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FARE 3310
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Jamie Gruman
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Chapter 7

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Food Agricultural and Resource Economics

FARE 3310

Jamie Gruman

Fall

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Chapter 7S: Capacity and Constraint Management
Importance of long-term capacity decisions
-capacity decisions have a real impact on the ability the organization to meet future demands for products and
services
-capacity decisions affect operating costs and ease of management
-capacity is usually a major determinant of capital cost
-capacity decisions involve long-term commitments
-capacity can affect competitiveness
Measuring Capacity, and Design and Effective Capacity
How to measure capacity:
-use measure that doesn’t require updating
-when multiple output are produced, state capacities in terms of each product or choose a major
product, or use availability of major input
-no single measure of capacity will be appropriate in every situation
Types of Capacity:
design capacity- the maximum output that can be attained under ideal conditions
effective capacity-the maximum possible output given operating hours, product mix, scheduling
difficulties and expected delays and machine maintenance
Efficiency and Utilization
Efficiency- the ratio of actual output to effective capacity
Utilization- the ratio of actual output to design capacity or used time of available time
Example- Determine the utilization and efficiency of each of the following situations:
1. A loan processing operation processes an average of 7 loans per day. The operation has a design capacity of 10
loans per day and an effective capacity of 8 loans per day.
2. A furnace repair team services an average of four furnaces a day. The design capacity is 6 furnaces a day and the
effective capacity is 5 furnaces a day Example 2- In a job shop, effective capacity is only 50% of design capacity and actual output is 80% of effective
capacity. What design capacity would be needed to achieve an actual output of eight jobs per week? Let
D=design capacity, E=effective capacity, and A=actual output.
Example 3- A manufacturer of ballet shoes has determined that its production facility has a design capacity of
300 shoes per week. The effective capacity, however, is 230 shoes per week. What is the manufactures capacity
utilization and efficiency if the actual output is 200 shoes per week?
Example 4- A car manufacturer has a painting line with a design capacity of 100 square meters per minute and
the line is operated 24 hours a day, 7 days a week (168 hours). Record of a week show the following lost time in
production:
Planned 1 Product changeovers (setups) 18hrs
2 Regular maintenance 12hrs
3. No work scheduled 6hrs
4. Quality sample checks 8hrs
5. Shift change times 8hrs
Unplanned 6. Maintenance breakdown 16hrs
7. Quality failure investigation 12hrs
8. Paint stock-outs 6hrs
9. Labour shortages 6hrs
10 Waiting for paint 5hrs
Total 100hrs
Determine the design capacity, the effective capacity and the actual output in hours per week.
Calculate the utilization and efficiency of the plant Four considerations for a good capacity decisions:
1/ forecast demand accurately – an accurate forecast is paramount to the capacity decision
2/ understand the technological and capacity increments
3/ find the optimal operating size
4/ build for change –technology and capacity increments often dictate and optimal size for a facility
Managing Demand
-when there is a poor match (mismatch) between actual demand and the available capacity, firms have a
few options:
1/ when demand exceeds capacity:
-in the short run, the firm may be able to curtail demand by raising prices, scheduling long lead time, and
discourage marginally profitable business
-in the long run, increase capacity
2/ when capacity exceeds demand:
-stimulate demand through price reductions or aggressive marketing
-accommodate the market through product changes
- -layoffs and plant closure
3/ adjusting to seasonal demand; seasonal demand is another capacity challenge
-produce products with complementary demand patterns (ie. Products for the demand is high for one when
low for the other)
Bottleneck Analysis and Theory Constraints
1/ each work area can have its own unique capacity
2/ capacity analysis determines the throughput capacity of workstations in a system
3/ a bottleneck is a limiting factor or constraint
4/ a bottleneck has the lowest effective capacity in a system
Theory of Constraints
theory of constraints (TOC) – body of knowledge that deals with anything that limits an organizations ability to
achieve its goals
-five step process for recognizing and managing limitations:
1/ identify constraint
2/ develop a plan for overcoming the constraints
3/ focus on resources on accomplishing step 2
4/ reduce the effects of constraints by offloading work or expanding capability
5/ once overcome, go back to step 1 and find new constraints
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 time for the whole system. The bottleneck should always be
kept busy with work
3. Increasing the capacity of a non-bottleneck station is a mirage. Increasing the capacity the non-bottleneck
stations has no impact on the systems overall capacity
4. Increasing the capacity of a bottleneck increases the capacity of the whole system. Managers should focus
improvement effort on the bottleneck
Break-even Analysis
1/ costs and revenue are linear functions (they are in direct proportion to the volume of units being produced)
-generally not the case in the real world (volume discounts, overtime labour cost)
2/ time value of money Break-even Analysis – BEA
-BEA is a method of finding the point, in dollars and units, at which costs equal revenues
-firms must operative above the break-even point to achieve profitability
Break-even Analysis
1/ costs and revenue are linear functions (ie. They are in direct pro

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