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How much money can Cheapest save per week with improvement #1?
o Decreasing flow time in repairs by 1 week will lower the inventory in repairs from 120 to 60. This will reduce the
number of cars required by 60 and thus weekly depreciation by $2400.
How much money can Cheapest save per week with improvement #2?
o Decreasing repair cost by $30 lowers repair cost by 60X30 = $1800
3.10 The Evanstonian is an upscale independent hotel that caters to both business and leisure travelers. On average, one-third of the
guests checking in each day are liesure travelers. Leisure travelers generally stay for 3.6 nights-twice a long as the average business
customer
On an average day, 135 guests check into The Evanstonian. On average, how many leisure travelers are in the hotel on
any given day?
o RL = 135/3 = 45 guests/night and TL = 3.6 nights → IL = RL TL = 45 × 3.6 = 162 guests
On an average day, 135 guests check into The Evanstonian. On average, how many business travelers are in the hotel
on any given day?
o For Business Travelers we have RL = 135 × 2/3 = 90 guests/night and TL = 1.8 nights → IL = RL TL = 90 × 1.8 = 162
guests
How many times per month does the hotel turn over its inventory of guests (assume 30 days per month)?
o the total inventory is then IT = 324. We then have Turns = RT/IT = 135/324 = 0.4167 turns per day = 12.5 turns per
month.
The average business traveler pays a rate of $250 per night, while leisure travelers pay an average rate of $210 per
night. What is the average revenue The Evanstonian receives per night per occupied room?
o On average 324 rooms are occupied with half othe guests being leisure. Thus average rate received per occupied
room is ½ X 250 + ½ X 210 = $230
POW 1
1. Each month a Bank carries an average balance of $3632 in all checking accounts. These accounts are being turned over 3 times a
year. Based on this information, fill in the below data:
I = $3632, T = 4 months
On average, how much money is flowing through the bank each month? Hint: Keep in mind the conversion from year to
month.
o R = I/T = 3632 / 4 = $908/month
2. A manager observes that on average, 5 students per minute enter the campus cafeteria. 10% of the students that enter the
cafeteria see a long line and leave without entering the line. Given students are leaving before entering the process, the manager
must determine the rate at which students are entering the process. On average, 18 students are waiting in line and we can assume
that any student that enters the line will not leave.
I = 18, R = 4.5 (5*.90)
On average how long does a student spend in the cafeteria line?
o T = I/R = 18/4.5 = 4 minutes
3. A manager of a taco stand is interested in advertising to get more lunch time customers, but doesn't know how much time it takes
to process a single customer. The amount of time it takes to process a single customer will help the manager determine the
maximum amount of customers they can process in the lunch hour. On average, during lunch hour, there are 12 people in line
waiting to order at the window. 4 people per minute leave the taco stand after receiving their food.
I = 12, R = 4
On average how long do customers wait in line? Calculate answer in minutes. (Enter the value only. Do not enter text per
Week 1 -> Important Instructions)
o 12/4 = 3 minutes
4. Cheapest Car Rental rents cars at the Chicago airport. The rental market consists of two segments: the short term segment, which
rents for an average of 0.5 weeks, and the medium-term segment, which rents for an average of 2 weeks. Cheapest currently rents
an average of 200 cars a week to the short-term segment and 100 cars a week to the medium-term segment. How many customers
per week go through the process?
Total Inventory will be the sum of both segments. Hint: I = R * T can be calculated for both segments.
Clean/Repair Data:
Approximately 20 percent of the cars returned or going back into the process (evenly distributed across both segments) are found to
be defective and in need of repairs before they can be made available for rent again. The remaining 80 percent of cars not needing
repairs are cleaned, filled with gas ,and made available for rent when returned. On average, there are 100 cars waiting to be
cleaned. The average cost of this operation is $5 per car. Cars needing repairs spent an average of 2 weeks in the repair shop and
incur an average cost of $150 per car. Assume that cars are rented as soon as they are available for rent, that is, as soon as they have
been cleaned or repaired. Short term renters pay $200 per week, while medium-term renters pay $120 per week. The flow of cars is
shown in Figure 3.9.
a. Identify throughput, inventory, and flow time at each stage.
Inventory (I) Throughput(R) Flowtime (T)
Stage
cars cars/week week(s)
Customers (.5*200)+(2*100)=300 200 + 100 = 300 I/R = 1
Cleaning 100 300*.8 = 240 I/R = .42
Repairs R*T=120 300 * .2 = 60 2
b. What profit does Cheapest earn per week with the current system? Assume that each car loses $40 in value
per week because of depreciation.
o Cars on rent for short * 200$/week +cars of Med. * $120 = (100*$200) + (200*$120) = $44,000/ week is profit
o Cleaning Cost is R or 240 * $5 = $1200/week, Repair cost is R or 60 * $150 = $9000/week
o Depreciation is total cars owned or all I = 300+100+120=520*40=20,800
o Profit is 44000 – (1200+9000+20800) = 13,000/week
5. Jasper Valley Motors (JVM) is a family-run auto dealership selling both new and used vehicles. In an average month, JVM sells a
total of 160 vehicles. New vehicles represent 60 percent of sales, and used vehicles represent 40 percent of sales. Max has recently
taken over the business from his father. His father always emphasized the importance of carefully managing the dealership’s
inventory. Inventory financing was a significant expense for JVM. Max’s father consequently taught him to keep inventory turns as
high as possible.
A. Examining the dealership’s performance over recent years, Max discovered that JVM has been turning its inventory
(including both new and used vehicles) at a rate of 8 times per year. What is JVM’s average inventory (including both new
and used vehicles)?
o Turns = 1/8 year or T = 1.5 months (12/8 or 1/8*12)
o R = 160 vehciles/month
o I = 160 vehicles/ month *1.5 months = 240 vehicles
Drilling down into the numbers, Max has determined that the dealership’s new and used business appear to behave
differently. He has determined that turns of new vehicles are 7.2 per year, while turns of used vehicles are 9.6 per year.
Holding a new vehicle in inventory for a month costs JVM roughly $175. Holding the average used vehicle in inventory for a
month costs roughly $145. What are the JVM’s average monthly financing costs per vehicle?
o New T = 1/7.2 yr = 1.67 moths, Used T = 1/9.6yr = 1.25 months
o New I = 160 * .6 * 1.67 = 160.32 or 160 vehicles
o Used I = 160*.4*1.25 = 80 vehicles
o Total cost = 160*175 + 80*145 or 28000 + 11600 = $39,600/month
o Cost per vehicle = 39600/240 = 165$
A consulting firm has suggested that JVM subscribe to its monthly market analysis services. They claim that their program
will allow JVM to maintain its current sales rate of new cars while reducing the amount of time a new car sits in inventory
before being sold by 20 percent. Assuming the consulting firm’s claim is true, how much should Max be willing to pay for
the service?
o Reducing New T by 20% is 1.67 * .8 = 1.336
o Now I = 160 * .6 * 1.336 = 128.256 or 128
o Same as 160 * .8 = 128
o Cost of new Cars was 160 * $175 or $28000
o Changes to 128 * $175 = 22,400
o Difference is 28000-22400 = 5600$ per month
6. The Evanstonian is an upscale independent hotel that caters to both business and leisure travelers. On average, one-third of the
guests checking in each day are leisure travelers. Leisure travelers generally stay for 3.6 nights-twice as long as the average business
customer.
a. On an average day, 135 guests check into The Evanstonian. On average, how many guests of each type are in the hotel on
any given day?
o Leisure T= R = 135 guest/ day / 3 = 45 guest/day
o 45 guest day * 3.6 nights = I or 162 guests
o Business = 138 *(2/3) = 90 * 1.8 = I or 162 guests
b. How many times per month does the hotel turn over its inventory of guests (assume 30 days per month)?
o Total I = 162 * 2 = 324, Turns = R/I or 135/324 = .41666 per day * 30=
o Turns =12.5 turns per month
c. The average business traveler pays a rate of $250 per night, while leisure travelers pay an average rate of $210 per night.
What is the average revenue The Evanstonian receives per night per occupied room?
o Average revenue = .5(250) + .5(210) = 230$ per room revnue
Chapter 4: Flow-Time Analysis
Flow time – The total amount of time required by that unit to flow through the process from entry to exit.
o The flow time of different flow units varies substantially
Flow Time of a Process – The average flow time of the individual flow units
Reasons Process Flow Time is a Valuable Measure of Process Performance:
o 1) Flow time affects delivery-response time – Key product attribute that customers value.
o 2) Short flow times in the production and delivery process reduce the inventory and associated costs – By Little’s
Law
o 3) A shorter flow time in a firm’s new product development process enables the firm to more quickly introduce
the produce to the market- A major source of competitive advantage. Enables the firm to bring more generations
of a product to a market.
o 4) In markets featuring shorter product life cycles, shorter mfg-process flow time allows firms to delay
production closer to the time of sale – gain valuable market information, avoid product obsolescence, and
minimize inventory required
o 5) Short flow times result in fast feedback and correction in quality problems
o 6) It is an integrative measure of overall process performance – short flow time frequently requires a high level of
overall operational excellence
4.1 Flow Time Measurement
Flow time of a process can be determined by:
o 1. Direct observation
1. Observe the process over a specified, extended period of time
2. Select a random sample of flow units over the specified period
3. Measure the flow time, from entry to exit, of each flow unit in the sample
4. Compute the average of the flow times measured
o 2. Application of Little’s Law ( Indirect Approach)
I=RXT
Average Inventory could be measured by:
1. Observe the process over a specified, extended period of time
2. Select a random sample of points of time during the specified period
3. Measure the actual inventory within the system boundaries at each point in the sample
4. Compute the average of the inventory values measured
Example: Golden Touch is charged with releasing research reports. The firm’s reports can be: new release and updates. In a
typical month the department releases 20 new released, for a combined value (sales price) of $40,000, and 40 updates for a
combined value of $20,000. On average, there are 10 open (unfinished) new releases and 8 open updates
o Flow time of reports, irrespective of type, we can define the flow unit of the process as one report. Throughput R
= 20+40 = 60 reports per month.
Inventory = 10+8= 18 reports
T = I/R = 18/60 = .3 month
o Flow of sales dollars through the system, we can define the flow unit as a sales-dollar. The throughput R =
40,000+20,000 = $60,000 per month.
Inventory = 10 X 2,000 + 8 X 500 = $24,000
T = I/R = 24k/60/ = .4 month
4.2 The Process Flowchart
Elements of a Process:
o Inputs and Outputs
o Flow units
o Network of activities and buffers
o Resources allocated to activities
o Information structure
Process Flowchart – A graphical representation of the network structure of the process. Originally developed to coordinate
large projects involving complex sets of activities and considerable resources.
o Activities = Rectangles
o Precedence Relationships = Arrows
o Events = Ovals
o Buffers = Triangles - Designated locations within the process for the accumulation of inventory
o Decisions = Diamonds – Activities at which flow is ‘routed’ into several continuing routes, resulting in splitting of
the flows.
o Roles of the various resources can be emphasized by partitioning the flowchart into several horizontally distinct
bands, one for each resource.
o Information can be distinguished from physical flows by using dashed arrows
4.3 Flow Time and Critical Paths
Flow time of a given activity within the process is the time required by an average flow unit to flow through the activity
o Can be measured by observing the specific activity over an extended time interval, or estimated based on
experience.
o Flow time of the process, and of each of its activities, consists of periods of activity interspersed with periods of
waiting.
Flow time of the various activities in the process, coupled with the sequence in the various activities performed, allow us to
compute the flow time of the entire process.
o For each path, the flow time along that path is the sum of the flow times of the activities that constitute the path.
o A flow unit can exit the process only after all the activities along all the paths are completed.
o Flow time of a process must equal the flow time of the longest path in the process flowchart – the critical path
Critical Activities - Activities that lie on the critical path.
Determine the flow time of the entire process. A delay in completing any critical activity results
directly in a corresponding delay in processing the flow unit.
4.4 Theoretical Flow Time and Role of Waiting
As a flow unit travels through the various activities which make up the process, it undergoes periods of waiting interspersed
with periods of activity. Thus, for each activity, we can break down the flow time of the activity into tis waiting and activity
components
o Flow time = Activity Time + Waiting Time
Theoretical Flow Time – The minimum amount of time required for a flow unit to flow through the process from entry to
exist, without any waiting or interruptions.
o Can be computed from the flowchart of the process using the same approach as for computing the flow time, by
using data on activity time, instead of flow time.
o Can be broken down:
TFT = Value-adding flow time + Non-value adding flow time
Reducing non-value-adding flow time is often a powerful way to save time and money
Flow-Time Efficiency – The ratio between theoretical flow time and the flow time of a given process
o FTE = Theoretical Flow Time / Average Flow Time
4.5 Levers for Managing Theoretical Flow Time
The only way to reduce flow time is to shorten the length of every critical path
o Flow Time = Waiting Time + Activity Time
Because these two components arise from different sources, the levers available for managing each
naturally distinct.
Levers for reducing waiting time:
Managing the effects of congestion
Reducing batch sizes
Reducing safety buffers
Synchronizing flows
Levers for managing the activity/theoretical part of flow time
Basic Approaches:
o Move work content off the critical path (‘work in parallel’)
Restructuring – leaves the total amount of work per unit unaffected but
manages the sequencing of the various activities to reduce the length of the
critical path
Moving work off the critical path and into paths that do not affect process flow
time.
1. Move work off critical path to noncritical activity – Redesigning the process
so that critical activities are performed in parallel rather than sequentially
2. Move work off critical path to the ‘out loop’ (pre- or post processing) –
Performing them either before the countdown for the process starts or after it
ends, as defined by the process boundary, an approach that is also called pre or
postprocessing.
o Eliminate non-value-adding activities (‘work smarter’)
Elimination – Leaves the network structure of the process as is, but reduces the
total amount of work required for activities along the critical path
Value-adding Activities – Activities that increase the economic value of a flow
unit from the perspective of the customer.
Non-value Adding Activities – Activities that do not directly increase the value
of a flow unit
1) Non-value adding work that is necessary to support the current
process
2) Non-value adding work that does not
Slack Time – Amount of time an activity can be delayed without affecting
Process Flow Time
o Reduce the amount of rework (‘do it right the first time’)
Depends on setting a robust quality management system
Decreasing the amount of work by process-improvement techniques such as
SPC, design for manufacturability, process fool-proofing, workforce training.
o Modify the product mix (‘do the quickest things first’)
Prioritization – Gives priority to flow units that can be processed faster – to the
extent allowed by the market
o Increase the speed of operation (‘work faster’)
Working at a faster rate
Increasing the speed at which an activity is performed can be proved by
acquiring faster equipment, increasing allocated resources, or offering
incentives for faster work.
Whatever approach is selected – it must be direct towards the critical path: reducing the work
content of noncritical activities does no t reduce the theoretical flow time.
Exercises
1. Traffic court of King James County operates between 9-1pm. Each morning, roughly at 9am, 200 defendants show up for trial
involving traffic violations. On Monday June 10, a sample of 10 defendants was selected at random by a consultant. For each
defendant, the consultant recorded the actual time spent in discussion with the judge and time paying the fine (not waiting). Also
recorded were times the defendant arrived and left court.
1. What is the process flow time (in minutes, from receipt of order to debit the guest's account)?
o The flow time is 4+18 + 12 + 4 = 38 minutes
2. What is the process flow time (in minutes, from receipt of order to debit the guest's account) if the waiter could prepare
the cart in 8 minutes, instead of 10?
o 38 cart preparation not on critical path
3. What is the process flow time (in minutes, from receipt of order to debit the guest's account) if the waiter could deliver
the order in 10 minutes, instead of 12?
o The critical path will be reduced to 4+18 +10 + 4 = 36 minutes
4.4 A home insurance application consists of two forms: F1 and F2 . On receipt, each application is processed and separated into F1
and F2; 10 min. F1 requires Activity A for 15 min and then Activity B for 10 min. F2 requires Activity C for 20 min. F1 and F2 are then
combined and further processed by a loan officer for 15 min. All the times mentioned represent flow time at the various activities,
and include the effects of waiting.
1. What is the process flow time (in minutes)?
o The flow time is 50 minutes. The critical path is the one of F1 (process and separate, Activity A, Activity B, Loan
Officer).
2. What is the effect on flow time if 50% of F1 forms must repeat activity A one more time due to quality problems?
o Since activity A is on the critical path, the flow time will increase by 50%* 15 = 7.5 minutes, to 57.5 minutes.
4.5 The Vancouver International Airport Authority manages and operates Vancouver International Airport (YVR). To understand
flow, management started with a single security line comprising an X-ray scanner for the carryon items and a screening station for
passengers. Arriving customers first prepare themselves for the inspection by removing belts, coats and shoes, emptying their
pockets, and separating electronic gear from other personal items. They then deposit all bags in trays on the scanner and proceed
personally to the screening station. Once the screening is completed, passengers retrieve their belongings , put on their shoes, belts,
and coats, and exit the facility. On average it takes passengers 30 seconds to prepare for the lines, and to place all carry-on items in
the trays for the X-ray scanner. The X-ray scanner takes 40 seconds per tray, and the average passenger utilizes 1.5 trays. The
personal screening station requires 30 seconds per person. Finally, retrieving of belongings and getting reorganized takes 60
seconds.
a. Determine theoretical flow time from the order thru payment. Assume no waiting over the entire process.
o 45
Now consider the effect on flow time given the following alternatives:
b. Buy a second oven that can bake one cake pan (plus existing oven cooking 1 cake pan).
o 28
c. Replace oven with one that can hold two cake pans at the same time (still 9 min bake).
o 30
d. Replace oven with a faster convection oven that can bake one cake pan in 6 minutes (instead of 9).
o 30
Chapter 5: Flow Rate and Capacity Analysis
5.1 Flow Rate Measurement
Throughput – Average flow rate of a stable process – the average number of flow units that flow through the process per
unit of time
o R – The average flow rate of a stable process
1. Observe the process over a given, extended period of time
2. Measure the number of flow units that are processed by the process over the selected period of time
3. Compute the average flow units per unit of time
Capacity – The maximum sustainable throughput/ flow rate
o Measured by observing the system in periods of heavy congestion in which the flow rate is limited by (and
therefore equal to) capacity
Throughput and Capacity indicate a ‘scale’ of a process and are extremely important metrics of performance
o The higher the throughput, the greater the value generated by the process because the flow of units through the
process represents the creation of economic value
o Capacity is important from the perspective of managing process flow times since insufficient process capacity may
lead to congestion and excessive waiting time
For these reasons – keeping track of the flow rate of a process is one of the most fundamental tasks of
management in any organization
Takt Time – The reciprocal of throughput
o Useful in the context of synchronized assembly lines, where it represents the average activity time at each work
station (takt times for the assembly of mass-produced cars are on the order of 1 minute)
5.2 Resources and Effective Capacity
Capacity of a system depends on the level of resource deployed by the system and on the effectiveness at which these
resources are utilized
Capacity is difficult to analyze due to the subtle and complicated ways in which the various resources can interact
Activities are performed by capital and labor resources
Resource Pool – A collection of interchangeable resources that can perform an identical set of activities
o Resource Unit – Each unit in a resource pool
Resource Pooling – Combining separate resource pools into a single, more flexible, pool able to perform several activities
o A powerful operational concept that can significantly affect not only process flow rate and process capacity but
also flow time
Unit Load of a Resource Unit – The average amount of time required by the resource unit to process one flow unit, given
the way the resource is utilized by the process
o Effective Capacity of a Resource Unit – The inverse of the unit load. Represents the maximum sustainable flow
rate through the resource unit, if it were to be observed in isolation
Effective Capacity of a Resource Pool – The sum of the effective capacities of all the resource units in that pool.
Effective Capacity (of a resource pool i) = Ci/Ti
o I: Resource Pool
o Ti: Unit load at resource pool
o Ci: # of resources
o If the various resource units are not identical in terms of their effective capacities, then the affective capacity of
the resource pool will be the sum of the effective capacities of each resource unit in the pool
o Since all resource pools are required to process each flow unit, no process can produce output any faster than its
bottleneck
Bottleneck – The ‘slowest’ resource pool of the process
Effective capacity of a process – The effective of the bottleneck
5.3 Effect of Product Mix and Effective Capacity and Probability of a Process
o Effective capacity depends on the products produced and their proportions in the mix
o Unit Contribution Margin of each flow – its revenue less all of its variable costs
5.4 Capacity Waste and Theoretical Capacity
o Theoretical Unit Load of a Resource Unit – The minimal amount of time required to process a flow unit, if all waste were
eliminated
o Theoretical Capacity of the Resource Unit – The reciprocal of the theoretical unit load
o Represents that maximum sustainable flow rate through the resource unit, if it were utilized without any waste
o Theoretical Capacity of a Process – Provides a highly idealized and seldom attainable notion of capacity
o Usefulness devices from the fact that it provides an estimate of the waste in the system and forms the basis for
any action plan for waste elimination
o Theoretical Capacity: Effective Capacity / (1-CWF)
o Theoretical Capacity Utilization of a Resource Pool = Throughput / theoretical capacity of the I th resource pool
o Defined by the bottleneck resource pool
5.5 Levers for Managing Throughput
o Throughput Profit multiplier = % change in profit / % change in throughput
o EX: The fixed costs of owning and operating the resources amount to $180,000 per month. The revenue is 22$ per
unit and the variable costs amount to $2 per unit. Thus the contribution margin is 20$ per unit. In july 2010, the
process throughput was 10,000 units. The profit for july was:
20$perunit *10000units -$180000 fixed costs = $20000 profit
o A process improvement team was able to increase output in August by 1% to 10,100 units, without an increase in
fixed cost. The profit for august was:
20$ X 10,100 -$180,000 = $22,000
o Thus a 1% increase in throughput has resulted in a 10% increase in profit – a throughput profit multiplier of 10!
o =Contribution margin per unit / profit per unit
o 20/2 = 10
o Throughput Improvement Mapping – A view of the big picture and identifying the most likely source of additional
throughput.
o Throughput <= (Effective) Capacity <= Theoretical Capacity
o When the throughput is significantly less than capacity, we say the bottle neck is external – the process is limited
by factors that lie outside its bounds, such as demand for its outputs or the supply of its inputs.
Demand: Lowering prices, increasing quality, increasing sales, or increasing advertising budget
Supply: need to identify additional suppliers, modify supply chain processes
o Through=Capacity – Bottleneck is internal
Increasing capacity to increase throughput
Increase the financial capacity of the process by modifying product mix
Increase the physical capacity of the process
o If capacity = theoretical capacity, existing resources are efficiently utilized, and extra
capacity will require increasing level of resources
o If lower than theoretical capacity, existing resources are not utilized effectively and the
key to extra throughput is the elimination of waste
o Increasing resource levels – if capacity = to theoretical capacity
o Key is to increase theoretical capacity of the process. This requires increasing the resource levels of each
bottleneck resource pool.
1. Increase the number of resource units – adding more units of resource to the bottleneck resource pool
will increase its theoretical capacity. Naturally, the cost of these resources must be compared to the value
of the extra throughput generated. Particular appealing when the bottleneck resources are relevantly
cheap and readily available, and easy to install
2. Increase the size of resource units – increase the load batch of resource (resources o=processing
multiple units simultaneously).
3. Increase the time of operations – extended scheduled availability during which the bottleneck resource
operates
4. Subcontract or outsource
5. Speed up the rate at which activities are performed
o Reducing Resource Capacity Waste
o One of the most effective ways to increase capacity
1. Eliminate non-value adding activities – flow time focus on activities along critical path
2. Avoid defects, rework, and repetitions – flow rate, focus on activities performed by bottleneck resource
3. Reduce time availability loss – improved maintenance policies, scheduling preventive maintenance
outside periods of availability, effective problem-solving measures that reduce frequency and duration of
breakdowns
4. Reduce setup loss – decreasing frequency of changeovers, working proactively to reduce the time
required for each set up, managing the product mix.
5. Move some of the work to non-bottleneck resources
6. Reduce Interference Waste: Occurs due to interactions and lack of synchronization among various
resources
o Starving: Resources are available but cannot process units because some of the
necessary inputs are unavailable
o Blocking: resources are prevented from producing more flow units because there is no
place to store the already processed flow units or additional processing has not been
authorized
o Shifting bottlenecks and improvement Spiral
o Only way to increase the throughput of a process is to identify its bottle neck and to increase its capacity
Exercises
5.2 Reconsider the law firm in the POW, assu me the prevailing revenues per shopping and medical projects are $4000, and $5000
per project, respectively, and that tout of pocket expenses associated with each project are negligible. The fixed cost of operating
the office is $500,000 per month.
Shopping case is more profitable.
o True
o The capacity of shopping cases is 24/4 = 6 cases per day and the capacity of medical cases is 24/6 = 4 cases per day.
o The contribution from shopping cases is 6* 4000 = $24,000 per day and from medical cases is 4*5000 = $20,000
per day. Shopping is more profitable
At the current product mix (50%-50%) how much contribution margin is generated per day?
o The capacity is 4.8 cases per day, and the margin per unit is 0.5*5000 + 0.5*4000 = $4500 per case. The margin at
capacity is 4.8 * 4500 = $21,600 per day
At the current product mix, hat is the profit at capacity? Use a negative number for a loss.
o The profit at capacity is (21,600* 20days) –-500,000 = –68,000 (a loss)
At the current product mix, what is the value of hiring an extra Paralegal?
o $108,000
o An extra paralegal will increase the capacity by 1/5*30hours=6 cases per day*20= 120 cases per month. 120-
96=24, This is worth 24*4500 = $108,000 per month (less the cost of the paralegal
5.3 Three hairstylists, Francois, Bernard, and Mimi run a hair salon. They stay open from 6:45 to 9pm. They only perform
shampooing and hairstyling activities. On average, it takes 10 minutes to shampoo, 15 minutes to style, and 5 minutes to bill the
customer. When a customer arrives, he or she checks in with the receptionist Lulu. This takes only 3 minutes. One of the three stylist
then takes charge of the customer and performs all three activities – shampooing, styling, and billing consecutively
What is the capacity (customers per hour) of the three stylist?
o 6
o The unit load from the three hair stylists is 10+ 15 +5 = 30 minutes per customer. Thus, the capacity of the stylists
is 3 * 60 /30 = 6 customers per hour.
A customer of the salon suggested that billing be transferred to Lulu. What is the capacity (customers per hour) of LuLu?
o 20
o Checking in (LuLu) takes 3 minutes. Thus, the capacity of LuLu is 1* 60/3 = 20 customers per hour.
How many customers can be serviced per hour in this hair salon?
o 6 - The bottleneck is the stylists.
What is the theoretical capacity (customers per hour)?
o 7.2
o If LuLu does the billing, the unit load of the stylists is reduced to 25 minutes per customer, and their theoretical
capacity increases to 3* 60/ 25 = 7.2 customers per hour. On the other hand, Lulu’s unit load increases to 3+5 = 8
minutes per hour, and her capacity decreases to 60/8=7.5 customers per hour.
5.4 A company makes two products A and B using a single resource pool. The resource is available for 900 minutes per day. The
contribution margins for A and B are $20 and 35$ per unit. The unit loads are 10 and 20 minutes per unit
Which product is more profitable?
o Product A
o The capacity of A and B respectively are 900/10= 90 and 900/20= 45 units per day. The margin capacity of the two
products are 90*20 =$1800 and 45*35 = $1575 per day respectively.
The company wishes to produce a mix of 60% A and 40% B, what is the effective capacity?
o 64.3
o The unit load of the mix is 60%*10 +40%*20 = 14 minutes per unit. The capacity is 900/14 = 64.3 units per day.
At the indicated product mix, what is the financial capacity (profit per day)?
o 1,671
o The margin per unit is 60%*20+40%*35= $26 per unit. The financial capacity is 26*900/14 = $1671.43 per day.
5.5 An insurance company processes two types of claims, Life and Property. The capacity of processing life claims is 500 P/month.
The capacity of processing property claims is 1000 per month.
What is the capacity per month – assuming a cmmon bottle neck and a processing mix of 50-50%
o 750
o (500 + 1000)/2 = 1500/2 = 750
Reexamine POW, assume that the capacity waste factors of the paralegals, tax lawyers, and senior partners are 20%, 30%, and
35%.
o What is the theoretical capacity of Paralegal (contracts per day)?
o 6
o 4.8/(1-0.2)= 6.00
What is the theoretical capacity of Tax lawyer (contracts per day)?
o 17.14
o 12/(1-0.3)= 17.14
What is the theoretical capacity of Senior partner (contracts per day)?
o 12.31
o 8/(1-0.35)=12.31
What is the theoretical capacity of the process (contracts per day)?
o 6 bottle neck
POW
1. A law firm specializes in the issuance of insurance policies covering large commercial real estate projects. The projects fall into
two categories: shopping centers, and medical complexes. The typical work involved in each transaction is quite predictable and
repetitive. The time requirements (unit loads) for preparing a standard contract of each type are given in the below table. Also
listed are the number of professionals of each type and the number of available hours per professional per day (the rest of the
time is taken by other office activities). For the month of March, 2015, the firm has generated 150 orders, 75 of each type.
Assume one month equals 20 days.