Question 1. Refer to the XTM case. What are the different types of inventory identified in the case and what are the reasons mentioned in the case for having these different types of inventory? Do you think inventory is necessary for businesses? What are the situations when businesses should have inventory?
Question 2. Refer to the XTM case. What is the typical amount of time products (or flow units) spend waiting in a process, as mentioned in the case?
Question 3. Refer to the XTM case. What are the types of variability which affect throughput time (also called lead time or flow time), as mentioned in the case?
Question 4. Refer to the XTM case. Is the company using a make-to-order or make-to-stock production process? What is make-to-order production?
11:57 X XTM Bike Corporation An Exercise in... " XTM Bike Corporation An Exercise in Process Analysis Introduction TMC The by a XTM dd the way Crew Pred popular Bicycle Production The r e and w ww The dando winary and Thewlyw e day five days , 45 , ha ray ) Hourly we are a few time and her for the digande 2000 m The part of the ide XTM away as is the frame all the com and was the dealer mechanism wheels and speake are un from Marconi Fra c tion is a wlatively simple, the proces. First aluminum alloy warm ste the preced e d for frames and en com i ng in the comfort anders In the theme angle w gehen was and bits theat the w w room e r The er schwede Weight down the plant and ever y 21 de wat I wew e ngand welding The frames when the painting , which is s ed by the workers caring the and wa s minutes to paint a frame, which it is planned to dry h o was the mes in various stage completion in the painting w the final y The t frames are the in a line where a group we work e rpended 11:57 X XTM Bike Corporation An Exercise in... 000 T The finished frames are then the y were a group of workers arranged in a line attaches the wheels as anders and other equip s endered a mbly me averages about the hand no time to switch from bide the next Completed bicycles are the bed and went to the leading deck for shipment to the final dealer Shipping time w ww days and shipping costs un 535 per unit Process Analysis To analyze XTM's operation let's mine the proces by pande what we canam DIAGRAMMING THE PROCESS A fint in analyzing a production process acha XTM's is to diagramit Such a diagram describes in visual rms the various operations of a process and the path of ma a nd India . We there are two ingchaam. the ng is a typical and met E s hes the standard symbols n These are individual per steps o as welding wiga are red by a cink, and w the carried out in the peaction process, ad t es winga hamburger Ort a lly with pertinent information Columbia Case Works These were involve moving aral parts, internatio n e point of the process to her. Examples indade pumping liquid from a vat trading parts from a fabrication plan ho m bly plant, transmitting an order via modern and shuttling engine blocks free workstation to the transportation is red by an arow, with a dotted line indicating a wo m an that the physical flow Ma and information in the wystem that is being redan transported is waiting in tage Stud e nts and swally wed by an in g le Store can be by his belas I though dated in database is commonly reprend sa cylinderdrum CONSTRUCTING A PROCESS FLOW DIAGRAM Using the whole described above, we can contrata proseduram of the XTM mantring . Suha diagram is shown in Ex p ertinent informati about each of the process with next to the wymbols. This allows to via at a glance of the prodata Suchage ly defines the present shows input and activitateach age of the ratio or wie similar du grams can be to though mo they will do the w e ll activities inter experience in a wid e rather than physical practs ) A Basic Cost Analysis b fintl of quest to ask about the XTM ons is it a proble operations how much poot is XTM making why not? Tewwer the question, we need to do some t ry analysis of XTMs structu To put started let's s p ectie 11:57 X XTM Bike Corporation An Exercise in... 000 Towweethers were to do w a ry analysis od XTMs wrotu Te pet started let's just the w and d uctie direct labor, ery, etc.-in order to determine XTM's tribution margin. These calen das In protams, the margini 110 Every dollar in extra contribuerghly 11 cm to caming before depreciation and taxes. Since this figure only includes alle s in eming w a analyses of investment options and process changes Corporation Page 3 IXT GARRETTEN Columbia Case Works For a mee l epar, we can add in the demand and find-cost indormation Auming a demande fonts we get the following numbers in thods of dollar 8629 CES Thus XTM is making an operating profit of 2.000 per year. At current operating levels XTM es variable costs o f sales and find t u les leaving rating moodules O ther penting expenstand with the band w firundial and operational int errumple, the here that volume is defined as the lowest od per unit and total funds are ,000 per you must will bruk t e mith, which is w ow their outro wie. Ander quantity is the bivity AIM pealt onder volume. For cumple demand in 20% to 720 units per the years perdicted, then the nnburton NSL to an a Nether, that the car diola , indut the de the capul invested in XTM The attractives of XTM as a business will on the boalapitalit requires top . The peod 2.000 per year mig attractive the total capital deployed in the w ay is one million dollars, but distinctly attractive the company requires five min dollars of capital Varmes financial performance can be developed to evaluate proasa fund inwested capitale (ROA) We will not point detal thre e this thing this coneindin urne Singer s ingeration theagh, we will be considering how provary with the value of two important s and plant and equipment Capacity and Bottlenecks While a financial analys e some Important 11:57 X XTM Bike Corporation An Exercise in... *** Capacity and Bottlenecks TM w have a w . In particular that the p an impact post in w Columbia Case Works quinto and was the complete the h a single ead s e pode work and theme a woman in units of me to performance The death in hun given. This indby diving the number of waren in the c an d by the pr e the Founder are well in the wedding area and the welding p a g es in to the and towywa city 15 frame . Smarcal y the product s of each oration shown in Exhibit 2 Sow much can XTM power in this case, it is there to see that the has to go through each patience the output will be limited by her with the In the production process is called the tw o XTML Welding firm pa r a detects the bene Sedi ts way we det will the e n d the w here may be The du TM TMS with ming the dead The wind o w w w behind that in the wind The watched w u parte quality w i th that c e pod pop for Thus there Page XT Corporation Columbia Case Works X XTM Bike Corporation An Exercise in... 0 XTM Bike Corporation An Exercise in Process Analysis BY GARRETT I VAN RYZIN s Introduction XTM Corporation is a specialty manufacturer of high-performance is known among biking enthusiasts for highly customized frame is equipment options and t h provided by a work of the dealers. The w bicycle is $750, which XTM wives w ere u . The film a wider e o XTM nder om Further deed is growing to the popularit a t e Bicycle Production The firm comploys 21 production works and the y were the cand labor we formats in the plant is 15 per hour in and b e per year in lary and benefits. The typically w h ether day five days a work for works a year. For implicitame e r wecks) Hourly w e are paid for productive time. Rent in the find costs for the building and equipment average $20,000 per month The only part of the bicyde XTM actually fabricates is the frame all the components, such as handlebars was the dealer medium wheels and are purchased from outside supplier Mars and parts per Frame fabrication is a relatively simple, two-step procen t imaoy tubing various diameters is out to the precise dimensions required foreach and bad a computed dofinning onder. A tag giving the case the order is Author Cevi casc centre attached to the frame this point Cutting and the he a rtbeat 30 minutes and the the workers in the cutting area are paid the standard laborate Lilled welde pe harina and his whe t her om the basic frame. The lignment of the frame and the quality of the w o ndered critical to the promo the final product It takes a welderbeut 5 minutes a g ree and the bag for fra 45 min u ired to the weld. We has always to caused at the plant and an average therap y anders waiting to he welded between the cutting and welding areas The frames are then went to the painting which is said by the w e aring the standand wait takes minutes to paint araw, after which is placed on a rack to dry foreight hours. On average there are frames in various peo p le in the painting arranged in a line attache e penent de X XTM Bike Corporation An Exercise in... 000 The finished frames are then taken to the final assembly area, where a group of even workers arranged in a line attaches the wheels, brakes, handlebars and other equipments de Total assembly time averages about 1.5 hours per bicycle, and no time is required to wich from bicycle to the next Completed bicycles are the band and went to the loading duck shipment to the final dealer Shipping time va n werk days, and shipping 25 per Process Analysis To analyze XTM's operation, let's mine the process step by step and see what we can am DIAGRAMMING THE PROCESS Afin spinaaying a production procesach as XI is to dimit Such a di describes in visuals the various pr o ap and the path of material and flow. While there are variety of ways of contracting wacha the lowing is a typical and useful nation Exhibit shows the dandm ed Operations These are individual processes tasks that are carried out in the production procesach as welding a wing awam, filling a bottle of pils, grilling a burger Operations are pewned by a circle and the diese ly annotated with information about the operation Columbia Case Works XTM BR Corporation Page 2 BY GARRETTI VANRIN Movements These steps involve moving material part or information from one point of the process to another Examples include pumping liquid from a vat trucking parts from a fabricatie plant mbly plant transmitting an onder demandshutting engine back from one workstation to the next Transportation is rend by an mw. with a decidiam wally indicating a few of information rather than a physical flow Storage waiting in die wi nd w erde Stoned data can be word by this w as well the data in database is commonly represented as a cylinder or drum CONSTRUCTING A PROCESS FLOW DIAGRAM Using the whole described above a t a prowding the XTM mutung . Such a diagram shown in t2Nthat information houtachement of the process is wi t to the symbols. This allows me to v ie at a glance much of the process data Such a diagram will defines the process of interest, it shows inputs outputs, and activities at each of the operation (For service operations, wimilar dirams can be structed though most of they will detail the sequence of activities a customer experiences in a service offering, rather than physical product flows) Basic Cost Analysis An obvious fit wel of questions to ask about the XTM operatione pofitable operations how much titi XTM making? If not, why not? To answer these questions, we wed to do some elementary analysis of XTM's cost structure Towelstand sust wowemu X XTM Bike Corporation An Exercise in... *** To answer these questions, we need to do some elementary analysis of XTM's cost structure To get started. let's just consider the wenues and variables of production-le, materials direct labor. y. -in order to determine XTM's contributie margin. These calculations are performed as follows Revent Maior Components Gross Margin 200.00 Cuarga Wendingar (500 5.30 ure shown 31 hour mes shown Assembly Labor 1 hour Shoping 500 Canon Marga 1500 In percentage terms the contribution marginis (55/750) 100-11.30%. Every dollar in extra cribe y 11 ci toaming before deprecated in this figure only includes variable costs, it is most useful in performing analyses of investment options and process changes Page 3 XTMB Corporation GARRETTIVANT Columbia Case Works For a more complete picture, we can add in the demand and fixed-cost information. Assuming a demand rate of 600 units per month, we get the following numbers (in thousands of dollars) for one year of operation at XTM Annual Revenue 5.400 100 04 Materiais & Components (3.960) (73.3%) Nel Contribution Rent & Equipment Operating Pro Thus, XTM is making an operating profit of $22.000 per year. At current operating levels XTM Incurs variable costs of 88.7% of sales and fixed costs of 726 of sales, leaving an operating profit of 4.1% of sales. Of course other nonperating expenses e interest and tes) are subtracted from operating profits to determine income to shareholders With these base numbers in hand we can now consider other s that will be of both financial and operational interest. For example, the ba n volume is defined as the lowest level of demand for which a firm's operating profit is positive. Since XTM s actribution od 45 per unit and total costs are per year its annually DOSS) break even units p ath which is well below the current well wales. Another quantity of interest is the sensitivity of XTM's profits to order volume For amplif dedicas 20 to 720 per month next year as predicted then the al contribution to 73 resulting in an operating profit of 562400-an increase 30 Note, however, that these calculations do not tell a complete financial story, in that they do not in the capital invested in XTML The attractiveness XTM as a bu s will also depend on the total capital it requires to operate. The profit of $222000 war might look attractive of the total capital deployed in the company is one million dollar but distinctly attractive of the company requires five million dollars of capital. Various measures of financial performance can be developed to evaluate profit as a function of w e measure of invested capitales. rs ily (ROD) (ROA). We will not go into detail on these sort of financial evaluations, this is something that is covered in detail in your finance courses. Since our focus is on operations, though we will be considering how profits vary with the value of two important items. 1) inventories and 2) plant and equipment X XTM Bike Corporation An Exercise in... .00 Capacity and Bottlenecks While a financial analysis is a useful starting point it does not answer me important questions about XTM's operations. In particular, R e sts that the projected increase in sales volument year will have a significant impact on profits. But is an increase in output possible? How much volume can XTM stain? How heavily tied their proces? To answer these questions we have to tum again to our process flow diagram. Note that for each operation we have indicated the w r of the operate le, the time te Columbia XTM Corpo Page Case Works quired to perform the complete operation on a single unit. As units are produced workers and machines process them through a sequence of tasks, and the total time it takes to execute all the tasks is called the processing time. Thus, sum of all processing times is ewentially the total work measured in units of time) required to perform an operation The c ity of each operation in units per hour is also give. This is determined by dividing the number of workers for machines in the case of an automated process) by the processing time of the operation. For example, there are welders in the welding area and the welding operation has a processing time of 1.5 hours (45 min to position the and 45 min to weld yielding a capacity of 6/1. 5 4 framebor. Similar calculations yield the production rates of each operation shown in Exhibit 2 So how much can XTM produced in this case, it is rather easy to see that since each bicycle has to go through each operation once, the output will be limited by the operation with the smallest capacity, which in this case is the welding operation. The operation that limits the output of a productie pe is called the operation For XTM welding is the bottleneck. If a firm produces a range of different products, the bottleneck can be more difficult to identity. Since different products may have different processing times at each operation the bottleneck will usually depend on the mix of products being produced In general, one is likely to find that bottlenecks are operations that are especially costly or consume scarcerers. For example, the capital equipment costs of the operation may be high or the labor force required may be highly skilled and thus difficult to expand and for expensive to employ. This is likely the case for XTM since the led welders are the most expensive workers in the process The bottleneck is important to identity for s al e by definitions the operation that limits the output of the entire process and thus it defines the overall c ity. This is an important quantity to know for obvious For example, we saw abone that year'speed in sales will encantly profits B eve since the capacity eXTM is her fa t hwch are not be supported without modifying the proces adding a sud o r ing the facility on time. The welding bonek is limiting XTM ality to increase output. It would be nice to break this bottleneck, that is in the welding production ate. Then the output volume of the facility could be increased Ma facility is rating at i mum capacity, then the bottleneck is even more critical In this cawany product time is lost on the bottleneck rating the lack of input parts of material quality problems, breakdowns hentes, etc.)then that production time can never be recoveredSince the bottleneck operation is at maximum capacity. It can be sped up to make up for the last time. Thus the could be ignificant opportunity costs due to lost sales from the lost production. For this is often critical to ensure that the bottleneck pation incur minimal idle time and down time Page 5 XTM Bike Corporation Columbia 11:57 X XTM Bike Corporation An Exercise in... " XTM Bike Corporation An Exercise in Process Analysis Introduction TMC The by a XTM dd the way Crew Pred popular Bicycle Production The r e and w ww The dando winary and Thewlyw e day five days , 45 , ha ray ) Hourly we are a few time and her for the digande 2000 m The part of the ide XTM away as is the frame all the com and was the dealer mechanism wheels and speake are un from Marconi Fra c tion is a wlatively simple, the proces. First aluminum alloy warm ste the preced e d for frames and en com i ng in the comfort anders In the theme angle w gehen was and bits theat the w w room e r The er schwede Weight down the plant and ever y 21 de wat I wew e ngand welding The frames when the painting , which is s ed by the workers caring the and wa s minutes to paint a frame, which it is planned to dry h o was the mes in various stage completion in the painting w the final y The t frames are the in a line where a group we work e rpended 11:57 X XTM Bike Corporation An Exercise in... 000 T The finished frames are then the y were a group of workers arranged in a line attaches the wheels as anders and other equip s endered a mbly me averages about the hand no time to switch from bide the next Completed bicycles are the bed and went to the leading deck for shipment to the final dealer Shipping time w ww days and shipping costs un 535 per unit Process Analysis To analyze XTM's operation let's mine the proces by pande what we canam DIAGRAMMING THE PROCESS A fint in analyzing a production process acha XTM's is to diagramit Such a diagram describes in visual rms the various operations of a process and the path of ma a nd India . We there are two ingchaam. the ng is a typical and met E s hes the standard symbols n These are individual per steps o as welding wiga are red by a cink, and w the carried out in the peaction process, ad t es winga hamburger Ort a lly with pertinent information Columbia Case Works These were involve moving aral parts, internatio n e point of the process to her. Examples indade pumping liquid from a vat trading parts from a fabrication plan ho m bly plant, transmitting an order via modern and shuttling engine blocks free workstation to the transportation is red by an arow, with a dotted line indicating a wo m an that the physical flow Ma and information in the wystem that is being redan transported is waiting in tage Stud e nts and swally wed by an in g le Store can be by his belas I though dated in database is commonly reprend sa cylinderdrum CONSTRUCTING A PROCESS FLOW DIAGRAM Using the whole described above, we can contrata proseduram of the XTM mantring . Suha diagram is shown in Ex p ertinent informati about each of the process with next to the wymbols. This allows to via at a glance of the prodata Suchage ly defines the present shows input and activitateach age of the ratio or wie similar du grams can be to though mo they will do the w e ll activities inter experience in a wid e rather than physical practs ) A Basic Cost Analysis b fintl of quest to ask about the XTM ons is it a proble operations how much poot is XTM making why not? Tewwer the question, we need to do some t ry analysis of XTMs structu To put started let's s p ectie 11:57 X XTM Bike Corporation An Exercise in... 000 Towweethers were to do w a ry analysis od XTMs wrotu Te pet started let's just the w and d uctie direct labor, ery, etc.-in order to determine XTM's tribution margin. These calen das In protams, the margini 110 Every dollar in extra contribuerghly 11 cm to caming before depreciation and taxes. Since this figure only includes alle s in eming w a analyses of investment options and process changes Corporation Page 3 IXT GARRETTEN Columbia Case Works For a mee l epar, we can add in the demand and find-cost indormation Auming a demande fonts we get the following numbers in thods of dollar 8629 CES Thus XTM is making an operating profit of 2.000 per year. At current operating levels XTM es variable costs o f sales and find t u les leaving rating moodules O ther penting expenstand with the band w firundial and operational int errumple, the here that volume is defined as the lowest od per unit and total funds are ,000 per you must will bruk t e mith, which is w ow their outro wie. Ander quantity is the bivity AIM pealt onder volume. For cumple demand in 20% to 720 units per the years perdicted, then the nnburton NSL to an a Nether, that the car diola , indut the de the capul invested in XTM The attractives of XTM as a business will on the boalapitalit requires top . The peod 2.000 per year mig attractive the total capital deployed in the w ay is one million dollars, but distinctly attractive the company requires five min dollars of capital Varmes financial performance can be developed to evaluate proasa fund inwested capitale (ROA) We will not point detal thre e this thing this coneindin urne Singer s ingeration theagh, we will be considering how provary with the value of two important s and plant and equipment Capacity and Bottlenecks While a financial analys e some Important 11:57 X XTM Bike Corporation An Exercise in... *** Capacity and Bottlenecks TM w have a w . In particular that the p an impact post in w Columbia Case Works quinto and was the complete the h a single ead s e pode work and theme a woman in units of me to performance The death in hun given. This indby diving the number of waren in the c an d by the pr e the Founder are well in the wedding area and the welding p a g es in to the and towywa city 15 frame . Smarcal y the product s of each oration shown in Exhibit 2 Sow much can XTM power in this case, it is there to see that the has to go through each patience the output will be limited by her with the In the production process is called the tw o XTML Welding firm pa r a detects the bene Sedi ts way we det will the e n d the w here may be The du TM TMS with ming the dead The wind o w w w behind that in the wind The watched w u parte quality w i th that c e pod pop for Thus there Page XT Corporation Columbia Case Works X XTM Bike Corporation An Exercise in... 0 XTM Bike Corporation An Exercise in Process Analysis BY GARRETT I VAN RYZIN s Introduction XTM Corporation is a specialty manufacturer of high-performance is known among biking enthusiasts for highly customized frame is equipment options and t h provided by a work of the dealers. The w bicycle is $750, which XTM wives w ere u . The film a wider e o XTM nder om Further deed is growing to the popularit a t e Bicycle Production The firm comploys 21 production works and the y were the cand labor we formats in the plant is 15 per hour in and b e per year in lary and benefits. The typically w h ether day five days a work for works a year. For implicitame e r wecks) Hourly w e are paid for productive time. Rent in the find costs for the building and equipment average $20,000 per month The only part of the bicyde XTM actually fabricates is the frame all the components, such as handlebars was the dealer medium wheels and are purchased from outside supplier Mars and parts per Frame fabrication is a relatively simple, two-step procen t imaoy tubing various diameters is out to the precise dimensions required foreach and bad a computed dofinning onder. A tag giving the case the order is Author Cevi casc centre attached to the frame this point Cutting and the he a rtbeat 30 minutes and the the workers in the cutting area are paid the standard laborate Lilled welde pe harina and his whe t her om the basic frame. The lignment of the frame and the quality of the w o ndered critical to the promo the final product It takes a welderbeut 5 minutes a g ree and the bag for fra 45 min u ired to the weld. We has always to caused at the plant and an average therap y anders waiting to he welded between the cutting and welding areas The frames are then went to the painting which is said by the w e aring the standand wait takes minutes to paint araw, after which is placed on a rack to dry foreight hours. On average there are frames in various peo p le in the painting arranged in a line attache e penent de X XTM Bike Corporation An Exercise in... 000 The finished frames are then taken to the final assembly area, where a group of even workers arranged in a line attaches the wheels, brakes, handlebars and other equipments de Total assembly time averages about 1.5 hours per bicycle, and no time is required to wich from bicycle to the next Completed bicycles are the band and went to the loading duck shipment to the final dealer Shipping time va n werk days, and shipping 25 per Process Analysis To analyze XTM's operation, let's mine the process step by step and see what we can am DIAGRAMMING THE PROCESS Afin spinaaying a production procesach as XI is to dimit Such a di describes in visuals the various pr o ap and the path of material and flow. While there are variety of ways of contracting wacha the lowing is a typical and useful nation Exhibit shows the dandm ed Operations These are individual processes tasks that are carried out in the production procesach as welding a wing awam, filling a bottle of pils, grilling a burger Operations are pewned by a circle and the diese ly annotated with information about the operation Columbia Case Works XTM BR Corporation Page 2 BY GARRETTI VANRIN Movements These steps involve moving material part or information from one point of the process to another Examples include pumping liquid from a vat trucking parts from a fabricatie plant mbly plant transmitting an onder demandshutting engine back from one workstation to the next Transportation is rend by an mw. with a decidiam wally indicating a few of information rather than a physical flow Storage waiting in die wi nd w erde Stoned data can be word by this w as well the data in database is commonly represented as a cylinder or drum CONSTRUCTING A PROCESS FLOW DIAGRAM Using the whole described above a t a prowding the XTM mutung . Such a diagram shown in t2Nthat information houtachement of the process is wi t to the symbols. This allows me to v ie at a glance much of the process data Such a diagram will defines the process of interest, it shows inputs outputs, and activities at each of the operation (For service operations, wimilar dirams can be structed though most of they will detail the sequence of activities a customer experiences in a service offering, rather than physical product flows) Basic Cost Analysis An obvious fit wel of questions to ask about the XTM operatione pofitable operations how much titi XTM making? If not, why not? To answer these questions, we wed to do some elementary analysis of XTM's cost structure Towelstand sust wowemu X XTM Bike Corporation An Exercise in... *** To answer these questions, we need to do some elementary analysis of XTM's cost structure To get started. let's just consider the wenues and variables of production-le, materials direct labor. y. -in order to determine XTM's contributie margin. These calculations are performed as follows Revent Maior Components Gross Margin 200.00 Cuarga Wendingar (500 5.30 ure shown 31 hour mes shown Assembly Labor 1 hour Shoping 500 Canon Marga 1500 In percentage terms the contribution marginis (55/750) 100-11.30%. Every dollar in extra cribe y 11 ci toaming before deprecated in this figure only includes variable costs, it is most useful in performing analyses of investment options and process changes Page 3 XTMB Corporation GARRETTIVANT Columbia Case Works For a more complete picture, we can add in the demand and fixed-cost information. Assuming a demand rate of 600 units per month, we get the following numbers (in thousands of dollars) for one year of operation at XTM Annual Revenue 5.400 100 04 Materiais & Components (3.960) (73.3%) Nel Contribution Rent & Equipment Operating Pro Thus, XTM is making an operating profit of $22.000 per year. At current operating levels XTM Incurs variable costs of 88.7% of sales and fixed costs of 726 of sales, leaving an operating profit of 4.1% of sales. Of course other nonperating expenses e interest and tes) are subtracted from operating profits to determine income to shareholders With these base numbers in hand we can now consider other s that will be of both financial and operational interest. For example, the ba n volume is defined as the lowest level of demand for which a firm's operating profit is positive. Since XTM s actribution od 45 per unit and total costs are per year its annually DOSS) break even units p ath which is well below the current well wales. Another quantity of interest is the sensitivity of XTM's profits to order volume For amplif dedicas 20 to 720 per month next year as predicted then the al contribution to 73 resulting in an operating profit of 562400-an increase 30 Note, however, that these calculations do not tell a complete financial story, in that they do not in the capital invested in XTML The attractiveness XTM as a bu s will also depend on the total capital it requires to operate. The profit of $222000 war might look attractive of the total capital deployed in the company is one million dollar but distinctly attractive of the company requires five million dollars of capital. Various measures of financial performance can be developed to evaluate profit as a function of w e measure of invested capitales. rs ily (ROD) (ROA). We will not go into detail on these sort of financial evaluations, this is something that is covered in detail in your finance courses. Since our focus is on operations, though we will be considering how profits vary with the value of two important items. 1) inventories and 2) plant and equipment X XTM Bike Corporation An Exercise in... .00 Capacity and Bottlenecks While a financial analysis is a useful starting point it does not answer me important questions about XTM's operations. In particular, R e sts that the projected increase in sales volument year will have a significant impact on profits. But is an increase in output possible? How much volume can XTM stain? How heavily tied their proces? To answer these questions we have to tum again to our process flow diagram. Note that for each operation we have indicated the w r of the operate le, the time te Columbia XTM Corpo Page Case Works quired to perform the complete operation on a single unit. As units are produced workers and machines process them through a sequence of tasks, and the total time it takes to execute all the tasks is called the processing time. Thus, sum of all processing times is ewentially the total work measured in units of time) required to perform an operation The c ity of each operation in units per hour is also give. This is determined by dividing the number of workers for machines in the case of an automated process) by the processing time of the operation. For example, there are welders in the welding area and the welding operation has a processing time of 1.5 hours (45 min to position the and 45 min to weld yielding a capacity of 6/1. 5 4 framebor. Similar calculations yield the production rates of each operation shown in Exhibit 2 So how much can XTM produced in this case, it is rather easy to see that since each bicycle has to go through each operation once, the output will be limited by the operation with the smallest capacity, which in this case is the welding operation. The operation that limits the output of a productie pe is called the operation For XTM welding is the bottleneck. If a firm produces a range of different products, the bottleneck can be more difficult to identity. Since different products may have different processing times at each operation the bottleneck will usually depend on the mix of products being produced In general, one is likely to find that bottlenecks are operations that are especially costly or consume scarcerers. For example, the capital equipment costs of the operation may be high or the labor force required may be highly skilled and thus difficult to expand and for expensive to employ. This is likely the case for XTM since the led welders are the most expensive workers in the process The bottleneck is important to identity for s al e by definitions the operation that limits the output of the entire process and thus it defines the overall c ity. This is an important quantity to know for obvious For example, we saw abone that year'speed in sales will encantly profits B eve since the capacity eXTM is her fa t hwch are not be supported without modifying the proces adding a sud o r ing the facility on time. The welding bonek is limiting XTM ality to increase output. It would be nice to break this bottleneck, that is in the welding production ate. Then the output volume of the facility could be increased Ma facility is rating at i mum capacity, then the bottleneck is even more critical In this cawany product time is lost on the bottleneck rating the lack of input parts of material quality problems, breakdowns hentes, etc.)then that production time can never be recoveredSince the bottleneck operation is at maximum capacity. It can be sped up to make up for the last time. Thus the could be ignificant opportunity costs due to lost sales from the lost production. For this is often critical to ensure that the bottleneck pation incur minimal idle time and down time Page 5 XTM Bike Corporation Columbia
