Capacity Management Definition (Capacity): - Ability of an organization to provide the customers the goods and services they demand. Capacity Measure: - 1. Rate of output (Example: Production output rate; customer served/time period) - 2. Units of input (Typically used in services; example: # of rooms in a motel; # of beds in a hospital) Capacity Decisions Capacity Decisions are important because: - Capital investment (often, irreversible) - Company objectives must be met - Competitive edge The most important concept in Capacity Management: - Bottleneck is the primary determinant of capacity Capacity-Planning Decisions Capacity Decisions must be made in the light of - Competition - Industry trend - Consumer trend Capacity options: - - - - - - - Overtime Adding shifts Subcontract Expand facility Buy new machines Acquire other companies, facilities, resources Locate a new facility 1 Capacity-Planning Decisions (Contd.) 1. The Expansionist Strategy - Typically, large, infrequent jumps in capacity. Benefit: might increase market share due to preemptive marketing. Shortcoming: underused capacity. 2. The Wait-and-See Strategy - Typically, smaller, more frequent jumps in capacity. conservative approach and minimizes risks. Makes use of short-term capacity options such as overtime, delayed preventive maintenance, hiring temporary workers, etc. Class Activity (Matching) 1) Conservative 2) Capacity lags demand 3) Aggressive 4) Pricing power 5) Unused capacity 6) Higher risk if demand forecasts are inaccurate 7) Larger increments 8) Frequent capacity increments a) Wait-and-see approach b) Expansionist's Approach c) Either a) or b) d) Neither History of Theory of Constraints 1970s--Eliyahu Goldratt develops and sells a proprietary software \"Optimized Production Technique (OPT)\" - basically a black box - promised: scheduling developed would result in efficient use of capacity constrained resources - Some success/failure - No widespread acceptance due to secrete algorithms 2 History (continued) 1984: Goldratt and Cox published \"The Goal\" explaining the concepts behind OPT 1986: \"The Race\" followed--more clarification 1990: Umble and Shrikanth presented \"Synchronous Manufacturing In late 1980s, Goldratt redefined his ideas as \"the theory of constraints.\" What is Synchronous Manufacturing Simple idea: - \"The flow of material through a system, not the capacity of the system, should be balanced.\" Benefits: - Smooth and continuous materials movement from operation to operation - Lead-time and waiting time decreases - Improved use of equipment - Reduced inventory - Speed customer delivery - Thus, competitive advantage. Theory of Constraints Every organization has constraints that prevents it from achieving higher level of performance Constraints (not necessarily capacity constraints always) should be identified and managed for achieving higher performance This is a process similar to the continuos improvement process 3 Five Steps in Managing Constraints Identify the system's constraints Describe how to exploit systems constraints subordinate everything else to the above decision Elevate the system's constraints If in the previous steps a constraint has been broken, go back to step 1. The Goal and Performance Measures ROI: Important financial measure T = Throughput (money generates through sales--not the usual production throughput) I= Inventory (all the money invested in purchasing things that the system intends to sell--does not include direct labor and OH) OE= Operating expenses (all the money spent on turning inventory into throughput-includes direct labor and OH) Hence, (T - OE) ROI = -------------------I Notice that \"throughput\" has been elevated to being most the important measure--it has the maximum impact on ROI Must focus on T to find constraints that prevent us from making money. Inventory Turns = T/I Productivity = T/OE 4 Global/Local Optimization Global Optimization: - The overall organization is functioning at its best level Local optimization: - Local perfection may not always lead to global optimization - Example: 1) Increasing sales of most revenue-generating will not always increase the overall profitability. 2) You can maximize your manufacturing utilization at the expense of building up inventory Goldratt's Motto \"The sum of the local optima is not equal to the global optimum.\" Nine Golden Rules of Goldratt 1. Do not balance capacity, balance the flow. 2. The level of utilization of non-bottleneck is determined by some other constraint. 3. Utilization and activation of a resource are not the same. - Utilization: Production that adds to throughput - Activation: Production that does not add to throughput 4. An hour lost at a bottleneck is an hour lost for the entire system. 5 Nine Global Rules of Goldratt (Continued) 5. An hour saved at a non-bottleneck is a mirage 6. Bottlenecks govern both throughput and inventory. 7. The transfer batch does not have to equal the process batch. - Process Batch: Quantity produced before the workcenter changes over to produce something else - Transfer batch: Quantity produced before items are moved to the next process. 8. A process batch should be variable. 9. Priorities can be set only by examining the system's constraints. System Capacity and Capacity Balance System: A series of processes Steps may have capacity imbalance Must identify bottleneck(s) [the determinant of system capacity] Bottleneck:\"Resource whose capacity is equal to or less than the demand placed on.\" Output Input Example: Chemical Processing Departments A-E are in sequential order with given capacity (Gallons/Min) Determine: - Slack for each department; Bottleneck; System Capacity - If the existing bottlenecks' capacity is increased by 40 gallons/min, what happens to system capacity? - (Bottleneck is the one with least slack; multiple bottlenecks possible) A B 110 80 C D E 140 75 130 6 Example: Beer Brewing Co. Determine Bottleneck (constraints resource to maximize the throughput, assuming you can sell your product as soon as you produce them) Brewing 250 gal/min Bottling Packaging 1000 12-oz bottle/min 200 6-packs/ min Steel Production Flow: A Product Layout Determine Slacks for each department and identify the bottleneck Iron ore process 3 prts (4000 tpd) Blast 2 prt Basic Furnace Oxygen Furnace (3000 tpd) Coke Oven (4200 tpd) Scrap Handling (1000 tpd) Cont. Casting Finishing Mill (6000 tpd) (5000 tpd) tpd = Tons per day (1500 tpd) Rounding out System Capacity Iron ore process (4000 tpd) Coke Oven (1000 tpd) 3 prts Blast 2 prt Basic Furnace Oxygen Furnace (3000 tpd) Scrap Handling (4200 tpd) Cont. Casting Finishing Mill (6000 tpd) (5000 tpd) Helps in determining the amount by which the capacity of the bottleneck department be increased. (1500 tpd) 7 Broad Categories of Processes Product Focus Arrangement of resources to facilitate progressive steps in operations Process Focus Arrangement of resources according to functions (Departmentalization) Examples: Assembly Line, Cafeteria Examples: Job Shop, Hospital X Y A F CC YY XXX ZZ More on this topic in a later session The process Layout & System Capacity Jobshop; Determining system capacity is complex A change in product-mix can change bottleneck department Example: Jobshop with 4 departments with 40 hours of processing time available/week I II III IV JOB MIX FOR WEEK 1 Identify the bottleneck department Processing time needed per job Jobs # this week I II III IV A 10 2 1 1 2 B 20 - - 2 - C 15 1 2 - 1 8 JOB MIX FOR WEEK 2 Identify the bottleneck department. (Note that bottleneck may change) Processing time needed per job Jobs # this week I II III IV A 10 2 1 1 2 B 10 - - 2 - C 20 1 2 - 1 Example An electronic component makers can potentially make two products: Product A and Product B. Both of these products go through processing at 4 work centers (each with 40 hours of available processing time per week) as shown in the diagram and consume raw material as depicted. Processing times per unit at each of the station are listed in the accompanying table. Assume labor cost to be $15/hour. Please identify 1) Bottleneck process and 2) most profitable product mix for the company to exploit given constraint. Example (continued) Component $10 RM-1 $15 X W Selling Price for A =$85 7 min 12 min Demand = 70/week RM-2 $11 Y 16 min Z 10 min A 9 Example (continued) RM-3 $45 RM-2 $11 X W Y 16 min 6 min Selling Price for B =$110 6 min Y Demand = 80/week Z 16 min 10 min B Approach to solve the problem Determine total time needed at each processing stage for both the products to identify the bottleneck process. Based on the contribution margin (selling price-component costs-labor cost/unit) for each product, determine the dollar return per constraint minutes. Use that information to make a decision of best product mix. Homework 1. Identify bottleneck department(s), system capacity and department slacks. A 3 parts 100 g/m 5 parts B 200g/m 2 parts C D 90 g/m 70 g/m E 175 g/m F 175 g/m 10 2. Identify bottleneck department(s), system capacity and department slacks. 1 parts A 400 g/m B 2 parts 1500 g/m 500g/m 2 parts C F E 1500 g/m 3 parts D 300 g/m 800 g/m 3. What minimum changes, if any, must be made to various departments in problem 2 to make the system capacity 1500 g/m. (Hint: Work backward) Case (Adopted from Finch, Operations Now, 3rd Ed, McGraw Hill) Sound Design produces small speakers and other audio components for use with computers and mp3 players. One plant is dedicated to two small speaker systems (the i100 and i500 in which an mp3 player can be docked). The products are similar, but have different components and slightly different process requirements (depicted next) Case (continued) Enhancement Package $27 Console $10 A 3 min C 2 min D Speakers $22 B 4 min C 3 min 2 min Selling Price =$220 i100 Demand = 210/week 11 Case Cradle $18 A 3 min (continued) B 5 min D Speakers $22 B 4 min 2 min C 2 min Selling Price =$195 i500 Demand = 195/week Case They produce to stock and know the demand as shown in the diagrams. Assume labor cost to be $15/hour. Also assume that each stage of production has 40 hours of processing time available per week What product mix will maximize profit? (continued) An engineer suggests modification to work center C to allow it to also handle tasks done by work center B if needed. However, because of the changes, all the activities on \"C\" now take 4 minutes (not 2), and task on \"B\" reduces to 3 minutes from current 4 and 5 minutes. Case (continued)... Is this a good change? What happens to the bottleneck when the change is made? Any other thought about the proposed change? 12