8 ©Fotosearch/SuperStock Capacity Decisions Learning Objectives After completing this chapter, you should be able to: • Define capacity as a measure of an organization’s ability to provide customers with the requested service or good. • Explain that capacity estimation is difficult 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. von70154_08_c08_223-256.indd 223 2/22/13 3:34 PM Section 8.1 Capacity Defined CHAPTER 8 8.1 Capacity Defined C apacity 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 quantities 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 production 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 investment. Millions of dollars are required to build a brewery, a hospital, or a knitting production 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 consideration of an organization’s long-term objectives and the market demand. Capacity decisions must be consistent with current and anticipated demand. Organizations should be flexible in order to meet future as well as present capacity requirements. Flexibility can allow managers to: • • • von70154_08_c08_223-256.indd 224 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. 2/22/13 3:34 PM Section 8.2 Estimating and Altering Capacity CHAPTER 8 Real World Scenarios: Meijer Superstores Meijer superstores provide consumers with a full range of food products as well as a diverse range of other products, such as sporting goods, automotive supplies, clothes, and lawn care equipment. Meijer’s concept is twofold: 1) build big stores that have high sales; and 2) aggressively expand the number of stores. In addition to the advantage of one-stop shopping, Meijer’s large capacity stores offer other advantages. The average purchase made by each customer should be higher because of the wide product variety. Although most traditional grocery items such as bread, rice, and milk have very low profit margins, products like microwaveable hamburgers, organic products, free-range chicken, and in-store bakery goods have higher margins and these boost profits. Larger capacity allows Meijer to spread the fixed cost of a store over a greater sales volume, thereby reducing costs and increasing profits. For example, when more customers shop at Meijer, the cost of floor space, food display racks, and checkout facilities remain unchanged. These are simply utilized at a higher level. Heating and lighting costs are also unaffected by these additional shoppers, for the most part. Meijer is creating economies of scale by serving more customers with the same facilities and equipment. Examples of variable costs for Meijer include staffing levels for checkout counters and spending for items such as eggs and milk when customers buy more. Meijer also has installed self-checkout facilities that take less space and reduce labor costs at checkout to increase facility utilization and to enhance productivity. Meijer is also spreading the fixed costs of corporate operations over more stores by rapidly expanding the number of new stores. In addition to cutting the per-store share of these corporate-level fixed costs, expansion gives Meijer more buying power, which enables it to negotiate better prices and delivery schedules from suppliers. 8.2 Estimating and Altering Capacity B efore 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, maintenance requirements, material problems, or worker errors. While organizations strive to eliminate these unproductive delays, allowances for these elements must be made in order to develop realistic estimates of capacity. von70154_08_c08_223-256.indd 225 .Thinkstock To estimate capacity, managers must first select a way to measure it. Hospitals often use beds as a measure of capacity. 2/22/13 3:34 PM CHAPTER 8 Section 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 available gives the operating ratio shown below. Hospital’s operating ratio 5 24,000 patient-days consumed 36,500 patient-days available 3 100 5 65.8% In general, the operating ratio is calculated according to the following equation: Operating ratio 5 capacity consumed capacity available 3 100 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 generate 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 5 (maximum production rate/hour) 3 (number of hours worked/period) Production rate 5 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 maintenance, and allowances for unplanned equipment failure. von70154_08_c08_223-256.indd 226 2/22/13 3:34 PM Section 8.2 Estimating and Altering Capacity CHAPTER 8 Problem Given the following information on maximum production rate and hours worked for an oven that cooks pizzas, determine the capacity per week. Maximum production rate 5 40 pizzas/hour Number of hours 5 84 hours/week Overtime 5 0 hours/week Preventive maintenance 5 0 (because it is performed after closing) Equipment failure 5 2% of planned hours (Unplanned downtime) Capacity/week 5 (40 pizzas/hour)(84 1 0 2 0 hours/week)(1 2 0.02) 5 3,292.8 pizzas/week The hours worked per week is reduced from 100% to 98% of the available hours because of the 2% downtime anticipated for equipment failure. Several management decisions affect capacity. For example, increases in the amount and quality of preventive maintenance could increase capacity by reducing unexpected equipment 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 .Associated Press/AP Images the facility. Adding people to the An organization’s product mix is the percentage of total production process. output devoted to each product. Johnson & Johnson is a large Increasing the moticorporation with an expansive product mix including consumer vation of production and pharmaceutical products such as Tylenol and BAND-AIDs. employees. Increasing the machine production rate. Improving the quality of the raw materials and the work in process. Increasing product yield. Product Mix An organization’s product mix is the percentage of total output devoted to each product. For example, an agency may sell life, house, and automobile insurance. How does von70154_08_c08_223-256.indd 227 2/22/13 3:35 PM CHAPTER 8 Section 8.2 Estimating and Altering Capacity 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 policies reduces an agent’s selling capacity. In theory, the agent should earn more money selling life insurance to compensate for the extra time. Otherwise, the agent will favor house and auto insurance. Problem Assume that each contact for life insurance takes three hours, house insurance takes two hours, and automobile insurance requires one hour. What are the capacities of an agent who works 40 hours per week under Mix 1 and Mix 2? Type Mix 1 Mix 2 Life insurance 0.20 0.40 House insurance 0.30 0.40 Automobile insurance 0.50 0.20 Begin by calculating the production rate for each type of insurance. These production rates represent what an agent could do if he or she sold only that type of insurance. Production Rate 5 (hours worked per week)/(hour required per unit) Production RateLife 5 (40 hrs./wk.)/(3 hrs./unit) 5 13.33 contacts per week Production RateHouse 5 (40 hrs./wk.)/(2 hrs./unit) 5 20 contacts per week Production RateAuto 5 (40 hrs./wk.)/(1 hr./unit) 5 40 contacts per week Now calculate the capacity for one week if Mix 1 is assumed. Now, the agent’s time is divided among the various types according to the mix. PR 5 (13.3 contacts/wk.)(0.2) 1 (20 contact/wk.)(0.3) 1 (40 contacts/wk.)(0.5) 5 28.67 contacts/wk. As an exercise, calculate the capacity if Mix 2 is assumed. (The answer should be 21.33 contacts per week.) Thus, as the mix shifts away from automobile insurance to life and house insurance, which require more time per contact, the capacity of an agent as measured by the number of contacts declines. If an average selling price for each type of contract can be determined, it would be possible to calculate the capacity of a sales person when generating revenue on a daily, weekly, or monthly basis. 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 processes 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 8 Section 8.2 Estimating and Altering Capacity 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 production rates. Therefore, product mix must be estimated before capacity can be estimated. Problem Assume that a company uses steel that is 1/8-inch thick and has a density of 0.2833 pounds per cubic inch. The machines roll steel for 80 hours per week at an average speed of 30 inches per second. The company produces both 40- and 60-inch widths of steel and wants to determine the capacity of each of the following product mixes. Size Mix 1 Mix 2 40 inches 80% 50% 60 inches 20% 50% The company’s production rate can be calculated as follows: Production rate (PR) 5 (production rate for 40-inch)(mix for 40-inch) + (production rate for 60-inch) (mix for 60-inch) The production rate for the 40-inch size (PR40) can be determined as follows: PR40 5 (width)(thickness)(processing rate inches/hour)(density) 5 (40 in)(1/8 in)(30 in/sec)(3,600 sec/hr)(0.2833 Ibs/cubic in) 5 152,982 Ibs/hr This would be the production rate if only the 40-inch size were produced. Calculate the production rate for the 60-inch size, which is 229,473 pounds per hour. Now calculate the overall production rate if Mix 1 is assumed. PR 5 (152,982 Ibs/hr)(0.8) 1 (229,473 lbs/hr)(0.2) 5 122,385.6 lbs/hr 1 45,894.6 lbs/hr 5 168,280.2 Ibs/hr Convert this figure to tons per hour. PR 5 168,280.0 lbs/hr 2,000 lbs/ton 5 84.14 tons/hr Next, convert the production rate into an estimate of capacity for a week.            Capacity for Mix 1 5 (PR of mix 1)(hours worked)                  5 (84.14 tons/hr)(80 hrs/week)                  5 6,731.2 tons/week Calculate the capacity if Mix 2 is assumed, which is 7,649.1 tons per week. Thus, as the mix shifts from 40-inch to 60-inch steel, the capacity increases. Capacity is influenced by product mix. von70154_08_c08_223-256.indd 229 2/22/13 3:35 PM CHAPTER 8 Section 8.2 Estimating and Altering Capacity Adding People 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 varying levels of demand. Problem To assemble the frames for 25 rocker/recliner chairs, each assembler takes his or her work order to the inventory clerk to pick the parts required to make the chairs. This takes about 30 minutes. After returning to the work area, each assembler completes 25 chair frames in 3 1/2 hours. To increase the capacity to assemble chair frames, a separate stock picker could be hired to gather inventory for all the assemblers. Then each assembler would be able to increase production by 1/7 because the 30 minutes consumed in stock picking could now be used to assemble chairs. Therefore, each assembler could assemble for 4 hours rather than 3 1/2 hours. One stock picker could serve eight assemblers. The capacity improvement is calculated here. Capacity per assembler before stock picker 5 (25 chairs/4 hrs.)(8 hrs./shift) 5 50 chairs/shift Capacity per assembler after stock picker 5 (25 chairs/3.5 hrs.)(8 hrs./shift) 5 57.14 chairs/shift % Increase in Capacity 5 5 New Capacity 2 Old Capacity 3 100 Old Capacity 57.14 2 50 3 100 50 5 14.28% Increasing Motivation 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 workers 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 communication and cooperation offer better opportunities for success than sharp-tongued rhetoric, 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 increasingly 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 von70154_08_c08_223-256.indd 230 2/22/13 3:35 PM CHAPTER 8 Section 8.2 Estimating and Altering Capacity 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 simplified 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 created 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. Increasing Machine Production Rate 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 process is machine constrained. To increase capacity, either new machines should be purchased or existing machines should be operated more efficiently. .iStockphoto/Thinkstock A pizza oven is an example of a machine constraint. To increase capacity, new machines must be purchased or existing machines must be operated more efficiently. One possibility that was mentioned earlier is to increase preventive maintenance so that downtime due to machine failure will be reduced or eliminated. Another approach is to develop procedures that more efficiently utilize existing machines. With continuing process improvements there is usually 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. Improving Quality Improving quality can often increase the capacity of operations. Simply stated, if an operation 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 Section 8.2 Estimating and Altering Capacity CHAPTER 8 impression of its product, and also robs operations of needed capacity. Consider the following case. Real World Scenarios: Downey Carpet Cleaning Downey Carpet Cleaning is a family-owned business that cleans carpets, furniture, and drapery. It also performs general housekeeping services. For several years, Downey has offered a carpet service that thoroughly cleans high-traffic areas at one low price although some competitors charge extra for high-traffic areas. Why should Downey charge the lower rate? According to the owner, who is also the manager, it is a sound business decision. A callback to clean a carpet a second time for a dissatisfied customer takes as much time as making two regular carpet-cleaning stops because regular stops are scheduled to avoid as much nonproductive travel time as possible. Callbacks often require much longer drives. Each callback robs Downey of capacity and additional potential revenue. Comparatively, the extra time and money for the chemicals needed to clean the high-traffic areas right the first time are small. The typical carpet-cleaning worker can perform 10 jobs per day with an average revenue of $43 per job. One callback for which the company receives no additional revenue causes Downey to lose $86 in revenue. The company misses out on two regular jobs at $43 per job. Plus, the out-of-pocket costs for the chemicals to clean the carpet a second time, and the costs of operating the truck for the return trip are incurred. In one day, the extra costs of the chemicals, and the time for the worker to complete all 10 jobs correctly the first time is less than $20. By avoiding callbacks, Downey is able to increase its capacity. In addition to a sound financial policy, customers also like the policy and frequently have Downey return for other services as well as for their next carpet cleaning. Increasing Product Yield In many operations, the quantity of output is less than the quantity 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 5 quantity of output quantity of input Yield is a function of the characteristics of the process for producing the product. For example, 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 von70154_08_c08_223-256.indd 232 Comstock Images/Thinkstock When filming a movie, a director often shoots excess footage and then edits it, removing scenes to create the final version of the film. An increase in yield would mean shooting less “extra” footage. 2/22/13 3:35 PM Section 8.3 Determining System Capacity CHAPTER 8 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 equipment to make other movies. Increasing yield would mean shooting less than eight hours of film to make the two-hour movie. Highlight: Intel and Computer Chips After Intel introduces new computer chips, it usually experiences a dramatic improvement in yield during production. Initially, the number of chips that meet standards may be only 60%. As the company learns more about the process, the yield may increase to 90% or more. This 30-point increase in yield leads to 50% more product to sell. (Previously only 60 of 100 chips could be sold. Now 90 chips, that is, 30 more, are available.) Thus, capacity is increased. Because these 30 additional chips add no production cost, most of the revenue from their sale contributes directly to the company’s bottom line. For Intel, moving up the yield curve as quickly as possible has a substantial impact on meeting customer demand and on increasing profitability. Points to Consider 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 operating 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 Determining System Capacity U ntil 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 finished products. To plan effectively, management must know the capacity of the entire production 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 production 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. von70154_08_c08_223-256.indd 233 2/22/13 3:35 PM CHAPTER 8 Section 8.3 Determining System Capacity Product Layout Product-oriented layout is characterized by high demand for the same or similar products. 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 dominant 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). Figure 8.1: Product-oriented layout of paper mill Pulp preparation Papermaking Drying Process Layout 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 product has enough volume to support a dedicated set of machines. Each product has different 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 services. 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 problems. 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). Figure 8.2: Process-oriented layout of an automotive service center von70154_08_c08_223-256.indd 234 Tires Batteries and electrical Liftwork: Shock absorbers and exhaust systems Wheel alignment Brakes Tune-ups 2/22/13 3:35 PM CHAPTER 8 Section 8.3 Determining System Capacity Customer Services Requested A Tires, shock absorbers, wheel alignment B Tires, brakes, tune-up C Brakes, tune-up, exhaust system D Tires, brakes, shock absorbers, muffler E Shock absorbers The capacity of the product-oriented and process-oriented layouts is determined by analyzing the capacity of individual departments. Approaches to determining the capacity of both layouts are discussed next. Product Layout and System Capacity 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 limited 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. Figure 8.3: A bottleneck in the product flow Flow in 1 2 3 4 5 Flow out 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 capacity, 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 beginning 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 continues 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 8 Section 8.3 Determining System Capacity Figure 8.4: A sequential approach to bottleneck analysis Start 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 Reduce the system capacity to the department capacity No Can the next department process all the input? Yes System capacity does not change Yes No STOP: The System capacity is known von70154_08_c08_223-256.indd 236 Is there another department? 2/22/13 3:35 PM CHAPTER 8 Section 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. Figure 8.5: Simple steel production flow Basic oxygen furnace Continuous casting (4,200 tpd) (6,000 tpd) 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 process, 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. Figure 8.6: Steel production flow: a product layout 3 parts Iron ore processing (4,000 tpd) rt 1 pa 2 parts Blast furnace (3,000 tpd) 1 Coke ovens Scrap handling (1,000 tpd) (1,500 tpd) rt pa Basic oxygen furnace Continuous casting Finishing mill (4,200 tpd) (6,000 tpd) (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 von70154_08_c08_223-256.indd 237 2/22/13 3:35 PM CHAPTER 8 Section 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 output 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) 5 2,800 tpd comes from the blast furnace and (1/3)(4,200) 5 1,400 tpd comes from scrap. The requirements are listed above each department. The blast furnace requires (3/4)(2,800) 5 2,100 tpd of iron ore and (1/4)(2,800) 5 700 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. Figure 8.7: Determining system capacity (2,100 tpd) Iron ore processing 3 parts (4,000 tpd) (2,800 tpd)* Blast furnace (3,000 tpd)** pa (4,200 tpd) (4,200 tpd) (4,200 tpd) Basic oxygen furnace Continuous casting Finishing mill (4,200 tpd) (6,000 tpd) (5,000 tpd) rt rt (700 tpd) 1 2 parts (1,400 tpd) 1 Coke ovens Scrap handling (1,000 tpd) (1,500 tpd) pa *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. 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 department. 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. von70154_08_c08_223-256.indd 238 2/22/13 3:35 PM CHAPTER 8 Section 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 furnace 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 capacity 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 infinitely 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. Figure 8.8: Rounding out capacity (2,250 tpd) Iron ore processing 3 parts (4,000 tpd) p (750 tpd) 1 t ar (3,000 tpd)* Blast furnace 2 parts (3,000 tpd)** (1,500 tpd) 1 Coke ovens Scrap handling (1,000 tpd) (1,500 tpd) (4,500 tpd) (4,500 tpd) (4,500 tpd) Basic oxygen furnace Continuous casting Finishing mill (4,200 tpd) (6,000 tpd) (5,000 tpd) t ar p *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. Process Layout and System Capacity The process-oriented layout is characterized as a multiple-product facility with low volume per product. The products are different from one another and usually require different methods and procedures in production. There is no dominant product flow to guide von70154_08_c08_223-256.indd 239 2/22/13 3:35 PM CHAPTER 8 Section 8.3 Determining System Capacity the arrangement of departments as there is in the paper or steel industry, so similar operations 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 proceed 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 departments 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. Figure 8.9: A process layout of a medical center Departments Waiting area (1) X-ray (2) Orthopedic care (3) Patient type Department (1,000 ppw) (400 ppw) (250 ppw) A 1, 2, 3 B 1, 4, 6 C 1, 2, 5 D 1, 2, 6 Cardiology (4) Neurology (5) Intensive care (6) (500 ppw) (300 ppw) (600 ppw) 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 easily 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, respectively. The following table shows the various capacities if all of the patients in one week von70154_08_c08_223-256.indd 240 2/22/13 3:35 PM CHAPTER 8 Section 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. Mix System’s Capacity Bottleneck Department 100% A patients 250 ppw Orthopedic care 100% B patients 500 ppw Cardiology 100% C patients 300 ppw Neurology 100% D patients 400 ppw X-ray 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 Monday 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 5 2 2 2 1 (250 ppw) 1 (500 ppw) 1 (300 ppw) 1 (400 ppw) 7 7 7 7 5 357 ppw The fractions in the preceding equation are the patient mix. A different assumption concerning the number of days per week assigned to each patient type would cause a different 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 capacity 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) 5 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 generate 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 department 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. von70154_08_c08_223-256.indd 241 2/22/13 3:35 PM Section 8.3 Determining System Capacity CHAPTER 8 Capacity Decisions for Service Operations Most of the concepts discussed in this text apply to producers of services and producers 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 inventoried. 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. .Klaus Lahnstein/Getty Images Services cannot be inventoried and are typically produced and consumed simultaneously. Consequently, service organizations must effectively manage demand. Although it is not the most efficient method, allowing long waiting lines to occur is one way to manage 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 infrequently. This can mean large capital expenditures with limited return on investment. People who must wait in long lines for service may become dissatisfied, 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 longterm effects. Second, there is often a high degree of producer-consumer interaction during the production 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. von70154_08_c08_223-256.indd 242 2/22/13 3:35 PM CHAPTER 8 Section 8.3 Determining System Capacity Service Operations and System Capacity 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. Problem The flow of people through the restaurant follows this sequence. People arrive at the restaurant and park their cars. According to the records that the restaurant keeps, 20% of the guests spend time in the bar. The remaining 80% of the arrivals go directly to the dining area. According to standards that management has developed over the years, each dinner served per hour requires approximately four square feet of kitchen space. Listed below are the resources of the restaurant: Department/Area Capacity/Size Parking area 100 spaces Bar area 80 seats Dining area 200 seats Cooking area 600 square feet On average, 2.2 people arrive per car, only 80% of the seats in the bar are normally available because tables for four are sometimes occupied by two or three people, and only 85% of the dining area seats are normally available for the same reason. The average stay is 90 minutes. Everyone in the dining area orders a meal, and 40% of the people in the bar area order a meal. What is the capacity of the system? To begin, the capacity of each area can be calculated in terms of persons served per hour. Department/Area Capacity/Size Parking area (100 spaces)(2.2 people/car)/(1.5 hrs.) 5 147 people/hr. Bar area (80 seats) (0.8)/(1.5 hrs.) 5 43 people/hr. Dining area (200 seats)(0.85)/(1.5 hrs.) 5 113 people/hr. Cooking area (600 square feet)/(4 square feet/meal) 5 150 people/hr. If every customer spent time both in the bar and in the dining area, the system capacity would be easy to determine because each customer would place demands on each area. This would make the restaurant product layout similar to the steel industry, and the system capacity would be the smallest of the four department’s capacities. However, only a portion of the guests use both the bar and the dining areas. (continued) von70154_08_c08_223-256.indd 243 2/22/13 3:35 PM CHAPTER 8 Section 8.3 Determining System Capacity Problem (continued) To calculate the capacity of the system and determine the bottleneck department in this case, the approach illustrated in the medical center example mentioned earlier could be used. That method requires tracking two different flows: one involving the dining area and a second following the bar area. The process begins by selecting a level of demand that the restaurant can satisfy. If it cannot, the demand level is decreased, and another attempt is made. If it can, the demand level is increased. This trial and error method can quickly lead to the capacity if care is used in selecting the demand targets. This trial and error approach could also be used to solve problems, such as the steel industry problem described earlier. Inspecting the department capacities indicates that the system’s capacity cannot exceed 147 people per hour because that is the capacity of the parking lot, and the assumption of this model is that all patrons drive. It is also clear that the capacity of the system is at least 100 because all of the department capacities are at least 100, except for the bar area which only serves 20% of the customers. Therefore, the trial and error process begins by setting the arrival rate (demand) equal to 100 people per hour. This means that during each hour 100 people use the parking lot, 20 people use the bar, 80 people use the dining area, and 88 people order a meal. People in the bar that order a meal eat the meal in the bar. None of the individual departments is at capacity, so the analysis continues. The results are shown in the following table: Set Demand Equal To Department Area Capacity (People/ Hr.) 100 (People/ Hr.) 125 (People/ Hr.) 147 (People/ Hr.) 113/0.8 5 141 (People/Hr.) Parking area 147 100 125 147 141 Bar area 43 20 25 29 28 Dining area 113 80 100 118 113 Cooking area 150 88 110 130 124 Next, what happens if demand is set at 125 people/hour? Assume again that none of the departments is at capacity. As a result, the system capacity must be between 125 and 147 people/hour because the parking lot can hold no more than 147. With demand set at 147 people/hour, the parking lot is at capacity, but demand in the dining area exceeds capacity. Bar demand is equal to (147) (0.2) 5 29. Dining demand is equal to (147)(0.8) 5 118. Cooking demand is equal to 118 1 (29)(0.4) 5 130. At this point, the bottleneck is the dining area, but the system capacity is not clear because only some use the dining room. To determine the system capacity, divide the capacity of the dining area by 0.8, which is the percentage of customers that use the dining area. This calculation yields the system capacity, which is 141 people per hour. If the system capacity is set equal to demand and the department demands are calculated again, the excess capacities in the non-bottleneck departments can be identified. There is considerable excess capacity in the cooking area and in the bar, but the parking lot is near capacity. Expansion plans, if justified by demand, should be aimed at the dining area and the parking lot. von70154_08_c08_223-256.indd 244 2/22/13 3:35 PM Section 8.4 Making Capacity Decisions for Competitive Advantage CHAPTER 8 8.4 Making Capacity Decisions for Competitive Advantage I nformed 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. When to Add Capacity 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 management 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 probably 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. von70154_08_c08_223-256.indd 245 2/22/13 3:35 PM CHAPTER 8 Section 8.4 Making Capacity Decisions for Competitive Advantage Figure 8.10: Capacity versus demand Number of units Present capacity Construction lead time Today 1 Forecasted demand 2 3 4 5 6 Time (years) 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 limited to goods production because services have no finished goods inventory. Number of units Figure 8.11: Capacity, demand, and production rate Inventory draw-down Present capacity Production plan Inventory build-up Today 1 Production plan Forecasted demand 2 3 4 5 6 Time (years) von70154_08_c08_223-256.indd 246 2/22/13 3:35 PM CHAPTER 8 Section 8.4 Making Capacity Decisions for Competitive Advantage Other methods of dealing with the capacity shortfall in the third year can be understood 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 scheduling, 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 operation. It may be possible to buy production capacity to supplement the bottleneck operation and increase overall capacity. How Much Capacity to Add If additional capacity is built, how much should be added? Again, assuming that the forecasted 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. Figure 8.12: How much capacity to add Number of units Option 2 Today’s capacity Option 1 Construction Forecasted lead time demand Today 1 2 3 4 Additional capacity on line 5 6 Time (years) 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 focusing on the bottleneck to increase system capacity. The financial versus operating tradeoffs of these options are summarized here. von70154_08_c08_223-256.indd 247 2/22/13 3:35 PM Chapter Summary CHAPTER 8 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 multiple 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 capacity 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. Where to Add Capacity 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. What Type of Capacity to Add 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. Chapter Summary • • • von70154_08_c08_223-256.indd 248 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 economically. 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. 2/22/13 3:35 PM CHAPTER 8 Case Study • • • • Estimating an organization’s capacity is not easy because capacity is affected by management decisions regarding changing the number of hours worked, changing 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. Case Study Beck Manufacturing Al Beck, president of Beck manufacturing, wants to determine the capacity of his facility, 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 identical 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 industrial engineering department has provided you with the following data on present operations. In addition, you have been told that assembly operations, while not unlimited, can be easily changed to meet the need. 1. 2. 3. von70154_08_c08_223-256.indd 249 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 Calculate the capacity of each machine center and the capacity of the system. 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? How may Mr. Beck expand capacity without purchasing new equipment? Be specific. 2/22/13 3:35 PM CHAPTER 8 Problems Discussion Questions 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 statement, 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? Problems 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 2. B C 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 department B that is input to department D, two tons from department C must be added. A B D C 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. von70154_08_c08_223-256.indd 250 2/22/13 3:35 PM CHAPTER 8 Problems 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. A 5. B C Department Capacity (Parts/Hour) A 120 B 110 C 140 D 160 D 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. von70154_08_c08_223-256.indd 251 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 2/22/13 3:35 PM CHAPTER 8 Problems 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’ management 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. von70154_08_c08_223-256.indd 252 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 flakes 1,200 C Toast flakes 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 2/22/13 3:35 PM CHAPTER 8 Problems A B C E F G D 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? Pa rt s White Chemical has a problem with its operations. Analyze the following flow process: E Pa 2 D 1 a G Pa rt B rt A 1 P rt 9. 1 C F 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. b. c. d. von70154_08_c08_223-256.indd 253 What is the system’s capacity? Which department(s) is the bottleneck? How much slack (unused capacity) is available in the other departments? How much system capacity can be gained by adding capacity to the bottleneck? 2/22/13 3:35 PM CHAPTER 8 Problems 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: A B E C F H G I J D 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, respectively. 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 variable 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? von70154_08_c08_223-256.indd 254 2/22/13 3:35 PM Key Terms CHAPTER 8 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 company 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? Key Terms bottleneck The department, workstation, or operation that limits the flow of product through the production system. This department restricts the flow of product from upstream departments and starves downstream departments. capacity A measure of the organization’s ability to provide customers with the demanded services or goods, in the amount requested and in a timely manner. 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. von70154_08_c08_223-256.indd 255 product mix The percent of total demand or output that is devoted to each product. rounding out capacity Adding capacity 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 organization to produce a sufficient number of goods and services to meet the demands of customers. yield The ratio of the quantity of output to the quantity of input. 2/22/13 3:35 PM von70154_08_c08_223-256.indd 256 2/22/13 3:35 PM
Purchase answer to see full attachment