Students should be able to:
1. Assess the capacity of a process
2. Define the Theory of Constraints and explain how to use it.
3. Identify viable capacity strategies for a firm and link them to competitive priorities.

Constraint Management
Short-Term Capacity Planning Long-Term Capacity Planning
Theory of constraints
Identification and management of bottlenecks
Product mix decisions with bottlenecks
Economies of scale
Capacity timing and sizing strategies

What are the competitive priorities for the three products at Min-Yo?
Muscle Shirts
Thunder Shirts
Dragon Shirts

1. A Definition
“An approach to management that focuses on whatever impedes progress toward the goal of maximizing the flow of total valueadded funds.”
2. At Min-Yo, what impeded your progress?

High
A Schizophrenic Process?
Job process
Batch process
Line process
Low
Low
Volume
High

1. Identify the bottlenecks.
2. Optimize the schedule of the bottleneck.
3. Schedule all other resources to support the bottleneck.
4. If the bottleneck is still restrictive, increase its capacity.
5. Once the bottleneck has been relieved, check for other bottlenecks.

Contribution per hour c = contribution to profits and overhead per unit s = changeover time (hrs.) p = productivity rate (units per hour)
T = total resource hours required for customer order
C
H = contribution per hour
C
H
 cp( T
 s)
T

Contribution Per Hour
5.00
0 10 20 30 40 50 60 70 80 90 100 110 120
0.00
Resource Hours (T)
35.00
30.00
25.00
20.00
15.00
10.00
Muscle
Thunder
Dragon

Contribution Per Hour With No
Thunder Shirt Changeover
5.00
0 10 20 30 40 50 60 70 80 90 100 110 120
0.00
Resource Hours
(T)
35.00
30.00
25.00
20.00
15.00
10.00
Muscle
Thunder
Dragon

Contribution Per Hour With No
Muscle Shirt Changeover
5.00
0 10 20 30 40 50 60 70 80 90 100 110 120
0.00
Resource Hours
(T)
35.00
30.00
25.00
20.00
15.00
10.00
Muscle
Thunder
Dragon

Companies must recognize their process capabilities when choosing new markets or assessing the profitability of their customers.
An important performance measure to use in judging business opportunities, given limited capacity, is the contribution per hour of the limiting resource.
Effective scheduling and inventory management can increase the contribution per hour of a limiting resource.
Effective performance requires collaboration of all functional areas to execute the “customer relationship” and “order fulfillment” processes.

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 demand
• The cost of lost business
• The cost of idle capacity

Staying ahead of demand
Planned unused capacity
Forecast of capacity required
Time between expansions
Time
Capacity increase

Chasing demand
Planned use of short-term options
Forecast of capacity required
Time between expansions
Capacity Increase
Time