1. © 2007 Pearson Education Constraint Management Chapter 7

2. © 2007 Pearson Education Output and Capacity  What is a Constraint?  Any factor that limits system performance and restricts its output.  Capacity is the maximum rate of output of a process or system.  A Bottleneck  An output constraint that limits a company’s ability to meet market demand.  Also called Capacity Constraint Resource or CCR

3. © 2007 Pearson Education Theory of Constraints (TOC) Short-Term Capacity Planning  Theory of Constraints  Identification and management of bottlenecks  Product Mix Decisions using bottlenecks Long-term Capacity Planning  Economies and Diseconomies of Scale  Capacity Timing and Sizing Strategies  Systematic Approach to Capacity Decisions Constraint Management  A systematic approach that focuses on actively managing constraints that are impeding progress.

4. © 2007 Pearson Education Measures of Capacity  Output Measures: for example, the number of cars produced per day  Input Measures: such as number of workstations or number of workers  Utilization: the degree to which equipment, space, or the workforce is currently being used.

5. © 2007 Pearson Education Performance Measures in TOC  Inventory (I)  Throughput (T)  Operating Expense (OE)  Utilization (U)

6. © 2007 Pearson Education Operational MeasuresTOC ViewRelationship to Financial Measures Inventory (I) All the money invested in a system in purchasing things I Decrease, (ROI, net profit and cash flow) increase Throughput (T) Rate at which a system generates money through sales T increase, (ROI, net profit and cash flow) increase Operating Expense (OE) All the money a system spends to turn inventory into throughput OE Decrease, (ROI, net profit and cash flow) increase Utilization (U) the degree to which equipment, space, or the workforce is currently being used U increase at the bottleneck, (ROI, net profit and cash flow) increase Performance Measures in TOC

7. © 2007 Pearson Education 7 Key Principles of TOC 1.The focus is on balancing flow, not on balancing capacity. 2.Maximizing output and efficiency of every resource will not maximize the throughput of the entire system. 3.An hour lost at a bottleneck or constrained resource is an hour lost for the whole system. An hour saved at a non-constrained resource does not necessarily make the whole system more productive.

8. © 2007 Pearson Education 7 Key Principles of TOC 4.Inventory is needed only in front of the bottlenecks to prevent them from sitting idle, and in front of assembly and shipping points to protect customer schedules. Building inventories elsewhere should be avoided. 5.Work should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses.

9. © 2007 Pearson Education 7 Key Principles of TOC 6.Activation of non-bottleneck resources cannot increase throughput, nor promote better performance on financial measures. 7.Every capital investment must be viewed from the perspective of its global impact on overall throughput (T), inventory (I), and operating expense (OE).

10. © 2007 Pearson Education Application of TOC 1.Identify The System Bottleneck(s). 2.Exploit The Bottleneck(s): create schedules that maximize the throughput of the bottleneck(s). 3.Subordinate All Other Decisions to Step 2: non- bottleneck resources should be scheduled to support the schedule of the bottleneck and not produce more than it can handle 4.Elevate The Bottleneck(s): increase its capacity 5.Do Not Let Inertia Set In: if the system constraint shift, the whole process must be repeated.

11. © 2007 Pearson Education Identification and Management of Bottlenecks  A Bottleneck is the process or step which has the lowest capacity and longest throughput time.  Throughput Time is the total time from the start to the finish of a process.  Bottlenecks can be internal or external to a firm.

12. © 2007 Pearson Education Setup Time  If multiple services or products are involved, extra time usually is needed to change over from one service or product to the next.  This increases the workload and could be a bottleneck.  Setup Time  Setup Time is the time required to change a process or an operation from making one service or product to making another.

13. © 2007 Pearson Education Where is the Bottleneck? Example 7.1 It takes 10 + 20 + max (15, 12) + 5 + 10 = 60 minutes to complete a loan application. Unless more resources are added at step B, the bank will be able to complete only 3 loan accounts per hour, or 15 new load accounts in a five-hour day. 1. Check loan documents and put them in order (10 minutes) 2. Categorize loans (20 minutes) 3. Check for credit rating (15 minutes) 6. Complete paperwork for new loan (10 minutes) 4. Enter loan application data into the system (12 minutes) Customer 5. Is loan approved? (5 min) Yes No Bottleneck

14. © 2007 Pearson Education Ex 7.2: Identifying the bottleneck in a manufacturing process

15. © 2007 Pearson Education Ex 7.2: Identifying the bottleneck in a manufacturing process WSProduct’s Time (minutes) at WS ABCD V30--- W--515 X10205- Y10 55 Z--5 Raw material($/unit) 5324 Purchased Parts ($/unit) 5236 Price ($/unit)75724538 Demand (units/week) 6080 100

16. © 2007 Pearson Education Ex 7.2: Identifying the bottleneck in a manufacturing process Each workstation has one worker who works a single shift (8 hours) on his WS, the plant operates 5 days/week. Each worker is paid $18 per hour. Total Overhead costs per week are $8500. labor costs per one unit of products A,B,C and D are (15, 9, 6, 9) $/unit. 1)Which of the five workstations V,W,X,Y and Z has the highest workload and thus serves as the bottleneck? 2)Identify the product mix according to product’s profitability within specified capacity. 3)Use the TOC to identify best product mix. 4)Compare the two methods and decide which final product mix that should be produced.

17. © 2007 Pearson Education Utilization of a Constrained Resource: An Example Ensign Company produces two products and selected data are shown below:

18. © 2007 Pearson Education Utilization of a Constrained Resource  Machine A1 is the constrained resource and is being used at 100% of its capacity.  There is excess capacity on all other machines.  Machine A1 has a capacity of 2,400 minutes per week. Should Ensign focus its efforts on Product 1 or Product 2?  Machine A1 is the constrained resource and is being used at 100% of its capacity.  There is excess capacity on all other machines.  Machine A1 has a capacity of 2,400 minutes per week. Should Ensign focus its efforts on Product 1 or Product 2?

19. © 2007 Pearson Education Quick Check How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit d. 2 units 0.5 unit How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit d. 2 units 0.5 unit

20. © 2007 Pearson Education How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit d. 2 units 0.5 unit How many units of each product can be processed through Machine A1 in one minute? Product 1 Product 2 a. 1 unit 0.5 unit b. 1 unit 2.0 units c. 2 units 1.0 unit d. 2 units 0.5 unit Quick Check I was just checking to make sure you are with us.

21. © 2007 Pearson Education Quick Check What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. d. Cannot be determined. What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. d. Cannot be determined.

22. © 2007 Pearson Education Quick Check What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. d. Cannot be determined. What generates more profit for the company, using one minute of machine A1 to process Product 1 or using one minute of machine A1 to process Product 2? a. Product 1 b. Product 2 c. They both would generate the same profit. d. Cannot be determined. With one minute of machine A1, we could make 1 unit of Product 1, with a contribution margin of $24, or 2 units of Product 2, each with a contribution margin of $15. 2 × $15 = $30 > $24 With one minute of machine A1, we could make 1 unit of Product 1, with a contribution margin of $24, or 2 units of Product 2, each with a contribution margin of $15. 2 × $15 = $30 > $24

23. © 2007 Pearson Education Utilization of a Constrained Resource The key is the contribution margin per unit of the constrained resource. Product 2 should be emphasized. Provides more valuable use of the constrained resource machine A1, yielding a contribution margin of $30 per minute as opposed to $24 for Product 1.

24. © 2007 Pearson Education Utilization of a Constrained Resource If there are no other considerations, the best plan would be to produce to meet current demand for Product 2 and then use remaining capacity to make Product 1. The key is the contribution margin per unit of the constrained resource.

25. © 2007 Pearson Education Utilization of a Constrained Resource Let’s see how this plan would work.

26. © 2007 Pearson Education Utilization of a Constrained Resource Let’s see how this plan would work.

27. © 2007 Pearson Education Utilization of a Constrained Resource Let’s see how this plan would work.

28. © 2007 Pearson Education Utilization of a Constrained Resource According to the plan, we will produce 2,200 units of Product 2 and 1,300 of Product 1. Our contribution margin looks like this. The total contribution margin for Ensign is $64,200.

29. © 2007 Pearson Education Quick Check Colonial Heritage makes reproduction colonial furniture from select hardwoods. Colonial Heritage makes reproduction colonial furniture from select hardwoods. The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand? a. Yes b. No

30. © 2007 Pearson Education Colonial Heritage makes reproduction colonial furniture from select hardwoods. Colonial Heritage makes reproduction colonial furniture from select hardwoods. The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. Is this enough hardwood to satisfy demand? a. Yes b. No Quick Check (2  600) + (10  100 ) = 2,200 > 2,000

31. © 2007 Pearson Education Quick Check The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits? a. 500 chairs and 100 tables b. 600 chairs and 80 tables c. 500 chairs and 80 tables d. 600 chairs and 100 tables

32. © 2007 Pearson Education Quick Check The company’s supplier of hardwood will only be able to supply 2,000 board feet this month. What plan would maximize profits? a. 500 chairs and 100 tables b. 600 chairs and 80 tables c. 500 chairs and 80 tables d. 600 chairs and 100 tables

33. © 2007 Pearson Education Long-Term Capacity Planning Short-Term Capacity Planning  Theory of Constraints  Identification and management of bottlenecks  Product Mix Decisions using bottlenecks Long-term Capacity Planning  Economies and Diseconomies of Scale  Capacity Timing and Sizing Strategies  Systematic Approach to Capacity Decisions Constraint Management

34. © 2007 Pearson Education Long-Term Capacity Planning  Deals with investment in new facilities and equipment.  Plans cover a minimum of two years into the future.  Economies of scale: a concept that states that the average unit cost of a service or good can be reduced by increasing its output rate.

35. © 2007 Pearson Education Economies of scale  Economies of scale are sought in order to reduce costs through  Lower fixed costs per unit  Quantity discounts in purchasing materials  Reduced construction costs  Process advantages (shift toward line process, more efficient technology and specialized equipment, speeding the learning effect, lowering inventory, improve job design, reduce the number of changeovers)

36. © 2007 Pearson Education Economies of Scale  Economies of scale occur when the average unit cost of a service or good can be reduced by increasing its output rate.  Diseconomies of scale occur when the average cost per unit increases as the facility’s size increases 250-bed hospital 500-bed hospital 750-bed hospital Economies of scale Diseconomies of scale Output rate (patients per week) Average unit cost (dollars per patient)

37. © 2007 Pearson Education Capacity Timing and Sizing Strategies 1.Sizing Capacity Cushions 2.Timing and Sizing Expansions 3.Linking Process Capacity and other operating decisions.

38. © 2007 Pearson Education Capacity Cushions reserve capacity a firm has available. A capacity cushion is the amount reserve capacity a firm has available. Capacity Cushion = 100% − Utilization Rate (%) How much capacity cushion depends on The uncertainty and/or variability of demandThe uncertainty and/or variability of demand The cost of lost businessThe cost of lost business The cost of idle capacityThe cost of idle capacity

39. © 2007 Pearson Education Capacity Expansion Expansionist Strategy Planned unused capacity Time Capacity Forecast of capacity required Time between increments Capacity increment Staying ahead of demand

40. © 2007 Pearson Education Capacity Expansion Wait-and-See Strategy Time Capacity Forecast of capacity required Planned use of short-term options Time between increments Capacity Increment Chasing demand

41. © 2007 Pearson Education Expansionist strategy  Minimizes the chance of sales lost to insufficient capacity.  Can result in economies of scale and a faster rate in learning  Might increase the firm’s market share

42. © 2007 Pearson Education Wait-and-see strategy  Lags behind demand  To meet any shortfalls, it relies on short- term options:  Overtime  Temporary workers  Subcontractors  Stockouts  postponement of preventive maintenance on equipment

43. © 2007 Pearson Education Wait-and-see strategy  Uses smaller increments, such as by renovating existing facilities rather than building new one  Reduces the risks of overexpansion  Unable to respond if demand is unexpectedly high.  An intermediate strategy could be to follow the leader

44. © 2007 Pearson Education A Systematic Approach To Long-Term Capacity Decisions 1.Estimate future capacity requirements. 2.Identify gaps by comparing requirements with available capacity. 3.Develop alternative plans for filling the gaps. 4.Evaluate each alternative and make a final choice.

45. © 2007 Pearson Education  Capacity Requirement is determined over some future period based on demand and desired capacity cushion.  Planning Horizon is a set of consecutive future time periods for planning purposes. Step 1: Estimating Capacity Requirements

46. © 2007 Pearson Education 1) Using Output Measures for Estimating Capacity Requirements  Output Measures are the simplest way to express capacity.  Products produced or customers served per unit of time Example: Current capacity is 50 per day and demand is expected to double in five years. Management uses a capacity cushion of 20%. Capacity (M) in 5 years should be: M = 100/(1 - 0.2) = 125 customers

47. © 2007 Pearson Education 2) Using Input Measures for Estimating Capacity Requirements Input Measures are typically based on resource availability. –Availability of workers, machines, workstations, seats, etc. Capacity Requirement = Processing and setup hours required for year’s demand, summed over all services and products Hours available from a single capacity unit per year, after deducting desired cushion M =M =M =M = [Dp+(D/Q)s] product1+ [Dp+(D/Q)s] product2+ …+ [Dp+(D/Q)s] product n N[1 – (C/100)] D=demand forecast for the year p=processing time N=total number of hours per year during which the process operates C=desired capacity cushion, expressed as a percentage

48. © 2007 Pearson Education Surefoot Sandal Company Application 7.4  Put together a capacity plan for a critical bottleneck operation at the Surefoot Sandal Company. Capacity is measured as number of machines. Three products (men’s, women’s, & children’s sandals) are manufactured. The time standards, lot sizes, and demand forecasts are given below. There are two 8-hour shifts operating 5 days per week, 50 weeks per year. Experience shows that a capacity cushion of 5 percent is sufficient. a. How many machines are needed? b. If the operation currently has two machines, what is the capacity gap?

49. © 2007 Pearson Education Surefoot Sandal Company Application 7.4 Solution

50. © 2007 Pearson Education Surefoot Sandal Company Application 7.4 Solution

51. © 2007 Pearson Education Identifying Gaps and Developing Alternatives  A Capacity Gap is any difference, positive or negative, between forecast demand and current capacity.  Alternatives can be anything from doing nothing (Base Case), and various timing and sizing options (including the expansionist and wait-and-see strategies)  Evaluation of each alternative is important.

52. © 2007 Pearson Education Home Work  Answer questions 3,4,8,9,15, 16 from the textbook edition number 8.