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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)
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5-2 Capacity Planning
Facility Planning
Long range capacity planning,
Facility location
Facility layout
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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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5-5 Capacity Planning
Strategic Capacity PlanningDefined
Capacitycan be defined as the ability tohold, receive, store, or accommodate.
Strategic capacity planningis an
approach for determining the overallcapacity level of capital intensive
resources, including facilities, equipment,
and overall labor force size.
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5-6 Capacity Planning
Capacity Utilization
Capacity used
rate of output actually achieved
Best operating level capacity for which the process was designed
Capacity utilization rate = Capacity used
Best operating level
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5-7 Capacity Planning
Best Operating Level
Underutilization
Best OperatingLevel
Average
unit cost
of output
Volume
Overutilization
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5-8 Capacity Planning
Example of CapacityUtilization
During one week of production, a plantproduced 83 units of a product. Its historichighest or best utilization recorded was
120 units per week. What is this plantscapacity utilization rate?
Answer:Capacity utilization rate = Capacity used .
Best operating level
= 83/120=0.69 or 69%
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5-9 Capacity Planning
Economies & Diseconomiesof Scale
100-unitplant
200-unit
plant 300-unit
plant
400-unit
plant
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working
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5-10 Capacity Planning
The Experience Curve
Total accumulated production of units
Cost orprice
per unit
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit.
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5-12 Capacity Planning
Capacity Flexibility
Flexible plants
Flexible processes
Flexible workers
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5-13 Capacity Planning
Capacity Planning: Balance
Maintaining System Balance
Stage 1 Stage 2 Stage 3
Units
permonth
6,000 7,000 4,500
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5-14 Capacity Planning
Capacity Planning
Frequency of Capacity Additions
External Sources of Capacity
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5-15 Capacity Planning
Determining CapacityRequirements
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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5-16 Capacity Planning
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: 1 2 3 4
FancyFineSmall (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
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5-17 Capacity Planning
Requirements: The Product froma 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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5-18 Capacity Planning
Requirements: Equipment andLabor Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
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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5 20 Capacity Planning
20
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5-20 Capacity Planning
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88
Question: What are the values for columns 2, 3 and 4 in the table below?
56.67%
1.70
3.40
58.33%
1.17
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
20
The McGraw-Hill Companies, Inc., 2001
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5-21 Capacity Planning
Example of a Decision TreeProblem
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, managementestimates the respective demand probabilities as .10, .50, and
.40.
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5-22 Capacity Planning
Example of a Decision TreeProblem: The Payoff Table
0.1 0.5 0.4
Low Medium High
A 10 50 90B -120 25 200
C 20 40 60
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:
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5-24 Capacity Planning
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5-24 Capacity Planning
Example of Decision Tree Problem:Step 2. Add our possible states of
nature, probabilities, and payoffs
A
B
C
High demand (.4)
Medium demand (.5)
Low demand (.1)
$90k
$50k
$10k
High demand (.4)
Medium demand (.5)
Low demand (.1)
$200k
$25k
-$120k
High demand (.4)
Medium demand (.5)
Low demand (.1)
$60k
$40k
$20k
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5 25 Capacity Planning
Example of Decision TreeProblem: Step 3. Determine the
expected value of each decisionHigh demand (.4)
Medium demand (.5)
Low demand (.1)
A
$90k
$50k
$10k
EVA=.4(90)+.5(50)+.1(10)=$62k
$62k
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5 26 Capacity Planning
Example of Decision TreeProblem: Step 4. Make decision
High demand (.4)
Medium demand (.5)
Low demand (.1)
High demand (.4)Medium demand (.5)
Low demand (.1)
AB
CHigh demand (.4)
Medium demand (.5)
Low demand (.1)
$90k$50k
$10k
$200k$25k
-$120k
$60k
$40k
$20k
$62k
$80.5k
$46k
Alternative B generates the greatest expected profit, so our
choice is B or to construct a new facility.
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5 27 Capacity Planning
Planning Service Capacity
Time
Location
Volatility of Demand
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5 28 Capacity Planning
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 servicequality?
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5 29 Capacity Planning
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?
5-30 Capacity Planningmpor ance o apac y
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p y g
1. Impacts ability to meet futuredemands
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
mpor ance o apac yDecisions
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p y g
Capacity
Design capacity maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as
personal time, maintenance, and scrap
Actual output
rate of output actually achieved--cannot
exceed effective capacity.
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p y g
Efficiency and Utilization
Actual outputEfficiency =Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
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p y g
Actual output = 36 units/dayEfficiency= =
90%
Effective capacity 40 units/ day
Utilization= Actual output = 36 units/day=
72% Design capacity 50 units/day
Efficiency/Utilization Example
Design capacity = 50 trucks/dayEffective capacity = 40 trucks/day
Actual output = 36 units/day
5-34 Capacity Planninge erm nan s o ec ve
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p y ge erm nan s o ec veCapacity
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
Planning1. Amount of capacity needed2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
Capacity cushionextra demand intended to offset uncertainty
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Steps for Capacity Planning
1. Estimate future capacity requirements2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
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Make or Buy
1.Available capacity2.Expertise
3.Quality considerations
4.Nature of demand5.Cost
6.Risk
5-39 Capacity Planning eve op ng apac y
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eve op ng apac yAlternatives
1.Design flexibility into systems2.Take stage of life cycle into account
3.Take a big picture approach to capacity
changes4.Prepare to deal with capacity chunks
5.Attempt to smooth out capacity
requirements
6.Identify the optimal operating level
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E i f S l
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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
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Evaluating Alternatives
Minimumcost
Averagec
ostperunit
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5.3
Minimum average cost per unit
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Need to be near customers Capacity and location are closely tied
Inability to store services
Capacity must be matched with timing ofdemand
Degree of volatility of demand
Peak demand periods
Planning Service Capacity
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Cost-Volume Relationships
Amount($)
0Q (volume in units)
Fixed cost (FC)
Figure 5.5a
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Cost-Volume Relationships
Amou
nt($)
Q (volume in units)0
Figure 5.5b
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Cost-Volume Relationships
Amou
nt($)
Q (volume in units)0 BEP units
Figure 5.5c
5-47 Capacity Planning
Break Even Problem with Step
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Break-Even Problem with StepFixed Costs
Quantity
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
Figure 5.6a
5-48 Capacity Planning
Break-Even Problem with Step
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Break-Even Problem with StepFixed Costs
$
TC
TC
TCBEP
2
BEP3
Quantity
1
2
3
Multiple break-even points
Figure 5.6b
5-49 Capacity PlanningAssumptions of Cost-Volume
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1.One product is involved
2.Everything produced can be sold
3.Variable cost per unit is the sameregardless of volume
4.Fixed costs do not change withvolume
5.Revenue per unit constant withvolume
6.Revenue per unit exceeds variable
cost per unit
Assumptions of Cost VolumeAnalysis
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Financial Analysis
Cash Flow - the difference betweencash 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 Planninga cu a ng rocess ng
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a cu a ng rocess ngRequirements
ProductAnnualDemand
Standardprocessing time
per unit (hr.)Processing time
needed (hr.)
#1
#2
#3
400
300
700
5.0
8.0
2.0
2,000
2,400
1,400 5,800
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CHAPTER
Location Planningand Analysis
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. StevensonCopyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Need for Location Decisions
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources
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Nature of Location Decisions
Strategic Importance Long term commitment/costs
Impact on investments, revenues, and
operations Supply chains
Objectives Profit potential
No single location may be better than others Identify several locations from which to choose
Options Expand existing facilities
Add new facilities
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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
Site-relatedFactors
Multiple PlantStrategies
Community
Considerations
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Location of raw materials
Location of markets
Labor factors Climate and taxes
Regional Factors
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Quality of life
Services
Attitudes Taxes
Environmental regulations
Utilities Developer support
Community Considerations
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Land
Transportation
Environmental Legal
Site Related Factors
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Product plant strategy Market area plant strategy
Process plant strategy
Multiple Plant Strategies
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pManufacturing Considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking
Table 8.2
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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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ForeignGovernment a. Policies on foreign ownership of production facilitiesLocal ContentImport restrictionsCurrency restrictionsEnvironmental regulationsLocal product standards
b. Stability issuesCulturalDifferences
Living circumstances for foreign workers / dependentsReligious holidays/traditions
CustomerPreferences
Possible buy locally sentiment
Labor Level of training and education of workersWork practicesPossible regulations limiting number of foreign employeesLanguage differences
Resources Availability and quality of raw materials, energy,transportation
Table 8.3
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Evaluating Locations
Cost-Profit-Volume Analysis
Determine fixed and variable costs
Plot total costs
Determine lowest total costs
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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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pAnalysis
Fixed and variable costs for
four potential locationsL o c a t i o n F i x e d
C o s t
V a r i a b l e
C o s tABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 13 02 03 5
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Example 1: Solution
FixedCosts
VariableCosts
TotalCosts
ABCD
$250,000100,000150,000200,000
$11(10,000)30(10,000)20(10,000)35(10,000)
$360,000400,000350,000550,000
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Example 1: Solution
800700600500400300200100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
B
C
B SuperiorC Superior
A Superior
D
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Evaluating Locations
Transportation Model Decision based on movement costs of raw
materials or finished goods
Factor Rating
Decision based on quantitative and
qualitative inputs
Center of Gravity Method
Decision based on minimum distribution
costs
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CHAPTER
6
Facility Layout
McGraw-Hill/IrwinOperations Management, Eighth Edition, by William J. Stevenson
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Layout: the configuration of
departments, work centers, and
equipment, with particular emphasis
on movement of work (customers or
materials) through the system
Facilities Layout
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Requires substantial investments of
money and effort
Involves long-term commitments Has significant impact on cost and
efficiency of short-term operations
Importance of Layout Decisions
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Product layouts
Process layouts
Fixed-Position layout
Combination layouts
Basic Layout Types
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Raw
materials
or customer
Finished
item
Station
2
Station
3
Station
4
Material
and/or
labor
Station
1
Material
and/or
labor
Material
and/or
labor
Material
and/or
labor
Used for Repetitive or Continuous Processing
Figure 6.4 Product Layout
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Ad f P d L
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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
Advantages of Product Layout
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Disadvantages of Product
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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
Disadvantages of Product
Layout
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A U Sh d P d ti Li
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1 2 3 4
5
6
78910
In
Out
Workers
Figure 6.6A U-Shaped Production Line
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Dept. A
Dept. B Dept. D
Dept. C
Dept. F
Dept. E
Used for Intermittent processing
Job Shop or Batch
Process Layout(functional)
Figure 6.7 Process Layout
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Work
Station 1
Work
Station 2
Work
Station 3
Figure 6.7 (contd)
Product Layout
(sequential)
Used for Repetitive Processing
Repetitive or Continuous
Product Layout
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Can handle a variety of processing
requirements
Not particularly vulnerable to equipment
failures
Equipment used is less costly
Possible to use individual incentive
plans
Advantages of Process Layouts
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Disadvantages of Process
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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
Disadvantages of Process
Layouts
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C ll l L t
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Cellular Production
Layout in which machines are grouped
into a cell that can process items that
have similar processing requirements
Group Technology
The grouping into part families of items
with similar design or manufacturingcharacteristics
Cellular Layouts
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F ti l C ll l L t
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Dimension Functional CellularNumber of moves
between departments
many few
Travel distances longer shorter
Travel paths variable fixed
Job waiting times greater shorter
Throughput time higher lower
Amount of work in
process
higher lower
Supervision difficulty higher lower
Scheduling complexity higher lower
Equipment utilization lower higher
Table 6.3Functional vs. Cellular Layouts
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Warehouse and storage layouts
Retail layouts
Office layouts
Other Service Layouts
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Design Product Layouts: Line
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Line Balancing is the process of assigning
tasks to workstations in such a way that
the workstations have approximatelyequal time requirements.
Design Product Layouts: LineBalancing
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Cycle timeis the maximum time
allowed at each workstation to
complete its set of tasks on a unit.
Cycle Time
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Determine the Minimum Number
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N =(D)( t)
OT
t = sum of task times
Determine the Minimum Numberof Workstations Required
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Precedence Diagram
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Precedence diagram: Tool used in line balancing todisplay elemental tasks and sequence requirements
A Simple Precedence
Diagrama b
c de
0.1 min.
0.7 min.
1.0 min.
0.5 min. 0.2 min.
Figure 6.10 Precedence Diagram
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5-93 Capacity Planning
Example 1 Solution
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Workstation
TimeRemaining
EligibleAssignTask
RevisedTimeRemaining
StationIdle Time
1 1.0
0.9
0.2
a, c
c
none
a
c
-
0.9
0.2
0.2
2 1.0 b b 0.0 0.0
3 1.0
0.5
0.3
d
e
-
d
e
-
0.5
0.3 0.3
0.5
Example 1 Solution
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Calculate Percent Idle Time
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Percent idle time =Idle time per cycle
(N)(CT)
Efficiency = 1Percent idle time
Calculate Percent Idle Time
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Line Balancing Rules
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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.
Some Heuristic (intuitive) Rules:
Line Balancing Rules
5-96 Capacity Planning
Example 2
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c d
a b e
f g h
0.2 0.2 0.3
0.8 0.6
1.0 0.4 0.3
Example 2
5-97 Capacity Planning
Solution to Example 2
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Station 1 Station 2 Station 3 Station 4
a b e
fd
g hc
Solution to Example 2
5-98 Capacity Planning
Parallel Workstations
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1 min.2 min.1 min.1 min.30/hr. 30/hr. 30/hr.
30/hr.
1 min.
1 min.
1 min.1 min.60/hr.
30/hr. 30/hr.
60/hr.
1 min.
30/hr.
30/hr.
Bottleneck
Parallel Workstations
Parallel Workstations
5-99 Capacity Planning
Designing Process Layouts
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Information Requirements:
1. List of departments
2. Projection of work flows
3. Distance between locations4. Amount of money to be invested
5. List of special considerations
6. Location of key utilities
Designing Process Layouts
5-100Capacity Planning
Example 3: InterdepartmentalWork Flows
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1 3 2
30
170 10
0
A B C
Figure 6.12 Work Flowsfor Assigned Departments
5-101Capacity Planning
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Authors note:
The following three slides are not in the
8e, but I like to use them for alternate
examples.
5-102Capacity Planning
Process Layout
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Process Layout - work travelsto dedicated process centers
Milling
Assembly& Test
Grinding
Drilling Plating
Process Layout
5-103Capacity Planning
Functional Layout
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Gear
cutting
Mill Drill
Lathes
Grind
Heat
treat
Assembly
111
333
222
444
222
111
444
111 3331111 2222
222
3333
111
444
111
Functional Layout
5-104Capacity Planning
Cellular Manufacturing Layout
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-1111 -1111
222222222 - 2222
Assem
bly
3333333333 - 3333
44444444444444 - 4444
Lathe
Lathe
Mill
Mill
Mill
Mill
Drill
Drill
Drill
Heattreat
Heattreat
Heattreat
Gearcut
Gearcut
Grind
Grind
Cellular Manufacturing Layout
5-105Capacity Planning
Flexible Manufacturing
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Flexible Manufacturing
VD7
Process at Trek Bikes
5-106Capacity Planning
Location/Criteria
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Location/Criteria
PS11
Guitar site location
5-107Capacity Planning
Process Overview
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Process Overview