Semester– I

Lecture -4
Addis Collage
Argaw A

1
 Capacity
• Design capacity
– maximum output rate or service capacity an
operation, process, or facility is designed for
• Effective capacity
– Design capacity minus allowances such as
personal time, maintenance, and scrap
• Actual output
– rate of output actually achieved

2
 Efficiency and Utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

3
 Efficiency/Utilization Example
Design capacity = 50 Prefab/day
Effective capacity = 40 Prefab/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72%
Design capacity 50 units/day
4
Determinants of Effective Capacity

• Facilities
• Product and service factors
• Process factors
• Human factors
• Operational factors
• Supply chain factors
• External factors

5
 Steps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
6
 Evaluating Locations

• Cost-Profit-Volume Analysis
– Determine fixed and variable costs
– Plot total costs
– Determine lowest total costs

7
Location Cost-Volume Analysis
• Assumptions
– Fixed costs are constant
– Variable costs are linear
– Output can be closely estimated
– Only one product involved

8
 Example 1: Cost-Volume Analysis

Fixed and variable costs for four potential

methods
L oMethods
c a tio n F ix e d V a r ia b le
A Mivan
C ost C ost
A $ 2 5 0 ,0 0 0 $11
B Volumetric
B 1 0 0 ,0 0 0 30
C Prefab
C 1 5 0 ,0 0 0 20
D D Deck
Double 2 0 0 ,0 0 0 35

9
 Example 1: Solution
Fixed Variable Total
Costs Costs Costs

A $250,000 $11(10,000) $360,000

B 100,000 30(10,000) 400,000
C 150,000 20(10,000) 350,000
D 200,000 35(10,000) 550,000

10
 Example 1: Solution
$(000)
800 D
700
600 B
500 C
400 A
300 A Superior
200 C Superior
100 B Superior
0
0 2 4 6 8 10 12 14 16

Annual Output (000)

11
 Evaluating Methods
• Factor Rating
– Decision based on quantitative and
qualitative inputs

12
 Factor-Rating Method
► Popular because a wide variety of factors
can be included in the analysis
► Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each methods for each factor
5. Multiply score by weights for each factor for
each location
6. Make a recommendation based on the highest
point score
 Factor-Rating Example
Weights, Scores, and Solution
TABLE 8.4

SCORES
(OUT OF 100) WEIGHTED SCORES

KSF WEIGHT Mivan Prefab Mivan Prefab

Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude

Market input .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0

Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0

Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3

People to buy .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7

Totals 1.00 70.4 68.0

 Quality and Strategy

► Quality helps firms increase sales

and reduce costs
► Building a quality organization is a
demanding task
 Two Ways Quality
Improves Profitability
Sales Gains via
• Improved response
• Flexible pricing
• Improved reputation

Improved Increased
Quality Profits
Reduced Costs via
• Increased productivity
• Lower rework and scrap costs
• Lower warranty costs
 Defining Quality

The totality of features and

characteristics of a product or service
that bears on its ability to satisfy stated
or implied needs

American Society for Quality

 Different Views
► User-based: better performance,
more features
► Manufacturing-based: conformance
to standards, making it right the first
time
► Product-based: specific and
measurable attributes of the product
 Costs of Quality
► Prevention costs - reducing the
potential for defects
► Appraisal costs - evaluating products,
parts, and services
► Internal failure costs - producing
defective parts or service before
delivery
► External failure costs - defects
discovered after delivery
 Total Quality Management
► Encompasses entire organization from
supplier to customer
► Stresses a commitment by
management to have a continuing
companywide drive toward excellence
in all aspects of products and services
that are important to the customer
Seven Concepts of TQM
1. Continuous improvement
2. Six Sigma
3. Employee empowerment
4. Benchmarking
5. Just-in-time (JIT)
6. Taguchi concepts
7. Knowledge of TQM tools
 Continuous Improvement

► Never-ending process of continual

improvement
► Covers people, equipment, materials,
procedures
► Every operation can be improved
Shewhart’s PDCA Model

4. Act 1. Plan
Implement Identify the
the plan, pattern and
document make a plan

3. Check 2. Do
Is the plan Test the
working? plan
 Continuous Improvement

► Kaizen describes the ongoing process

of unending improvement
► TQM and zero defects also used to
describe continuous improvement
 Six Sigma
► Two meanings
► Statistical definition of a process that is
99.9997% capable, 3.4 defects per
million opportunities (DPMO)
► A program designed to reduce defects,
lower costs, save time, and improve
customer satisfaction
► A comprehensive system for achieving
and sustaining business success
 Six Sigma
Lower limits Upper limits
► Two meanings
2,700 defects/million
► Statistical definition of a process that is
3.499.9997%
defects/million capable, 3.4 defects per
million opportunities (DPMO)
► A program designed to reduce defects,
lower costs, save time, and improve
customer satisfaction Mean
► A comprehensive system±3for achieving

and sustaining business ±6success
Figure 6.4
 Six Sigma Program
► Originally developed by Motorola,
adopted and enhanced by Honeywell
and GE
► Highly structured approach to process
improvement
► A strategy
►

►
A discipline – DMAIC
A set of 7 tools 6
 Employee Empowerment
► Getting employees involved in product and
process improvements
► 85% of quality problems are due
to process and material
► Techniques
1) Build communication networks
that include employees
2) Develop open, supportive supervisors
3) Move responsibility to employees
4) Build a high-morale organization
5) Create formal team structures
 Quality Circles
► Group of employees who meet
regularly to solve problems
► Trained in planning, problem
solving, and statistical methods
► Often led by a facilitator
► Very effective when done properly
 Benchmarking
Selecting best practices to use as a
standard for performance
1. Determine what to benchmark
2. Form a benchmark team
3. Identify benchmarking partners
4. Collect and analyze benchmarking
information
5. Take action to match or exceed the
benchmark
 Best Practices for Resolving
Customer Complaints
Table 6.3
BEST PRACTICE JUSTIFICATION
Make it easy for clients to complain It is free market research
Respond quickly to complaints It adds customers and loyalty
Resolve complaints on first contact It reduces cost
Use computers to manage complaints Discover trends, share them, and align
your services
Recruit the best for customer service It should be part of formal training and
jobs career advancement
 Internal Benchmarking
▶ When the organization is large enough
▶ Data more accessible
▶ Can and should be established in a
variety of areas
 Just-in-Time (JIT)
Relationship to quality:
► JIT cuts the cost of quality
► JIT improves quality
► Better quality means less
inventory and better, easier-to-
employ JIT system
 Just-in-Time (JIT)
► ‘Pull’ system of production scheduling
including supply management
► Production only when signaled
► Allows reduced inventory levels
► Inventory costs money and hides
process and material problems
► Encourages improved process and
product quality
 TQM Tools
► Tools for Generating Ideas
► Check Sheet
► Scatter Diagram
► Cause-and-Effect Diagram
► Tools to Organize the Data
► Pareto Chart
► Flowchart (Process Diagram)
 TQM Tools
► Tools for Identifying Problems
► Histogram
► Statistical Process Control Chart
 Seven Tools of TQM
(a) Check Sheet: An organized
method of recording data

Hour

Defect 1 2 3 4 5 6 7 8

A /// / / / / /// /
B // / / / // ///
C / // // ////

Figure 6.6
 Seven Tools of TQM
(b) Scatter Diagram: A graph of the
value of one variable vs. another
variable
Productivity

Absenteeism
Figure 6.6
 Seven Tools of TQM
(c) Cause-and-Effect Diagram: A tool
that identifies process elements
(causes) that might effect an outcome
Cause
Materials Methods
Effect

Manpower Machinery
Figure 6.6
 Seven Tools of TQM
(d) Pareto Chart: A graph to identify and
plot problems or defects in descending
order of frequency
Frequency

Percent
A B C D E
Figure 6.6
 Seven Tools of TQM
(e) Flowchart (Process Diagram): A chart
that describes the steps in a process

Figure 6.6
 Seven Tools of TQM
(f) Histogram: A distribution showing the
frequency of occurrences of a variable
Distribution
Frequency

Repair time (minutes)

Figure 6.6
 Seven Tools of TQM
(g) Statistical Process Control Chart: A chart
with time on the horizontal axis to plot
values of a statistic

Upper control limit

Target value

Lower control limit

Time
Figure 6.6
Statistical Process Control (SPC)
► Uses statistics and control charts to tell
when to take corrective action
► Drives process improvement
► Four key steps
► Measure the process
► When a change is indicated, find the
assignable cause
► Eliminate or incorporate the cause
► Restart the revised process
 Inspection
► Involves examining items to see if an
item is good or defective
► Detect a defective product
► Does not correct deficiencies in
process or product
► It is expensive
► Issues
► When to inspect
► Where in process to inspect
 When and Where to Inspect
1. At the supplier’s plant while the supplier is
producing
2. At your facility upon receipt of goods from your
supplier
3. Before costly or irreversible processes
4. During the step-by-step production process
5. When production or service is complete
6. Before delivery to your customer
7. At the point of customer contact