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HBP No # 4443
This PowerPoint presentation was prepared by Georgetown University Professor Ricardo Ernst for the sole purpose of aiding classroom instructors in
the use of the Operations Management Exercise: Balancing Process Capacity (HBP No. 4301). HBP educational materials are developed solely as the basis
for class discussion. These materials are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright © 2013 Harvard Business Publishing. To order copies or request permission to reproduce materials, call 1‐800‐545‐7685 or go to
http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the
permission of Harvard Business Publishing. Revised June 6, 2015.
Example
Simplified Car Wash
Assume this is the situation during most of the day
2 cars in queue
Capacity: Average 20 cars/hr.
What is the “cycle time?” [Average time between completion of successive units]
What is the “throughput rate?” [Average number of units processed per time unit]
What is the “throughput time?” [Average time a unit spends in the system]
What is “work‐in‐process?” [Number of units in the system]
What is the “capacity utilization” for each station?
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Challenge 1: No variation
1. Constant demand
2. Fixed performance at the service stations
Capacity at the Stations only changes with Investment and is Fixed
Throughput rate is determined
by the bottleneck(s)
C D
A B
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THE BUDGET !!!
We need to optimize the budget allocation
by balancing the system capacity and
increasing throughput to the maximum
(budget is the real limitation).
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Capacity is
balanced across the
three Stations at
37.5 cars/hr
Little Law Performance
Optimal Investment Even Investment (Same at
all stations)
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Example of teams strategies…
PROFIT – INVESTMENT TRADE OFF
Challenge 1: Profit for Different Combinations of
Investment in $
$3,000,000 $830
$825
$820
$2,500,000
Car Wash Investment Spending
$810
$2,000,000
$800
Profit
$1,500,000 $790
$780
$1,000,000
$770
$500,000
$760
$0 $750
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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Challenge 2: Variation
1. Variable Demand
2. Variable Performance at the Service Stations
Capacity at the Stations changes with Investment but is NOT Fixed
(e.g., more investment brings better machines with less variability)
Arrival Rates in the Simulation
1.8
1.6
Minutes Between Arrivals
1.4
1.2
0.8
0.6
0.4
0.2
0
9 10 11 12 1 2 3 4 5
Time of Day
Challenge 2 (mins) Challenge 1 (mins)
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Don’t be surprised if throughput rate is less
than the “capacity”
of the bottleneck!
C D
A B
There is a difference between
“Rated Capacity” and “Usable Capacity”
Why the Difference?
“Rated The Curse of Variability
Capacity”
In manufacturing it is due to:
• Breakdowns and repairs
• Operator skill and experience
• Product and material variations
• Availability (arrival) of inputs
• Changes in schedule (setups)
• Rate of rejects and off‐specs
• Etc.
“Usable Similar reasons reduce effective capacities
Capacity” of service operations, too.
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Same Strategy?
Same Results?
What is the Impact of variability on cycle time?,
Leadtime?, and Profit? What to do?
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What Strategy to Use?
The BOTTLENECK WILL START «MOVING AROUND»
DUE TO VARIABLITY…. LET´S VISUALIZE IT…….
This means different combinations of investment strategy
can lead to the same results… even more confusing!
Challenge 2: Different investment options for the same profit
($675.00 and 270 Cars)
$3,000,000 1.750
$2,500,000
1.700
$2,000,000
Car Wash Investment Spending
1.650
Cycle Time (Minutes)
$1,500,000
1.600
$1,000,000
1.550
$500,000
$0 1.500
1 2 3 4 5 6 7 8 9 10 11
Different combinations of investment strategy
leading to same results…!
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No Variability (Challenge 1)
20 22 24 26 28 30 32 34 36 38 40
Station Investment
1. Vacuum $1.0 M 1
2. Wash $0.5 M 2 37.5
3. Dry $1.5 M 3
Optimal Solution
With Variability (Challenge 2)
Vacuum Wash Dry
36
30 24
20 25 30 35 40 45
20 25 30 35 20 25 30 35
Mode Variability
Any input for our new strategy?
With Variability (Challenge 2)
Vacuum Wash Dry
36
30 24
20 25 30 35 40 45 20 25 30 35 20 25 30 35
Mode Variability
1) It seems Vacuum has big variability in the «low end» … Should we invest more
money in Vacuum than in Challenge 1?
2) It seems Washing variability is also not balanced … Higher investment than in
challenge 1?
3) It seem Drying has bib variability in the «high end» … Lower investment than in
Challenge 1?
4) Let´s think in the Goal and the TOC … Where should we locate the bottleneck …
at the end? At the beginning of the process? (Where was «Herbie» located?)
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Examples of teams strategies…
Let´s see the optimal…
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Who is the bottleneck now?
Capacity is NOT
balanced across the
three Stations
Bottleneck will be moving around due to variablity!!
Even the optimal provides less profit and longer
leadtimes and cycle times that in Challenge 1
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Impact of process and demand
variability in our business
How much have we lost due to
variablity?
Challenge 1
Challenge 2
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Impact of Variability
PROFIT
Same Strategy Optimal Strategy
LEADTIMES
From «predictable 19min» to «unpredictable near 27min»… (+70%!!)
Impact of Variability
Challenge 2: Profit for Different Combinations of Investment
$3,000,000 $800
$690.00
$700
$2,500,000
$600
$2,000,000
$500
$1,500,000 $400
$300
$1,000,000 Optimal Solution (Challenge 2): $695 (274 Cars)
Balanced Capacity (Challenge 2): $655 (266 Cars) $200
$500,000 Balanced Capacity (Challenge 1): $825 (300 Cars)
$100
$0 $0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
Variability has a significant Impact on the Operational and
Financial Performance of a System
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Operations Enemy: Variability
Variability Kills !
1. Demand Variability
2. Process Variability
Target is to understand, manage,
control and eventually eliminate,
both sources of Variability
The OM Triangle
Slow High Inventory
(or long lead time)
Speed of response
Low
Fast
Variability
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Modeling Variability of the Process*
Resulting numbers for status quo (before investing)
* These equations explain the calculation of ranges at the stations
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