a way that the workstations have approximately equal time requirements.

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Cycle Time
Cycle time is the maximum time allowed at each workstation to complete its set of tasks on a unit.

5-89 Capacity Planning

Determine Maximum Output


OT O utput capacity = CT O T operating tim e per day D = Desired output rate OT CT = cycle tim e = D

5-90 Capacity Planning

Determine the Minimum Number of Workstations Required


N = (D)( t) OT

t = sum of task times

5-91 Capacity Planning

Figure 6.10

Precedence Diagram

Precedence diagram: Tool used in line balancing to display elemental tasks and sequence requirements
0.1 min. 1.0 min.

a c
0.7 min.

b d
0.5 min.

A Simple Precedence Diagram

e
0.2 min.

5-92 Capacity Planning

Example 1: Assembly Line Balancing


Arrange tasks shown in Figure 6.10 into three workstations.

Use a cycle time of 1.0 minute Assign tasks in order of the most number of followers

5-93 Capacity Planning

Example 1 Solution
Time Workstatio Remainin n g
1 1.0 0.9 0.2

Assig Eligible n Task


a, c c none a c -

Revised Time Station Remaining Idle Time


0.9 0.2 0.2

2
3

1.0
1.0 0.5 0.3

b
d e -

b
d e -

0.0
0.5 0.3

0.0
0.3 0.5

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Calculate Percent Idle Time


Idle time per cycle Percent idle time = (N)(CT)

Efficiency = 1 Percent idle time

5-95 Capacity Planning

Line Balancing Rules


Some Heuristic (intuitive) Rules:
Assign tasks in order of most following tasks.
Count the number of tasks that follow

Assign tasks in order of greatest positional weight.

Positional weight is the sum of each tasks time and the times of all following tasks.

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Example 2
0.2 0.2 0.3

a
0.8

b
0.6

f
1.0

g
0.4

h
0.3

5-97 Capacity Planning

Solution to Example 2
Station 1 Station 2 Station 3 Station 4

a
c

e f d

5-98 Capacity Planning

Parallel Workstations
1 min. 30/hr. 1 min. 30/hr. 2 min. 30/hr. 1 min. 30/hr.

Bottleneck
30/hr. 1 min.
60/hr. 1 min. 30/hr.

1 min.
30/hr. 1 min. 30/hr.

1 min.

60/hr.

Parallel Workstations

5-99 Capacity Planning

Designing Process Layouts


Information Requirements: 1. List of departments 2. Projection of work flows 3. Distance between locations 4. Amount of money to be invested 5. List of special considerations 6. Location of key utilities

Example 3: Interdepartmental Work Flows Figure 6.12 for Assigned Departments


30
1

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170

10 0

5-101 Capacity Planning

Authors note:
The following three slides are not in the 8e, but I like to use them for alternate examples.

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Process Layout
Milling
Assembly & Test Grinding

Drilling

Plating

Process Layout - work travels to dedicated process centers

5-103 Capacity Planning

Functional Layout
222 444

Mill

222 111 444

222

Drill
1111 2222

Grind

3333

111 333
111 333

Assembly
111

Lathes

Heat treat

Gear cutting

111 444

5-104 Capacity Planning

Cellular Manufacturing Layout


-1111

Lathe

Mill

Drill

Heat treat Heat treat

Gear -1111 cut Grind - 2222 Assembly

222222222

Mill

Drill

3333333333

Lathe Mill

Heat treat
Drill

Grind - 3333

44444444444444

Mill

Gear - 4444 cut

5-105 Capacity Planning

Flexible Manufacturing

VD7 Process at Trek Bikes

5-106 Capacity Planning

Location/Criteria

PS11 Guitar site location

5-107 Capacity Planning

Process Overview

AB2 Aluminum tubing, suppliers at Hillerich & Bradsby

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