Sewing Machine Type Setup Time Per Batch Runtime per Product

A
(Minutes)

40
(Minutes)

1
! " ∠
B 20 0.5
C 10 0.25

∠∠ [See next page.]

% & 2 out of 13 ' (

(a) Determine the configuration (i.e. the number of machines to adapt to type A, B and C)
that will maximize the factory’s capacity. What is this capacity (per shift)?

"A" machines take 40+200 1=240 min=4 hours per batch, so they can each process 2 batches per day.
"B" machines take 20+200  .5=120 min=2 hours per batch, so they can each process 4 batches per day.
"C" machines take 10+200  .25=60 min=1 hours per batch, so they can each process 8 batches per day.

Since the individual machine batch processing times are in a 4:2:1 ratio, the process capacity is maximizedwhen
the 63 available machines are also configured in a 4:2:1 ratio. So, we modify 36 machines to be type A,
18 machines to be type B, and 9 machines to be type C.

The capacity of each machine resource (i.e. A,B, or C) is now 72 batches per day.

(b) Assuming that the factory is operating at the capacity calculated in part a, what is the
factory’s average inventory?

I  R T 72 batches / day 15 days 1, 080 batches  216, 000 units

Problem 2
Management at Hand Pilot Inc. has been disappointed with the lack of growth over the
past two quarters. In a bold new initiative, they are adding a new product, the Newtoy,
which should increase their sales by 60%. The plant manager claims that there is
sufficient capacity to accommodate this growth; however, the added complexity would
double the flow time through the factory.
The following is representative of the recent financial situation:
Annual Revenues $12,000,000
Annual Fixed Costs $2,000,000
Annual Variable Manufacturing costs $8,000,000
Annual Inventory Costs $500,000
Annual Net Income (Revenue minus these costs) $1,500,000

The firm currently has $10 million dollars of assets, $5 million of which is variable
manufacturing costs that are tied up in WIP. Annual inventory costs are 10% of this WIP
value.

Based on these numbers, the current ROA equals 15%. Since the company does not
have any debt, this measure concerns the shareholders the most.
[Note: We will assume that all costs associated with the production of each Newtoy are
incurred at the time that the production order is released to the plant floor; this simply
means that you need not be concerned with the exact timing of when costs are incurred
during production.]

Solution
Define a flow unit for this process.
Either cost dollars or revenue dollars should give correct results (though they might give
different numbers for flow rate before and after, the % change should be the same).
Inventory costs as flow units will not work, as inventory does not correspond to flow.

What is the flow rate, using the definition of flow unit as above, before and after the
introduction of Newtoy?
Depends on the definition of flow unit but it should increase by 60% (same as sales)

a) What is the new WIP value given the changes in flow rate and flow time?

The initial inventory is 5, so the initial flow time = 5 / 8 = 0.625 yr

The new flow time will be twice this at 1.25 yr, so the new inventory value will be 12.8 
1.25 = 16 by Little’s Law.

b) What is the net income after the change?

Initial values New values
(million) (million)
Annual Revenues $12 $19.20
Annual Fixed Costs $2 $2
Annual Variable Manufacturing Costs $8 $12.80
Annual Inventory Costs $0.50 $1.60
Annual Net Income (Revenue minus these costs) $1.50 $2.80

c) Will the shareholders be pleased with their new ROA?

Before the change, there were $5 mil in non-inventory assets and this remains constant.
This, together with the $16 mil in inventory assets will give $21 mil in total assets.

Given $2.8 mil in net income, the new ROA will be 2.8 / 21 = 13.33%

This is a drop from 15%. The shareholders will not be pleased

Problem 3
The management at BuyRite grocery stores wishes to estimate the amount of time that
customers are spending, on average, in its stores and in a checkout line. The most obvious
approach for determining this information is to simply record when a customer enters and
exits the store. However, it is difficult to track the entering and exiting times of specific
customers. We will look at an alternative method.
Over the past two weeks, the following data have been collected at BuyRite’s newest
store during busy hours (this BuyRite is rather large and typically has 7 open checkout
lanes):

Results of Data Collection

Avg. rate of customers entering store 305/hr
Avg. # of customers in store 146
% of customers who do not make purchase 5%
Avg. # of customers in checkout lanes 24

As their consultant, you have been asked by BuyRite’s management to address the
following questions:
a) How much time does the average customer spend in the store?
b) How much of that total time is spent waiting, on average, to check out?
c) What effect might increasing the number of open lanes from 7 to 8 have on each of
the four measures collected? Provide qualitative answers.

Solution

We will employ a “black box” representation of the system and apply Little’s Law.

Items are: customers, Resources are: 1) The store and aisles, 2) Checkout Lane and
cashiers. Tasks are: 1) Shopping 2) Checking out.

With problems involving Little’s Law the important part is to define the items and where
the “process” begins and ends.

a) For this part the system is the entire store. Use Little’s Law, I = R T, for the store as a
whole (outer “black box”), where:

I = Avg. # of customers in store = 146.

R = Avg. rate of customers entering store (since no customers are ‘lost’, this is equal to
the throughput of the entire store) = 305 /hr

T= Avg. time a customer spends in store.

Solving for T, we get:

b) For this part the system is the checkout lanes. Now, we again use Little’s Law, but this
time applied to the check-out lanes, which are represented by the inner “black box” in the
diagram above.:

I = Avg. # of customers in checkout lanes = 24, R = Avg. rate of customers entering lanes
= 0.95(305/hr) = 290/hr T = Avg. time customer spends in checkout lane

Solving for T, we get: