mgmt 339 - exam 2 study

ch. 6-8

What is the definition of capacity in operations management?

The maximum rate of output of a process or a system.

What are the three primary resources that define capacity?

Equipment, space, and employee skills.

When are output measures of capacity most appropriate?

When applied to individual processes or firms providing a small number of standardized services and products.

When are input measures of capacity most appropriate?

When dealing with low-volume, flexible processes.

How is utilization calculated?

The ratio of average output rate to maximum capacity, expressed as a percentage.

What are economies of scale?

The phenomenon where the average unit cost of a service or good decreases as the output rate increases.

List four ways to achieve economies of scale.

Spreading fixed costs, reducing construction costs, cutting costs of purchased materials, and finding process advantages.

What are diseconomies of scale?

The phenomenon where the average cost per unit increases as the facility size increases, often due to complexity, loss of focus, or inefficiencies.

What is a capacity cushion?

The amount of reserve capacity a process uses to handle sudden increases in demand or temporary losses of production capacity.

What is the formula for calculating a capacity cushion?

Capacity cushion = 100% - Average Utilization rate (%).

How do capacity cushion preferences differ between capital-intensive and hotel industries?

Capital-intensive industries prefer cushions well under 10 percent, while the hotel industry can manage with 30 to 40 percent.

What is the expansionist strategy in capacity planning?

A strategy involving large, infrequent jumps in capacity to stay ahead of demand.

What is the wait-and-see strategy in capacity planning?

A strategy involving smaller, more frequent increments of capacity, often lagging behind demand to minimize risk.

What are the four steps in the systematic approach to long-term capacity decisions?

1. Estimate future capacity requirements, 2. Identify gaps, 3. Develop alternative plans, 4. Evaluate alternatives and make a final choice.

What variables are required to calculate the number of machines (M) needed for a process?

Demand forecast (D), processing time (p), total available operating hours (N), and desired capacity cushion (C).

What is the role of setup time in capacity requirement calculations?

It accounts for the time required to change a process or operation from producing one product or service to another.

Why is capacity planning considered a long-term decision?

Because it involves significant capital investment in equipment and space that cannot be easily or cheaply reversed.

What is a capacity gap?

The difference between the required capacity to meet future demand and the currently available capacity.

How does a capacity cushion relate to utilization?

A higher capacity cushion results in lower average utilization, providing more flexibility to handle demand spikes.

What tools are commonly used to assist in capacity planning decisions?

Waiting-line models, simulation, and decision trees.

What is the primary objective of capacity management?

To ensure that the organization's capacity is sufficient to meet customer demand while maintaining efficiency and cost-effectiveness.

How does complexity contribute to diseconomies of scale?

As a facility grows, the management and coordination of operations become more difficult, leading to inefficiencies that raise unit costs.

What does 'N' represent in the capacity requirement formula?

The total number of hours per year during which the process operates.

When calculating the number of machines required for a capacity requirement, what should be done if the result is a fraction?

Round up to the next integer.

What is the 'base case' in capacity planning?

The strategy of doing nothing and suffering the consequences.

What are some qualitative concerns when evaluating capacity alternatives?

Uncertainties about demand, competitive reaction, technological change, and cost estimates.

What are quantitative concerns in capacity planning?

Measures such as cash flows, which represent the difference between funds flowing into and out of an organization.

How is incremental cash flow calculated when expanding capacity?

It is the extra meals served due to increased capacity multiplied by the profit per meal.

What is the formula for Net Present Value (NPV)?

NPV = 1 / (1 + r), where r is the discount rate.

When are waiting-line models most useful in capacity planning?

In high customer-contact processes.

When is simulation used for capacity analysis?

When models are too complex for waiting-line analysis.

When are decision trees most useful in capacity planning?

When demand is uncertain and sequential decisions are involved.

If a capacity gap is calculated as 1.83 machines, how many machines should be purchased?

Two machines, unless short-term options are used to fill the gap.

What is the primary purpose of the Capacity Requirements Solver in OM Explorer?

To confirm capacity calculations using specific demand forecast scenarios.

What is a two-stage expansion in capacity planning?

An alternative where capacity is increased in increments over time rather than all at once.

How do you calculate the net cash flow for a period involving an investment?

Subtract the cash outflow (investment) from the cash inflow (sales profit).

Why might a single-stage expansion be preferred over a two-stage expansion?

It may result in a higher Net Present Value (NPV) on a purely monetary basis.

What must be considered alongside monetary metrics like NPV when choosing between capacity alternatives?

Qualitative factors, such as demand uncertainty and competitive reactions.

How is the before-tax profit margin determined for a meal?

By subtracting variable costs from the meal price.

What happens to potential sales if a business does nothing to address a capacity gap?

The business loses all potential sales beyond its current maximum capacity.

What does 'year 0' represent in a capacity investment project?

The initial period when the investment is made.

What is the main advantage of using the NPV method in capacity planning?

It accounts for the time value of money.

What is the difference between kitchen capacity and dining room capacity in the Grandmother's Chicken Restaurant example?

The kitchen capacity is 80,000 meals, while the dining room capacity is 105,000 meals.

In the two-stage expansion example, what triggers the second stage of expansion?

If sales in years 1 and 2 meet expectations.

What is the primary goal of conducting a capacity gap analysis?

To determine if current capacity is sufficient to meet projected demand.

What is a constraint in the context of operations management?

Any factor that limits the performance of a system and restricts its output.

Define a bottleneck (Capacity Constrained Resource).

A resource whose available capacity limits the organization's ability to meet product volume, product mix, or demand fluctuation requirements.

What is the primary goal of the Theory of Constraints (TOC)?

A systematic management approach focused on managing constraints to maximize profits and effectively utilize resources.

What is the core principle regarding flow versus capacity in TOC?

The focus should be on balancing flow, not on balancing capacity.

Why is maximizing the efficiency of every resource not always ideal?

Maximizing the output of every resource may not maximize the throughput of the entire system.

What is the significance of an hour lost at a bottleneck?

An hour lost at a bottleneck is an hour lost for the entire system.

Why is saving an hour at a non-bottleneck resource considered a 'mirage'?

Because it does not make the whole system more productive.

Where should inventory be maintained according to TOC?

Inventory should be kept in front of bottlenecks to prevent idle time and in front of assembly/shipping points to protect customer schedules.

How should work be released into a system based on TOC?

Work should be released only as frequently as needed by the bottlenecks, matching bottleneck flows to market demand.

How should capital investments be evaluated in TOC?

Every investment must be viewed from the perspective of its global impact on overall throughput, inventory, and operating expense.

List the five steps of the Theory of Constraints.

1. Identify the system bottleneck(s), 2. Exploit the bottleneck(s), 3. Subordinate all other decisions to step 2, 4. Elevate the bottleneck(s), 5. Do not let inertia set in.

What is throughput time?

The total elapsed time from the start to the finish of a job or a customer being processed at one or more work centers.

How do you identify a bottleneck in a process flow?

The bottleneck is the step in the process that takes the longest time to complete, thereby limiting the total capacity.

If a bottleneck takes 15 minutes to process one customer, what is the capacity in customers per hour?

4 customers per hour (60 minutes divided by 15 minutes).

Where do waiting lines typically form in a process?

Waiting lines form in front of bottlenecks or in front of steps where the preceding activities have a higher rate of output than the current step.

What factors affect the size of lots traveling through manufacturing batch processes?

Setup times and their associated costs.

How is a bottleneck identified in a manufacturing process with multiple products?

By computing the aggregate workload at each workstation and comparing it to the available production time.

What is the formula for calculating the workload at a workstation?

Multiply the processing time at the station for a product by the number of units demanded per week, then sum these loads across all products.

What happens if a non-bottleneck resource is activated beyond the needs of the bottleneck?

It does not increase throughput or improve system performance; it merely creates excess inventory.

What does 'subordinating' other decisions mean in TOC?

It means aligning all other non-bottleneck resources to support the schedule and requirements of the bottleneck.

What does 'elevating' the bottleneck mean?

Increasing the capacity of the bottleneck resource to improve the overall system output.

Why is 'Do not let inertia set in' the final step of TOC?

Because once a bottleneck is improved, the constraint may shift to another part of the system, requiring a continuous process of identification and management.

How does market demand relate to bottleneck management?

Bottleneck flows should be synchronized with market demand to avoid overproduction or missed sales.

Is it possible for a system to have multiple bottlenecks?

Yes, a system can have one or more bottlenecks depending on the process flow and resource availability.

What is the definition of a bottleneck in a production process?

A workstation where the aggregate workload exceeds the maximum available capacity.

How is contribution margin defined in the context of product mix decisions?

The amount each product contributes to profits and overhead, excluding fixed costs.

What is the traditional method for selecting a product mix?

Accepting as much of the highest contribution margin product as possible until capacity is exhausted, then moving to the next highest.

What is the primary goal of the bottleneck-based method for product mix decisions?

To maximize the dollar contribution margin per minute of processing time at the bottleneck workstation.

Why is the bottleneck method often more profitable than the traditional method?

It prioritizes products that generate the most value per unit of time at the constrained resource, rather than just per unit of product.

What is the definition of line balancing?

The assignment of work to stations in a line to achieve a desired output rate with the smallest number of workstations.

What are 'work elements' in the context of line balancing?

The smallest units of work that can be performed independently.

What are 'immediate predecessors' in a production process?

Work elements that must be completed before a specific subsequent element can begin.

What is the purpose of a precedence diagram?

To visualize the sequence of work elements and their immediate predecessors.

How is cycle time defined in line balancing?

The maximum time allowed for work on a unit at each workstation.

What is the first step in assigning tasks to workstations when balancing a line?

Identify eligible tasks (those with no remaining predecessors) and select the one with the greatest number of following tasks.

If two tasks have the same number of following tasks during line balancing, how is the tie broken?

By choosing the task with the greatest positional weight (total time of all following tasks plus the task's own time).

What is the rule for starting a new workstation in line balancing?

Start each workstation with the established cycle time.

When should a workstation be closed during the line balancing process?

When the next task in the sequence will not fit within the remaining time of the current workstation.

How is the 'positional weight' of a task calculated?

It is the sum of the task's own time plus the total time of all following tasks.

In the Dominic Electronics example, how did the bottleneck method affect profits?

It increased weekly profits by $930, representing an almost 60 percent improvement over the traditional method.

In the bottleneck method, why might a product with a lower unit contribution margin be prioritized?

Because it may consume significantly less time at the bottleneck, resulting in a higher contribution margin per minute.

What is the primary constraint mentioned in the Dominic Electronics example?

Workstation X.

True or False: Fixed costs are considered when making product mix decisions using the contribution margin approach.

False. Only the contribution margin is considered; fixed costs are ignored.

What is the final step in the line balancing assignment process?

Calculate or add the idle time for each workstation.

What does the 'theoretical number of workstations' represent?

The minimum number of stations required to achieve the desired output rate based on total work time and cycle time.

Why is it important to identify the bottleneck resource?

Because the bottleneck limits the total output and profitability of the entire system.

What happens to the remaining time at a workstation when a task is assigned?

The task time is subtracted from the cycle time or the remaining workstation time.

What is the definition of cycle time in a line process?

The maximum time allowed for work on a unit at each station.

How is cycle time calculated based on output rate?

Cycle time (c) = 1 / desired output rate (r) in units per hour.

What is the 'theoretical minimum' (TM) in line balancing?

A benchmark for the smallest number of workstations possible, calculated as the total time required to assemble each unit divided by the cycle time.

How is idle time defined in an assembly line?

The total unproductive time for all stations in the assembly of each unit, calculated as (number of stations * cycle time) - total time required to assemble each unit.

What is the formula for efficiency in a production line?

Efficiency = (Total productive time / Total time) expressed as a percentage.

How is balance delay calculated?

Balance delay (%) = 100 - Efficiency.

What is the primary goal when clustering work elements into workstations?

To minimize the number of workstations required while ensuring precedence and cycle-time requirements are not violated.

What are the two criteria for a work element to be a candidate for assignment to a workstation?

All of its predecessors must have been assigned, and adding the element must not cause the workstation's workload to exceed the cycle time.