For Nyanya Only, here another assignment thanks. hey i attach the case study it is in the pdf ok thanks.

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Home >Literature homework help >For Nyanya Only, here another assignment thanks. hey i attach the case study it is in the pdf ok thanks.

>ĞĂƌŶŝŶŐ�KďũĞĐƟǀĞƐ

After completing this chapter, you should be able to:

• De!ne capacity as a measure of an organization’s ability to provide customers with the requested service or good.

• Explain that capacity estimation is dif!cult because many management decisions affect capacity.

• Describe how overall capacity of the system is dependent on the capacities of the departments and machines that form the production system.

• Determine the bottleneck in a system and demonstrate how that information can be used.

• Describe key capacity decisions, such as how much capacity to add; when, where, and what type (process) of capacity to add; when to reduce capacity and by how much.

8 ©Fotosearch/SuperStock

Capacity Decisions

CHAPTER 8Section 8.1 Capacity De!ned

8.1 Capacity Defined

Capacity is a measure of an organization’s ability to provide customers with the demanded services or goods in the amount requested and in a timely manner. Capacity is also the maximum rate of production. An organization marketing and selling rotisserie chicken should be able to produce and deliver chicken in sufficient quan- tities to satisfy consumer demand during lunch and dinner times when demand peaks. Meeting customer demand requires the acquisition of physical facilities, the hiring and training of qualified people, and the acquisition of materials to achieve the desired pro- duction level. The following important questions about capacity planning are addressed in this chapter:

• How can management estimate capacity? • What is system capacity, and why is it important? • How can capacity decisions be made to gain a competitive advantage for the

organization?

Role of Capacity Planning Capacity planning is very important because significant capital is usually required to build the facilities and purchase the equipment to build capacity. Creating a series of large server farms to support the Internet and data communications requires substantial invest- ment. Millions of dollars are required to build a brewery, a hospital, or a knitting produc- tion line to make sweaters. These expenditures are for fixed assets that are expensive to maintain and even more expensive to change. Capacity decisions require careful consid- eration of an organization’s long-term objectives and the market demand. Capacity deci- sions must be consistent with current and anticipated demand.

Organizations should be flexible in order to meet future as well as present capacity require- ments. Flexibility can allow managers to:

• Adjust production volume to respond to changes in customer demand. • Produce different products on the same equipment (product mix) to respond to

changing customer needs. • Alter product technology and process technology to maintain or improve an

organization’s competitive position.

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CHAPTER 8Section 8.2 Estimating and Altering Capacity

8.2 �ƐƚŝŵĂƚŝŶŐ�ĂŶĚ��ůƚĞƌŝŶŐ��ĂƉĂĐŝƚǇ

Before estimating capacity, it is necessary to recognize the difference between theoretical or ideal capacity and achievable capacity. Theoretical capacity is what a service firm or a manufacturer can produce under ideal conditions for a short period of time. Under ideal conditions there are no equipment breakdowns, main- tenance requirements, mate- rial problems, or worker errors. While organizations strive to eliminate these unproductive delays, allowances for these ele- ments must be made in order to develop realistic estimates of capacity.

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Meijer superstores provide consumers with a full range of food products as well as a diverse range

ŽĨ�ŽƚŚĞƌ�ƉƌŽĚƵĐƚƐ͕�ƐƵĐŚ�ĂƐ�ƐƉŽƌƟŶŐ�ŐŽŽĚƐ͕�ĂƵƚŽŵŽƟǀĞ�ƐƵƉƉůŝĞƐ͕�ĐůŽƚŚĞƐ͕�ĂŶĚ�ůĂǁŶ�ĐĂƌĞ�ĞƋƵŝƉŵĞŶƚ͘� Meijer’s concept is twofold: 1) build big stores that have high sales; and 2) aggressively expand the

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CHAPTER 8Section 8.2 Estimating and Altering Capacity

To estimate capacity, managers must first select a way to measure it. In some cases, the choice is obvious, for example, tons per hour of steel or kilowatt-hours of electricity. A hospital can use beds as a measure of capacity. Thus, a hospital with 100 beds that are available 365 days per year has a capacity of 36,500 patient-days each year. Hospitals measure the number of patients admitted and how long each stays so they can calculate patient-days consumed. A comparison of patient-days consumed and patient-days avail- able gives the operating ratio shown below.

Hospital’s operating ratio ! 24,000 patient-days consumed 36,500 patient-days available

" 100

! 65.8%

In general, the operating ratio is calculated according to the following equation:

Operating ratio ! capacity consumed capacity available

" 100

Finding a yardstick to estimate capacity is more difficult in a restaurant than in a hospital because there is no uniform product on which the measurement can be based. Capacity could be measured in terms of people served, meals prepared, or the ability to gener- ate sales dollars. It is management’s responsibility to select the appropriate measure and apply it.

Once the measure has been selected, estimating capacity involves the following steps:

1. Determine the maximum rate per hour of the production equipment. 2. Determine the number of hours worked in a given time period. 3. Multiply those two numbers.

Capacity/period ! (maximum production rate/hour) " (number of hours worked/period)

Production rate ! number of units produced

amount of time

Capacity can be changed by changing the number of hours worked in a time period, or by changing the production rate. The number of hours worked per time period is affected by several factors, including overtime, multiple shifts, downtime for preventive mainte- nance, and allowances for unplanned equipment failure.

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CHAPTER 8Section 8.2 Estimating and Altering Capacity

Several management decisions affect capacity. For example, increases in the amount and quality of preventive mainte- nance could increase capacity by reducing unexpected equip- ment failure. Other decisions affect capacity by changing the production rate. The following decisions are examined in this section:

• Changing the mix of products produced by the facility.

• Adding people to the production process.

• Increasing the moti- vation of production employees.

• Increasing the machine production rate.

• Improving the quality of the raw materials and the work in process. • Increasing product yield.

WƌŽĚƵĐƚ�Dŝǆ An organization’s product mix is the percentage of total output devoted to each prod- uct. For example, an agency may sell life, house, and automobile insurance. How does

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CHAPTER 8Section 8.2 Estimating and Altering Capacity

WƌŽďůĞŵ

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Type Dŝǆ�ϭ Dŝǆ�Ϯ

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,ŽƵƐĞ�ŝŶƐƵƌĂŶĐĞ Ϭ͘ϯϬ Ϭ͘ϰϬ

Automobile insurance Ϭ͘ϱϬ Ϭ͘ϮϬ

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� WƌŽĚƵĐƟŽŶ�ZĂƚĞ�!�;ŚŽƵƌƐ�ǁŽƌŬĞĚ�ƉĞƌ�ǁĞĞŬͿͬ;ŚŽƵƌ�ƌĞƋƵŝƌĞĚ�ƉĞƌ�ƵŶŝƚͿ

� WƌŽĚƵĐƟŽŶ�ZĂƚĞ Life

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� WƌŽĚƵĐƟŽŶ�ZĂƚĞ,ŽƵƐĞ !�;ϰϬ�ŚƌƐͬ͘ǁŬ͘Ϳͬ;Ϯ�ŚƌƐͬ͘ƵŶŝƚͿ�!�ϮϬ�ĐŽŶƚĂĐƚƐ�ƉĞƌ�ǁĞĞŬ

� WƌŽĚƵĐƟŽŶ�ZĂƚĞ Auto

!�;ϰϬ�ŚƌƐͬ͘ǁŬ͘Ϳͬ;ϭ�Śƌ͘ ͬƵŶŝƚͿ�!�ϰϬ�ĐŽŶƚĂĐƚƐ�ƉĞƌ�ǁĞĞŬ

EŽǁ�ĐĂůĐƵůĂƚĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ĨŽƌ�ŽŶĞ�ǁĞĞŬ�ŝĨ�Dŝǆ�ϭ�ŝƐ�ĂƐƐƵŵĞĚ͘�EŽǁ͕�ƚŚĞ�ĂŐĞŶƚ Ɛ͛�ƟŵĞ�ŝƐ�ĚŝǀŝĚĞĚ�ĂŵŽŶŐ� ƚŚĞ�ǀĂƌŝŽƵƐ�ƚǇƉĞƐ�ĂĐĐŽƌĚŝŶŐ�ƚŽ�ƚŚĞ�ŵŝǆ͘

PR !�;ϭϯ͘ϯ�ĐŽŶƚĂĐƚƐͬǁŬ͘Ϳ;Ϭ͘ϮͿ # ;ϮϬ�ĐŽŶƚĂĐƚͬǁŬ͘Ϳ;Ϭ͘ϯͿ # ;ϰϬ�ĐŽŶƚĂĐƚƐͬǁŬ͘Ϳ;Ϭ͘ϱͿ

!�Ϯϴ͘ϲϳ�ĐŽŶƚĂĐƚƐͬǁŬ͘

�Ɛ�ĂŶ�ĞǆĞƌĐŝƐĞ͕�ĐĂůĐƵůĂƚĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŝĨ�Dŝǆ�Ϯ�ŝƐ�ĂƐƐƵŵĞĚ͘�;dŚĞ�ĂŶƐǁĞƌ�ƐŚŽƵůĚ�ďĞ�Ϯϭ͘ϯϯ�ĐŽŶƚĂĐƚƐ�ƉĞƌ� ǁĞĞŬ͘Ϳ�dŚƵƐ͕�ĂƐ�ƚŚĞ�ŵŝǆ�ƐŚŝŌƐ�ĂǁĂǇ�ĨƌŽŵ�ĂƵƚŽŵŽďŝůĞ�ŝŶƐƵƌĂŶĐĞ�ƚŽ�ůŝĨĞ�ĂŶĚ�ŚŽƵƐĞ�ŝŶƐƵƌĂŶĐĞ͕�ǁŚŝĐŚ� ƌĞƋƵŝƌĞ� ŵŽƌĞ� ƟŵĞ� ƉĞƌ� ĐŽŶƚĂĐƚ͕� ƚŚĞ� ĐĂƉĂĐŝƚǇ� ŽĨ� ĂŶ� ĂŐĞŶƚ� ĂƐ� ŵĞĂƐƵƌĞĚ� ďǇ� ƚŚĞ� ŶƵŵďĞƌ� ŽĨ� ĐŽŶƚĂĐƚƐ� ĚĞĐůŝŶĞƐ͘�/Ĩ�ĂŶ�ĂǀĞƌĂŐĞ�ƐĞůůŝŶŐ�ƉƌŝĐĞ�ĨŽƌ�ĞĂĐŚ�ƚǇƉĞ�ŽĨ�ĐŽŶƚƌĂĐƚ�ĐĂŶ�ďĞ�ĚĞƚĞƌŵŝŶĞĚ͕�ŝƚ�ǁŽƵůĚ�ďĞ�ƉŽƐƐŝďůĞ�ƚŽ� ĐĂůĐƵůĂƚĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�Ă�ƐĂůĞƐ�ƉĞƌƐŽŶ�ǁŚĞŶ�ŐĞŶĞƌĂƟŶŐ�ƌĞǀĞŶƵĞ�ŽŶ�Ă�ĚĂŝůǇ͕ �ǁĞĞŬůǇ͕ �Žƌ�ŵŽŶƚŚůǇ�ďĂƐŝƐ͘

product mix effect capacity? It may take more of an agent’s time to sell life insurance than automobile insurance. Consequently, a shift in demand toward life insurance poli- cies reduces an agent’s selling capacity. In theory, the agent should earn more money sell- ing life insurance to compensate for the extra time. Otherwise, the agent will favor house and auto insurance.

Product mix issues are also relevant in manufacturing. A steel company produces steel of many alloys, shapes, and sizes, and these differences require different production pro- cesses and times. For example, the sheet steel that forms the body of an automobile or an appliance is produced in many widths. A 60-inch piece may be needed for the hood, and a 40-inch piece may be needed for a door panel. The mill that rolls these widths takes about the same amount of time per foot regardless of width. Therefore, a mill with a heavy mix of 40-inch pieces will be able to produce fewer tons per hour than a mill with many 60-inch pieces. What is the capacity of the processing equipment, and what are the units of

von70154_08_c08_223-256.indd 228 2/22/13 3:35 PM

CHAPTER 8Section 8.2 Estimating and Altering Capacity

WƌŽďůĞŵ

�ƐƐƵŵĞ�ƚŚĂƚ�Ă�ĐŽŵƉĂŶǇ�ƵƐĞƐ�ƐƚĞĞů�ƚŚĂƚ�ŝƐ�ϭͬϴͲŝŶĐŚ�ƚŚŝĐŬ�ĂŶĚ�ŚĂƐ�Ă�ĚĞŶƐŝƚǇ�ŽĨ�Ϭ͘Ϯϴϯϯ�ƉŽƵŶĚƐ�ƉĞƌ�ĐƵďŝĐ� ŝŶĐŚ͘�dŚĞ�ŵĂĐŚŝŶĞƐ�ƌŽůů�ƐƚĞĞů�ĨŽƌ�ϴϬ�ŚŽƵƌƐ�ƉĞƌ�ǁĞĞŬ�Ăƚ�ĂŶ�ĂǀĞƌĂŐĞ�ƐƉĞĞĚ�ŽĨ�ϯϬ�ŝŶĐŚĞƐ�ƉĞƌ�ƐĞĐŽŶĚ͘�dŚĞ� ĐŽŵƉĂŶǇ�ƉƌŽĚƵĐĞƐ�ďŽƚŚ�ϰϬͲ�ĂŶĚ�ϲϬͲŝŶĐŚ�ǁŝĚƚŚƐ�ŽĨ�ƐƚĞĞů�ĂŶĚ�ǁĂŶƚƐ�ƚŽ�ĚĞƚĞƌŵŝŶĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ĞĂĐŚ� ŽĨ�ƚŚĞ�ĨŽůůŽǁŝŶŐ�ƉƌŽĚƵĐƚ�ŵŝǆĞƐ͘

^ŝǌĞ Dŝǆ�ϭ Dŝǆ�Ϯ�

40 inches 80% ϱϬй

ϲϬ�ŝŶĐŚĞƐ 20% ϱϬй

dŚĞ�ĐŽŵƉĂŶǇ Ɛ͛�ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ĐĂŶ�ďĞ�ĐĂůĐƵůĂƚĞĚ�ĂƐ�ĨŽůůŽǁƐ͗

WƌŽĚƵĐƟŽŶ�ƌĂƚĞ�;PR) !�;ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ĨŽƌ�ϰϬͲŝŶĐŚͿ;ŵŝǆ�ĨŽƌ�ϰϬͲŝŶĐŚͿ�н�;ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ĨŽƌ�ϲϬͲŝŶĐŚͿ ;ŵŝǆ�ĨŽƌ�ϲϬͲŝŶĐŚͿ

dŚĞ�ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ĨŽƌ�ƚŚĞ�ϰϬͲŝŶĐŚ�ƐŝǌĞ�;PR 40

) can be determined as follows:

PR 40

!�;ǁŝĚƚŚͿ;ƚŚŝĐŬŶĞƐƐͿ;ƉƌŽĐĞƐƐŝŶŐ�ƌĂƚĞ�ŝŶĐŚĞƐͬŚŽƵƌͿ;ĚĞŶƐŝƚǇͿ

!�;ϰϬ�ŝŶͿ;ϭͬϴ�ŝŶͿ;ϯϬ�ŝŶͬƐĞĐͿ;ϯ͕ϲϬϬ�ƐĞĐͬŚƌͿ;Ϭ͘Ϯϴϯϯ�/ďƐͬĐƵďŝĐ�ŝŶͿ

!�ϭϱϮ͕ϵϴϮ�/ďƐͬŚƌ

dŚŝƐ�ǁŽƵůĚ�ďĞ�ƚŚĞ�ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ŝĨ�ŽŶůǇ�ƚŚĞ�ϰϬͲŝŶĐŚ�ƐŝǌĞ�ǁĞƌĞ�ƉƌŽĚƵĐĞĚ͘��ĂůĐƵůĂƚĞ�ƚŚĞ�ƉƌŽĚƵĐƟŽŶ� ƌĂƚĞ�ĨŽƌ�ƚŚĞ�ϲϬͲŝŶĐŚ�ƐŝǌĞ͕�ǁŚŝĐŚ�ŝƐ�ϮϮϵ͕ϰϳϯ�ƉŽƵŶĚƐ�ƉĞƌ�ŚŽƵƌ͘

EŽǁ�ĐĂůĐƵůĂƚĞ�ƚŚĞ�ŽǀĞƌĂůů�ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ŝĨ�Dŝǆ�ϭ�ŝƐ�ĂƐƐƵŵĞĚ͘

PR !�;ϭϱϮ͕ϵϴϮ�/ďƐͬŚƌͿ;Ϭ͘ϴͿ # ;ϮϮϵ͕ϰϳϯ�ůďƐͬŚƌͿ;Ϭ͘ϮͿ

!�ϭϮϮ͕ϯϴϱ͘ϲ�ůďƐͬŚƌ # ϰϱ͕ϴϵϰ͘ϲ�ůďƐͬŚƌ

!�ϭϲϴ͕ϮϴϬ͘Ϯ�/ďƐͬŚƌ

�ŽŶǀĞƌƚ�ƚŚŝƐ�ĮŐƵƌĞ�ƚŽ�ƚŽŶƐ�ƉĞƌ�ŚŽƵƌ͘

PR ! 1ϲ8,280͘0 lbs/hr

2,000 lbs/ton

! ϴϰ͘ϭϰ ƚŽŶƐͬŚƌ

EĞǆƚ͕�ĐŽŶǀĞƌƚ�ƚŚĞ�ƉƌŽĚƵĐƟŽŶ�ƌĂƚĞ�ŝŶƚŽ�ĂŶ�ĞƐƟŵĂƚĞ�ŽĨ�ĐĂƉĂĐŝƚǇ�ĨŽƌ�Ă�ǁĞĞŬ͘

Capacity for Mix 1 ! (PR�ŽĨ�ŵŝǆ�ϭͿ;ŚŽƵƌƐ�ǁŽƌŬĞĚͿ

!�;ϴϰ͘ϭϰ�ƚŽŶƐͬŚƌͿ;ϴϬ�ŚƌƐͬǁĞĞŬͿ

!�ϲ͕ϳϯϭ͘Ϯ�ƚŽŶƐͬǁĞĞŬ

�ĂůĐƵůĂƚĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŝĨ�Dŝǆ�Ϯ�ŝƐ�ĂƐƐƵŵĞĚ͕�ǁŚŝĐŚ�ŝƐ�ϳ͕ϲϰϵ͘ϭ�ƚŽŶƐ�ƉĞƌ�ǁĞĞŬ͘�dŚƵƐ͕�ĂƐ�ƚŚĞ�ŵŝǆ�ƐŚŝŌƐ� ĨƌŽŵ�ϰϬͲŝŶĐŚ�ƚŽ�ϲϬͲŝŶĐŚ�ƐƚĞĞů͕�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŝŶĐƌĞĂƐĞƐ͘��ĂƉĂĐŝƚǇ�ŝƐ�ŝŶŇƵĞŶĐĞĚ�ďǇ�ƉƌŽĚƵĐƚ�ŵŝǆ͘

capacity? Steel is measured in tons per hour, but those who estimate capacity realize that capacity changes as the mix of steel changes because different products have different pro- duction rates. Therefore, product mix must be estimated before capacity can be estimated.

von70154_08_c08_223-256.indd 229 2/22/13 3:35 PM

CHAPTER 8Section 8.2 Estimating and Altering Capacity

�ĚĚŝŶŐ�WĞŽƉůĞ Adding people to an operation may increase the maximum production rate. This increase occurs when the operation is constrained by the amount of labor assigned to the job. The capacity of both service operations and manufacturing operations is affected by adding or eliminating people. Organizations that are successful need to be willing and able to adapt to change. Part of being able to adapt is having flexibility to meet changes in demand. The following example illustrates the flexibility available to an organization in meeting vary- ing levels of demand.

WƌŽďůĞŵ

dŽ�ĂƐƐĞŵďůĞ�ƚŚĞ�ĨƌĂŵĞƐ�ĨŽƌ�Ϯϱ�ƌŽĐŬĞƌͬƌĞĐůŝŶĞƌ�ĐŚĂŝƌƐ͕�ĞĂĐŚ�ĂƐƐĞŵďůĞƌ�ƚĂŬĞƐ�ŚŝƐ�Žƌ�ŚĞƌ�ǁŽƌŬ�ŽƌĚĞƌ�ƚŽ� ƚŚĞ�ŝŶǀĞŶƚŽƌǇ�ĐůĞƌŬ�ƚŽ�ƉŝĐŬ�ƚŚĞ�ƉĂƌƚƐ�ƌĞƋƵŝƌĞĚ�ƚŽ�ŵĂŬĞ�ƚŚĞ�ĐŚĂŝƌƐ͘�dŚŝƐ�ƚĂŬĞƐ�ĂďŽƵƚ�ϯϬ�ŵŝŶƵƚĞƐ͘��ŌĞƌ� ƌĞƚƵƌŶŝŶŐ�ƚŽ�ƚŚĞ�ǁŽƌŬ�ĂƌĞĂ͕�ĞĂĐŚ�ĂƐƐĞŵďůĞƌ�ĐŽŵƉůĞƚĞƐ�Ϯϱ�ĐŚĂŝƌ�ĨƌĂŵĞƐ�ŝŶ�ϯ�ϭͬϮ�ŚŽƵƌƐ͘�dŽ�ŝŶĐƌĞĂƐĞ�ƚŚĞ� ĐĂƉĂĐŝƚǇ�ƚŽ�ĂƐƐĞŵďůĞ�ĐŚĂŝƌ�ĨƌĂŵĞƐ͕�Ă�ƐĞƉĂƌĂƚĞ�ƐƚŽĐŬ�ƉŝĐŬĞƌ�ĐŽƵůĚ�ďĞ�ŚŝƌĞĚ�ƚŽ�ŐĂƚŚĞƌ�ŝŶǀĞŶƚŽƌǇ�ĨŽƌ�Ăůů� ƚŚĞ�ĂƐƐĞŵďůĞƌƐ͘�dŚĞŶ�ĞĂĐŚ�ĂƐƐĞŵďůĞƌ�ǁŽƵůĚ�ďĞ�ĂďůĞ�ƚŽ�ŝŶĐƌĞĂƐĞ�ƉƌŽĚƵĐƟŽŶ�ďǇ�ϭͬϳ�ďĞĐĂƵƐĞ�ƚŚĞ�ϯϬ� ŵŝŶƵƚĞƐ�ĐŽŶƐƵŵĞĚ�ŝŶ�ƐƚŽĐŬ�ƉŝĐŬŝŶŐ�ĐŽƵůĚ�ŶŽǁ�ďĞ�ƵƐĞĚ�ƚŽ�ĂƐƐĞŵďůĞ�ĐŚĂŝƌƐ͘�dŚĞƌĞĨŽƌĞ͕�ĞĂĐŚ�ĂƐƐĞŵďůĞƌ� ĐŽƵůĚ�ĂƐƐĞŵďůĞ�ĨŽƌ�ϰ�ŚŽƵƌƐ�ƌĂƚŚĞƌ�ƚŚĂŶ�ϯ�ϭͬϮ�ŚŽƵƌƐ͘�KŶĞ�ƐƚŽĐŬ�ƉŝĐŬĞƌ�ĐŽƵůĚ�ƐĞƌǀĞ�ĞŝŐŚƚ�ĂƐƐĞŵďůĞƌƐ͘� dŚĞ�ĐĂƉĂĐŝƚǇ�ŝŵƉƌŽǀĞŵĞŶƚ�ŝƐ�ĐĂůĐƵůĂƚĞĚ�ŚĞƌĞ͘

� �ĂƉĂĐŝƚǇ�ƉĞƌ�ĂƐƐĞŵďůĞƌ�ďĞĨŽƌĞ�ƐƚŽĐŬ�ƉŝĐŬĞƌ�!�;Ϯϱ�ĐŚĂŝƌƐͬϰ�ŚƌƐ͘Ϳ;ϴ�ŚƌƐͬ͘ƐŚŝŌͿ

!�ϱϬ�ĐŚĂŝƌƐͬƐŚŝŌ

� �ĂƉĂĐŝƚǇ�ƉĞƌ�ĂƐƐĞŵďůĞƌ�ĂŌĞƌ�ƐƚŽĐŬ�ƉŝĐŬĞƌ�!�;Ϯϱ�ĐŚĂŝƌƐͬϯ͘ϱ�ŚƌƐ͘Ϳ;ϴ�ŚƌƐͬ͘ƐŚŝŌͿ

!�ϱϳ͘ϭϰ�ĐŚĂŝƌƐͬƐŚŝŌ

� й�/ŶĐƌĞĂƐĞ�ŝŶ��ĂƉĂĐŝƚǇ�! New Capacity 2 Old Capacity

Old Capacity " 100

! ϱϳ͘14 2 ϱ0

ϱ0 " 100

!�ϭϰ͘Ϯϴй

/ŶĐƌĞĂƐŝŶŐ�DŽƚŝǀĂƚŝŽŶ Another way to increase the production rate for an operation with labor constraints is to increase motivation. Substantial increases in production rates can be achieved when work- ers feel they are an important part of the operation. These productivity increases do not require additional labor costs or extra investment in equipment. The people work harder to accomplish more when they have an emotional or financial stake in the organization.

There has been a growing awareness among both management and labor that communi- cation and cooperation offer better opportunities for success than sharp-tongued rheto- ric, lockouts, and strikes. Evidence of this willingness to cooperate exists in almost every industry as organizations fight for market share and workers fight for jobs in the increas- ingly global environment. In the automotive industry, labor has agreed to liberalize work rules so that productivity can be increased. For example, some facilities have reduced the number of job classifications from 100 to only a few, making it possible to perform simple

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CHAPTER 8Section 8.2 Estimating and Altering Capacity

.iStockphoto/Thinkstock

��ƉŝǌǌĂ�ŽǀĞŶ�ŝƐ�ĂŶ�ĞǆĂŵƉůĞ�ŽĨ�Ă�ŵĂĐŚŝŶĞ�ĐŽŶƐƚƌĂŝŶƚ͘�dŽ� ŝŶĐƌĞĂƐĞ�ĐĂƉĂĐŝƚǇ͕�ŶĞǁ�ŵĂĐŚŝŶĞƐ�ŵƵƐƚ�ďĞ�ƉƵƌĐŚĂƐĞĚ�Žƌ�ĞǆŝƐƚŝŶŐ� ŵĂĐŚŝŶĞƐ�ŵƵƐƚ�ďĞ�ŽƉĞƌĂƚĞĚ�ŵŽƌĞ�ĞĨĨŝĐŝĞŶƚůǇ͘

maintenance tasks with one or two employees rather than five or six. Management has agreed to profit sharing, which allows the workforce to share in the benefits of these sim- plified work rules. Management has also begun to recognize the talents of its labor force and has encouraged employee involvement in what used to be exclusively management domain: decision making.

Labor is learning to accept efforts to improve automation because workers see that cutting costs and enhancing quality can lead to the best kind of job security, that is, increasing sales. Shared decision-making has not only caused increased cooperation, but it has cre- ated more motivated employees, thus providing the following benefits to organizations:

• Organizations can tap into talent that already exists in their workforce. • Workforces are more receptive to training and new ideas. • People work harder and smarter.

/ŶĐƌĞĂƐŝŶŐ�DĂĐŚŝŶĞ�WƌŽĚƵĐƚŝŽŶ�ZĂƚĞ In an operation that is machine constrained, adding people will not increase capacity. Machine constrained means that the equipment is operating for all the available time at its best speed, while the operators have some idle time. For example, if a pizza oven can bake 40 pies per hour, and the staff can assemble 60 pies per hour, then the pro- cess is machine constrained. To increase capacity, either new machines should be purchased or existing machines should be operated more efficiently.

One possibility that was men- tioned earlier is to increase pre- ventive maintenance so that downtime due to machine fail- ure will be reduced or eliminated. Another approach is to develop procedures that more efficiently utilize existing machines. With continuing process improvements there is usu- ally a way to improve a machine’s production rate. A procedure could be as simple as finding a faster and better way to load pizzas into the oven or increasing the heat in the oven to cook pizzas faster.

/ŵƉƌŽǀŝŶŐ�YƵĂůŝƚǇ Improving quality can often increase the capacity of operations. Simply stated, if an oper- ation produces a product of inferior quality and the product is rejected, the capacity used to produce that product is wasted. Poor quality gives the organization’s customers a bad

von70154_08_c08_223-256.indd 231 2/22/13 3:35 PM

CHAPTER 8Section 8.2 Estimating and Altering Capacity

impression of its product, and also robs operations of needed capacity. Consider the fol- lowing case.

ZĞĂů�tŽƌůĚ�^ĐĞŶĂƌŝŽƐ͗��ŽǁŶĞǇ��ĂƌƉĞƚ��ůĞĂŶŝŶŐ

�ŽǁŶĞǇ��ĂƌƉĞƚ��ůĞĂŶŝŶŐ�ŝƐ�Ă�ĨĂŵŝůǇͲŽǁŶĞĚ�ďƵƐŝŶĞƐƐ�ƚŚĂƚ�ĐůĞĂŶƐ�ĐĂƌƉĞƚƐ͕�ĨƵƌŶŝƚƵƌĞ͕�ĂŶĚ�ĚƌĂƉĞƌǇ͘�/ƚ� ĂůƐŽ�ƉĞƌĨŽƌŵƐ�ŐĞŶĞƌĂů�ŚŽƵƐĞŬĞĞƉŝŶŐ�ƐĞƌǀŝĐĞƐ͘�&Žƌ�ƐĞǀĞƌĂů�ǇĞĂƌƐ͕��ŽǁŶĞǇ�ŚĂƐ�ŽīĞƌĞĚ�Ă�ĐĂƌƉĞƚ�ƐĞƌǀŝĐĞ� ƚŚĂƚ�ƚŚŽƌŽƵŐŚůǇ�ĐůĞĂŶƐ�ŚŝŐŚͲƚƌĂĸĐ�ĂƌĞĂƐ�Ăƚ�ŽŶĞ�ůŽǁ�ƉƌŝĐĞ�ĂůƚŚŽƵŐŚ�ƐŽŵĞ�ĐŽŵƉĞƟƚŽƌƐ�ĐŚĂƌŐĞ�ĞǆƚƌĂ�ĨŽƌ� ŚŝŐŚͲƚƌĂĸĐ�ĂƌĞĂƐ͘�tŚǇ�ƐŚŽƵůĚ��ŽǁŶĞǇ�ĐŚĂƌŐĞ�ƚŚĞ�ůŽǁĞƌ�ƌĂƚĞ͍��ĐĐŽƌĚŝŶŐ�ƚŽ�ƚŚĞ�ŽǁŶĞƌ͕ �ǁŚŽ�ŝƐ�ĂůƐŽ� ƚŚĞ�ŵĂŶĂŐĞƌ͕ �ŝƚ�ŝƐ�Ă�ƐŽƵŶĚ�ďƵƐŝŶĞƐƐ�ĚĞĐŝƐŝŽŶ͘

��ĐĂůůďĂĐŬ�ƚŽ�ĐůĞĂŶ�Ă�ĐĂƌƉĞƚ�Ă�ƐĞĐŽŶĚ�ƟŵĞ�ĨŽƌ�Ă�ĚŝƐƐĂƟƐĮĞĚ�ĐƵƐƚŽŵĞƌ�ƚĂŬĞƐ�ĂƐ�ŵƵĐŚ�ƟŵĞ�ĂƐ�ŵĂŬŝŶŐ� ƚǁŽ�ƌĞŐƵůĂƌ�ĐĂƌƉĞƚͲĐůĞĂŶŝŶŐ�ƐƚŽƉƐ�ďĞĐĂƵƐĞ�ƌĞŐƵůĂƌ�ƐƚŽƉƐ�ĂƌĞ�ƐĐŚĞĚƵůĞĚ�ƚŽ�ĂǀŽŝĚ�ĂƐ�ŵƵĐŚ�ŶŽŶƉƌŽĚƵĐͲ ƟǀĞ�ƚƌĂǀĞů�ƟŵĞ�ĂƐ�ƉŽƐƐŝďůĞ͘��ĂůůďĂĐŬƐ�ŽŌĞŶ�ƌĞƋƵŝƌĞ�ŵƵĐŚ�ůŽŶŐĞƌ�ĚƌŝǀĞƐ͘��ĂĐŚ�ĐĂůůďĂĐŬ�ƌŽďƐ��ŽǁŶĞǇ�ŽĨ� ĐĂƉĂĐŝƚǇ�ĂŶĚ�ĂĚĚŝƟŽŶĂů�ƉŽƚĞŶƟĂů�ƌĞǀĞŶƵĞ͘��ŽŵƉĂƌĂƟǀĞůǇ͕ �ƚŚĞ�ĞǆƚƌĂ�ƟŵĞ�ĂŶĚ�ŵŽŶĞǇ�ĨŽƌ�ƚŚĞ�ĐŚĞŵŝͲ ĐĂůƐ�ŶĞĞĚĞĚ�ƚŽ�ĐůĞĂŶ�ƚŚĞ�ŚŝŐŚͲƚƌĂĸĐ�ĂƌĞĂƐ�ƌŝŐŚƚ�ƚŚĞ�ĮƌƐƚ�ƟŵĞ�ĂƌĞ�ƐŵĂůů͘

dŚĞ�ƚǇƉŝĐĂů�ĐĂƌƉĞƚͲĐůĞĂŶŝŶŐ�ǁŽƌŬĞƌ�ĐĂŶ�ƉĞƌĨŽƌŵ�ϭϬ�ũŽďƐ�ƉĞƌ�ĚĂǇ�ǁŝƚŚ�ĂŶ�ĂǀĞƌĂŐĞ�ƌĞǀĞŶƵĞ�ŽĨ�Ψϰϯ�ƉĞƌ� ũŽď͘�KŶĞ�ĐĂůůďĂĐŬ�ĨŽƌ�ǁŚŝĐŚ�ƚŚĞ�ĐŽŵƉĂŶǇ�ƌĞĐĞŝǀĞƐ�ŶŽ�ĂĚĚŝƟŽŶĂů�ƌĞǀĞŶƵĞ�ĐĂƵƐĞƐ��ŽǁŶĞǇ�ƚŽ�ůŽƐĞ�Ψϴϲ� ŝŶ�ƌĞǀĞŶƵĞ͘�dŚĞ�ĐŽŵƉĂŶǇ�ŵŝƐƐĞƐ�ŽƵƚ�ŽŶ�ƚǁŽ�ƌĞŐƵůĂƌ�ũŽďƐ�Ăƚ�Ψϰϯ�ƉĞƌ�ũŽď͘�WůƵƐ͕�ƚŚĞ�ŽƵƚͲŽĨͲƉŽĐŬĞƚ�ĐŽƐƚƐ� ĨŽƌ�ƚŚĞ�ĐŚĞŵŝĐĂůƐ�ƚŽ�ĐůĞĂŶ�ƚŚĞ�ĐĂƌƉĞƚ�Ă�ƐĞĐŽŶĚ�ƟŵĞ͕�ĂŶĚ�ƚŚĞ�ĐŽƐƚƐ�ŽĨ�ŽƉĞƌĂƟŶŐ�ƚŚĞ�ƚƌƵĐŬ�ĨŽƌ�ƚŚĞ� ƌĞƚƵƌŶ�ƚƌŝƉ�ĂƌĞ�ŝŶĐƵƌƌĞĚ͘�/Ŷ�ŽŶĞ�ĚĂǇ͕ �ƚŚĞ�ĞǆƚƌĂ�ĐŽƐƚƐ�ŽĨ�ƚŚĞ�ĐŚĞŵŝĐĂůƐ͕�ĂŶĚ�ƚŚĞ�ƟŵĞ�ĨŽƌ�ƚŚĞ�ǁŽƌŬĞƌ�ƚŽ� ĐŽŵƉůĞƚĞ�Ăůů�ϭϬ�ũŽďƐ�ĐŽƌƌĞĐƚůǇ�ƚŚĞ�ĮƌƐƚ�ƟŵĞ�ŝƐ�ůĞƐƐ�ƚŚĂŶ�ΨϮϬ͘��Ǉ�ĂǀŽŝĚŝŶŐ�ĐĂůůďĂĐŬƐ͕��ŽǁŶĞǇ�ŝƐ�ĂďůĞ�ƚŽ� ŝŶĐƌĞĂƐĞ�ŝƚƐ�ĐĂƉĂĐŝƚǇ͘�/Ŷ�ĂĚĚŝƟŽŶ�ƚŽ�Ă�ƐŽƵŶĚ�ĮŶĂŶĐŝĂů�ƉŽůŝĐǇ͕ �ĐƵƐƚŽŵĞƌƐ�ĂůƐŽ�ůŝŬĞ�ƚŚĞ�ƉŽůŝĐǇ�ĂŶĚ�ĨƌĞͲ ƋƵĞŶƚůǇ�ŚĂǀĞ��ŽǁŶĞǇ�ƌĞƚƵƌŶ�ĨŽƌ�ŽƚŚĞƌ�ƐĞƌǀŝĐĞƐ�ĂƐ�ǁĞůů�ĂƐ�ĨŽƌ�ƚŚĞŝƌ�ŶĞǆƚ�ĐĂƌƉĞƚ�ĐůĞĂŶŝŶŐ͘

/ŶĐƌĞĂƐŝŶŐ�WƌŽĚƵĐƚ�zŝĞůĚ In many operations, the quantity of output is less than the quan- tity of input. In other words, some inputs are lost during the production of a good or service. Yield is the ratio of the quantity of output to the input quantity.

Yield ! quantity of output quantity of input

Yield is a function of the charac- teristics of the process for pro- ducing the product. For exam- ple, an oil refinery begins with one barrel of crude oil, but when it is finished, there is less than one barrel of finished product. Small amounts evaporate, are spilled, or are otherwise lost in

Comstock Images/Thinkstock

tŚĞŶ�ĨŝůŵŝŶŐ�Ă�ŵŽǀŝĞ͕�Ă�ĚŝƌĞĐƚŽƌ�ŽĨƚĞŶ�ƐŚŽŽƚƐ�ĞǆĐĞƐƐ�ĨŽŽƚĂŐĞ� ĂŶĚ�ƚŚĞŶ�ĞĚŝƚƐ�ŝƚ͕�ƌĞŵŽǀŝŶŐ�ƐĐĞŶĞƐ�ƚŽ�ĐƌĞĂƚĞ�ƚŚĞ�ĨŝŶĂů�ǀĞƌƐŝŽŶ�ŽĨ� ƚŚĞ�Ĩŝůŵ͘��Ŷ�ŝŶĐƌĞĂƐĞ�ŝŶ�ǇŝĞůĚ�ǁŽƵůĚ�ŵĞĂŶ�ƐŚŽŽƚŝŶŐ�ůĞƐƐ�͞ĞǆƚƌĂ͟� footage.

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CHAPTER 8Section 8.3 Determining System Capacity

WŽŝŶƚƐ�ƚŽ��ŽŶƐŝĚĞƌ Capacity estimation is a necessary prerequisite to capacity planning. Without knowledge of the existing limits on capacity, meaningful capacity planning or production planning cannot take place. As the earlier section indicates, capacity is not a fixed number. Capacity is a function of management ingenuity. It can be influenced by good planning, good oper- ating procedures, effective maintenance programs, and other management decisions. One of the important responsibilities of operations managers is to investigate ways to increase capacity before investing substantial capital in new facilities.

8.3 �ĞƚĞƌŵŝŶŝŶŐ�^ǇƐƚĞŵ��ĂƉĂĐŝƚǇ

Until this point, the discussion of estimating and improving capacity has focused on only one machine or one operation within a company. The reality is that operations are a combination of different machines, equipment, and processes that make fin- ished products. To plan effectively, management must know the capacity of the entire pro- duction system, not just the capacity of individual parts. System capacity is the ability of the organization to produce a sufficient number of goods and services to meet the demands of customers. The capacity of an insurance company is not dependent only on the capacity of its sales personnel, the capacity of a hospital is not set only by the number of surgery rooms, and the capacity of a pizza parlor is not determined only by the capacity of its ovens.

For convenience, the term department is used when referring to a portion of the produc- tion system. To analyze system capacity, it is important to determine how departments are related. The two basic arrangements, product layout and process layout, are discussed in Chapter 7 and are also used here.

the production process. Some is burned as waste gas. The yield is the percentage of the output that is a useful product. A 96% yield means 96 of every 100 barrels of input are made into useful products. If a refinery’s engineers find methods to increase the yield by 1%, the refinery will have more product to sell, which increases effective capacity. Making movies follows a similar process. A director may shoot eight hours of film but may edit the film so that the final movie is two hours or less. The extra time used to shoot the movie costs money and prevents using the actors, sound stage, locations, cameras, and equip- ment to make other movies. Increasing yield would mean shooting less than eight hours of film to make the two-hour movie.

,ŝŐŚůŝŐŚƚ͗�/ŶƚĞů�ĂŶĚ��ŽŵƉƵƚĞƌ��ŚŝƉƐ

�ŌĞƌ�/ŶƚĞů�ŝŶƚƌŽĚƵĐĞƐ�ŶĞǁ�ĐŽŵƉƵƚĞƌ�ĐŚŝƉƐ͕�ŝƚ�ƵƐƵĂůůǇ�ĞǆƉĞƌŝĞŶĐĞƐ�Ă�ĚƌĂŵĂƟĐ�ŝŵƉƌŽǀĞŵĞŶƚ�ŝŶ�ǇŝĞůĚ� ĚƵƌŝŶŐ�ƉƌŽĚƵĐƟŽŶ͘�/ŶŝƟĂůůǇ͕ �ƚŚĞ�ŶƵŵďĞƌ�ŽĨ�ĐŚŝƉƐ�ƚŚĂƚ�ŵĞĞƚ�ƐƚĂŶĚĂƌĚƐ�ŵĂǇ�ďĞ�ŽŶůǇ�ϲϬй͘��Ɛ�ƚŚĞ�ĐŽŵͲ ƉĂŶǇ�ůĞĂƌŶƐ�ŵŽƌĞ�ĂďŽƵƚ�ƚŚĞ�ƉƌŽĐĞƐƐ͕�ƚŚĞ�ǇŝĞůĚ�ŵĂǇ�ŝŶĐƌĞĂƐĞ�ƚŽ�ϵϬй�Žƌ�ŵŽƌĞ͘�dŚŝƐ�ϯϬͲƉŽŝŶƚ�ŝŶĐƌĞĂƐĞ�ŝŶ� ǇŝĞůĚ�ůĞĂĚƐ�ƚŽ�ϱϬй�ŵŽƌĞ�ƉƌŽĚƵĐƚ�ƚŽ�ƐĞůů͘�;WƌĞǀŝŽƵƐůǇ�ŽŶůǇ�ϲϬ�ŽĨ�ϭϬϬ�ĐŚŝƉƐ�ĐŽƵůĚ�ďĞ�ƐŽůĚ͘�EŽǁ�ϵϬ�ĐŚŝƉƐ͕� ƚŚĂƚ�ŝƐ͕�ϯϬ�ŵŽƌĞ͕�ĂƌĞ�ĂǀĂŝůĂďůĞ͘Ϳ�dŚƵƐ͕�ĐĂƉĂĐŝƚǇ�ŝƐ�ŝŶĐƌĞĂƐĞĚ͘��ĞĐĂƵƐĞ�ƚŚĞƐĞ�ϯϬ�ĂĚĚŝƟŽŶĂů�ĐŚŝƉƐ�ĂĚĚ�ŶŽ� ƉƌŽĚƵĐƟŽŶ�ĐŽƐƚ͕�ŵŽƐƚ�ŽĨ�ƚŚĞ�ƌĞǀĞŶƵĞ�ĨƌŽŵ�ƚŚĞŝƌ�ƐĂůĞ�ĐŽŶƚƌŝďƵƚĞƐ�ĚŝƌĞĐƚůǇ�ƚŽ�ƚŚĞ�ĐŽŵƉĂŶǇ Ɛ͛�ďŽƩŽŵ� ůŝŶĞ͘�&Žƌ�/ŶƚĞů͕�ŵŽǀŝŶŐ�ƵƉ�ƚŚĞ�ǇŝĞůĚ�ĐƵƌǀĞ�ĂƐ�ƋƵŝĐŬůǇ�ĂƐ�ƉŽƐƐŝďůĞ�ŚĂƐ�Ă�ƐƵďƐƚĂŶƟĂů�ŝŵƉĂĐƚ�ŽŶ�ŵĞĞƟŶŐ� ĐƵƐƚŽŵĞƌ�ĚĞŵĂŶĚ�ĂŶĚ�ŽŶ�ŝŶĐƌĞĂƐŝŶŐ�ƉƌŽĮƚĂďŝůŝƚǇ͘

von70154_08_c08_223-256.indd 233 2/22/13 3:35 PM

CHAPTER 8Section 8.3 Determining System Capacity

WƌŽĚƵĐƚ�>ĂǇŽƵƚ Product-oriented layout is characterized by high demand for the same or similar prod- ucts. Examples include refining steel, making paper, and processing checks in a bank. In this arrangement, there are few, if any, product variations, and the layout fits the domi- nant flow of the product—thus, the name “product layout.”

For example, to make paper, wooden logs are ground and chemically treated to produce a watery mixture called pulp. The pulp is pumped to the papermaking machine where excess water is gradually squeezed out, leaving a thin sheet of wet paper. The wet paper passes through a series of dryers that remove most of the remaining moisture. The paper is then rolled into logs that can be 30 feet wide and several feet in diameter. These huge logs are later cut into many different widths. Most types of paper are made using the same process and follow the same flow (see Figure 8.1).

&ŝŐƵƌĞ�ϴ͘ϭ͗�WƌŽĚƵĐƚͲŽƌŝĞŶƚĞĚ�ůĂǇŽƵƚ�ŽĨ�ƉĂƉĞƌ�ŵŝůů

Pulp preparation Papermaking Drying

WƌŽĐĞƐƐ�>ĂǇŽƵƚ Process-oriented layout is characterized by the production of many different products with the same equipment and low volume of any individual product. No single prod- uct has enough volume to support a dedicated set of machines. Each product has differ- ent production requirements that place different demands on the equipment. Examples include a machine shop that produces specialty automotive parts for racing engines, a hospital emergency room, and an automotive repair shop that offers a wide variety of ser- vices. In this arrangement, the layout is grouped by similar machine types because there is no dominant product flow—thus the name “process layout.”

An automotive center contains the equipment to analyze a variety of mechanical prob- lems. As seen in the following list, different customers desire a different set of services. The facilities are arranged by process because there is no dominant flow (see Figure 8.2).

&ŝŐƵƌĞ�ϴ͘Ϯ͗�WƌŽĐĞƐƐͲŽƌŝĞŶƚĞĚ�ůĂǇŽƵƚ�ŽĨ�ĂŶ�ĂƵƚŽŵŽƚŝǀĞ�ƐĞƌǀŝĐĞ�ĐĞŶƚĞƌ

Liftwork: Shock absorbers

and exhaust systems

Batteries and electricalTires

Tune-upsBrakesWheelalignment

von70154_08_c08_223-256.indd 234 2/22/13 3:35 PM

CHAPTER 8Section 8.3 Determining System Capacity

�ƵƐƚŽŵĞƌ ^ĞƌǀŝĐĞƐ�ZĞƋƵĞƐƚĞĚ

A dŝƌĞƐ͕�ƐŚŽĐŬ�ĂďƐŽƌďĞƌƐ͕�ǁŚĞĞů�ĂůŝŐŶŵĞŶƚ

B dŝƌĞƐ͕�ďƌĂŬĞƐ͕�ƚƵŶĞͲƵƉ

C �ƌĂŬĞƐ͕�ƚƵŶĞͲƵƉ͕�ĞǆŚĂƵƐƚ�ƐǇƐƚĞŵ

D dŝƌĞƐ͕�ďƌĂŬĞƐ͕�ƐŚŽĐŬ�ĂďƐŽƌďĞƌƐ͕�ŵƵŋĞƌ

� ^ŚŽĐŬ�ĂďƐŽƌďĞƌƐ

The capacity of the product-oriented and process-oriented layouts is determined by ana- lyzing the capacity of individual departments. Approaches to determining the capacity of both layouts are discussed next.

WƌŽĚƵĐƚ�>ĂǇŽƵƚ�ĂŶĚ�^ǇƐƚĞŵ��ĂƉĂĐŝƚǇ The capacity of a product-oriented system can be visualized as a series of pipes of varying capacity, with the smallest diameter or capacity holding back the entire system. Figure 8.3 shows five pipes (departments or machines) with different diameters (capacities). The output from one pipe becomes the input to the next until the finished product exits pipe number five. In Figure 8.3, pipe number two cannot handle all the flow that pipe number one can deliver and, therefore, it restricts the flow. Because of pipe number two’s lim- ited capacity, it restricts the flow from upstream pipes and starves the downstream pipes. Pipes three, four, and five can work on only what pipe two can deliver. This restriction is called a bottleneck, and it determines the system’s capacity.

&ŝŐƵƌĞ�ϴ͘ϯ͗��ďŽƚƚůĞŶĞĐŬ�ŝŶ�ƚŚĞ�ƉƌŽĚƵĐƚ�ĨůŽǁ

Flow in Flow out1 2 3

4 5

Analysis of System Capacity

In a product-oriented layout, identifying the bottleneck is critical. The importance of this analysis cannot be overstated because the results are used not only in determining capac- ity, but also in planning and scheduling production, which are discussed later in the book.

The approach to determining the bottleneck is illustrated in Figure 8.4. Start at the begin- ning of the system, and determine the capacity of the first operation or department. This is the system capacity so far. Use this capacity as the input to the next department in the sequence. Can that department take the total input from the previous department and process it completely? If it can, then the system capacity has not changed. If it cannot, then the system capacity is reduced to the capacity of that department. The procedure contin- ues until the end of the process is reached and the system capacity is known.

von70154_08_c08_223-256.indd 235 2/22/13 3:35 PM

CHAPTER 8Section 8.3 Determining System Capacity

&ŝŐƵƌĞ�ϴ͘ϰ͗��ƐĞƋƵĞŶƚŝĂů�ĂƉƉƌŽĂĐŚ�ƚŽ�ďŽƚƚůĞŶĞĐŬ�ĂŶĂůǇƐŝƐ

STOP: The System capacity is known

No Yes

Yes

Reduce the system capacity

to the department capacity

Start

System capacity does not change

Determine capacity of first department (this is the system

capacity so far)

Use the system’s capacity so far as

the input to the next department

Can the next department process all the input?

Is there another department?

von70154_08_c08_223-256.indd 236 2/22/13 3:35 PM

CHAPTER 8Section 8.3 Determining System Capacity

Consider the example shown in Figure 8.5. The basic oxygen furnace has a maximum rate of 4,200 tons per day (tpd), while the continuous caster’s rate is 6,000 tpd. According to the example, the capacity of that part of the system is limited by the capacity of the slower department.

&ŝŐƵƌĞ�ϴ͘ϱ͗�^ŝŵƉůĞ�ƐƚĞĞů�ƉƌŽĚƵĐƚŝŽŶ�ĨůŽǁ

Basic oxygen furnace

(4,200 tpd) (6,000 tpd)

Continuous casting

Determining the Bottleneck

Now consider the entire system for making steel shown in Figure 8.6. The capacity of a department is listed below the department name. At two points in the steel-making pro- cess, outputs from two departments are inputs to a single department. The ratio of each input is listed above the arrow that illustrates the flow. For example, in the blast furnace, three pounds of iron ore are mixed with one pound of coke. This is like a recipe for a cake, three cups of flour to one cup of sugar, or three parts gin and one part vermouth for a martini. The capacity to mix martinis depends on both gin and vermouth. To supply the blast furnace with what it needs, iron ore and coke oven output should be combined in the correct proportion until at least one of these inputs is exhausted or until the capacity of the blast furnace is completely consumed.

&ŝŐƵƌĞ�ϴ͘ϲ͗�^ƚĞĞů�ƉƌŽĚƵĐƚŝŽŶ�ĨůŽǁ͗�Ă�ƉƌŽĚƵĐƚ�ůĂǇŽƵƚ

Iron ore processing

(4,000 tpd)

Blast furnace

(3,000 tpd)

3 parts

1 p ar

t 1 p

ar t

2 parts

Coke ovens

(1,000 tpd)

Scrap handling

(1,500 tpd)

Basic oxygen furnace

(4,200 tpd)

Continuous casting

(6,000 tpd)

Finishing mill

(5,000 tpd)

What is the system capacity? Follow along in Figure 8.6. Iron ore processing and coke ovens can deliver 3,000 and 1,000 tpd, respectively. (Only 3,000 tons can be used from iron ore processing because of the ratio requirements.) The combined 4,000 tpd is more than sufficient for the blast furnace, which can process only 3,000 tpd total. So far, the blast furnace is holding back production. The blast furnace and scrap handling, in turn, supply

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CHAPTER 8Section 8.3 Determining System Capacity

3,000 and 1,500 tpd, which is more than adequate for the basic oxygen furnace capacity of 4,200 tpd. Because the basic oxygen furnace cannot process all available inputs, the blast furnace cannot be the bottleneck. The basic oxygen furnace cannot deliver sufficient out- put to the remaining departments. Therefore, the basic oxygen furnace is the bottleneck for the system, and the capacity of the system is 4,200 tpd.

To calculate the production rates that allow the system to produce 4,200 tpd, begin at the bottleneck department in Figure 8.7. Trace the product flow from the bottleneck to the beginning and the end of the process. In order to achieve 4,200 tpd of basic oxygen furnace input, (2/3)(4,200) ! 2,800 tpd comes from the blast furnace and (1/3)(4,200) ! 1,400 tpd comes from scrap. The requirements are listed above each department. The blast furnace requires (3/4)(2,800) ! 2,100 tpd of iron ore and (1/4)(2,800) ! 700 tpd of coke. Moving from the basic oxygen furnace to the end of the process is simpler because there are no pairs of departments. The requirement for those departments is 4,200 tpd. When making steel, each operation in this process would suffer a yield loss, which is not considered here in order to simplify discussion.

&ŝŐƵƌĞ�ϴ͘ϳ͗��ĞƚĞƌŵŝŶŝŶŐ�ƐǇƐƚĞŵ�ĐĂƉĂĐŝƚǇ

Iron ore processing

(4,000 tpd)

Blast furnace

(3,000 tpd)**

3 parts

1 p ar

t 1 p

ar t

2 parts

Coke ovens

(1,000 tpd)

*Numbers above each department indicate the production rate required from that department to achieve a system capacity of 4,200 tpd. **Numbers below each department indicated the individual department’s capacity.

Scrap handling

(1,500 tpd)

Basic oxygen furnace

(4,200 tpd)

Continuous casting

(6,000 tpd)

Finishing mill

(5,000 tpd)

(2,100 tpd) (2,800 tpd)*

(700 tpd) (1,400 tpd)

(4,200 tpd) (4,200 tpd) (4,200 tpd)

Rounding Out System Capacity

It is also important to know which department, machine, or step in the process restricts the system’s capacity. An operations manager may be charged with increasing the system’s capacity. If he or she tries to do so by increasing blast furnace capacity, there will be no increase in the system’s capacity. This organization could spend hundreds of millions of dollars on a new blast furnace without producing one additional ton of steel because the bottleneck constricts the flow, and the bottleneck is the basic oxygen furnace.

The system capacity can be increased by applying resources to the bottleneck depart- ment. This approach is called rounding out capacity because resources are applied to the bottleneck to bring it into balance with other parts (departments) in the system. Rounding out capacity has a limit, however. Simply stated, if the operations manager doubles basic oxygen furnace capacity because it is the bottleneck, the system’s capacity will not double.

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CHAPTER 8Section 8.3 Determining System Capacity

There is not enough capacity in other departments to absorb that large an increase. As a result of doubling basic oxygen furnace capacity, the bottleneck simply jumps to another department. Managers should understand this issue and carefully analyze the effect on the system when departmental capacity is increased.

An important and useful piece of information is how far the system’s capacity can be increased before another bottleneck appears. To answer this question, examine the requirements listed above each department in Figure 8.7. A quick review shows that scrap handling and the blast furnace will be bottlenecks as basic oxygen furnace capacity is increased. With a cushion of 100 tons per day in scrap handling, the capacity of the system could increase by only 300 tpd. (Remember that one part scrap and two parts hot metal from the blast furnace are required.) The scrap handling and blast furnace departments have insufficient capacity to handle an increase of more than 300 tpd in basic oxygen fur- nace capacity.

Another way of thinking about it is to simply set the capacity of the present bottleneck to infinity and rework the problem. The results are shown in Figure 8.8. The system’s capac- ity is 4,500 tpd. There are two bottlenecks: blast furnace and scrap handling. Remember, the basic oxygen furnace capacity was set to infinity. It actually does not need to be infi- nitely large, but it must be 4,500 tpd or more if the system capacity is 4,500 tpd.

The analysis of system capacity and associated bottlenecks is extremely important to determine capacity. Rational decisions about capacity can be made only if these concepts are fully understood.

&ŝŐƵƌĞ�ϴ͘ϴ͗�ZŽƵŶĚŝŶŐ�ŽƵƚ�ĐĂƉĂĐŝƚǇ

Iron ore processing

(4,000 tpd)

Blast furnace

(3,000 tpd)**

3 parts

1 p ar

t 1 p

ar t

2 parts

Coke ovens

(1,000 tpd)

*Numbers above each department indicate the production rate required from that department to achieve a system capacity of 4,500 tpd. **Numbers below each department indicate the individual department’s capacity.

Scrap handling

(1,500 tpd)

Basic oxygen furnace

(4,200 tpd)

Continuous casting

(6,000 tpd)

Finishing mill

(5,000 tpd)

(2,250 tpd) (3,000 tpd)*

(750 tpd) (1,500 tpd)

(4,500 tpd) (4,500 tpd) (4,500 tpd)

WƌŽĐĞƐƐ�>ĂǇŽƵƚ�ĂŶĚ�^ǇƐƚĞŵ��ĂƉĂĐŝƚǇ The process-oriented layout is characterized as a multiple-product facility with low vol- ume per product. The products are different from one another and usually require differ- ent methods and procedures in production. There is no dominant product flow to guide

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CHAPTER 8Section 8.3 Determining System Capacity

the arrangement of departments as there is in the paper or steel industry, so similar opera- tions are grouped together. The process-oriented layout does not have enough volume in any one product to require dedicated specialized production facilities.

A medical center is an example of a process-oriented operation. Patients are screened at the reception desk to determine the nature and seriousness of their injuries, and then pro- ceed to a waiting room to be called by a nurse or physician. After an initial examination, the method of treatment for each patient is determined. Each treatment could be different and is based on the patient’s individual needs. A patient in an automobile accident may be scheduled for X-rays, orthopedic surgery, and application of a cast. The next patient may have heart problems. Each follows a different path through the medical center. The equipment should be flexible enough to handle a wide range of needs. For example, X-ray machines can provide images of legs, feet, hands, and other areas of the body.

Analysis of System Capacity

Determining system capacity in a process-oriented layout is more complex than doing so in a product-oriented layout. In the process layout, each product does not follow the same path through the system. The functions and machines are grouped into departments, and different products follow different paths. The layout shown in Figure 8.9 has six depart- ments and four different patterns of treatment or products. The departments’ capacities are given in patients per week (ppw) and are based on average time per treatment.

&ŝŐƵƌĞ�ϴ͘ϵ͗��ƉƌŽĐĞƐƐ�ůĂǇŽƵƚ�ŽĨ�Ă�ŵĞĚŝĐĂů�ĐĞŶƚĞƌ

Patient type Department

Waiting area (1)

(1,000 ppw)

X-ray (2)

(400 ppw)

Orthopedic care (3)

(250 ppw)

Cardiology (4)

(500 ppw)

Neurology (5)

(300 ppw)

Departments

Intensive care (6)

(600 ppw)

A B C D

1, 2, 3 1, 4, 6 1, 2, 5 1, 2, 6

System capacity is not merely a search for the minimum department capacity because there is no dominant flow. The capacity of the system is a function of the jobs presented. If the medical center only processed one type of patient, the system capacity could be eas- ily and accurately estimated. If all the patients arriving at the medical center are type-A patients (those needing orthopedic care), the capacity of the system will be 250 patients per week. In the very specific and highly specialized case, the analysis is like that of a product layout. This is completed by finding the minimum capacity for departments 1, 2, and 3. If all patients are of type B, then the capacity will be 500 patients per week. For patients of types C and D, the system capacities are 300 and 400 patients per week, respec- tively. The following table shows the various capacities if all of the patients in one week

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CHAPTER 8Section 8.3 Determining System Capacity

were a single type. This is not likely to occur, so the system’s capacity is a function of the job types presented. This is called the product mix or, in this case, patient mix.

Dŝǆ ^ǇƐƚĞŵ͛Ɛ��ĂƉĂĐŝƚǇ �ŽƩůĞŶĞĐŬ��ĞƉĂƌƚŵĞŶƚ

ϭϬϬй��ƉĂƟĞŶƚƐ ϮϱϬ�ƉƉǁ Orthopedic care

ϭϬϬй��ƉĂƟĞŶƚƐ ϱϬϬ�ƉƉǁ Cardiology

ϭϬϬй��ƉĂƟĞŶƚƐ 300 ppw Neurology

ϭϬϬй��ƉĂƟĞŶƚƐ 400 ppw yͲƌĂǇ

Product Mix and Capacity in a Process Layout

What would the system capacity be if the medical center processed all four types during the same week? To simplify the problem, assume that only type A patients arrive on Mon- day and Tuesday, type B on Wednesday and Thursday, type C on Friday and Saturday, and type D on Sunday. The system capacity per week for that mix would be calculated as follows:

System Capacity ! 2 7

(250 ppw) # 2 7

(500 ppw) # 2 7

(300 ppw) # 1 7

(400 ppw)

! 357 ppw

The fractions in the preceding equation are the patient mix. A different assumption con- cerning the number of days per week assigned to each patient type would cause a differ- ent product mix and would result in a different system capacity.

In reality, not all orthopedic care patients (type A) will arrive on Monday and Tuesday. The method illustrated in the prior calculation is likely to underestimate the system capac- ity because we have assumed that no patient other than an orthopedic patient arrives on Monday or Tuesday. However, the system does have the capacity to process type B, C, and D patients on Monday and Tuesday in addition to (2/7) (250 ppw) ! 71.4 type A patients. How can managers of a medical center get an accurate estimate of system capacity and determine which department is the bottleneck? An often-used technique for estimating capacity in a process layout is simulation.

In this approach, an estimate of product mix (patient mix) is used to randomly gener- ate arriving patients. The time to service each patient is based on historical data, and is also randomly generated. The simulation is run for a long period of time, and statistics about the number of patients served and the use of each department are kept. Utilization data should be kept regularly for equipment in a process layout so that bottlenecks can be anticipated and corrective action taken. Management can change the mix of arriving patients in the simulation to determine how the system capacity and bottleneck depart- ment change. A different mix places different demands on the resources. Managers should plan for the present mix of patients and the associated bottleneck, as well as for the mix of possibilities that the future holds.

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CHAPTER 8Section 8.3 Determining System Capacity

�ĂƉĂĐŝƚǇ��ĞĐŝƐŝŽŶƐ�ĨŽƌ�^ĞƌǀŝĐĞ�KƉĞƌĂƚŝŽŶƐ Most of the concepts discussed in this text apply to producers of services and produc- ers of goods. It is important to note, however, that service operations are different from manufacturing operations in some aspects. First, services are direct and cannot be inven- toried. Whereas the consumption of goods can be delayed, the general rule is that services are produced and consumed simultaneously. This means that service organizations must (1) build enough capacity to meet maximum demand, (2) manage demand so that people will use the services at off-peak times (allowing long waiting lines to occur is one way to manage demand, albeit a poor way, and offering monetary incentives to use the service at off peak times is another way), or (3) choose not to satisfy all the demand.

Each of these options has a cost. Building sufficient capacity to meet maximum demand can mean that a significant portion of the capacity is used infre- quently. This can mean large capital expenditures with lim- ited return on investment. Peo- ple who must wait in long lines for service may become dissat- isfied, and that will result in a loss of business. For example, a hospital that has long lines in its emergency room is likely to lose business to another emergency room that is better organized and has a shorter wait time. Choosing to ignore demand means a loss of customers that may have both short- and long- term effects.

Second, there is often a high degree of producer-consumer interaction during the produc- tion of a service. This interaction frequently introduces a significant amount of uncertainty about processing time, and processing time is a determinant of capacity. For example, a person waiting in line at a bank may have one or many transactions to perform and may be skilled or unskilled at communicating his or her needs. This variation makes it more difficult to estimate the capacity required to meet customer demands.

Third, many services are not transported to the customer, so the customer must come to the service delivery system. This has important implications for the location decision. It also means that capacity decisions should result in adequate space for the customer in the service delivery system. For example, many restaurants use a generous bar area to deal with excess demand in the dining area.

.Klaus Lahnstein/Getty Images

^ĞƌǀŝĐĞƐ�ĐĂŶŶŽƚ�ďĞ�ŝŶǀĞŶƚŽƌŝĞĚ�ĂŶĚ�ĂƌĞ�ƚǇƉŝĐĂůůǇ�ƉƌŽĚƵĐĞĚ�ĂŶĚ� ĐŽŶƐƵŵĞĚ�ƐŝŵƵůƚĂŶĞŽƵƐůǇ͘��ŽŶƐĞƋƵĞŶƚůǇ͕�ƐĞƌǀŝĐĞ�ŽƌŐĂŶŝǌĂƚŝŽŶƐ� ŵƵƐƚ�ĞĨĨĞĐƚŝǀĞůǇ�ŵĂŶĂŐĞ�ĚĞŵĂŶĚ͘��ůƚŚŽƵŐŚ�ŝƚ�ŝƐ�ŶŽƚ�ƚŚĞ�ŵŽƐƚ� ĞĨĨŝĐŝĞŶƚ�ŵĞƚŚŽĚ͕�ĂůůŽǁŝŶŐ�ůŽŶŐ�ǁĂŝƚŝŶŐ�ůŝŶĞƐ�ƚŽ�ŽĐĐƵƌ�ŝƐ�ŽŶĞ� ǁĂǇ�ƚŽ�ŵĂŶĂŐĞ�ĚĞŵĂŶĚ͘

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CHAPTER 8Section 8.3 Determining System Capacity

^ĞƌǀŝĐĞ�KƉĞƌĂƚŝŽŶƐ�ĂŶĚ�^ǇƐƚĞŵ��ĂƉĂĐŝƚǇ Despite differences, determining system capacity and finding where a bottleneck occurs applies to service as well as manufacturing operations. The principles are the same, but in some cases the application is different. In the following case, managers of an upscale restaurant chain are attempting to determine the capacity of their restaurant.

WƌŽďůĞŵ

dŚĞ�ŇŽǁ�ŽĨ�ƉĞŽƉůĞ�ƚŚƌŽƵŐŚ�ƚŚĞ�ƌĞƐƚĂƵƌĂŶƚ�ĨŽůůŽǁƐ�ƚŚŝƐ�ƐĞƋƵĞŶĐĞ͘�WĞŽƉůĞ�ĂƌƌŝǀĞ�Ăƚ�ƚŚĞ�ƌĞƐƚĂƵƌĂŶƚ�ĂŶĚ� ƉĂƌŬ�ƚŚĞŝƌ�ĐĂƌƐ͘��ĐĐŽƌĚŝŶŐ�ƚŽ�ƚŚĞ�ƌĞĐŽƌĚƐ�ƚŚĂƚ�ƚŚĞ�ƌĞƐƚĂƵƌĂŶƚ�ŬĞĞƉƐ͕�ϮϬй�ŽĨ�ƚŚĞ�ŐƵĞƐƚƐ�ƐƉĞŶĚ�ƟŵĞ�ŝŶ� ƚŚĞ�ďĂƌ͘ �dŚĞ�ƌĞŵĂŝŶŝŶŐ�ϴϬй�ŽĨ�ƚŚĞ�ĂƌƌŝǀĂůƐ�ŐŽ�ĚŝƌĞĐƚůǇ�ƚŽ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ͘

According to standards that management has developed over the years, each dinner served per

ŚŽƵƌ�ƌĞƋƵŝƌĞƐ�ĂƉƉƌŽǆŝŵĂƚĞůǇ�ĨŽƵƌ�ƐƋƵĂƌĞ�ĨĞĞƚ�ŽĨ�ŬŝƚĐŚĞŶ�ƐƉĂĐĞ͘�>ŝƐƚĞĚ�ďĞůŽǁ�ĂƌĞ�ƚŚĞ�ƌĞƐŽƵƌĐĞƐ�ŽĨ�ƚŚĞ� restaurant:

�ĞƉĂƌƚŵĞŶƚͬ�ƌĞĂ �ĂƉĂĐŝƚǇͬ^ŝǌĞ

WĂƌŬŝŶŐ�ĂƌĞĂ 100 spaces

Bar area 80 seats

Dining area 200 seats

�ŽŽŬŝŶŐ�ĂƌĞĂ ϲϬϬ�ƐƋƵĂƌĞ�ĨĞĞƚ

KŶ�ĂǀĞƌĂŐĞ͕�Ϯ͘Ϯ�ƉĞŽƉůĞ�ĂƌƌŝǀĞ�ƉĞƌ�ĐĂƌ͕ �ŽŶůǇ�ϴϬй�ŽĨ�ƚŚĞ�ƐĞĂƚƐ�ŝŶ�ƚŚĞ�ďĂƌ�ĂƌĞ�ŶŽƌŵĂůůǇ�ĂǀĂŝůĂďůĞ�ďĞĐĂƵƐĞ� ƚĂďůĞƐ�ĨŽƌ�ĨŽƵƌ�ĂƌĞ�ƐŽŵĞƟŵĞƐ�ŽĐĐƵƉŝĞĚ�ďǇ�ƚǁŽ�Žƌ�ƚŚƌĞĞ�ƉĞŽƉůĞ͕�ĂŶĚ�ŽŶůǇ�ϴϱй�ŽĨ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ�ƐĞĂƚƐ� ĂƌĞ�ŶŽƌŵĂůůǇ�ĂǀĂŝůĂďůĞ�ĨŽƌ�ƚŚĞ�ƐĂŵĞ�ƌĞĂƐŽŶ͘�dŚĞ�ĂǀĞƌĂŐĞ�ƐƚĂǇ�ŝƐ�ϵϬ�ŵŝŶƵƚĞƐ͘��ǀĞƌǇŽŶĞ�ŝŶ�ƚŚĞ�ĚŝŶŝŶŐ� ĂƌĞĂ�ŽƌĚĞƌƐ�Ă�ŵĞĂů͕�ĂŶĚ�ϰϬй�ŽĨ�ƚŚĞ�ƉĞŽƉůĞ�ŝŶ�ƚŚĞ�ďĂƌ�ĂƌĞĂ�ŽƌĚĞƌ�Ă�ŵĞĂů͘�tŚĂƚ�ŝƐ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ƚŚĞ� ƐǇƐƚĞŵ͍�dŽ�ďĞŐŝŶ͕�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ĞĂĐŚ�ĂƌĞĂ�ĐĂŶ�ďĞ�ĐĂůĐƵůĂƚĞĚ�ŝŶ�ƚĞƌŵƐ�ŽĨ�ƉĞƌƐŽŶƐ�ƐĞƌǀĞĚ�ƉĞƌ�ŚŽƵƌ͘

�ĞƉĂƌƚŵĞŶƚͬ�ƌĞĂ �ĂƉĂĐŝƚǇͬ^ŝǌĞ

WĂƌŬŝŶŐ�ĂƌĞĂ ;ϭϬϬ�ƐƉĂĐĞƐͿ;Ϯ͘Ϯ�ƉĞŽƉůĞͬĐĂƌͿͬ;ϭ͘ϱ�ŚƌƐ͘Ϳ !�ϭϰϳ�ƉĞŽƉůĞͬŚƌ͘

Bar area ;ϴϬ�ƐĞĂƚƐͿ�;Ϭ͘ϴͿͬ;ϭ͘ϱ�ŚƌƐ͘Ϳ !�ϰϯ�ƉĞŽƉůĞͬŚƌ͘

Dining area ;ϮϬϬ�ƐĞĂƚƐͿ;Ϭ͘ϴϱͿͬ;ϭ͘ϱ�ŚƌƐ͘Ϳ !�ϭϭϯ�ƉĞŽƉůĞͬŚƌ͘

�ŽŽŬŝŶŐ�ĂƌĞĂ ;ϲϬϬ�ƐƋƵĂƌĞ�ĨĞĞƚͿͬ;ϰ�ƐƋƵĂƌĞ�ĨĞĞƚͬŵĞĂůͿ !�ϭϱϬ�ƉĞŽƉůĞͬŚƌ͘

/Ĩ�ĞǀĞƌǇ�ĐƵƐƚŽŵĞƌ�ƐƉĞŶƚ�ƟŵĞ�ďŽƚŚ�ŝŶ�ƚŚĞ�ďĂƌ�ĂŶĚ�ŝŶ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ͕�ƚŚĞ�ƐǇƐƚĞŵ�ĐĂƉĂĐŝƚǇ�ǁŽƵůĚ�ďĞ� ĞĂƐǇ�ƚŽ�ĚĞƚĞƌŵŝŶĞ�ďĞĐĂƵƐĞ�ĞĂĐŚ�ĐƵƐƚŽŵĞƌ�ǁŽƵůĚ�ƉůĂĐĞ�ĚĞŵĂŶĚƐ�ŽŶ�ĞĂĐŚ�ĂƌĞĂ͘�dŚŝƐ�ǁŽƵůĚ�ŵĂŬĞ�ƚŚĞ� restaurant product layout similar to the steel industry, and the system capacity would be the smallest

ŽĨ�ƚŚĞ�ĨŽƵƌ�ĚĞƉĂƌƚŵĞŶƚ Ɛ͛�ĐĂƉĂĐŝƟĞƐ͘�,ŽǁĞǀĞƌ͕ �ŽŶůǇ�Ă�ƉŽƌƟŽŶ�ŽĨ�ƚŚĞ�ŐƵĞƐƚƐ�ƵƐĞ�ďŽƚŚ�ƚŚĞ�ďĂƌ�ĂŶĚ�ƚŚĞ� ĚŝŶŝŶŐ�ĂƌĞĂƐ͘� � � � � � � � ��;ĐŽŶƟŶƵĞĚͿ

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CHAPTER 8Section 8.3 Determining System Capacity

WƌŽďůĞŵ�;ĐŽŶƟŶƵĞĚ)

dŽ�ĐĂůĐƵůĂƚĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ƚŚĞ�ƐǇƐƚĞŵ�ĂŶĚ�ĚĞƚĞƌŵŝŶĞ�ƚŚĞ�ďŽƩůĞŶĞĐŬ�ĚĞƉĂƌƚŵĞŶƚ�ŝŶ�ƚŚŝƐ�ĐĂƐĞ͕�ƚŚĞ� ĂƉƉƌŽĂĐŚ�ŝůůƵƐƚƌĂƚĞĚ�ŝŶ�ƚŚĞ�ŵĞĚŝĐĂů�ĐĞŶƚĞƌ�ĞǆĂŵƉůĞ�ŵĞŶƟŽŶĞĚ�ĞĂƌůŝĞƌ�ĐŽƵůĚ�ďĞ�ƵƐĞĚ͘�dŚĂƚ�ŵĞƚŚŽĚ� ƌĞƋƵŝƌĞƐ�ƚƌĂĐŬŝŶŐ�ƚǁŽ�ĚŝīĞƌĞŶƚ�ŇŽǁƐ͗�ŽŶĞ�ŝŶǀŽůǀŝŶŐ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ�ĂŶĚ�Ă�ƐĞĐŽŶĚ�ĨŽůůŽǁŝŶŐ�ƚŚĞ�ďĂƌ� ĂƌĞĂ͘�dŚĞ�ƉƌŽĐĞƐƐ�ďĞŐŝŶƐ�ďǇ�ƐĞůĞĐƟŶŐ�Ă�ůĞǀĞů�ŽĨ�ĚĞŵĂŶĚ�ƚŚĂƚ�ƚŚĞ�ƌĞƐƚĂƵƌĂŶƚ�ĐĂŶ�ƐĂƟƐĨǇ͘�/Ĩ�ŝƚ�ĐĂŶŶŽƚ͕� ƚŚĞ�ĚĞŵĂŶĚ�ůĞǀĞů�ŝƐ�ĚĞĐƌĞĂƐĞĚ͕�ĂŶĚ�ĂŶŽƚŚĞƌ�ĂƩĞŵƉƚ�ŝƐ�ŵĂĚĞ͘�/Ĩ�ŝƚ�ĐĂŶ͕�ƚŚĞ�ĚĞŵĂŶĚ�ůĞǀĞů�ŝƐ�ŝŶĐƌĞĂƐĞĚ͘� dŚŝƐ�ƚƌŝĂů�ĂŶĚ�ĞƌƌŽƌ�ŵĞƚŚŽĚ�ĐĂŶ�ƋƵŝĐŬůǇ�ůĞĂĚ�ƚŽ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŝĨ�ĐĂƌĞ�ŝƐ�ƵƐĞĚ�ŝŶ�ƐĞůĞĐƟŶŐ�ƚŚĞ�ĚĞŵĂŶĚ� ƚĂƌŐĞƚƐ͘�dŚŝƐ�ƚƌŝĂů�ĂŶĚ�ĞƌƌŽƌ�ĂƉƉƌŽĂĐŚ�ĐŽƵůĚ�ĂůƐŽ�ďĞ�ƵƐĞĚ�ƚŽ�ƐŽůǀĞ�ƉƌŽďůĞŵƐ͕�ƐƵĐŚ�ĂƐ�ƚŚĞ�ƐƚĞĞů�ŝŶĚƵƐƚƌǇ� ƉƌŽďůĞŵ�ĚĞƐĐƌŝďĞĚ�ĞĂƌůŝĞƌ͘ �/ŶƐƉĞĐƟŶŐ�ƚŚĞ�ĚĞƉĂƌƚŵĞŶƚ�ĐĂƉĂĐŝƟĞƐ�ŝŶĚŝĐĂƚĞƐ�ƚŚĂƚ�ƚŚĞ�ƐǇƐƚĞŵ Ɛ͛�ĐĂƉĂĐŝƚǇ� ĐĂŶŶŽƚ�ĞǆĐĞĞĚ�ϭϰϳ�ƉĞŽƉůĞ�ƉĞƌ�ŚŽƵƌ�ďĞĐĂƵƐĞ�ƚŚĂƚ�ŝƐ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ƚŚĞ�ƉĂƌŬŝŶŐ�ůŽƚ͕�ĂŶĚ�ƚŚĞ�ĂƐƐƵŵƉͲ ƟŽŶ�ŽĨ�ƚŚŝƐ�ŵŽĚĞů�ŝƐ�ƚŚĂƚ�Ăůů�ƉĂƚƌŽŶƐ�ĚƌŝǀĞ͘�/ƚ�ŝƐ�ĂůƐŽ�ĐůĞĂƌ�ƚŚĂƚ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ƚŚĞ�ƐǇƐƚĞŵ�ŝƐ�Ăƚ�ůĞĂƐƚ�ϭϬϬ� ďĞĐĂƵƐĞ�Ăůů�ŽĨ�ƚŚĞ�ĚĞƉĂƌƚŵĞŶƚ�ĐĂƉĂĐŝƟĞƐ�ĂƌĞ�Ăƚ�ůĞĂƐƚ�ϭϬϬ͕�ĞǆĐĞƉƚ�ĨŽƌ�ƚŚĞ�ďĂƌ�ĂƌĞĂ�ǁŚŝĐŚ�ŽŶůǇ�ƐĞƌǀĞƐ� ϮϬй�ŽĨ�ƚŚĞ�ĐƵƐƚŽŵĞƌƐ͘

dŚĞƌĞĨŽƌĞ͕�ƚŚĞ�ƚƌŝĂů�ĂŶĚ�ĞƌƌŽƌ�ƉƌŽĐĞƐƐ�ďĞŐŝŶƐ�ďǇ�ƐĞƫŶŐ�ƚŚĞ�ĂƌƌŝǀĂů�ƌĂƚĞ�;ĚĞŵĂŶĚͿ�ĞƋƵĂů�ƚŽ�ϭϬϬ�ƉĞŽƉůĞ� ƉĞƌ�ŚŽƵƌ͘ �dŚŝƐ�ŵĞĂŶƐ�ƚŚĂƚ�ĚƵƌŝŶŐ�ĞĂĐŚ�ŚŽƵƌ�ϭϬϬ�ƉĞŽƉůĞ�ƵƐĞ�ƚŚĞ�ƉĂƌŬŝŶŐ�ůŽƚ͕�ϮϬ�ƉĞŽƉůĞ�ƵƐĞ�ƚŚĞ�ďĂƌ͕ � ϴϬ�ƉĞŽƉůĞ�ƵƐĞ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ͕�ĂŶĚ�ϴϴ�ƉĞŽƉůĞ�ŽƌĚĞƌ�Ă�ŵĞĂů͘�WĞŽƉůĞ�ŝŶ�ƚŚĞ�ďĂƌ�ƚŚĂƚ�ŽƌĚĞƌ�Ă�ŵĞĂů�ĞĂƚ� ƚŚĞ�ŵĞĂů�ŝŶ�ƚŚĞ�ďĂƌ͘ �EŽŶĞ�ŽĨ�ƚŚĞ�ŝŶĚŝǀŝĚƵĂů�ĚĞƉĂƌƚŵĞŶƚƐ�ŝƐ�Ăƚ�ĐĂƉĂĐŝƚǇ͕ �ƐŽ�ƚŚĞ�ĂŶĂůǇƐŝƐ�ĐŽŶƟŶƵĞƐ͘�dŚĞ� results are shown in the following table:

^Ğƚ��ĞŵĂŶĚ��ƋƵĂů�dŽ

�ĞƉĂƌƚŵĞŶƚ� �ƌĞĂ

Capacity ;WĞŽƉůĞͬ ,ƌ͘ Ϳ

100 ;WĞŽƉůĞͬ ,ƌ͘ Ϳ

ϭϮϱ� ;WĞŽƉůĞͬ ,ƌ͘ Ϳ

ϭϰϳ� ;WĞŽƉůĞͬ ,ƌ͘ Ϳ

ϭϭϯͬϬ͘ϴ�!�ϭϰϭ� ;WĞŽƉůĞͬ,ƌ͘ Ϳ

WĂƌŬŝŶŐ�ĂƌĞĂ ϭϰϳ 100 ϭϮϱ ϭϰϳ 141

�Ăƌ�ĂƌĞĂ 43 20 Ϯϱ 29 28

Dining area 113 80 100 118 113

�ŽŽŬŝŶŐ�ĂƌĞĂ ϭϱϬ 88 110 130 124

EĞǆƚ͕�ǁŚĂƚ�ŚĂƉƉĞŶƐ�ŝĨ�ĚĞŵĂŶĚ�ŝƐ�ƐĞƚ�Ăƚ�ϭϮϱ�ƉĞŽƉůĞͬŚŽƵƌ͍��ƐƐƵŵĞ�ĂŐĂŝŶ�ƚŚĂƚ�ŶŽŶĞ�ŽĨ�ƚŚĞ�ĚĞƉĂƌƚŵĞŶƚƐ� ŝƐ�Ăƚ�ĐĂƉĂĐŝƚǇ͘��Ɛ�Ă�ƌĞƐƵůƚ͕�ƚŚĞ�ƐǇƐƚĞŵ�ĐĂƉĂĐŝƚǇ�ŵƵƐƚ�ďĞ�ďĞƚǁĞĞŶ�ϭϮϱ�ĂŶĚ�ϭϰϳ�ƉĞŽƉůĞͬŚŽƵƌ�ďĞĐĂƵƐĞ� ƚŚĞ�ƉĂƌŬŝŶŐ�ůŽƚ�ĐĂŶ�ŚŽůĚ�ŶŽ�ŵŽƌĞ�ƚŚĂŶ�ϭϰϳ͘�tŝƚŚ�ĚĞŵĂŶĚ�ƐĞƚ�Ăƚ�ϭϰϳ�ƉĞŽƉůĞͬŚŽƵƌ͕ �ƚŚĞ�ƉĂƌŬŝŶŐ�ůŽƚ�ŝƐ� Ăƚ�ĐĂƉĂĐŝƚǇ͕ �ďƵƚ�ĚĞŵĂŶĚ�ŝŶ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ�ĞǆĐĞĞĚƐ�ĐĂƉĂĐŝƚǇ͘��Ăƌ�ĚĞŵĂŶĚ�ŝƐ�ĞƋƵĂů�ƚŽ�;ϭϰϳͿ�;Ϭ͘ϮͿ�!�Ϯϵ͘� �ŝŶŝŶŐ�ĚĞŵĂŶĚ�ŝƐ�ĞƋƵĂů�ƚŽ�;ϭϰϳͿ;Ϭ͘ϴͿ�!�ϭϭϴ͘��ŽŽŬŝŶŐ�ĚĞŵĂŶĚ�ŝƐ�ĞƋƵĂů�ƚŽ�ϭϭϴ # ;ϮϵͿ;Ϭ͘ϰͿ�!�ϭϯϬ͘��ƚ� ƚŚŝƐ�ƉŽŝŶƚ͕�ƚŚĞ�ďŽƩůĞŶĞĐŬ�ŝƐ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ͕�ďƵƚ�ƚŚĞ�ƐǇƐƚĞŵ�ĐĂƉĂĐŝƚǇ�ŝƐ�ŶŽƚ�ĐůĞĂƌ�ďĞĐĂƵƐĞ�ŽŶůǇ�ƐŽŵĞ� ƵƐĞ�ƚŚĞ�ĚŝŶŝŶŐ�ƌŽŽŵ͘�dŽ�ĚĞƚĞƌŵŝŶĞ�ƚŚĞ�ƐǇƐƚĞŵ�ĐĂƉĂĐŝƚǇ͕ �ĚŝǀŝĚĞ�ƚŚĞ�ĐĂƉĂĐŝƚǇ�ŽĨ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ�ďǇ�Ϭ͘ϴ͕� ǁŚŝĐŚ�ŝƐ�ƚŚĞ�ƉĞƌĐĞŶƚĂŐĞ�ŽĨ�ĐƵƐƚŽŵĞƌƐ�ƚŚĂƚ�ƵƐĞ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ͘�dŚŝƐ�ĐĂůĐƵůĂƟŽŶ�ǇŝĞůĚƐ�ƚŚĞ�ƐǇƐƚĞŵ� ĐĂƉĂĐŝƚǇ͕ �ǁŚŝĐŚ�ŝƐ�ϭϰϭ�ƉĞŽƉůĞ�ƉĞƌ�ŚŽƵƌ͘ �/Ĩ�ƚŚĞ�ƐǇƐƚĞŵ�ĐĂƉĂĐŝƚǇ�ŝƐ�ƐĞƚ�ĞƋƵĂů�ƚŽ�ĚĞŵĂŶĚ�ĂŶĚ�ƚŚĞ�ĚĞƉĂƌƚͲ ŵĞŶƚ�ĚĞŵĂŶĚƐ�ĂƌĞ�ĐĂůĐƵůĂƚĞĚ�ĂŐĂŝŶ͕�ƚŚĞ�ĞǆĐĞƐƐ�ĐĂƉĂĐŝƟĞƐ�ŝŶ�ƚŚĞ�ŶŽŶͲďŽƩůĞŶĞĐŬ�ĚĞƉĂƌƚŵĞŶƚƐ�ĐĂŶ�ďĞ� ŝĚĞŶƟĮĞĚ͘�dŚĞƌĞ�ŝƐ�ĐŽŶƐŝĚĞƌĂďůĞ�ĞǆĐĞƐƐ�ĐĂƉĂĐŝƚǇ�ŝŶ�ƚŚĞ�ĐŽŽŬŝŶŐ�ĂƌĞĂ�ĂŶĚ�ŝŶ�ƚŚĞ�ďĂƌ͕ �ďƵƚ�ƚŚĞ�ƉĂƌŬŝŶŐ� ůŽƚ�ŝƐ�ŶĞĂƌ�ĐĂƉĂĐŝƚǇ͘��ǆƉĂŶƐŝŽŶ�ƉůĂŶƐ͕�ŝĨ�ũƵƐƟĮĞĚ�ďǇ�ĚĞŵĂŶĚ͕�ƐŚŽƵůĚ�ďĞ�ĂŝŵĞĚ�Ăƚ�ƚŚĞ�ĚŝŶŝŶŐ�ĂƌĞĂ�ĂŶĚ� ƚŚĞ�ƉĂƌŬŝŶŐ�ůŽƚ͘

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CHAPTER 8Section 8.4 Making Capacity Decisions for Competitive Advantage

ϴ͘ϰ� DĂŬŝŶŐ��ĂƉĂĐŝƚǇ��ĞĐŝƐŝŽŶƐ�ĨŽƌ��ŽŵƉĞƚŝƚŝǀĞ��ĚǀĂŶƚĂŐĞ

Informed capacity decisions can be made only when management: (1) knows the ability of its present resources, which is achieved by accurately estimating system capacity; (2) knows the bottlenecks and what is causing them; and (3) has an estimate of future demand. The first two topics have been the focus of the chapter to this point. Estimating demand is discussed in the chapter on forecasting. Now, this information can be used to discuss the capacity decisions listed below:

• When to add capacity. • How much capacity to add. • Where to add capacity. • What type of capacity to add.

tŚĞŶ�ƚŽ��ĚĚ��ĂƉĂĐŝƚǇ Many managers argue that determining how much capacity an organization requires should not be difficult. The real problem is obtaining an accurate forecast of demand. These managers believe that once an estimate of demand is obtained, it is simply a matter of setting capacity to meet demand. With knowledge of the point at which demand equals capacity, and an estimate of how long it takes to build additional capacity, management subtracts the lead time to determine when to begin construction. In Figure 8.10, capacity is exceeded two years in the future. If it takes 18 months to add capacity, then manage- ment should begin construction six months from today; however, the answer is not that simple. To avoid compounding the question of when to add capacity with forecasting error, assume that forecasts are guaranteed to be accurate.

As management considers the timing decision in Figure 8.10, it should ask the following question: should the capacity be added by the end of the second year? The answer is prob- ably no, for several sound reasons. Management could simply choose not to satisfy all of the demand during the third year. The forecast shows that the significant and long-term increase does not take place until the end of year five. It is possible that the organization has no long-term interest in the market and would choose to allocate resources to other product. On the other hand, failing to fully satisfy demand may not be consistent with a company policy of building market share. If the sales force is asked to increase market share, but operations cannot deliver the product, then long-term damage to the firm’s reputation could result.

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CHAPTER 8Section 8.4 Making Capacity Decisions for Competitive Advantage

&ŝŐƵƌĞ�ϴ͘ϭϬ͗��ĂƉĂĐŝƚǇ�ǀĞƌƐƵƐ�ĚĞŵĂŶĚ

Today 1

Present capacity

Forecasted demand

Construction lead time

2 3 4 5 6

Time (years)

N u

m b

er o

f u

n it

If ignoring the excess demand in the third year is not acceptable, then management must find a way to meet that demand. One possibility is to set the production rate higher than demand during the first and second years so that sufficient inventory is created to satisfy demand in the third year. Figure 8.11 illustrates this point. Obviously, this solution is lim- ited to goods production because services have no finished goods inventory.

&ŝŐƵƌĞ�ϴ͘ϭϭ͗��ĂƉĂĐŝƚǇ͕�ĚĞŵĂŶĚ͕�ĂŶĚ�ƉƌŽĚƵĐƚŝŽŶ�ƌĂƚĞ

Today 1 2 3 4 5 6

Time (years)

N u

m b

er o

f u

n it

Production plan

Forecasted demandInventory

build-up

Production plan

Present capacity

Inventory draw-down

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CHAPTER 8Section 8.4 Making Capacity Decisions for Competitive Advantage

Other methods of dealing with the capacity shortfall in the third year can be under- stood by recalling the earlier sections on capacity estimation. Capacity is a variable that is subject to change through management innovation. If the operation runs two shifts five days per week, then overtime or another shift could be considered. Better schedul- ing, improved operating procedures, or improved quality of raw materials can increase capacity. Another important concept to remember is system level capacity. To increase the capacity of a system, it is necessary to increase the capacity of only the bottleneck opera- tion. It may be possible to buy production capacity to supplement the bottleneck opera- tion and increase overall capacity.

,Žǁ�DƵĐŚ��ĂƉĂĐŝƚǇ�ƚŽ��ĚĚ If additional capacity is built, how much should be added? Again, assuming that the fore- casted demand is accurate, consider the example in Figure 8.12 when deciding how much capacity to add. In this example, the decision concerning when to add capacity has been made. Construction begins in the middle of the third year, and the new capacity will come on line at the end of the fourth year.

&ŝŐƵƌĞ�ϴ͘ϭϮ͗�,Žǁ�ŵƵĐŚ�ĐĂƉĂĐŝƚǇ�ƚŽ�ĂĚĚ

Today 1

Option 2

Option 1

Forecasted demand

Construction lead time

Additional capacity on line

Today’s capacity

2 3 4 5 6

Time (years)

N u

m b

er o

f u

n it

Option 1 adds only enough capacity to handle the demand in the early part of the fifth year. Option 2 adds enough capacity to handle the increase in the sixth year. Whether Option 1 or Option 2 is selected, the company should understand the importance of focus- ing on the bottleneck to increase system capacity. The financial versus operating tradeoffs of these options are summarized here.

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CHAPTER 8Chapter Summary

Advantages of Option 1 1. Limits short-term investment and risk. Changes in technology will not find the

organization with as much capital tied up in outdated technology. 2. Limits unused capacity for which no return on investment is provided.

Advantages of Option 2 1. May reduce long-term investment. Building capacity at one time instead of mul-

tiple times can help save on total construction costs. 2. May reduce inflationary effects on construction costs by building now.

The primary questions associated with Option 2 are:

• How long will it be before the capacity is needed? • How likely is it that the forecasted need will occur? • How stable is the technology?

A firm producing products in an industry where the product or process technology is likely to change does not want to build plants that limit its long-term ability to compete.

The decisions about when to add capacity and how much capacity to add are critical capac- ity decisions that are complicated by the uncertainty in the estimates of future demand. Decision theory, which uses statistics and probability theory, can be used to model these decisions when forecasts are uncertain.

tŚĞƌĞ�ƚŽ��ĚĚ��ĂƉĂĐŝƚǇ The decision on where to add capacity (usually called the location decision) is complex and involves many factors. It is strategically important because it commits significant resources to a location. Great care and consideration should be given to the long-term implications. The location decision is addressed in another chapter.

tŚĂƚ�dǇƉĞ�ŽĨ��ĂƉĂĐŝƚǇ�ƚŽ��ĚĚ In addition to determining how much capacity to add and when to add it, management should consider what type of capacity to add. Type of capacity can be separated into a technological or engineering question and an economy of scale or business question. These topics are the focus of Chapter 7.

�ŚĂƉƚĞƌ�^ƵŵŵĂƌǇ

• Capacity is a measure of an organization’s ability to provide customers with demanded services and goods in the amount requested and in a timely manner.

• Capacity decisions are critical to an organization’s success because they commit significant resources to assets that usually cannot be changed easily or economi- cally. Capacity decisions should be based on the best estimate of the future and should be made so that as much flexibility as possible is retained.

• Capacity should also be obtained in the proper amount. Too much capacity means that money has been invested in resources that are not really needed. Too little means that potential sales and market share are lost.

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CHAPTER 8Case Study

• Estimating an organization’s capacity is not easy because capacity is affected by management decisions regarding changing the number of hours worked, chang- ing the product mix, adding staff, improving worker motivation, improving machine capabilities, enhancing quality, and increasing product yield.

• Machine and departmental capacities are needed to determine the capacity of the system. The capacity of a system can only be as much as its slowest department, which is the bottleneck.

• An increase in system capacity can be achieved by increasing capacity in the bottleneck department. This is called rounding out capacity.

• Capacity decisions include the following: when to add capacity, how much capacity to add, where to add capacity, what type of capacity to add, and when to reduce capacity.

�ĂƐĞ�^ƚƵĚǇ

�ĞĐŬ�DĂŶƵĨĂĐƚƵƌŝŶŐ Al Beck, president of Beck manufacturing, wants to determine the capacity of his facil- ity, which produces steering gears for auto manufacturers. He has asked you to sort through the data and determine the capacity of the system and how that capacity may be increased. The operation is a product layout that produces large numbers of nearly iden- tical products. The process includes milling, grinding, boring, drilling, and assembling, in that order. Each finished product requires one operation on each type of machine. For example, each finished part is processed on one of the five milling machines, one of the seven grinding machines, etc.

The facility runs two 8-hour shifts per day, with a third shift for maintenance. The indus- trial engineering department has provided you with the following data on present opera- tions. In addition, you have been told that assembly operations, while not unlimited, can be easily changed to meet the need.

Operation

Number of Machines

Run Time per Piece (min.) % Reject Rate

Milling 5 2 3

Grinding 7 3 5

Boring 3 1 2

Drilling 6 2.5 7

1. Calculate the capacity of each machine center and the capacity of the system. 2. If Beck wants to expand capacity, where should he focus the company’s efforts?

How much extra capacity can he get without causing another operation to become the bottleneck?

3. How may Mr. Beck expand capacity without purchasing new equipment? Be specific.

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CHAPTER 8Problems

�ŝƐĐƵƐƐŝŽŶ�YƵĞƐƚŝŽŶƐ

1. What is capacity, and why is it important? 2. Why is it difficult to estimate capacity? Is capacity a constant? Why or why not? 3. Should an organization always attempt to match its capacity to its estimate of

demand? Why or why not? 4. Capacity decisions are strategically important. Agree or disagree with the state-

ment, and support your position. 5. What factors influence the capacity of an organization? List three factors, and

explain how they influence capacity. 6. Explain in detail the difference between departmental and system capacity. 7. What are the principles for determining system capacity in the product layout? 8. What are the principles for determining system capacity in the process layout? 9. How does a change in the product mix effect system capacity? 10. What are the important decisions for capacity planners? 11. What are the key factors that determine when to add capacity? 12. What are the key factors that determine how much capacity to add? 13. Why would an organization want to reduce its capacity?

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1. Determine the system capacity and the bottleneck department in the following line flow process. The capacities in pieces per hour for departments A, B, and C are 5,250, 4,650, and 5,300, respectively.

A B C

2. Determine the system capacity and the bottleneck department in the following line flow process. The capacities in tons per hour for departments A, B, C, and D are 2,200, 1,100, 1,600, and 2,500, respectively. For each ton of output from depart- ment B that is input to department D, two tons from department C must be added.

A B

3. Answer the following questions using the information in Problem 2: a. How much can the system capacity be increased by adding capacity to the

bottleneck department? b. How much capacity must be added to the bottleneck department to achieve

this increase in system capacity? c. Which department is the new bottleneck department?

4. Examine the following line flow process: a. Determine the system capacity. b. Determine which department is the bottleneck. c. Determine how much capacity can be gained by adding capacity to the

bottleneck.

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CHAPTER 8Problems

d. Explain your answers to a, b, and c. e. How would the analysis change if department A achieved an 85% yield?

Recalculate a, b, and c.

DA B C

Department

Capacity (Parts/Hour)

A 120

B 110

C 140

D 160

5. Macro Galvanizing coats sheet steel for the appliance industry in its plant in Gary, Indiana. Macro has one production line that can coat steel up to 72 inches wide. The production line runs 80 hours per week. Regardless of width, the steel is processed at 200 feet per minute. Macro processes only the three widths of steel listed here:

Width (in.) Product Mix

36 0.30

50 0.25

60 0.45

a. What is the capacity of Macro’s production line in square feet of steel coated per week?

b. What is the capacity in square feet per week if the mix changes to 0.40, 0.40, and 0.20, respectively?

c. What is the capacity in square feet per week if the mix does not change and Macro decides to use 10% overtime per week?

d. What is the capacity in square feet per week if the mix does not change, there is no overtime, and Macro experiences 5% unplanned downtime?

e. What is the capacity in square feet per week if the mix does not change, there is no overtime, and Macro’s engineers find a way to run the line at 220 feet per minute?

6. Monique Food Processing Company produces light snacks that can be heated in a microwave. The following steps are included in the process:

Steps

Description

Capacity (Units/Hour)

1 Prepare food 200

2 Measure and place in plastic pouch

175

3 Prepare cardboard box 200

4 Insert pouch into box 300

5 Shrink-wrap box 200

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CHAPTER 8Problems

a. What is the system capacity, and which is the bottleneck department? b. How much slack (unused capacity) is available in other departments? c. How much system capacity can be gained by adding capacity to the

bottleneck?

7. Botkins Bicycle Shop manufactures 10-speed bikes. The assembly process requires the components listed below. Botkins can assemble approximately 350 bicycles per week without overtime. The labor contract allows Botkins’ manage- ment to add up to 10% overtime to assembly operations.

Component

Quantity per Finished Bicycle

Source

Capacity (Units/Week)

Wheels 2 Internal 750

Tires 2 External 900

Frame 1 Internal 400

Brakes 2 External 950

Handle bars 1 Internal 600

Pedal and drive sprocket subassembly

1 Internal 500

a. What is the capacity of the facility without using overtime? Which is the bottleneck department(s)?

b. What is the capacity of the facility with overtime? Which is the bottleneck department(s)?

c. What increases in department capacity would be required to increase system capacity to 450 units per week?

8. The Mills Brothers Cereal Company makes a wheat and raisin cereal on one of its production lines. One pound of raisins is required for four pounds of wheat flakes in order to make five pounds of cereal. The following steps are included in the process:

Step

Description

Capacity (Pounds/Hour)

A Crush wheat 1,400

B Form #akes 1,200

C Toast #akes 1,600

D Coat raisins 250

E Mix cereal and raisins 1,200

F Put mixture in box 1,100

G Place boxes in shipping containers

1,400

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CHAPTER 8Problems

F GEA B C

bottleneck?

9. White Chemical has a problem with its operations. Analyze the following flow process:

GEA B D

FC 1

Pa rt

1 Pa

2 Pa

rts

Department

Capacity (Gallons/hour)

A 100

B 60

C 50

D 120

E 100

F 40

G 140

The ratio for mixing the outputs from departments E and F is 2:1. This means that getting three gallons out of G requires mixing two gallons of E’s output and one gallon of F’s output. The ratio for departments B and C is 1:1.

a. What is the system’s capacity? b. Which department(s) is the bottleneck? c. How much slack (unused capacity) is available in the other departments? d. How much system capacity can be gained by adding capacity to the

bottleneck?

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CHAPTER 8Problems

10. Platinum Refining and Chemical Company is examining its pesticide plant. At this time, the company is unable to satisfy customer demand for a new insect spray. You have been asked to spend some time at the facility to determine how output can be increased. Analyze the following line flow process:

HFA B E

Department

Capacity (Gallons/Hour)

A 300

B 250

C 200

D 250

E 600

F 550

G 600

H 1,100

I 300

J 1,200

The ratio for mixing the outputs from departments B, C, and D is 2:2:1, respec- tively. This means that making five gallons for department E requires mixing two gallons of B’s output, two gallons of C’s output, and one gallon of D’s output. The ratio for departments F and G is 1:1. The ratio for departments H and I is 4:1. a. What is the system capacity, and which is the bottleneck department? b. How much slack (unused capacity) is available in other departments? c. How much system capacity can be gained by adding capacity to the

bottleneck?

11. Bauer Electric makes integrated circuits for the computer industry. Currently, the process for making circuits yields 80% good parts. The facility has the capacity to produce 2,000,000 units per year, including both good and bad units. The vari- able cost is $2.00 per unit. The annual fixed cost is $10,000,000. The selling price is $12.00 per unit. Currently, the market demand exceeds the units available. a. If Bauer Electric works at capacity, what is the total amount of units produced

in one year that meet specifications?

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CHAPTER 8Key Terms

bottleneck The department, workstation, or operation that limits the #ow of prod- uct through the production system. This department restricts the #ow of product from upstream departments and starves downstream departments.

capacity A measure of the organiza- tion’s ability to provide customers with the demanded services or goods, in the amount requested and in a timely man- ner. Capacity is the maximum rate of production.

machine constrained The machine is holding back production. The equipment is operating for all the available time at its best speed while the operator has some idle time.

product mix The percent of total demand or output that is devoted to each product.

rounding out capacity Adding capac- ity to a bottleneck department to increase the capacity of a system by bringing the capacity of the bottleneck department into balance with the other departments.

system capacity The ability of the organi- zation to produce a suf!cient number of goods and services to meet the demands of customers.

yield The ratio of the quantity of output to the quantity of input.

b. If the yield can be increased from 80% to 90%, how much does the unit cost for a circuit change?

c. If the yield can be increased from 80% to 90% and demand is unlimited, how much will profits increase?

d. If the yield can be increased from 80% to 90% and demand is 1,600,000 units, what is the impact on profits?

e. Why is there such a difference between the answers to c and d?

12. McComas Educational Service provides training to pass the bar exam. The com- pany offers a money back guarantee if a student does not pass on the first try. Currently, 60% pass the exam. The company is working on some computer-based training that could increase the pass rate to 80%. The cost of the service is $800, and 10,000 first-time students enroll in the course each year. Demand has grown at about 5% per year. The variable cost is only $100, and the annual fixed cost is $2,000,000. For the current cost structure, capacity is 12,000 students per year. a. Currently, how many first-time students pass the test each year? b. If the pass rate increases from 60% to 80%, how much will profits increase? c. Should McComas consider reducing capacity?

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