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.

 a. Fill in the following table


Unit Load for Product Mix Total hours Resources can Work Effective Capacity of Resource Pool
( hours per contract) (hours per day) (contracts per day)
Paralegal 5 24 1/5=.2*24= 4.8
Tax Lawyer 2 24 ½=.5*2= 12
Senior Partner 1 8 1/1=1*8 = 8
 b. What is the effective capacity of the process (contracts per day) based on data in part a
o 4.8 contracts per day
 c. Out of the 150 cases, how many will the firm process in the month of March?
o 4.8 * 20 = 96
 e. What is the optimal number of professionals of each type that are needed to process all 150
cases available in March with the least amount of waste? (Round answers to the nearest whole
person as you cannot hire a partial person)
o 150/20 = 7.5 contracts per day
o Paralegals: .2 * 6 = 1.2, 7.5/1.2 = 6.25 = 7
o Tax Lawyers .5 *8 = 4, 7.5/4 = 1.875 = 2
o Senior Partners: 1*4 = 7.5/4 = 1.875 = 2
 f. List the Theoretical capacity of each resource pool in below table using the assumption below:
(Show all answers rounding up to two decimal places even if they are zero. Example: Answer is 1
then type 1.00) Use original data and assume that the capacity waste factors of the paralegals,
tax lawyers, and senior partners are 20%, 30%, 35%, respectively.
 g. What is the new theoretical capacity of the process using the data in part f?
o 6 Cases per day
 h. Using all the above information, which resource group is the bottleneck?
o Paralegal