SCM Test #1 Supplement 7

A good capacity decision requires that it be tightly integrated with the organization's strategy and investments. But there are four other special "considerations" to making a good capacity decision. Identify them.

(1) Forecast demand accurately. (2) Match technology increments and sales volume. (3) Find the optimum operating size (volume). (4) Build for change.

What are the four limitations of the net present value technique?

(1) Investments with the same net present value may have significantly different projected lives and different salvage values. (2) Investments with the same net present value may have different cash flows. Different cash flows may make substantial differences in the company's ability to pay its bills. (3) The assumption is that we know future interest rates, which we do not. (4) Payments are always made at the end of the period (week, month, or year), which is not always the case.

A tortilla chip workstation produces 1,000 chips in 20 seconds. What is its bottleneck time?

.02 seconds per chip

A product sells for $5, and has unit variable costs of $3. This product accounts for $20,000 in annual sales, out of the firm's total of $60,000. When performing multiproduct break-even analysis, what is the weighted contribution of this product? ?????

0.133

Identify the six tactics for matching capacity to demand.

1. Making staffing changes (increasing or decreasing the number of employees or shifts), 2. Adjusting equipment (purchasing additional machinery or selling or leasing out existing equipment), 3. Improving processes to increase throughput, 4. Redesigning products to facilitate more throughput, 5. Adding process flexibility to better meet changing product preferences, and 6. Closing facilities.

Fabricators, Inc. wants to increase capacity by adding a new machine. The fixed costs for machine A are $90,000, and its variable cost is $15 per unit. The revenue is $21 per unit. What is the break-even point for machine A?

15,000 units

An assembly line has 10 stations with times of 1, 2, 3, 4, ..., 10, respectively. What is the bottleneck time?

18.18% of the throughput time

A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the throughput time of the system?

35

Christopher's Cranks uses a machine that can produce 100 cranks per hour. The firm operates 12 hours per day, five days per week. Due to regularly scheduled preventive maintenance, the firm expects the machine to be running during approximately 95% of the available time. Based on experience with other products, the firm expects to achieve an efficiency level for the cranks of 85%. What is the expected weekly output of cranks for this company? ????

4845

The Academic Computing Center has five trainers available in its computer labs to provide training sessions to students. Assume that the design capacity of the system is 1900 students per semester and that effective capacity equals 90% of design capacity. If the number of students who actually got their orientation session is 1500, what is the efficiency of the system?

87.7%

A work system has five stations that have process times of 5, 9, 4, 9, and 8. What is the bottleneck time?

9

Explain the importance of a bottleneck operation in a production sequence.

A bottleneck operation is the one that limits output in the production sequence. Consequently, to increase throughput of the facility, the bottleneck output must be increased.

Which of the following techniques is NOT a technique for dealing with a bottleneck?

A) Schedule throughput to match the capacity of the bottleneck. B) Increase the capacity of the constraint. C) Have cross-trained employees available to keep the constraint at full operation. D) Develop alternate routings. E) All are techniques for dealing with bottlenecks.

TOC strives to reduce the effect of constraints by:

A) offloading work from constrained workstations. B) increasing constrained workstation capability. C) changing workstation order to reduce throughput time. D) A and B

Of the four approaches to capacity expansion, the approach that "straddles" demand:

A) uses incremental expansion. B) uses one-step expansion. C) at some times leads demand, and at other times lags. D) works best when demand is not growing but is stable. E) Choices A and C are both correct.

Distinguish between utilization and efficiency.

Both are ratios, not item counts. Both use actual output in the ratio numerator. Utilization is the ratio of actual output to design capacity, so it measures output as a fraction of ideal facility usage. Efficiency is the ratio of actual output to effective capacity, so it measures output as a fraction of the practical or current limits of the facility. Utilization will be lower than efficiency. UTILIZATION WILL BE LOWER THAN EFFICIENCY

Which of the following is not one of the four principles of bottleneck management?

Bottlenecks should be moved to the end of the system process.

How is break-even analysis useful in the study of the capacity decision? What limitations does this analytical tool have in this application?

Breakeven is defined as the volume for which costs equal revenue. It is useful to know the break-even point for each capacity alternative under consideration. In reality, costs may not be as linear as they are assumed to be in this model.

Which of the following is FALSE regarding capacity expansion?

Capacity may only be added in large chunks.

What is the fundamental distinction between design capacity and effective capacity? Provide a brief example.

Design capacity is the theoretical maximum output of a system in a given period under ideal conditions. Effective capacity, on the other hand, is the capacity that a firm expects to achieve given the current operating constraints. Effective capacity is often lower than design capacity because the facility may have been designed for an earlier version of the product or a different product mix than is currently being produced. Most firms operate at less than design capacity because they don't want to be stretching their resources to the limit. As an example, a restaurant might have 100 seats, but it only opens up 60 every night because it cannot find enough qualified servers.

Break-even analysis identifies the volume at which fixed costs and revenue are equal.

FALSE

Break-even analysis is a powerful analytical tool, but is useful only when the organization produces a single product.

FALSE

Capacity decisions are based on technological concerns, not demand forecasts.

FALSE

Possible decision alternatives found in capacity EMV problems are future demands or market favorability.

FALSE

Substantial research has proved that the only successful method of dealing with bottlenecks is to increase the bottleneck's capacity.

FALSE

The bottleneck time is always at least as long as the throughput time.

FALSE

The net present value of $10,000 to be received in exactly three years is considerably greater than $10,000.

FALSE

To find the throughput time with simultaneous processes, compute the time over all paths and choose the shortest path through the system.

FALSE

Utilization is the number of units a facility can hold, receive, store, or produce in a period of time.

FALSE

Define fixed costs.

Fixed costs are those that continue even if no units are produced.

The theory of constraints has its origins in:

Goldratt and Cox's book, The Goal: A Process of Ongoing Improvement.

TOC was popularized by:

Goldratt and Cox.

________ is a means of determining the discounted value of a series of future cash receipts.

Net Present Value

Consider a production line with five stations. Station 1 can produce a unit in 9 minutes. Station 2 can produce a unit in 10 minutes. Station 3 has two identical machines, each of which can process a unit in 12 minutes (each unit only needs to be processed on one of the two machines. Station 4 can produce a unit in 5 minutes. Station 5 can produce a unit in 8 minutes. Which station is the bottleneck station?

STATION 2

A useful tactic for increasing capacity is to redesign a product in order to facilitate more throughput.

TRUE

Changes in capacity may lead, lag, or straddle the demand.

TRUE

Design capacity is the theoretical maximum output of a system in a given period under ideal conditions.

TRUE

Expected output is sometimes referred to as rated capacity.

TRUE

Fixed costs are those costs that continue even if no units are produced.

TRUE

One limitation of the net present value approach to investments is that investments with identical net present values may have very different cash flows.

TRUE

Price changes are useful for matching the level of demand to the capacity of a facility.

TRUE

The theory of constraints is a body of knowledge that deals with anything that limits an organization's ability to achieve its goals.

TRUE

Describe how EMV might be used to analyze a capacity decision.

The EMV for each capacity decision (perhaps large, medium, and small plants) can be evaluated for unknown costs/revenue/other conditions. Each possible scenario (perhaps low, medium, and high demand) is given a payoff value and a probability. The weighted results of these various states of nature sum to the EMV for each capacity decision. An operations manager can then choose the highest EMV to maximize profit or the lowest EMV to minimize costs.

Why is the capacity decision important?

The capacity decision is important for several reasons. First, capacity costs represent a large portion of fixed costs. Second, a facility of the wrong size means that costs are not as low as they could be. If a facility is too large, and portions of it remain idle, the firm's costs are too high because of the higher fixed costs. If a plant is too small, costs are again higher than they might be due to inefficiencies of working in cramped and crowded spaces. Further, a facility too small may lead to lost sales, perhaps even lost markets.

Identify, in proper sequence, the steps in the process of recognizing and managing constraints.

The five-step process of the theory of constraints includes: Step 1: Identify the constraints. Step 2: Develop a plan for overcoming the identified constraints. Step 3: Focus resources on accomplishing Step 2. Step 4: Reduce the effects of the constraints by offloading work or by expanding capability. Make sure that the constraints are recognized by all those who can have an impact on them. Step 5: When one set of constraints is overcome, go back to Step 1 and identify new constraints.

Describe the theory of constraints in a sentence.

The theory of constraints is the body of knowledge that deals with anything that limits an organization's ability to achieve its goals.

Lag and straddle strategies for increasing capacity have what main advantage over a leading strategy?

They delay capital expenditure.

Define variable costs. What special assumption is made about variable costs in the textbook?

Variable costs are those that vary with the number of units produced. Linearity (or proportionality) is assumed.

Which of the following statements regarding fixed costs is TRUE?

While fixed costs are ordinarily constant with respect to volume, they can "step" upward if volume increases result in additional fixed costs.

utilization=

actual output/design capacity

efficiency=

actual output/effective capacity

________ analysis finds the point at which costs equal revenues.

break-even

Which of the following costs would be incurred even if no units were produced?

building rental costs

Effective capacity is the:

capacity a firm expects to achieve given the current operating constraints.

Which of the following represents a common way to manage capacity in the service sector?

changes in staffing levels

Multiproduct break-even analysis calculates the ________ of each product, ________ it in proportion to each product's share of total sales.

contribution, weighting

In the service sector, scheduling customers is a type of ________ management, while scheduling the workforce is a type of ________.

demand, capacity

In "drum, buffer, rope," what provides the schedule, i.e. the pace of production?

drum

Utilization will always be lower than efficiency because:

effective capacity is less than design capacity.

________ is actual output as a percent of effective capacity.

efficiency

What is sometimes referred to as rated capacity?

expected output

________ cost is the cost that continues even if no units are produced.

fixed

Net present value will be greater:

for a 4% discount rate than for a 6% discount rate.

An organization whose capacity is on that portion of the average unit cost curve that falls as output rises:

has a facility that is below optimum operating level and should build a larger facility.

Net present value:

is the discounted value of a series of future cash receipts.

Which of the following represents an aggressive approach to demand management in the service sector when demand and capacity are not particularly well matched?

lower resort hotel room prices on Wednesdays

What is a common method used to increase capacity with a lag strategy?

overtime and subcontracting

The basic break-even model can be modified to handle more than one product. This extension of the basic model requires:

price and variable cost for each product, and the percent of sales that each product represents.

In "drum, buffer, rope," the ________ acts like signals between workstations.

rope

The capacity planning strategy that delays adding capacity until capacity is below demand, then adds a capacity increment so that capacity is above demand, is said to ________ demand.

straddle

Break-even analysis can be used by a firm that produces more than one product, but:

the break-even point depends upon the proportion of sales generated by each of the products.

Adding a complementary product to what is currently being produced is a demand management strategy used when:

the existing product has seasonal or cyclical demand.

________ is the number of units a facility can hold, store, receive, or produce in a period of time.

throughput or capacity

Break-even is the number of units at which:

total revenue equals total cost

________ is actual output as a percent of design capacity

utilization

Basic break-even analysis typically assumes that:

variable costs and revenues increase in direct proportion to the volume of production.