S7 - 1 Course Title: Production and Operations Management Course Code: MGT 362 Course Book: Operations Management 10 th Edition. By Jay Heizer & Barry Render

S7 - 2 Chapter 7S: Capacity and Constraint Management

S7 - 3 Summary  Capacity  Design and Effective Capacity  Capacity and Strategy  Capacity Considerations  Managing Demand  Demand and Capacity Management in the Service Sector

S7 - 4 Outline – Continued  Bottleneck Analysis and Theory of Constraints  Process Times for Stations, Systems, and Cycles  Theory of Constraints  Bottleneck Management  Break-Even Analysis  Single-Product Case  Multiproduct Case

S7 - 5 Tactics for Matching Capacity to Demand 1.Making staffing changes 2.Adjusting equipment  Purchasing additional machinery  Selling or leasing out existing equipment 3.Improving processes to increase throughput 4.Redesigning products to facilitate more throughput 5.Adding process flexibility to meet changing product preferences 6.Closing facilities

S7 - 6 Demand and Capacity Management in the Service Sector  Demand management  Appointment, reservations, FCFS rule  Capacity management  Full time, temporary, part-time staff

S7 - 7 Bottleneck Analysis and Theory of Constraints  Each work area can have its own unique capacity  Capacity analysis determines the throughput capacity of workstations in a system  A bottleneck is a limiting factor or constraint  A bottleneck has the lowest effective capacity in a system

S7 - 8 Process Times for Stations, Systems, and Cycles process time of a station  The process time of a station is the time to produce a unit at that single workstation process time of a system  The process time of a system is the time of the longest process in the system … the bottleneck process cycle time  The process cycle time is the time it takes for a product to go through the production process with no waiting These two might be quite different!

S7 - 9 A Three-Station Assembly Line Figure S7.4 2 min/unit4 min/unit3 min/unit ABC

S Process Times for Stations, Systems, and Cycles system process time  The system process time is the process time of the bottleneck after dividing by the number of parallel operations system capacity  The system capacity is the inverse of the system process time process cycle time  The process cycle time is the total time through the longest path in the system

S Capacity Analysis  Two identical sandwich lines  Lines have two workers and three operations  All completed sandwiches are wrapped Wrap 37.5 sec/sandwich Order 30 sec/sandwich BreadFillToast 15 sec/sandwich 20 sec/sandwich 40 sec/sandwich BreadFillToast 15 sec/sandwich20 sec/sandwich40 sec/sandwich

S Capacity Analysis Wrap 37.5 sec Order 30 sec BreadFillToast 15 sec 20 sec 40 sec BreadFillToast 15 sec20 sec40 sec  Toast work station has the longest processing time – 40 seconds  The two lines each deliver a sandwich every 40 seconds so the process time of the combined lines is 40/2 = 20 seconds  At 37.5 seconds, wrapping and delivery has the longest processing time and is the bottleneck  Capacity per hour is 3,600 seconds/37.5 seconds/sandwich = 96 sandwiches per hour  Process cycle time is = seconds

S Capacity Analysis  Standard process for cleaning teeth  Cleaning and examining X-rays can happen simultaneously Check out 6 min/unit Check in 2 min/unit Develops X-ray 4 min/unit8 min/unit Dentist Takes X-ray 2 min/unit 5 min/unit X-ray exam Cleaning 24 min/unit

S Capacity Analysis  All possible paths must be compared  Cleaning path is = 46 minutes  X-ray exam path is = 27 minutes  Longest path involves the hygienist cleaning the teeth  Bottleneck is the hygienist at 24 minutes  Hourly capacity is 60/24 = 2.5 patients  Patient should be complete in 46 minutes Check out 6 min/unit Check in 2 min/unit Develops X-ray 4 min/unit 8 min/unit Dentist Takes X-ray 2 min/unit 5 min/unit X-ray exam Cleaning 24 min/unit

S Theory of Constraints  Five-step process for recognizing and managing limitations Step 1: Step 1:Identify the constraint Step 2: Step 2:Develop a plan for overcoming the constraints Step 3: Step 3:Focus resources on accomplishing Step 2 Step 4: Step 4:Reduce the effects of constraints by offloading work or expanding capability Step 5: Step 5:Once overcome, go back to Step 1 and find new constraints

S Bottleneck Management 1.Release work orders to the system at the pace of set by the bottleneck 2.Lost time at the bottleneck represents lost time for the whole system 3.Increasing the capacity of a non- bottleneck station is a mirage 4.Increasing the capacity of a bottleneck increases the capacity of the whole system

S Break-Even Analysis  Technique for evaluating process and equipment alternatives  Objective is to find the point in dollars and units at which cost equals revenue  Requires estimation of fixed costs, variable costs, and revenue

S Break-Even Analysis  Fixed costs are costs that continue even if no units are produced  Depreciation, taxes, debt, mortgage payments  Variable costs are costs that vary with the volume of units produced  Labor, materials, portion of utilities  Contribution is the difference between selling price and variable cost

S Break-Even Analysis  Costs and revenue are linear functions  Generally not the case in the real world  We actually know these costs  Very difficult to verify  Time value of money is often ignored Assumptions

S Profit corridor Loss corridor Break-Even Analysis Total revenue line Total cost line Variable cost Fixed cost Break-even point Total cost = Total revenue – 900 – 800 – 700 – 600 – 500 – 400 – 300 – 200 – 100 – – |||||||||||| Cost in dollars Volume (units per period) Figure S7.5

S Break-Even Analysis BEP x =break-even point in units BEP $ =break-even point in dollars P=price per unit (after all discounts) x=number of units produced TR=total revenue = Px F=fixed costs V=variable cost per unit TC=total costs = F + Vx TR = TC or Px = F + Vx Break-even point occurs when BEP x = F P - V

S Break-Even Analysis BEP x =break-even point in units BEP $ =break-even point in dollars P=price per unit (after all discounts) x=number of units produced TR=total revenue = Px F=fixed costs V=variable cost per unit TC=total costs = F + Vx BEP $ = BEP x P = P = F (P - V)/P F P - V F 1 - V/P Profit= TR - TC = Px - (F + Vx) = Px - F - Vx = (P - V)x - F