Operations Management:

Sustainability and Supply Chain

Management
Fourteenth Edition, Global Edition

Chapter 7s
Capacity and Constraint
Management

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Outline
• Capacity
• Bottleneck Analysis and the Theory of Constraints
• Break-Even Analysis
• Reducing Risk with Incremental Changes
• Applying Expected Monetary Value (EMV) to Capacity
Decisions
• Applying Investment Analysis to Strategy-Driven
Investments

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Capacity
• The throughput, or the
number of units a facility
can hold, receive, store, or
produce in a period of time
• Determines fixed costs
• Determines if demand will
be satisfied

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Planning Over a Time Horizon
Figure S7.1

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• Design capacity is the maximum theoretical output of a system
– Normally expressed as a rate

• Effective capacity is the capacity a firm expects to achieve given current • Design
operating constraints availab
– Often lower than design capacity
• If mach
the plan
• Effectiv
resourc
setups/
• if frito-la
mainten
machin

Actual
resourc
quality
• On ave
and ma

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Utilization and Efficiency
Utilization is the percentage of design capacity actually
achieved
Utilization = Actual output / Design capacity

Efficiency is the percentage of effective capacity actually

achieved
Efficiency = Actual output / Effective capacity

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Bakery Example

• Sara James Bakery has a plant for processing Deluxe breakfast

rolls and wants to better understand its capability. Last week the
facility produced 148,000 rolls. The effective capacity is 175,000
rolls. The production line operates 7 days per week, with three 8-
hour shifts per day. The line was designed to process the nut-
filled, cinnamon-flavored Deluxe roll at a rate of 1,200 per hour.
Determine the design capacity, utilization, and efficiency for this
plant when producing this Deluxe roll.

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Bakery Example (1 of 7)
Design Capacity

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Bakery Example (2 of 7)
Utilization

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Bakery Example (3 of 7)
Efficiency

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Bakery Example -Expansion

The manager of Sara James Bakery now needs to increase production of the increasingly
popular Deluxe roll.

To meet this demand, she will be adding a second production line. The second line has
the same design capacity (201,600) and effective capacity (175,000) as the first line;
however, new workers will be operating the second line.

Quality problems and other inefficiencies stemming from the inexperienced workers are
expected to reduce output on the second line to 130,000 (compared to 148,000 on the first).
The utilization and efficiency were 73.4% and 84.6%, respectively, on the first line.
Determine the new utilization and efficiency for the Deluxe roll operation after adding the
second line.

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Bakery Example (4 of 7)
Design Capacity
Expansion

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Bakery Example (5 of 7)
Effective Capacity
Expansion

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Bakery Example (6 of 7)
Actual Output
Expansion

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Bakery Example (7 of 7)

Utilization and Efficiency

Expansion

Design capacity = 403,200 rolls

Effective capacity = 350,000 rolls
Actual output = 278,000 rolls

Utilization = 278,000 ÷ 403,200 = 68.95%

Efficiency = 278,000 ÷ 350,000 = 79.43%

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Capacity Considerations

Capacity decisions must be integrated into the organization’s

mission and strategy

1. Forecast demand accurately

2. Match technology increments and sales volume
3. Find the optimum operating size (volume)
4. Build for change

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Managing Demand
• Demand exceeds capacity
– Curtail demand by raising prices, scheduling longer
lead times, discouraging marginally profitable business
– Long-term solution is to increase capacity
• Capacity exceeds demand
– Stimulate market
– Product changes
• Adjusting to seasonal demands
– Produce products with complementary demand
patterns

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Complementary Demand Patterns
Figure S7.3

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Bottleneck Analysis

• Each work area can have its own unique capacity

• Capacity analysis determines the throughput capacity of
workstations in a system
• A bottleneck is a limiting factor or constraint
– A bottleneck has the lowest effective capacity in a
system
• The time to produce a unit or a specified batch size is the
process time

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Bottleneck Analysis and the Theory
of Constraints (continued)
• The bottleneck time is the time of the slowest workstation
(the one that takes the longest) in a production system
(4min)
• The throughput time is the time it takes a unit to go
through production from start to end, with no waiting (9min)

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Capacity Analysis Ex.
Howard Kraye’s sandwich shop provides healthy sandwiches for customers. Howard has
two identical sandwich assembly lines.

(1) A customer first places an order, which takes 30 seconds. The order is then sent to
one of the two assembly lines. Each assembly line has two workers and three
operations:

(2) assembly worker 1 retrieves and cuts the bread (15 seconds/sandwich),

(3) assembly worker 2 adds ingredients and places the sandwich onto the toaster
conveyor belt (20 seconds/sandwich), and the toaster heats the sandwich (40
seconds/sandwich).

(4) Finally, another employee wraps the heated sandwich coming out of the toaster and
delivers it to the customer (37.5 seconds/sandwich).

A flowchart of the process is shown below. Howard wants to determine the bottleneck
time and throughput time of this process.

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Capacity Analysis (1 of 5)
• Two identical sandwich lines
• Lines have two workers and three operations
• All completed sandwiches are wrapped

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Capacity Analysis (2 of 5)
• The two lines are identical, so parallel processing can
occur
• At 40 seconds, the toaster has the longest processing time
and is the bottleneck for each line
• At 40 seconds for two sandwiches, the bottleneck time of
the combined lines = 20 seconds
• At 37.5 seconds, wrapping and delivery is the bottleneck
for the entire operation

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Capacity Analysis (3 of 5)
• Capacity per hour is 3,600 seconds/37.5
seconds/sandwich = 96 sandwiches per hour
• Throughput time is 30 + 15 + 20 + 40 + 37.5 = 142.5
seconds

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Bottleneck Management
1. Release work orders to the system at the pace set by the
bottleneck’s capacity
– Drum, Buffer, Rope
2. Lost time at the bottleneck represents lost capacity for
the whole system
3. Increasing the capacity of a nonbottleneck station is a
mirage
4. Increasing the capacity of a bottleneck increases the
capacity of the whole system

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Break-Even Analysis (1 of 7)

• Break-even analysis is the critical tool for determining the

capacity a facility must have to achieve profitability.
• Technique for evaluating process and equipment
alternatives
• Objective is to find the point in dollars and units at which
cost equals revenue
• Requires estimation of fixed costs, variable costs, and
revenue

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Break-Even Analysis (2 of 7)
• Fixed costs (sabit maliyetler)are costs that continue even if
no units are produced
– Depreciation, taxes, debt, mortgage payments
• Variable costs(değişken maliyetler) are costs that vary with
the volume of units produced
– Labor, materials, portion of utilities
• Contribution(katkı) is the difference between selling price
and variable cost

• Contibution= selling price – variable cost

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Break-Even Analysis (3 of 7)

• Revenue function(gelir fonksiyonu) begins at the

origin and proceeds upward to the right,
increasing by the selling price of each unit
• Where the revenue function crosses the total cost
line is the break-even point

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Break-Even Analysis (4 of 7) Figure S7.5

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Break-Even Analysis (5 of 7)

Assumptions

• Costs and revenue are linear functions

– Generally not the case in the real world
• We actually know these costs
– Very difficult to verify
• Time value of money is often ignored

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Break-Even Analysis (6 of 7)
Single-Product Case

BEPx  break - evenpoint in x  number of units produced

units TR  total revenue  Px
BEP$  break - evenpoint in F  fixed costs
dollars V  variable cost per unit
P  priceper unit (after TC  total costs  F + Vx
alldiscounts)
Break-even point occurs when

TR  TC F
or BEPx =
Px  F  Vx PV

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Break-Even Analysis (7 of 7)
Single-Product Case

BEPx  break - even point in x  number of units produced

units TR  total revenue  Px
BEP$  break - even point in F  fixed costs
dollars V  variable cost per unit
P  price per unit (after TC  total costs  F + Vx
all discounts)

F
BEP$  BEPx P  P
P –V Profit = TR – TC
F = Px – (F + Vx)

(P – V)  P = Px – F – Vx
F = (P – V)x – F

1 –V P
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Break-Even Example (1 of 3)

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Break-Even Example (2 of 3)
Fixed costs = $10,000 Material  $.75  unit

Direct labor  $1.50  unit Selling price = $4.00 per unit

F $10,000
BEP$  
1 – (V  P ) 1 – 1.50 + .75    4.00 
$10,000
  $22,857.14
.4375
V=
F $10,000 P=
BEPx   = 5,714
P – V 4.00 – 1.50 + .75  F=

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Break-Even Example (3 of 3)

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Break-Even Example Multiproduct
Case
Break - even F
Point in dollars =
(BEP$ )  V  
  1  i
Pi   Wi 
  
Where F = fixed costs
Vi = variable cost per unit for product
Pi = price per unit for product i

Wi = percentage of total dollar sales for product i

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Multiproduct Example (1 of 2)
Le Bistro, like most other restaurants, makes more than one product and would like to
know its breakeven point in dollars. Information for Le Bistro follows. Fixed costs are
$3,000 per month.

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Multiproduct Example (2 of 2)
F
BEP$ =
 Vi  
  1    Wi 
 Pi  
$3,000  12
= = $76,596
.47

$76,596
Daily sales = = $245.50
312 days

The restaurant management now knows that it must

generate average sales of $245.50 each day to break even.
Management also knows that if the forecasted sales of
$72,500 are correct, the restaurant will lose money, as
break-even is $76,596.
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