LEONARD N.

STERN SCHOOL OF BUSINESS

ANALYSIS OF AN OPERATION

ANALYSIS OF AN OPERATION
Some of the key information that any entrepreneur or manager wants to know about their business is how much can the business produce per unit of time and under what conditions, i.e., how much can it produce of a single or a mix of products and services, or how much can it produce given large or small or even a mixture of order sizes. Information on how long it takes to get orders through the manufacturing or service facility is also required to set up service guarantees regarding delivery and due dates, i.e., film will be ready in an hour, loan will be approved in three days, and pizza will be delivered to the door in 30 minutes. Determination of how much labor, and its mix between full and part time, is required in order to meet or exceed these guarantees is also important. The type and level of capital investment and its match with the strategic direction of the firm must also be harmonized. Since the types of problems in the real world that involve the analysis of processes vary dramatically from setting to setting, we have developed an introductory approach which will give the reader the ability to model many different situations. This is done by developing a sequential set of definitions which, when employed should lead to an introductory set of results to the above questions. Process: A process is that which converts inputs to outputs. For example, consider the task make tea. Then, fill water, heat water, place tea bag, and steep the tea, could be the four steps that are required to make tea. Put together they define the process of making tea. Practice process flow-charting with simple examples such as doing the laundry or taking an order from a customer over the phone. We can debate on how finely we should breakup the flow of work into individual processes. The usual answer is that it depends, on the purpose. Treating the entire task of doing the laundry as one process will be adequate if the purpose is to know when we will get done if we start now. However if we want to improve the process then analysis on a finer scale will be necessary. The first step to analyze a process is the preparation of a process flow chart. This chart shows the process steps, the flow of materials, the flow of information, the storage of materials (buffers) and also what resources are necessary to perform each step. Process flow charting is explained below. Resources: These are the things needed to carry out the process. These could be machines, labor, information, process recipes (how to make tea), material handling equipment (tongs, gloves), utilities (electricity and gas), space, etc. Process Flow Chart: A symbolic representation of the processes and how they interconnect with one another is called a process chart. It is the starting point of any process analysis. The two symbols commonly used to draw a process flow chart are those of a square and a triangle. A square represents a process step and a triangle represents storage. See for example the sample process flow charts given at the end of this note. Thus, the process chart should indicate stocks and flows. Stocks stand for inventory (raw material (RM), work-in-progress (WIP), and finished goods (FG) inventory). Flows stand for where the order goes from one process to another. In addition, process flow charts sometimes indicate information flows, decision nodes, who is doing what (sometimes called swim lanes, where each lane stands for a person or a resource and the processes are written in the lane for that person), as well as, line of visibility, line of customer interaction, fail points, and fail-safing methods. It is good practice to write below each process step, the resources that are necessary for completing that step and the time required of each resource for completing one unit of work. Sometimes different times might be needed of different resources such as heat water might require 15 seconds of labor but 4 minutes of cooking range time. The time to

ANALYSIS OF AN OPERATION
complete each process step also depends on the number of units that are to be processed. Thus, it is important to write down the unit of work. For example, if the unit of work is one cookie then the time will be given to mix or bake one (a single) cookie. Otherwise if the unit of work is a dozen cookies, the time will be specified at each process step for 12 cookies1. Capacity and cycle time: The flow chart of a process is a static picture. To be able to analyze some of the dynamics of a process we need to define capacity and cycle time. The capacity of a process is the maximum rate at which output can be created given an infinite supply of inputs and orders. Cycle time can be defined both for a process and a process step. The cycle time for a process is defined to be time between successive order completions when the process is operating at capacity. Thus, cycle time of a process = 1/capacity of the process. The cycle time for a process step is the time to process a unit of work. We begin with some simple examples. In these examples there is a single resource and a single process step. This will therefore b the constraining resource and hence called the bottleneck resource. For example consider the capacity of a process called heating water to make tea. Assume that a kettle can hold one gallon of water and that the time it takes to heat water to the appropriate temperature is five minutes. We say that the cycle time for this process is five minutes. The capacity of heating is 1 gallon per five minutes and in an hour we can do 12 cycles (60/5). The resultant capacity of this task is 12 gallons per hour. Another example is packing a computer. If it takes on the average 12 minutes to pack a computer, the capacity of the process is 1 computer in 12 minutes or 5 computers per hour. The cycle time is 12 minutes. Remember that Capacity is a rate it is the maximum rate at which work can be done. We did not explicitly consider the resources involved in these examples. In the first, the resources could be the cooking range and the kettle. As both are occupied all the time (if we are working to capacity) the two are considered to be bottleneck resources. In the second example, assume the packing is done by one person. The resource is labor. The labor is the bottleneck resource as it is the single resource. It is quite important to understand that the cycle time is the average time necessary to carry out a process for a unit of work For example, the cycle time is five minutes per gallon and 12 minutes per computer in the two examples. If we place 50 cookies all at once in an oven to bake and the oven completes the process in 50 minutes, the cycle time is one minute per cookie. (To see this notice that the oven bakes 50 cookies in 50 minutes or one cookie per minute. That is the ovens capacity. Cycle time = 1/capacity = 1 /(1 cookie/minute) = 1 minute per cookie.) However, if in the last example the unit for analysis is 50 cookies then the cycle time is 50 minutes (that is it takes 50 minutes to bake 50 cookies). Obviously, cycle time and capacity depend upon the unit of work (sometimes also called unit of analysis). Usually, capacity is easier to determine but not always. The two concepts are related as already explained. The cycle time is defined to be the inverse of capacity. It has time as its unit of measurement. How do we measure cycle time of a process? One method is to ensure an infinite supply of inputs and orders, then to stand at the output end of the process and record the time between orders (parts, cars, satisfied customers, etc.) exiting the process. For example, if we observe that a car comes off the end of an assembly line roughly one every one minute, then the cycle time = 1 minute per car. The capacity is 1 car per minute. Or, the capacity of the assembly line is 60 cars per hour or about 240,000 cars per year for two 8 hours shift operation and 250 working days per year. There are issues of quality involved

Sometimes the unit of analysis will vary from process step to process step. This might happen if several orders are combined to exploit economy of scale at some process step.

ANALYSIS OF AN OPERATION
in these definitions, should we count the good parts or all parts? What is the correct definition? For our purposes we shall not count bad or defective parts as output. Cycle Time: When we say that the cycle time of a machine is 10 minutes per part, we mean that if the machine were never starved for inputs it would produce on the average one good part every ten minutes. The notions of on the average and good part are very critical in this definition. Cycle time is the average time between parts exiting the process or task (if you were to stand and observe it over a long period of time and the process were producing steadily at the same rate.) Before we discuss how to determine capacity when there are several process steps or resources involved, we will formally define and measure capacity and cycle time. One approach is to consider the system you wish to observe as a black box. Give it an unlimited supply of inputs. Let N(t) be the number of good parts produced by the system in time t. Then the ratio, N(t)/t is a measure of the capacity, when t is sufficiently large. Why do we need the caveat that t be large? The reason is we want to obtain the average rate as t goes to infinity. To clarify this point, say a machine were given an unlimited supply of inputs. It is then observed to produce 60 parts all at once every 60 minutes. Unless we observe for 60 minutes we would say that the machine is not working! Check that the capacity for this example is 60 parts per hour or one part every minute and that the cycle time is one minute per part. As cycle time is the inverse of the capacity, t/N(t) is the measure of cycle time for sufficiently large t. In these definitions, we have assumed that carrying out a process does not interfere with other processes. In some operations there may be interference, i.e., if a person is assigned to perform two processes, the same person often cannot attend to these two tasks at the same time. We will discuss this point in more detail in our section on bottlenecks. The definition of capacity has to be modified in such circumstances. When multiple constraining resources such as space, labor and machine are involved, the calculation of capacity is no trivial matter. The notion that subdivision of processes may be necessary for capacity analysis leads to the definitions of work area and system. In this note we shall also see how setup time, product mix and quality affect the capacity of a system. Work Area: A grouping of similar machines or equipment is called a work area. For example, a collection of drilling machines represents the drilling work area at a Ford plant. A collection of tellers comprises the customer banking work area at a Citibank branch. A collection of order takers comprises the customer order call center at Amazon, Dell, Lands End, etc. Flow Time: The flow time is the time spent by a typical part, job, (order), or customer in the system. For example, if customers are processed by a teller in batches of five (one after another but no one can leave until all five are attended to!) and it takes the teller five minutes to serve a customer, the cycle time is five minutes per customer, the capacity is 12 customers per hour and the flow time is 25 minutes for an order of five customers. If they are processed one by one and there is no waiting (customers are nice enough to arrive evenly spaced) then the capacity and cycle time are unchanged but the flow time is five minutes. (It is harder to determine flow time when all five customers arrive at the same time and there is only one teller. The average flow time, (remember that all but the first customer encounters waiting time) is given by (5+10+15+20+25)/5 = 15 minutes.) How do you measure flow time? A practical approach is to tag jobs or customers as they enter the system. Write down the time when they entered. Record when they leave. Flow times for cars in an auto plant can vary from 12 to 24 hours often depending on how long they stay in the paint shop. Understanding the source of the variability is a good starting

ANALYSIS OF AN OPERATION
point to understanding the dynamics of the system. It is a good exercise to construct examples where the flow time is not equal to the cycle time. One example is when jobs or customers are processed in batches. Another example is when there is a queue and a customer or order has to wait until served. This waiting time becomes part of the flow time. It is clearly possible that each order going through a process could have different flow times. Thus flow time is not a unique number but a distribution. In this case to set a service guarantee we must decide the percent of the customer we want to satisfy within the given time guarantee in a make to order system. We call this percent the customer service level. In a make to stock or assemble to order system the service level will be determined by the flow time distribution as well as the level of finished goods or component inventories carried. We cover these topics when we discuss inventory management. Bottleneck: The resource with the smallest capacity in the system is called the bottleneck. The astute reader will note that we use the term resource and not process step in this definition. The reason is that the same resource may be required for carrying out two processes. For example, consider the example in which, one person verifies signatures on checks and then subsequently the same person verifies the balance in the customer's account. There are two process steps, but the bottleneck is the single person. Clearly having two people do the two jobs will increase the capacity. We shall assume unless stated that each process is carried out using a separate resource (or separate set of resources if there are more than one identical machines or workers attending to the same process). However we briefly describe how to analyze a process when the same resource (or set of identical resources) is used to carry out several processes. When the same resource is used to perform different processes do not compute the capacity of a process step but instead make a list of all resources. For each resource list the processes that have to be performed by that resource. Then determine the work that has to be done (in units of time). Finally, determine the capacity using the formula, capacity = time available divided by time required (work) per order. A sample table is provided below: Making breakfast at a Deli. Unit of work = 1 customer order Resource Person making coffee Person making hot breakfast Range2 Number Available 1 1 1 Process steps where needed Make coffee Make toast Make eggs Wrap Make eggs Time required per unit of work (mins) 2 mins. 2.5 4 0.5 6 Capacity (units per hour) 30 8.57 10

The approach suggested above is not difficult but attention to detail is important. Particularly, for each process step we must know what resources are needed and how much of time is needed on each resource. It is also important to write down the unit of work. In fact, as we shall see in our examples, the bottlenecks may shift depending on the demand pattern (product-mix) and the lot size. Improper scheduling also can create temporary and shifting bottlenecks.

The range is needed for more time than the person cooking the eggs.

ANALYSIS OF AN OPERATION
System Capacity: The capacity of a system is the capacity of the bottleneck. The cycle time of the system is the cycle time of the bottleneck. Caution the capacity of the system is not the sum of the capacities of all resources but the capacity of the most limiting resource. In the table above, the limiting resource is the person making hot breakfast. System Flow Time: The total time spent in the system by a typical order is the system flow time. It is not necessarily equal to the sum of flow times of all process tasks in the system for one simple reason: processes can be done in parallel. For example, consider the processes for attending to your car comprising: filling the gas tank, checking the water in the radiator and topping it up if necessary and checking the water in the battery and topping it up if necessary. These processes can be done sequentially (serially-one after another) or simultaneously (in parallel- all at the same). If these processes are done sequentially and each takes five minutes, a customer can be served in 15 minutes. If, however, they are all done simultaneously, a customer can be served in five minutes. What are the labor implications of the two approaches? Idle Time: The idle time of a resource is the time during which work is not being done by a resource. Transfer Time: This is the time during which the order is being moved for one work area to another. Typically no work is being done and no value is being added.

EXAMPLE I
In example I, parts are produced every five minutes. The cycle time is five minutes per part for the system since Machine A is the bottleneck operation, the flow time is seven minutes in the system and the capacity is 12 parts per hour. This system is not balanced because the two machines A and B have different cycle times. It is indeed rare to see a perfectly balanced operating system. This is why the notion of a bottleneck is useful. If the system is fully utilized, then machine B is idle for three minutes in every five minutes, and we say that machine Bs capacity utilization is 2/5 or 40%.

Machine A

Machine B

Cycle Time = 5

Cycle Time = 2

Finished G o o ds

ANALYSIS OF AN OPERATION EXAMPLE II

M a c h in e A

M a c h in e B C y c le T im e = 2 F in is h e d G ood s

M a c h in e A M a c h in e C y c le T im e = 5 W ork A rea

C y c le T im e = 2 .5

In example II, the cycle time for the work area with two machines of type A is 2.5 minutes. This work area is the bottleneck (note that the whole area is the bottleneck not just one of the two machines denoted as A). The capacity of the system is 60/2.5 = 24 parts per hour. (Conversely, the capacity of each machine A is 12 parts per hour. So the capacity of the work area is 24 parts/hour. The cycle time = 60/24 = 2.5 minutes.) If the two machines A actually produced 20 parts per hour yesterday, we will say that the capacity utilization was 20/24 = 83.33% yesterday. We can now define capacity utilization. Capacity Utilization: The actual rate at which the system delivers outputs divided by its capacity is called capacity utilization. This is equivalent to Capacity Utilization = (Time used) divided by (Time Available). The flow time in Example II is still seven minutes, because assuming that we cleverly stagger inputs to the two machines of type A, we can ensure that there is no waiting at machine B. In that case we have managed to double capacity while maintaining the time spent by a typical part equal to seven minutes. However, if we can double the rate of machine A (cycle time equal 2.5) then we get the same capacity but reduce flow time to 4.5 minutes. This seems to be good time to introduce the notion of Gantt charts to clarify the flow time calculations. Gantt charts are used to pictorially depict the flow of a typical job(s) through the system. The X-axis of the chart is time, the Y-axis will have several bars. The bars correspond to each of the processes and each of the (key) resources. In the above example the Gantt chart for two typical jobs will be as follows (not to scale):

ANALYSIS OF AN OPERATION

PROCESS A

PART 1 PART 2

PART 3

PART 1 PROCESS B MACHINE A-1 MACHINE A-2 MACHINE B PART 1 PART 2 PART 1

PART 2

PART 3

PART 2 IDLE

PART 3

10 11 12

Time (min.)

The points to note are as follows: 1. Each process has a bar. We have two bars for work area A to show that the process is being done in parallel. 2. Each resource has a bar, and we have named the machines A-1 and A-2 to distinguish between the identical type A machines. 3. The idle time of machine B stands out as a result of the analysis. Extend the chart for a few more parts to get a feel of why it is that we termed the work area with the two machines as the bottleneck. You should be able to observe that: The machines in work area A will always be busy. Therefore the work area is the bottleneck. If the system is working to full capacity then the utilization of the work areas also can be read from the chart. Finally, the chart can be used to schedule tasks so that they do not interfere with one another, thus to determine the due dates for each order as they are received and accepted into the system)

EXAMPLE: Computing Utilization in Example II

We are given that the cycle time of the bottleneck is 2.5 minutes. In the month of January 1999 we find that the system produced 3100 units. What was the capacity utilization of the bottleneck? Assume that there are 20 working days in the month and 7 working hours per day. Basic Approach: Strategy -- Reduce everything to common units e.g., time. Time available per machine = 20 x 7 x 60 = 8400 minutes Process A: Time available = 2 machines x 8400 = 16,800 minutes. Time used = 3100 units = 5 x 3100 units = 15,500 minutes Capacity utilization = Time used/Time Available = 15,500/16,800 = 92.3% Process B: Time available = 8,400 minutes Time used to produce the 3100 units = 3100 x 2 = 6,200 minutes Capacity utilization = 6,200/8,400 = 73.8% Labor Content and Labor Cost The labor content of a task is the actual labor hours spent on doing the task. It is not necessarily equal to the flow time and it does not include the idle time. In both previous

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examples the labor content of the process is 5 min. + 2 min. = 7 minutes. In our making Tea example, it might take just 30 seconds to put the Tea bag in the cup but the tea requires a full five minutes to steep including the insertion time of the tea bag. Thus, the labor content of this task is only 30 seconds and the labor is free to do other tasks while the tea finishes steeping. In most situations the labor cost includes idle time since most organizations would not lay workers off while they are idle for short periods of time. How should the cost of labor per part produced be computed? A little thought reveals that it should equal the (cycle time of the system) x (the number of direct workers in the system) x (the labor rate expressed in $ per unit time). For example if the labor rate is 12 dollars per hour, then in example I, the labor cost = 5 min. times 2 persons (one each for the two machines) times $(12/60)/minute = $2 per part. (Even though the worker on machine B is idle 60% of the time most organizations pay by the shift and do not deduct idle time from compensation.) In example II, the labor cost per part is 2.5 min. x 3 persons x $12/60/minute = $1.50 per part. Productivity: Productivity is defined as output divided by input. Labor productivity is output divided by labor hours (that is, total labor hours including idle time if any). Efficiency: This is defined as the actual output divided by the standard output. For example, despite the availability of inputs, if the worker operating machine A produced only 10 parts per hour, the efficiency of the worker is 10/12 = 83.33%. In more complex situations efficiency is measured by standard hours of output divided by the hours worked. (What is a standard hour? It is the time which the industrial engineer says that must be taken to perform the operation. The methods used to establish the standard time are called work-study techniques.) Available Capacity: Available Capacity is defined to be equal to Time Available times Capacity Utilization times Efficiency. Effectiveness: Effectiveness is sometimes defined as useful outputs divided by actual output. For example if none of the parts produced could be sold, effectiveness is zero. It could also be defined as doing the right thing.

ANALYSIS OF AN OPERATION
Connection with productivity (output/labor hours): Example Cycle Time (min.) 5.0 2.5 Output per hour (units) 12 24 Total Labor Used (min.) 120 180 Labor Content per unit (min.) 7 7 Labor Productivity Cost per (parts/labor unit min) (min.) 10.0 12/120 = 0.1 7.5 24/180 = 0.133

I II

Direct Labor Utilization: Labor utilization is defined similar to capacity utilization. It is equal to: Labor Content of what was produced divided by the Labor hours paid for. Example I II Labor Content Labor Used in IdleTime Direct Labor of 1 hours one hour (min.) Utilization (%) output (min.) (min.) 12x7 = 84 120 120-84= 36 70.00 24x7=168 180 180-168= 12 93.33

You might like to ask yourselves whether capacity utilization, idle time and productivity are useful measures for a firm? How do these measures reflect competitive advantage? Can these measures be used to understand or be related to a firms performance? For example, is capacity utilization of 85% good for a process industry? A heavy machinery industry? A bakery? Flow Time (once again): It is the length of time spent by a part or customer order in a process. You should be able to answer why is: Flow Time Cycle Time? Flow Time Labor Content ? Production Rate: This is the rate at which a machine, work area or system produces goods or services. It need not be the maximum rate. For example a machine may have the capacity to produce at the rate of 15 parts per hour (note this is how a rate is expressed in parts or orders per unit time), but the manager may choose to produce at a rate of only 2 parts per hour because the demand rate is 2 parts per hour. We shall denote production rate as Th (for throughput rate). What is the connection between, Flow Time and Capacity? Assume that a system is producing orders at a particular production rate (which may not equal the capacity). Let the average inventory in the system over a sufficiently long period be INV. Then: INV = Production Rate (Th) x Flow Time. Note that this relationship has apparently nothing to do with capacity. In queuing theory we shall study how capacity affects various performance parameters of the system and the ideas in the last paragraph will become clear. This equation is called Littles law. It can be applied to determine how many seats are needed in the bar in a restaurant. Some examples of this law are given below.

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ANALYSIS OF AN OPERATION
Process Flow Time Examples Customer Flow: Taco Bell processes on average 1,500 customers per day (15 hours). On average there are 75 customers in the restaurant (waiting to place the order, waiting for the order to arrive, eating etc.). How long does an average customer spend at Taco Bell? Answer: Throughput (Th)= 1500/day = 1500/15 per hour. Inventory (I) = 75. Time = ? I = Th x Time => Time = I/Th = 75/100 hours = 45 min. Job Flow: The Travelers Insurance Company processes 10,000 claims per year. The average processing time is 3 weeks. Assuming 50 weeks in a year, what is the average number of claims in process.? Answer: Th = 10000/year = (10000/50)/week = 200/week. Time = 3 weeks. I = Th x Time = 200 x 3 = 600. Material Flow: Wendys processes an average of 5,000 lb. of hamburgers per week. The typical inventory of raw meat is 2,500 lb. What is the average hamburgers flow time? Answer: Th = 5000 lb/week, I = 2500 lb, Time = ? Time = I/Th = 2500/5000 = 0.5 week Cash Flow: Motorola sells $300 million worth of cellular equipment per year. The average accounts receivable in the cellular group is $45 million. What is the average billing to collection process flow time? Answer: I = $45 million, Th = $300 million/year, Time = ? Time = I/Th = 45/300 years = 3/20 year = 1.8 months. Question: A general manager at Baxter states that her inventory turns three times a year. She also states that everything that Baxter buys gets processed and leaves the docks within six weeks. Are these statements consistent? Inventory turns = Th/I = 3 in a year. I = Th x Time => Time = I/Th = 1/(Th/I) = 1/Turns = 1/3 years. Six weeks is not equal to 1/3 year. Not an accurate statement by the general manager. Set Up Time: This is the time needed to prepare for doing an operation. Examples are mixing the dough to make pancakes, cleaning the paint nozzles prior to changing the color of an automated painting machine, switching on and activating a database before accessing records from it, and signing on before buying things from Amazon. There may be a significant time expended in preparation. For example, we may have to not only do the physical set up but also undertake some trial and error production before we get the operation correct. An example of set up time is the time required to learn a new topic like capacity. After having spent so much time getting it correct it becomes easier when we must use it some place! Setup time can be either internal or external. Internal setups take up time on the machine, i.e., the machine must be stopped to do the setup. External setups are done offline. Example: We are painting different colors on cars. If we have two paint booths while one color is being used, we can clean the other one for use with another color. While food is cooking, we can dice up onions needed for the next step. In other words, doing external setups is doing things in parallel, it saves time. The technique of reducing set up time has been refined to a science, and made popular by Shingeo Shingo in his book on Single Minute Exchange of Dies (SMED). The lower the setup time the more output variety a process can create per unit time. This can be a key source of strategic advantage for many firms (as it was for Dell in the 1990s).

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ANALYSIS OF AN OPERATION
Lot Size: Whenever there is a significant amount of time spent setting up and preparing to do an operation, we would like to process several parts or carry out the operations several times. We do this to spread our setup time investment over as many parts as possible. If it takes 36 hours to set up a lathe to produce a spindle, and it takes 2 seconds to make a spindle, we may wish to make a few thousand having set up the lathe. Similarly given that it takes 20 minutes to mix the dough or switch on and activate a database, we would like to make several pancakes or process several records once the set up has been accomplished. The lot size may also be dictated by other considerations. For example if an oven has a capacity to bake 2 dozen cookies at a time, then we may choose a reasonable number of cookies to bake at a time. The consideration here is that the cost of baking (reflected in time spent in the oven) is the same for 1 cookie to two-dozen cookies. The number of units being processed as a batch is referred to as lot size. In processes that can produce multiple products, lot size refers to the number of units of any one product that are produced together before beginning the production of any other product. Each product may have a different lot size. The lot size is a decision parameter chosen by the manager. Run Time: This is the time required to produce a part or carry out an operation once the set up has been accomplished. In the lathe example it is 2 seconds. In the oven example it is the baking time. The former is a situation when parts are made one at a time and the latter an example of batch processing. In general most tasks can be defined as one at a time, batch or continuous. One at a Time Processing: In this process only one unit is worked on from beginning to end before the next unit can be started. An ATM is an example of such a process Batch Processing: In this process, several units of a product are worked on at exactly the same time. Typing with carbon paper or sending out an e-mail message to a list of people are examples of such a process. Moving the batch from step to step together is a method of production known as batch processing Continuous Process. In this process a new unit can be started as soon as the previous unit has entered the system. An automated car wash is an example of such a process. A conveyor oven is another example. Transfer Size: Transfer lot size is less than or equal to the lot size. It defines the number of units that can be moved to the next operation before the complete lot has finished processing at the prior operation. It reflects the fact that we may wait till the whole lot is processed to transfer the parts to the next operation, or transfer to the next operations in a transfer lot size that is smaller than the lot size, see Example III below. Ideally we wish to transfer parts as they are produced on a continuous basis. But this leads to excessive transportation or material handling costs. On the other hand, if we wait for the whole lot to be processed we may create idle time in the system. The effect of small transfer sizes is to make the flow in a system more continuous. An example is check clearing in banks. If checks are scrutinized for the signature by one person and passed on to another to verify the balance in the account, will it not be advisable to pass on the checks for verifying the balance as soon as the signature has been verified? Imagine 20,000 checks, 10 second per check for signature verification and 10 seconds for verifying the checking balance, and two persons doing this task. What is the flow time for the 20,000 checks if the transfer lot size is one versus 20,000?

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ANALYSIS OF AN OPERATION
Capacity Determination when There is Setup Time: The following table illustrates how to calculate capacity when there is a set up involved. The idea is that the capacity is computed in terms of the number of lots that can be produced per unit time. Then to multiply by the lot size to obtain the capacity in units. Set up Time (A) X Run Time (B) Y Number of machines at work center (C) Z Lot size Time per Lot (E) X + YL Capacity (units)

(D) L

(F) Z*L/(X+YL)

The run and set up time have to defined correctly. As an example consider the process of baking bread in an oven. There exists a small counter top apartment oven capable of baking one loaf at a time with a setup time of one minute and a baking time of 29 minutes (run time). A normal house oven cooks loaves in a batch of two with a one-minute setup time (one loaf in each hand) and a 29-minute bake time. A small industrial strength baking oven processes bread continuously with a load size of two loaves, a load time of one minute (both hands again) and a 29 minute bake time. Using the chart the results are as follows. Per Hour Capacity Type of Task Countertop House Oven Bakery Oven One At A Time Batch Continuous (A) 1 1 1 (B) 29 14.5 0 (C) 1 1 1 (D) 1 2 2 (E) 30 30 1 (F) capacity per hour 2 4 120

A look at the previous chart is a powerful illustration of how different machine types, even with the same setup and run times, can produce vastly different outputs. But you would correctly argue that the cost of these machines also varies dramatically and you would be correct. Thus, there is often a trade off between fixed cost and capacity and between capacity and variety. (High fixed cost often implies high capacity but low variety - low fixed cost often implies low capacity but high variety). Of course, these capacities should also be confirmed intuitively. They must be answers to what we think the ovens are capable of producing per hour. Capacity Determination with setup saving: Clearly for one at a time and batch machines we would like to spread the setup time over as many units as possible. If technically feasible we would like to increase the number of units we can process before we have to setup again. Capacity Determination For Multiple Product Production Processes. Few firms make only one product so we need to be able to determine capacity based on a firm's product mix. In the best of all worlds, if every product requires the same setup and run time, (e.g., in cookie baking the oven set up and run time do not vary whether chocolate chip or oatmeal raisin cookies are produced) then product mix complexity does not affect capacity. However, if setup times vary or both setup and run

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ANALYSIS OF AN OPERATION
times vary with the product type then capacity will be a function of the percent of the mix and the lot size of each product produced in the mix. Assume a firm has two products A and B and PA, PB are the percents of each products normally sold. We restrict the analysis to a single stage process that has one-at-a-time machines. To determine the capacity of such a product mix we must first determine the capacity of the process to produce each product. If we assume LA, LB are the lot sizes for each product then the time per lot can be computed as in the previous paragraph substituting the individual lot sizes for Q. Then the capacity determination table (modified for set up saving) can be used to compute product capacity based on the type of the bottleneck machine. As an example for A the number of units produced per unit of time would be

LA where XA and YA are the setup and run time of product A. X a YA LA

We must be sure that the unit of time is great enough to allow for the completion of the lot size (LA) or else we will over estimate capacity. We compute in this manner the capacity for producing each product separately. Let CA and CB be the capacity per unit time of products A and B when they are produced separately. Let x units of the productmix be produced. Then x PA and x PB are produced of products A and B respectively. The time needed to produce product A is: x PA/ CA and time needed to produce product B is: x PB/ CB . The sum total of these should not exceed one (unity) thus:

xPA / C A

xPB / C B

1 PA CA PB CB 1 PA CA

Or, the capacity of the process is given by:

PB CB

The above definition is easily extended to more than two products. When there are several resources, the capacity is computed for each resource and the minimum of these becomes the capacity of the system. Remember that the above formula works only when the product mix is known. When the product mix itself unknown or has to be determined, optimization techniques can be brought into play, such as linear and mixed integer programming methods. A final word about process choice: As depicted in the picture belo, process selection depends on volume. It also depends on variety. Finally, it can also be linked to the stage of the product on the product life cycle. Thus process choice must depend on the strategic direction of the enterprise.

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ANALYSIS OF AN OPERATION

Total Cost

Large

M edium Minimum cost envelope Entry Growth M ature Volume

Small

Total Cost vs. Volume Depending on Average Order Size

CAPACITY CALCULATIONS EXAMPLES & SOLUTIONS

Find the cycle time, capacity and flow time for the system in each of the following: 1. Bank tellers: assume that it takes five minutes to attend to one customer and there are 10 (ten) counters (operating in parallel i.e., a customer can go to any one of the tellers and get full service there). ATM machines: on the average it takes 4 minutes for one person to complete all transactions at an ATM and there are 8 (eight) ATM machines. Car assembly: there are 50 stations (in series i.e., one after the other) on the line; each station involves an operation on the car that takes 1.2 minutes. After the car assembly, the car is tested. This takes 15 minutes per car and there are five testing stations, any one of the stations can do the entire testing (i.e., the testing stations are identical and work in parallel). Four lane freeway: the freeway is 100 mile long, cars travel at 65 miles per hour and must maintain a separation of 100 feet between cars. (One mile = 5280 feet, 65 miles per hour = 5720 feet per minute.) What is the capacity of the freeway? This one is hard; try finding the cycle time, i.e. the rate at which cars enter a lane first. University: Each course is 40 hours of instruction. To prepare for each course it takes 80 hours of work by an instructor. Each student has to take 25 courses (on the average) to obtain a degree. The average size of a classroom is 40 students. There are 200 instructors, who work 300 days per year and forty hours per week. What is the capacity of the university? This one is also hard. Hint: Compute how many classes an instructor can teach in a year.

2. 3.

4.

5.

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ANALYSIS OF AN OPERATION ANSWERS

1. Bank tellers: Capacity of one teller = 60/5 = 12 customers per hour Capacity of 10 tellers = 10x12 = 120 customers per hour for the system Cycle time = 1/capacity = 1/120 hours/customer = 0.5 minutes per customer for the system Flow time = 5 minutes for the system 2. ATM machines: Capacity of one ATM = 60/4 = 15 customers per hour Capacity of 8 ATMs = 8x15 = 120 customers per hour for the system for the system Cycle time = 1/capacity = 1/120 hours/customer = 0.5 minutes per customer for the system Flow time = 4 minutes for the system 3. Car assembly: Each station is a bottleneck (bottleneck is the station with the smallest capacity). Capacity of line (system) = capacity of bottleneck station = 60/1.2 = 50 cars per hour Cycle time = 1/capacity = 1/50 hours/car = 60/50 minutes/car = 1.2 minutes per car (for the system) Flow Time = 50x1.2 = 60 minutes = 1 hour for the system After the car assembly, the car is tested. This takes 15 minutes per car and there are five testing stations. Capacity of testing station = 5 (stations) x (60/15 cars per hour) = 20 cars per hour Capacity of combined system = minimum of capacity of assembly line and testing station = = Minimum of 20 & 50 = 20 cars per hour Cycle time of Combined system = 1/capacity = 1/20 hours/car = 60/20 min./car = 3 minutes/car Flow time = 60 min. (assembly) + 15 min. (testing) = 75 minutes. 4. Four lane freeway: the freeway is 100 mile long, cars travel at 65 miles per hour and must maintain a separation of 100 feet between cars. (One mile = 5280 feet, 65 miles per hour = 5720 feet per minute.) Cars can enter only with a spacing of 100 feet. So the time between cars entering the freeway is the time taken to travel 100 feet = 100/(65x5280 feet/hour) = 0.0175 minutes Therefore cycle time = 0.0175 minutes! For one lane Capacity of one lane = 1/cycletime = 57.2 cars per minute per lane Capacity of freeway = capacity of 4 lanes = 4x57.2 = 228.8 cars per minute Flow time = time taken to travel 100 miles = 100/65 = 1.538 hours Cycle time of Freeway = 1/228.8 = 0.00437 minutes = 0.262 seconds This means if the freeway is being used to capacity, cars will come out (or enter) every 0.262 seconds. 5. University: Each course is 40 hours of instruction. To prepare for each course it takes 80 hours of work. Each student has to take 25 courses (on the average) to obtain a degree. The average size of a classroom is 40 students. There are 200 instructors, who work 300 days per year and forty hours per week.

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ANALYSIS OF AN OPERATION
Let us assume that 300 days = 52 weeks. To teach one class (this is the key) an instructor puts in 120 hours (40 hours in class plus 80 hours preparing for the class). So the total number of classes that can be taught = 200x52x40/120 = 3467 classes per year (i.e. 200 instructors work 52 weeks per year, 40 hours a week so the available instructor hours = 200x52x40, each class takes 120 hours of the instructors time). That is the capacity in terms of classes (sections offered). 3467 classes = 3467/25 (classes per degree) = 139 degrees (for classes of size 40) per year. But each class has 40 students. Thus the capacity = 139x40 = 5546 graduates per year.

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ANALYSIS OF AN OPERATION
Some of these examples were created by Wedad Elmaghraby (throughput Time is the same as Flowtime)

18

ANALYSIS OF AN OPERATION

19

ANALYSIS OF AN OPERATION

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ANALYSIS OF AN OPERATION

Toyota/Ford Hub Cap Mfg. - Make to stock - Customer Contact N

Raw
Inventory

Injection
1 . . . . . . n

Polishing
Center
1 . . . . . n

Put On

Pain

Plastic

Bake

Pack
1 . . . . n

Finished Hub
Boxed

Lands End/Amazon.com - Assemble/Pack to Order - Customer Contact ff d

Raw
Inventory Customer Phone/Email / Web Queue

Order
1 . . . . n

Paying

Order

Picking
1 . . . . n

In

Inventory

Clothes

Book

Order
1 . . . n

Order Finished
Boxed C Orders Inventory

UPS

Fed Ex

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ANALYSIS OF AN OPERATION

Car Wash/ATM - Make to Order - Customer Contact - Continuous

Car Wash
Pay Raw Material Inventory Customer Physical Queue Wash Hand Dry In Process Inventory Customer Queue Vacuum Machines

. . .

Exit

Exit
Bank ATM Facility
Account Activity Raw Material Inventory Customer Physical Queue

ATM-1
. . .

Exit

ATM-n

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ANALYSIS OF AN OPERATION SOME PRACTICE PROBLEMS

1. Is set up time to be included in computing capacity measures and capacity utilization? Give an example to illustrate your answer. 2. Given the total number of units produced during the day can we compute cycle time and flow time? For a given operating system, what is the minimum information needed to compute capacity, capacity utilization, idle time, cycle time, flow time, labor content, labor cost, and to identify bottlenecks? Try to answer in a tabular form. 3. What is the capacity and flow time of the system shown below (transfer lot size example)?

EXAMPLE III
LOT SIZE AND TRANSFER SIZE

4 at a time

2 at a time

2 at a time

Run

Run

Finished Goods

Time = 5 Lot Size = 4 Transfer Size = 2

Time = 2 Lot Size = 2 Transfer Size = 2

4. We visit an office that processes insurance claims. The manager asserts that it takes just two days on the average to process a claim. We examine the past records and see that on the average 200 claims are processed to completion every week. A quick estimate of the pending claims in the office reveals that there are 1500 claims waiting to be processed at different desks (stages of processing) in the office. i) What is the flow rate (Th) in this example? ii) Can we say anything at all about the capacity of the office for processing claims? iii) What is a good estimate for the flow time in the office? iv) How can we explain the finding in (iii) to the manager in very simple terms?

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