Production and Operations
Management
CHAPTER 2
Capacity and Performance
Measurement
1
© 2006 Prentice Hall, Inc.
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
 Three time horizons
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Planning Over a Time Horizon
Long-range
planning
Add facilities
Add long lead time equipment
Intermediaterange
planning
Subcontract
Add equipment
Add shifts
Short-range
planning
*
Add personnel
Build or use inventory
*
Modify capacity
Schedule jobs
Schedule personnel
Allocate machinery
Use capacity
* Limited options exist
Figure S7.1
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Design and Effective Capacity
 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
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Utilization and Efficiency
Utilization is the percent of design
capacity achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective
capacity achieved
Efficiency = Actual output/Effective capacity
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Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
© 2006 Prentice Hall, Inc.
Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
© 2006 Prentice Hall, Inc.
Example 2
A production plant has been designed
to produce 7.000 hammers per day, but
its limited to produce 6.000 due to the
time needed to change from one
hammer model to the next one.
Compute Utilization value.
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Example 2: Solution
Actual output
6,000
S7.1 Utilization =
=
= 0.857  85.7%
Design capacity 7,000
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Other important concepts about
capacity (1)
• Work center:
– Group of workers and/or machines with a clear
identification for planning and capacity decisions:
Cars factory (presses, steel bending, assembly,
painting, ….); Parfume factory (essence labs,
production, bottling, expedition,….); Beer factory
(brewing, bottling,…)
– WC can also be called sections or departments.
WC
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Other important concepts about
capacity (2)
• Bottleneck: Work center limiting the plant
capacity or resource limiting work center
capacity
WC1
WC3
55 un./h.
45 un./h.
WC5
65 un./h.
WC2
WC4
60 un./h.
65 un./h.
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Other important concepts about
capacity (3)
• WC Load
– Work volume already assigned but yet to be
performed by the plant or WC.
Load Chart
Load (thousend units)
90
80
70
Capacity
60
50
40
30
20
10
0
E
F
M
A
My
J
Jl
.
,
,
,
Month
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Example 3
• A bottling plant has three sections:
– Bottling: 2 machines with a maximum capacity of 100 liters per
minute each one and a maintenance stop time of one hour per day
– Labeling: 3 machines with a maximum capacity of 3.000 bottles per
hour each one and programmed stops of 30 minutes per day as an
average
– Packaging: area with a capacity of 10.000 boxes per day
• The plant has been designed to fill 1L bottles and pack those
in 12 Bottles boxes working 12 hours per day.
a)
b)
c)
d)
Which is the designed capacity of the plant?
Which is the effective capacity of the plant?
If we work at the plant effective capacity, which is the utilization of each
section?
If a failure reduces the output of the plant to 70.000 bottles, which is the
efficiency of each operation?
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Example 3: Solution
• We can see the plant as a production line:
Bottling
----- Labeling ----- Packaging
2 machines
3 machines
1 area
100 l. /min.
3.000 bot/h
10.000 boxes/d
Maint. 1h/day
Stops 30 min/day
To homogenize data we will choose 1L bottles as the
planning unit
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Example 3: Solution
• Designed capacities for each area are:
– Bottling:
• 2 mach. * 100 l/(mach * min) * 60 min/h * 12 h/day = 144.000
bot / day
– Labeling:
• 3 mach * 3000 bot / (mach * h) * 12 h/day = 108.000 bot /day
– Packaging:
• 10.000 boxes / day * 12 bot. / box = 120.000 bot/day
• Plant capacity will be defined by the lowest
capacity section (Bottleneck) : Labeling section, so
plant capacity will be 108.000 bot/day
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Example 3: Solution
• Effective capacities will consider
scheduled stops:
– Bottling: 144.000 * (11 / 12) = 132.000 bot/day
– Labeling: 108.000 * (11,5 / 12) = 103.500
bot/day
– Packaging: 120.000 bot/day
• Plant effective capacity will be defined
again by the bottleneck: 103.500 bot/day
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Example 3: Solution
• If the plant works at a 103.500 bot / day rate,
utilizations would be:
– Bottling = 103.500 / 144.000 = 0,719 = 71,9 %
– Labeling= 103.500 / 108.000 = 0,958 = 95,8 %
– Packaging = 103.500 / 120.000 = 0,863 = 86,3 %
© 2006 Prentice Hall, Inc.
Example 3: Solution
• With a real output of 70.000 bottles per day,
efficiencies would be:
– Bottling: 70.000 / 132.000 = 0,530 = 53 %
– Labeling: 70.000 / 103.500 = 0,676 = 67,6%
– Packaging: 70.000 / 120.000 = 0,583 = 58,3 %
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Productivity Challenge
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources
such as labor and capital)
The objective is to improve productivity!
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The Economic System
Inputs
Processes
Outputs
Labor,
capital,
management
The U.S. economic system
transforms inputs to outputs at
about an annual 2.5% increase
in productivity per year. The
productivity increase is the
result of a mix of capital (38%
of 2.5%), labor (10% of 2.5%),
and management (52% of
2.5%).
Goods
and
services
Feedback loop
Figure 1.7
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Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:
Stop requiring signatures
on credit card purchases
under $25
Saved 8 seconds
per transaction
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines
Saved 12 seconds
per shot
© 2006 Prentice Hall, Inc.
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways to
shave time. Some
improvements:
Operations improvements have helped Starbucks
increase yearly revenue per outlet by $200,000 to
signatures
$940,000 in six years. Saved 8 seconds
Stop requiring
on credit card purchases
per transaction
Productivity has improved by 27%, or about 4.5%
under $25
per year.
Change the size of the ice
scoop
Saved 14 seconds
per drink
New espresso machines
Saved 12 seconds
per shot
© 2006 Prentice Hall, Inc.
Productivity
Productivity =
Total Output
Input used
 Measure of process improvement
 Represents output relative to input
 Only through productivity increases
can our standard of living improve
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Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used
=
1,000
250
= 4 units/labor-hour
One resource input  single-factor productivity
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Multi-Factor Productivity
Productivity =
Output
Labor + Material + Energy +
Capital + Miscellaneous
 Many possible combination of inputs
(Labor + Material, Materials + Energy, ...)
 Output and inputs are often expressed in
dollars
Multiple resource inputs  multi-factor productivity
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Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
8 titles/day
Overhead = $400/day
8 titles/day
Old labor
=
productivity
32 labor-hrs
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
8 titles/day
Overhead = $400/day
8 titles/day
Old labor
=
= .25 titles/labor-hr
productivity
32 labor-hrs
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old labor
=
= .25 titles/labor-hr
productivity
32 labor-hrs
14 titles/day
New labor
=
productivity
32 labor-hrs
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old labor
=
= .25 titles/labor-hr
productivity
32 labor-hrs
14 titles/day
New labor
=
= .4375 titles/labor-hr
productivity
32 labor-hrs
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
productivity
$640 + 400
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
= .0077 titles/dollar
productivity
$640 + 400
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
= .0077 titles/dollar
productivity
$640 + 400
14 titles/day
New multifactor
=
productivity
$640 + 800
© 2006 Prentice Hall, Inc.
Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day
Payroll cost = $640/day
New System:
14 titles/day
8 titles/day
Overhead = $400/day
Overhead = $800/day
8 titles/day
Old multifactor
=
= .0077 titles/dollar
productivity
$640 + 400
14 titles/day
New multifactor
=
= .0097 titles/dollar
productivity
$640 + 800
© 2006 Prentice Hall, Inc.
Measurement Problems
 Quality may change while the quantity
of inputs and outputs remains
constant
 External elements may cause an
increase or decrease in productivity
 Precise units of measure may be
lacking
© 2006 Prentice Hall, Inc.
Example 5
• Data about a product in the first quarter:
–
–
–
–
–
–
Selling price : 40 Euros
Units sold: 1.000
Raw Materials Cost : 8.000 Euros
Labor Cost : 5.000 Euros
Energy Cost: 7.000 Euros
Other Costs: 10.000 Euros
• Describe the productivity of the corresponding
production process
© 2006 Prentice Hall, Inc.
Example 5: Solution
Total  =
 Productividad
Total
Productivity
40×1000
= 1,33
8000+5000+7000+10000
• For each Euro spent in inputs, 1,33 Euros
of Output are produced.
• Single Factor Productivities:
– Raw Materials :
– Labor:
– Energy:
– Other costs:
40 x 1000 / 8000 = 5
40 x 1000 / 5000 = 8
40 x 1000 / 7000 = 5,7
40 x 1000 / 10000 = 4
© 2006 Prentice Hall, Inc.
Example 5: Solution
• Multi-factor Productivities:
– Materials and Labor: 40 x 1000 / (8000 +
5000) = 3,1
– Materiales and Energy: 40 x 1000 / (8000 +
7000) = 2,7
– Labor and Other Costs: 40 x 1000 / (5000 +
10000) = 2,7
© 2006 Prentice Hall, Inc.
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
© 2006 Prentice Hall, Inc.
Capacity Considerations
 Forecast demand accurately
 Understand the technology and
capacity increments
 Find the optimum
operating level
(volume)
 Build for change
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Average unit cost
(dollars per room per night)
Economies and Diseconomies
of Scale
25 - room
roadside motel
50 - room
roadside motel
Economies
of scale
25
75 - room
roadside motel
Diseconomies
of scale
50
Number of Rooms
75
Figure S7.2
© 2006 Prentice Hall, Inc.
Build In Flexibility
Percent of North American Vehicles
Made on Flexible Assembly Lines
100% –
80% –
0–
Ford
Toyota
GM
Honda
20% –
Nissan
40% –
Chrysler
60% –
Figure S7.3
© 2006 Prentice Hall, Inc.
Managing Demand
 Demand exceeds capacity
 Curtail demand by raising prices, scheduling longer lead time
 Long term solution is to increase capacity
 Capacity exceeds demand
 Stimulate market
 Product changes
 Adjusting to seasonal demands
 Produce products with complementary demand patterns
© 2006 Prentice Hall, Inc.
Complementary Demand
Patterns
Sales in units
4,000 –
3,000 –
2,000 –
1,000 –
JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Jet ski
engine
sales
Figure S7.3
© 2006 Prentice Hall, Inc.
Complementary Demand
Patterns
Sales in units
4,000 –
3,000 –
Snowmobile
motor sales
2,000 –
1,000 –
JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Jet ski
engine
sales
Figure S7.3
© 2006 Prentice Hall, Inc.
Complementary Demand
Patterns
Sales in units
4,000 –
Combining both
demand patterns
reduces the
variation
3,000 –
Snowmobile
motor sales
2,000 –
1,000 –
JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Jet ski
engine
sales
Figure S7.3
© 2006 Prentice Hall, Inc.
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
© 2006 Prentice Hall, Inc.
Demand and Capacity Management in
the Service Sector
 Demand management
 Appointment, reservations, FCFS rule
 Capacity
management
 Full time,
temporary,
part-time
staff
© 2006 Prentice Hall, Inc.
Approaches to Capacity
Expansion
Expected
demand
New
capacity
Expected
demand
Demand
New
capacity
New
capacity
(c) Capacity lags demand with
incremental expansion
Demand
(b) Leading demand with
one-step expansion
Expected
demand
(d) Attempts to have an average
capacity with incremental
expansion
Demand
Demand
(a) Leading demand with
incremental expansion
New
capacity
Expected
demand
Figure
S7.5
© 2006 Prentice Hall, Inc.
Approaches to Capacity
Expansion
(a) Leading demand with incremental
expansion
Demand
New
capacity
Expected
demand
1
2
3
Time (years)
Figure
S7.5
© 2006 Prentice Hall, Inc.
Approaches to Capacity
Expansion
(b) Leading demand with one-step
expansion
New
capacity
Demand
Expected
demand
1
2
3
Time (years)
Figure
S7.5
© 2006 Prentice Hall, Inc.
Approaches to Capacity
Expansion
(c) Capacity lags demand with incremental
expansion
New
capacity
Demand
Expected
demand
1
2
3
Time (years)
Figure
S7.5
© 2006 Prentice Hall, Inc.
Approaches to Capacity
Expansion
(d) Attempts to have an average capacity with
incremental expansion
New
capacity
Demand
Expected
demand
1
2
Time (years)
3
Figure
S7.5
© 2006 Prentice Hall, Inc.
Example 6 (Capacity Planning)
• A metallurgical company wants to determine
its need for moulds at its press section in
order to be able to produce 300.000 good
units per year.
• The press operation as a cycle time of 1,2
minutes / unit and produces a 2% of defective
units.
• Knowing that a mould can work for 2.200
hours per year, how much moulds the
company needs?
© 2006 Prentice Hall, Inc.
Example 6: Solution
•
First we determine the quantity of units to produce in a year in order to obtain 3000.000
good units (needed capacity):
300.000 / (1-0,02) = 306.122 units per year
•
Second we determine the production capacity per year and mould:
Cycle time = 1,2 minutes / unit
60 minutes / hour ÷ 1,2 minutes / unit = 50 units / hour
50 units / hour × 2.200 hours / year and mould = 110.000 units / year and mould
•
Now we can determine the number of moulds needed:
306.122 units / year ÷ 110.000 units /year and mould = 2,78 moulds
•
In fact, we will need to have three moulds, so we will have an utilization of:
Capacity with 3 moulds: 3 moulds × 110.000 units / year and mould = 330.000
units /year
Utilization = 306.122 units /year ÷ 330.000 units / year = 0,9276 → 92,76 %
© 2006 Prentice Hall, Inc.