Capacity

Critical thinking Exercises

1. A computer repair service has a design capacity of 80 repairs per day. Its effective capacity,
however, is 64 repairs per day, and its actual output is 62 repairs per day. The manager would
like to increase the number of repairs per day. Which of the following factors would you
recommend that the manager investigate: quality problems, absenteeism, or scheduling and
balancing? Explain your reasoning.

2. Compared to manufacturing, service requirements tend to be more time dependent, location

dependent, and volatile. In addition, service quality is often directly observable by customers.
Find a recent article in a business magazine that describes how a service organization is
struggling with one or more of these issues and make recommendations on what an
organization needs to do to overcome these difficulties.

3. Identify four potential unethical actions or inactions related to capacity planning, and the
ethical principle each violates.

4. Any increase in efficiency also increases utilization. Although the upper limit on efficiency is
100%, what can be done to achieve still higher levels of utilization?

5. One approach that can be effective in reducing the impact of production bottlenecks in a job
shop or batch operations setting is to use smaller lot sizes.
a. What is the impact of a production bottleneck?
b. Explain how small lot sizes can reduce the impact of bottleneck operations.
c.What are the key trade-offs in using small lot sizes for the purpose of reducing the
bottleneck effect?
d. In some cases, the location of a bottleneck will shift (i.e., sometimes it is at workstation
3, another time it is at workstation 12). Furthermore, there can be more than one bottleneck
operation at the same time. How would these situations impact scheduling using small lot
sizes?
 Exercises
1. Determine the utilization and the efficiency for each of these situations:
a. A loan processing operation that 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.
b. A furnace repair team that services an average of four furnaces a day if the design
capacity is six furnaces a day and the effective capacity is five furnaces a day.
c. Would you say that systems that have higher efficiency ratios than other systems will
always have higher utilization ratios than those other systems? Explain.
2. The following diagram shows a four-step process that begins with Operation 1 and ends with
Operation 4. The rates shown in each box represent the effective capacity of that operation.
a. Determine the capacity of this process.
b. Which action would yield the greatest increase in process capacity: (1) increase the
capacity of Operation 1 by 15 percent; (2) increase the capacity of Operation 2 by 10 percent;
or (3) increase the capacity of Operation 3 by 10 percent?
12/hr 15/hr 11/hr 14/hr

Operation 1 Operation 2 Operation 3 Operation 4

3. A producer of pottery is considering the addition of a new plant to absorb the backlog of
demand that now exists. The primary location being considered will have fixed costs of
$9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to
retailers at a price that averages 90 cents.

a. What volume per month is required in order to break even?

b. What profit would be realized on a monthly volume of 61,000 units? 87,000 units?
c. What volume is needed to obtain a profit of $16,000 per month?
d. What volume is needed to provide a revenue of $23,000 per month?

Case
Your Garden Gloves
Joseph Murray, Grand Valley State University
 “Your Garden Gloves” is a small gardening business located in Michigan. The company plants
and maintains flower gardens for both commercial and residential clients. The company was founded
about five years ago, and has since grown substantially, averaging about 10 new clients and one new
employee a year. The company currently employs eight seasonal employees who are responsible for
a certain number of clients.

Each morning crews are assigned to jobs by the owner. Crew sizes range from two to four
workers. Crew size and composition are a function of the square footage of the garden and
requirements of the job. The owner feels that large jobs should be assigned to crews of four workers
in order to complete the job in a reasonable amount of time.

From time to time, the owner noticed that some jobs, especially the largest ones, took longer than
she had estimated, based on the square footage of the garden space involved. The owner’s son, Joe,
decided to investigate. He kept records of job times and crew sizes, and then used those records to
compute labor productivity. The results were:

Crew Size Average productivity per crew

2 4,234 square feet per day

3 5,352 square feet per day

4 7,860 square feet per day

The company operates on a small profit margin, so it is especially important to take worker
productivity into account.

Questions

1. Which crew size had the highest productivity per worker? Which crew size had the lowest
productivity per worker? What are some possible explanations for these results?

2. After a recent storm, a customer called in a panic, saying that she had planned a garden party
for the upcoming weekend and her garden was in shambles. The owner decided to send a crew of
four workers, even though a two-worker crew would have a higher productivity. Explain the
rationale for this decision.
 3. What is a possible qualitative issue that may very well influence productivity levels that the
productivity ratios fail to take into account?

Critical Thinking

1.The computer repair shop must improve its effective capacity which is the maximum capacity that the
shop can repair given its product mix, scheduling difficulties, and other possible situations. There is a
wide gap between the design capacity (80) and effective capacity (64). Design capacity which is the
maximum attainable output is 80. The company could have produced more if scheduling and balancing
have been improved. Hence, there is a need to investigate these aspects.
Absenteeism may also be investigated because considering the company's resources, it
should have repaired 64 computers but the actual output was only 62. This may mean
that some of the company's resources (e.g. human resources) may not have been fully
utilized.
Efficiency: (62/64) * 100 = 96.88%
Utilization: (62/80) * 100 = 77.5 %
Efficiency is very high, but utilization is not. The implication is that the potential for
increasing output by improving efficiency is quite limited, whereas the potential for
doing so by improving the effective capacity is much greater. Of the factors listed,
scheduling and balancing are in the category of factors that affect effective capacity,
so they would have the higher potential to be investigated for potential improvements

The recommendation for the manager is to investigate more on scheduling

and balancing.
Explanation:
It is clear that it is not a problem of quality (the problem is the number of
repairs per day, not how the satisfaction customer's level is after the
repairment). It is not either a problem of absenteeism since it does not define
the total workers hired Vs the output of the total repairs. It seems that the
effective capacity has to do more with how the tasks and loads are carried by
the working team, since the difference between "design" capacity and
"effective" capacity suggests a problem with balancing and scheduling
activities
5. The production bottleneck creates a boundary for the production of the entire system due to
not having sufficient capacity or excessive demand or some combination of both at a given
workstation. The entire production system will depend on the output of the bottleneck
workstation.
It is obviously true that smaller the lot sizes, quicker the batches transfer from one workstation to
another. It would be very helpful to produce the smaller batch at a bottleneck workstation and
transfer it to the next workstation. Thus, next workstation could begin to work quickly so that
there will be less idle time that ultimately lead to higher throughput of the entire manufacturing
system.
When we use small lot sizes for the purpose of reducing the bottleneck effect, it can cost more
due to more frequent setups since additional batches needed to be produced. On the other side,
smaller lot sizes result in less work-in process inventory and smaller transfer batches, which is
likely to increase the throughput of the system.
As the bottlenecks shift from one workstation to another, it becomes more difficult to identify
and take appropriate action on bottleneck workstations. Thus, it could be advantageous to use
smaller lot sizes in producing many different jobs at many different workstations because we
generally do not know how long a bottleneck will remain a bottleneck. In addition to that, it can
improve the efficiency of the production process.  However, sometimes it is not desirable to
reduce the batch size because small batch sizes could increase the setup cost.

Exercises

Utilization = (Actual Output/Design Capacity)*100= (5/11)*100= 45.5%

Efficiency = (Actual Output/Effective Capacity)*100= (5/9)*100= 55.6%

Utilization = (4/8)*100= 50%

Efficiency = (4/6)*100= 66.7%

This is not necessarily true, if the design capacity is relatively High, the utilization could be low,
even though efficiency was high.

Based on the formula, the utilization depends on the design capacity a d hence this would vary
accordingly.

( . In a situation where the design capacity is High this means that there is
likelyhood that the utilization could be lesser despite the efficiency was high.
Therefore based on the above calculations , the utilization will tend to relied
on the design capacity and it may vary accordingly.)
3. Fixed cost (FC) = 9200 per month
Variable cost (VC) = 70 cents per unit

Selling price (SP) = 90 cents per unit

a) For break even, Total cost = Total revenue

For break even quantity "Q", Total cost = FC + Q*VC

Total revenue = Q*SP

So, 9200 + Q*0.70 = Q*0.90

Q = 46000 units

b)

Profit = Total revenue - Total cost = Q*SP - (FC + Q*VC)

Q = 61000

Profit = 61000*0.9 - (9200 + 61000*0.7) = 3000 $

Q = 87000

Profit = 87000*0.9 - (9200 + 87000*0.7) = 8200 $

c) For Profit = 16000, let quantity be Q

16000 = Q*0.9 - (9200 + Q*0.7)

16000 - 9200 = Q*0.2

Q = 126000

d) For revenue of 23000, let quantity be Q

Revenue = SP*Q

23000 = 0.9*Q

Q = 115000

a) 46,000 units

b ) $3,000 $8,200

c) 126,000 units

d) 25,556 units