Operations Management :

Sustainability and Supply Chain

Management

CAPACITY AND CONSTRAINT

MANAGEMENT

Dr. Ousha Alshamsi

Chapter 7S
 Outline
■ Capacity

■ Capacity and strategy

■ Service-Sector Demand and Capacity Management

■ Bottleneck Analysis and the Theory of Constraints

■ Break-Even Analysis.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity

■ The throughput, or the number of units a facility can hold,

receive, store, or produce in a period of time

■ Determines fixed costs

■ Determines if demand will be satisfied.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Planning Over a Time Horizon
Figure S7.1

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Design and Effective Capacity (1 of 4)

■ Design capacity is the maximum theoretical output of a system

– Normally expressed as a rate

■ Effective capacity is the capacity a firm expects to achieve given

current operating constraints

– Often lower than design capacity.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Design and Effective Capacity (2 of 4)
Table S7.1 Capacity Measurements

MEASURE DEFINITION EXAMPLE

Design capacity Ideal conditions Machines at Frito-Lay are designed to

exist during the produce 1,000 bags of chips/hr., and the
time that the plant operates 16 hrs./day.
Design Capacity equal to 1,000 bags per hour times 16 hours equal to 16,000 bags per day.

The photo shows Machines at Frito-Lay are designed to produce 1,000 bags of chips/hr., and the plant operates 16 hrs./day.
system is available
Design Capacity = 1,000 bags / hr. ´ 16hrs.
= 16,000 bags / day

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Design and Effective Capacity (3 of 4)
Table S7.1 Capacity Measurements

MEASURE DEFINITION EXAMPLE

Effective capacity Design capacity minus lost Frito-Lay loses 3 hours of output per day (= 0.5
output because of planned hrs./day on preventive maintenance, 1 hr./day
resource unavailability (e.g., on employee breaks, and 1.5 hrs./day setting
The photo shows people who are employees working on preventive maintenance and setting up of machines for different products.
preventive maintenance, up machines for different products).
machine
Effective Capacity = 16,000bags / day
Effective Capacity equal to 16,000 bags per day minus left parenthesis 1,000 bags per hour right parenthesis. Left parenthesis 3 hours per day right parenthesis equal to 16,000 bags per day minus 3,000 bags per day equal to 13,000 bags per day.

setups/changeovers,
changes in product mix, - (1,000 bags / hr. ) ( 3 hrs. / day )
scheduled breaks) = 16,000 bags / day - 3,000 bags / day
= 13,000 bags / day

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Design and Effective Capacity (4 of 4)
Table S7.1 Capacity Measurements

MEASURE DEFINITION EXAMPLE

Actual output Effective capacity On average, machines at Frito-Lay are not

minus lost output running 0.25 hr./day due to late parts and
during unplanned machine breakdowns.
resource idleness
Actual Output = 13,000 bags / day - (1,000 bags / hr.)
Actual Output minus 13,000 bags per day minus left parenthesis 1,000 bags per hour right parenthesis. Left parenthesis 0.25 hour per day right parenthesis minus 13,000 bags per day minus 250 bags per day minus 12,750 bags per day.

A person repairing or performing maintenance of the machines.

(e.g.,
absenteeism, ( 0.25 hr. / day ) = 13,000 bags / day - 250 bags / day
machine = 12,750 bags / day
breakdowns,
unavailable parts,
quality problems)

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Utilization and Efficiency

Utilization is the percentage of design capacity actually achieved

Utilization = Actual output / Design capacity

Efficiency is the percentage of effective capacity actually achieved

Efficiency = Actual output / Effective capacity

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Bakery Example:
Design Capacity

Acual Production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Efficiency = Actual output /Effective capacity
Bakery operates 7 days/week, 3 - 8 hour shifts
Utilization = Actual output / Design capacity

1- Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

2- Utilization = 148,000/201,600 = 73.4%

3- Efficiency = 148,000/175,000 = 84.6%

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

Bakery Example:

Design capacity, Effective Capacity & Actual Output

• Expansion by adding a second line.

Acual Production last week = 148,000 rolls

Effective capacity = 175,000 rolls
(doubling design capacity & Effective capacity )
Design capacity = 201,600 rolls / line did not double actual output due to
Efficiency = 84.6% inexperienced workers.
Expected output of new line = 130,000 rolls

Design capacity = 201,600 X 2 = 403,200 rolls

Effective capacity = 175,000 X 2 = 350,000 rolls
Actual output = 148,000 + 130,000 = 278,000 rolls

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

Bakery Example
Utilization and Efficiency
• Expansion by adding a second line.

Efficiency = Actual output / Effective capacity

Utilization = Actual output / Design capacity

Utilization = 278,000 / 403,200 = 68.95 %

Efficiency = 278,000 / 350,000 = 79.43%

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity and Strategy

■ Capacity decisions impact all 10 decisions of operations

management as well as other functional areas of the organization

■ Capacity decisions must be integrated into the organization’s mission

and strategy.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity Considerations

To define the capacity we have to consider:

1. Forecast demand accurately

2. Match technology increments and sales volume

3. Find the optimum operating size (volume)

4. Build for change.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Economies and Diseconomies of Scale

Diseconomies of scale
happen when
production costs
increase per product as
the business expands.

Economies of scale
occur in a business
when costs per unit of a
product decreases as
the business expands.

Figure S7.2

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Managing Demand

■ Demand exceeds capacity

– Reduce demand by raising prices, scheduling longer lead times, discouraging

marginally profitable business

– Long-term solution is to increase capacity

■ Capacity exceeds demand

– Stimulate market

– Product changes

■ Adjusting to seasonal demands

– Produce products with complementary demand patterns.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Tactics for Matching Capacity to Demand
To match 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.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Service-Sector Demand and Capacity Management

■ Demand management

– Appointment, reservations, FCFS rule

■ Capacity management
– Full time, temporary, part-time staff.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Bottleneck Analysis and the 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.

■ The time to produce a unit or a specified batch

size is the process time.
Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP
 Bottleneck Analysis and the Theory of Constraints
(continued)

■ The bottleneck time is the time of the slowest workstation

(the one that takes the longest) in a production system

■ The throughput time is the time it takes a unit to go through

production from start to end, with no waiting.

Figure S7.4
Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP
 Capacity Analysis (1 of 5)
■ Two identical sandwich lines
■ Lines have two workers and three operations
■ All completed sandwiches are wrapped.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity Analysis (2 of 5)

■ The two lines are identical, so parallel processing can occur

■ At 40 seconds, the toaster has the longest processing time and is

the bottleneck for each line

■ At 37.5 seconds, wrapping and delivery is the bottleneck for the

entire operation.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity Analysis (3 of 5)

■ Capacity per hour is 3,600 seconds/37.5

seconds/sandwich = 96 sandwiches per hour

■ Throughput time is 30 + 15 + 20 + 40 + 37.5 = 142.5

seconds.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity Analysis (4 of 5)

■ Standard process for cleaning teeth

■ Cleaning and examining X-rays can happen simultaneously.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Capacity Analysis (5 of 5)
■ All possible paths must be compared
■ Bottleneck is the cleaning at 24 minutes
■ Hourly capacity is 60/24 = 2.5 patients
■ X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 minutes
■ Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 minutes
■ Longest path involves the hygienist cleaning the teeth,
patient should complete in 46 minutes.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Theory of Constraints
■ Five-step process for recognizing and managing
limitations:

Step 1: Identify the constraints

Step 2: Develop a plan for overcoming the constraints

Step 3: Focus resources on accomplishing Step 2

Step 4: Reduce the effects of constraints by offloading work or

expanding capability

Step 5: Once overcome, go back to Step 1 and find new constraints.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Bottleneck Management

1. Release work orders to the system at the pace set by the

bottleneck’s capacity

2. Lost time at the bottleneck represents lost capacity for the whole
system.

3. Increasing the capacity of a bottleneck increases the capacity of

the whole system

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 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.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 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

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Break-Even Analysis

■ Revenue function begins at the origin and proceeds upward

to the right, increasing by the selling price of each unit.

■ Where the revenue function crosses the total cost line is

the break-even point.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Break-Even Analysis

Figure S7.5
Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP
 Break-Even Analysis
Assumptions

■ 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.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Break-Even Analysis
Single-Product Case

BEPx = break - evenpoint in x = number of units produced

units TR = total revenue = Px
BEP$ = break - evenpoint in F = fixed costs
dollars V = variable cost per unit
P = priceper unit (after TC = total costs = F + Vx
alldiscounts)

Break-even point occurs when:

TR = TC F
BEPx =
Profit = TR – TC P-V
= Px – (F + Vx)
= Px – F – Vx BEP$= BEPx X P
= (P – V)x – F
Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP
 Break-Even Example
Fixed costs $150,000.
Variable cost is $50 per unit.
Revenue is $100 per unit.
What is the break-even point?

F
BEPx =
P-V BEP$= BEPx X P
■ BEPx = 150,000 / (100-50)
■ BEP$ = 3000 X 100
= 3000 units
= 300,000 $

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP

 Summary
■ Capacity

■ Capacity and strategy

■ Service-Sector Demand and Capacity Management

■ Bottleneck Analysis and the Theory of Constraints

■ Break-Even Analysis.

Prepared by Dr. Ousha Alshamsi, Ph.D., MEM, B. Eng, PMP