Determine the utilization and the efficiency for each of these situation: A. A l

Question

Determine the utilization and the efficiency for each of these situation: 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.

Explanation / Answer

Capacity: Capacity refers to an upper limit on the load that an operating unit can handle. Theoperating unit can be a plant, department, machine, store, or worker. Importance of Capacity Planning: The goal of strategic capacity planning is to achieve a match between the long-term supply capabilities of an organization and the predicted level of long-termdemand.Organizations plans capacity for various reasons. Among the major reasons are changes in demand,changes in technology, changes in environment, and recognized threats or opportunities.A gap between current and desired capacity will result in capacity that is out of balance.Overcapacity causes operating costs that are too high, while undercapacity causes damagedresources and possible loss of customer.For a number of reasons capacity decisions are among the most fundamental of all the designdecisions. They are as follows:(i)Capacity decisions have a real impact on the ability of the organization to meet futuredemands for products and services. Capacity essentially limits the rate of output possible.(ii)Capacity decisions affect operating costs. If the capacity and demand matches, theoperating cost decreases.(iii)Capacity is a major determinant of initial cost. The greater the capacity the greater itsinitial cost.(iv)Capacity decisions involve long-term commitment of resources. Once these decisionsare implemented, it may be difficult or impossible to modify them without incurringmajor cost.(v)Capacity decisions can affect competitiveness. Defining and measuring capacity: In selecting a measure of capacity, it is important to choose one that does not require updating. For example, dollar amounts are often a poor measure of capacity because price changes necessitateupdating of that measure. The measure of capacity must be tailored to the situation. Keeping this inmind, we define the capacity by two ways:(i)Design capacity: It is the maximum rate of output achieved under ideal conditions.(ii)Effective capacity: Design capacity minus allowances (such as personal time,maintenance). It is usually less than design capacity owing to realities of changing product mix, the need for periodic maintenance of equipment, lunch break, coffee breaks, etc. Measures of system effectiveness: Above different measures of capacity are useful in definingtwo measures of system effectiveness:(a) Efficiency: Efficiency is the ratio of actual output to effective capacity.%100 ×= capacityeffectiveoutput actual b) Utilization: Capacity utilization is the ratio of actual output to design capacity.%100 ×= capacitydesignoutput actual nutilizatio Example: Given the information bellow, compute the efficiency and the utilization of thevehicle repair department.Design capacity =50 trucks per dayEffective capacity =40 trucks per dayActual output =36 tracks per day Solution: %90%1004036 =×== capacityeffectiveoutput actual Efficiency %72%1005036 =×== capacitydesignoutput actual nutilizatio Compared to the effective capacity of 40 units per day, 36 unit per day looks pretty good.However, compared to the design capacity of 50 units per day, 36 unit per day is much lessimpressive although probably more meaningful. Increasing utilization depends on being able toincrease effective capacity and this requires a knowledge of what is constraining effectivecapacity. Example 2: Determine efficiency and utilization for a loan processing operation that processesan average of 7 loans per day. The operation has a design capacity of 10 loans per day and aneffective capacity of 8 loans per day. Example 3: In a job shop, effective capacity is only 50% of the design capacity, and actualoutput is 80% of effective output. What design capacity would be needed to achieve an actualoutput of eight jobs per week? Determinants of effective capacity: Many decisions about system design have an impact on capacity. The main factors relate to1. Facilities2. Product or service process3. Human considerations4. Operational factors5. Supply chain6. External1. Facilities: Among the design of facilities location factors such as transportationcosts, distance to market, labor supply, and energy sources are important. Also, layout of the work area often determines how smoothly work can be performed. Environmentalfactors such as heating, lighting, and ventilation also play an important role in determiningwhether personnel can perform effectively.2. Product and service factors: Product and service design have a tremendous influence oncapacity. For example, when items are similar, the ability of the system to produce thoseitems is generally much greater than when successive items differ.3. Human factors: The tasks that make up a job, the variety of activities involved, andthe training, skill and experience required to perform a job all have an impact on the2 BBN potential and actual output. Also motivation of employee has an important impact oncapacity.4. Operational factors: Scheduling, inventory stocking decisions, purchasingrequirements, quality inspection and control have impact on effective capacity.5. Supply chain factors: It should be taken into account in capacity planning if substantial capacity changes are involved. Ex. If the capacity increases, will the elementsof supply chain be able to handle the increase?6. External factors: Product standards, safety regulations, pollution control have impact oncapacity planning.Facilities:(i)design location(ii)layout(iii)environment2. Product/ service(i) Design(ii) Product /service mix3. Human factors(i) Job content(ii) Training(iii) Motivation4. Operational(i) Scheduling(ii) Quality assurance(iii) Purchasing5. External(i) Product standard(ii) Safety regulations(iii) Pollution controlFactors that determine effective capacity. Steps in Capacity planning process: 1.Estimate future capacity requirements.2.Evaluate existing capacity and facilities and identify gaps.3.Identify alternatives for meeting requirements.4.Conduct financial analysis of each alternative.5.Asses key qualitative issues for each alternative.6.Select one alternative to pursue.7.Implement the selected alternative.8.Monitor results. Developing capacity alternatives: To improve capacity management the followings can be done:1. Design flexibility in the systems: Provision for future expansion in the original design of structure frequently can be obtained at a small price compared to what it would cost toremodel an existing structure. Example: If water lines, power hookups, and waste disposal lines are put in place initially,the modification to this structure can be minimized.2. Take stages of life cycles into account: Capacity requirements are often closely linked tothe stage of the life cycle (introduction phase, growth phase, maturity phase, ) that a products sevices. BBNAt introduction phase, it is difficult to determine both market size and the organization’sshare of that market. So the organization should be cautious in making inflexible capacityinvestment. In growth phase, the overall market may experience rapid growth.In the maturity phase, the size of the market levels off and the organizations tend to havestable market share.3. Take a “big picture” approach to capacity changes: When developing capacityalternatives, it is important to consider how parts of the system interrelate?4. Prepare to deal with capacity “chunks”: Capacity increases are often acquired in largechunks rather than smooth increments, making it difficult to achieve a match betweendesired capacity and feasible capacity. Ex. if the desired capacity of an operation is 55 units/hr but the machine is able to produce 40 units/hr. So one machine causes 15 unit/hr short buttwo machine cause 25 units/hr excess.5. Attempt to smooth out requirements: Unevenness in capacity requirements create certain problems. Ex. during bad weather public transportation ridership tends to increase compareto that of good weather.6. Identify the optimal operating level: At the optimal level cost per unit is the lowest for that production unit. If the output rate is less than the output level, increasing the output ratewill result in decreasing average unit costs. This is called economics of scale. But if theoutput is increased beyond the optimal level, average unit costs will be larger. This is calleddiseconomies of scales. Evaluating alternatives: An organization needs to examine alternatives for future capacity from different perspectives. Mostobvious are economic considerations. Less obvious is possible negative public opinion. Techniques used evaluating capacity alternatives are: (i) Cost-Volume analysis(ii) financial analysis and(iii) decision theory Cost-Volume analysis: It is a relation between cost, revenue, and volume of output. It estimates theincome of an organization under different operating conditions. It is useful as a tool for comparingcapacity alternatives. Formulation: Step 1: Identify all costs related to the production of a product.Step 2: Designate them as fixed (remain constant) cost (Ex. equipment cost, property taxes) or variable costs (vary with volume of output, Ex. material cost and labor cost).Total cost = Fixed cost + total variable cost.If we define, total cost, fixed cost, and total variable cost by TC, FC, VC, then VC FC TC += .But vQVC ×= , where v variable cost per unit and Q is the quantity or volume of output.4 BBNSimilarly, if revenue per unit is R and total revenue is TR then, Q RTR ×= Then profit, ( ) ( ) FC v RQQv FC Q RTC TR P --=×+-×=-= . Therefore, the required volumeQ needed to generate a specified profit is, v R FC P Q -+= The break-event (BEP) BEP Q , the volume of output at which total cost = total revenue. Break-even point (BEP): The volume at which total cost = total revenue. When volume is less thanthe break-even point, there is a loss and when volume is greater than the break-even point, there is a profit.Example: The owner of a old-fashioned berry pies, is considering adding a new line of pies, whichwill require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie and revenue is $7 per pie.(a)How many pies must be sold in order to break even?(b)What would the profit or loss be if 1,000 pies made and sold in a month?(c)How many pies must be sold to realize a profit of $4,000?(d)If 2,000 pies can be sold, and a profit target is $5,000, what price should be charged per pie?

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