Ops Mgnt Ch 4 & 5

Capacity Utilization Formula

(Average Output Rate/Maximum Capacity) x 100%

Theory of Constraints

1. Identify the System Bottleneck(s) 2. Exploit the Bottleneck(s) 3. Subordinate All Other Decisions to Step 2 4. Elevate the Bottleneck(s) 5. Do Not Let Inertia Set In

The four operational measures for the Theory of Constraints

1. Inventory 2. Throughput 3. Operating Expense 4. Utilization

Capacity Cushion Formula

100% - average utilization rate (%)

Return on Investment (ROI)

A ratio of profit to capital used, or a rate of return from capital. (Gains from inv. - Costs from inv.) / Cost of Investment

Economies of Scale

ADVANTAGES More quantity produced Spreading fixed costs (Lower fixed cost per unit) Reducing construction costs (Overhead, element of FC) Cutting costs of purchased materials Finding process advantages

Constraint

Any factor that limits the performance of a system and restrict its output

Capacity Management

Balance supply with demand

Diseconomies of Scale

DISADVANTAGES Lower quantity produced Complexity (large companies) Loss of focus Inefficiencies

How can profits be improved?

Increasing sales and/or Decreased costs

Capacity Planning

Long-Term Economies and diseconomies of scale Capacity timing and sizing strategies Systematic approach to capacity decisions Produce more More upfront capital expenditures Entails financial risk

Financial metrics of profitability

Net Profit (Net Income) ROI Cash Flow

Throughput rate (r)

Rate at which each work center generated outputs, expressed in units tr = 1/c c = cycle time 1 = 60 min

Decrease in throughput time

Reduce Inventory to Increase ROI Increase Cash Flow Reduce Operating Cost to Increase NI Reduce Delivery Time to Increase sales to Increase market share and NI

Net Profit (Net Income)

Sales Revenue - Operating Costs

Constraint Management

Short-Term Theory of constraints Identification and management of bottlenecks Product mix decisions using bottlenecks Managing constraints in a line process Maximize output

Expansionist Strategy

Stays ahead of demand, minimizes the chance of sales lost to insufficient capacity Optimistic and aggressive Expand based on forecast of market demand

Capacity

The *maximum rate* of *output* of a process

Cycle Time (c)

The maximum time allowed for work on a unit at each work center

Idle Time

The total unproductive time for all stations in the assembly of each unit = Total available time - Actual processing time

Bottleneck

a capacity constraint *resource* (CCR) whose available capacity limits the organization's ability to meet the product volume, product mix, or demand fluctuation required by the marketplace Constraint that holds down all other processes (slows output) Tesla = battery pack production

Drum-Buffer-Rope

a concept in theory of constraints where the drum sets the pace of production, buffer is placed in front of the bottleneck, and rope communicates changes

Consider consecutive processes A-B-C, where process A has a capacity of 20 units per hour, process B has a capacity of 25 units per hour, and process C has a capacity of 30 units per hour. Where would an operations manager want any inventory? a. in front of process A b. Inventory should not exist anywhere. c. in front of process C d. in front of process B

a. in front of process A

A business school with plenty of classroom space that hires adjunct faculty for a semester to meet unusually high student demand for courses is an example of elevating a bottle neck. a. true b. false

a. true

The time for a process improvement exercise should be on balancing: a. Time b. Flow c. Capacity d. Utilization

b. Flow

Cycle time formula

c = 1/r c = cycle time r = throughput rate 1 = 60 min.

The following statements describe a bottle neck. Which one is false? a. A resource that has the lowest throughput rate. b. A resource that limits the capacity of a process or a system. c. A resource that has the longest throughput time. d. A resource that has the largest capacity.

d. A resource that has the largest capacity.

Which of the following statements is false? a. Firms can improve cash flow by shortening throughput time of their products and services. b. Firms can improve their returns on investment by shortening throughput time of their products and services. c. Firms can increase their market share by shortening throughput time of their products and services. d. Firms can increase their inventory by shortening throughput time of their products and services

d. Firms can increase their inventory by shortening throughput time of their products and services

Which of the following statements does not comply with the Theory of Constraints? a. The first step in applying the Theory of Constraints is to identify the constraint. b. The process with the least capacity is called a bottleneck if its output is less than market demand. c. The Theory of Constraints method is also referred to as the drum-buffer-rope method. d. The focus for a process improvement exercise should be on balancing capacity.

d. The focus for a process improvement exercise should be on balancing capacity.

The second step in Theory of Constraints application, "exploit the bottleneck(s)," means that the analyst should: a. schedule non-bottleneck resources to support the bottleneck. b. repeat the analysis process to look for other bottlenecks. c. consider increasing capacity of the bottleneck. d. create a schedule that maximizes the throughput of the bottlenecks.

d. create a schedule that maximizes the throughput of the bottlenecks.

According to the Theory of Constraints, the four operational measures of capacity include all of the following EXCEPT: a. utilization. b. throughput. c. inventory. d. delivery lead times.

d. delivery lead times.

Use the process flow diagram to determine which of these events has the greatest impact on the capacity of the process Station A (1 worker, 8 min) Station B (1 worker, 7 units/hr) Station C (1 worker, 6 units/hr) Station D (1 worker, 9 minutes) a. reducing the flow time at Station D from 9 to 8 minutes b. increasing the capacity at Station B to 8 units per hour c. reducing the flow time at Station A from 8 to 7 minutes d. increasing the capacity at Station C to 7 units per hour

d. increasing the capacity at Station C to 7 units per hour

Wait and See Strategy

postponing form commitments to build expensive new facilities until demand has already exceeded capacity. Conservative Wait for demand to increase, then increase capacity

Capacity Cushion

the amount of reserve capacity a process uses to handle sudden increases in demand or temporary losses of production capacity; it measures the amount by which the average utilization (in terms of total capacity) falls below 100 percent Buffer against market fluctuations Vary with industry - Capital intensive (manufacturing) as small as 5% -Industry (service industry) 30-40%

Throughput Time

total elapsed time from the start to the finish of a job or a customer being processed at one or more work centers

Key principles of the TOC

•Every capital investment must be viewed from the perspective of the global impact on throughput, inventory and operating expense. •The focus should be on balancing flow, not on balancing capacity. •Maximizing the output and efficiency of every resource may not maximize the throughput of the entire system. • An hour lost at a bottleneck or constrained resource is an hour lost for the whole system. -An hour saved does not make the system more productive. •Activating a non-bottleneck resources is not the same as utilizing a bottleneck. -It doesn't increase throughput or promote better performance. •Work should be released into the system only as frequently as needed by the bottlenecks. -Bottleneck flows = market demand

Example 5.1 - Identifying the bottleneck in a service process

•Managers at the First Community Bank are attempting to shorten the time it takes customers with approved loan applications to get the paperwork processed. •Approved loan applications first arrive at activity or step 1, where they are checked for completeness and put in order. •At step 2, the loans are categorized into different classes according to the loan amount and whether they are being requested for personal or commercial reasons. •While credit checking commences at step 3, loan application data are entered in parallel into the information system for record-keeping purposes at step 4. •Finally, all paperwork for setting up the new loan is finished at step 5 FLOWCHART