airtel 4g services

Module IIntroduction to Operations

and ProductionDr S. Sridhar

AIMIT

Syllabus• Production-meaning; Nature and scope of production; Production as a

system; Production function; Types of production processes- continuous, semi-continuous, intermittent and project• Interface between Operations Management and other functional areas

in an organization; Current trends in OM; Operations strategy; Lean Manufacturing Systems; Theory of constraints; Meaning of constraint; Identification and management of bottlenecks.

Product• For a Consumer: The product is a combination of or optimal mix of

potential utilities. This is because every consumer expects some use or uses from the product. Hence he/she always identifies the product in terms of the uses. • For a Production Manager: Product is the combination of various

resources and processes (or operations). This is because the production Manager is solely responsible for producing the product. He has to think of the various resources by which the product is made of, so that he can plan for required capacity of the facility• For a Financial Manager: For him the product is a mix of various cost

elements as he is responsible for the profitability of the product.• For a Personnel Manager: For him the product is a mix of various skills, as

he is the person who selects and trains the personnel to meet the demand of the skill to produce the product.

Product …

• In general we can define the product as a bundle of tangible and intangible attributes, which along with the service is meant to satisfy the customer wants.

Typical Characteristics of Services and Goods Producers (Hellriegel, Jackson and Slocum, 1999)

Primarily Service Producers

Primarily GoodsProducersContinuum of

Characteristics

Intangible, nondurable

Output can’t be inventoried

High customer contact

Short response time

Labor intensive

Tangible, durable

Output can be inventoried

Low customer contact

Long response time

Capital intensive

Mixed

Goods Versus Services

Can be resoldCan be inventoriedSome aspects of quality measurableSelling is distinct from productionProduct is transportable

Revenue generated primarily from tangible product

Attributes of Goods(Tangible Product)

Attributes of Services (Intangible Services)Reselling unusual

Difficult to inventoryQuality difficult to measure

Selling is part of service

Provider, not product, isoften transportableRevenue generated primarily from the intangible service

Production• Production is defined as “the step-by-step conversion

of one form of material into another form through chemical or mechanical process to create or enhance the utility of the product to the user.” • Thus production is a value addition process.• At each stage of processing, there will be value

addition.• ‘A process by which goods and services are created’

(Buffa).

“Production function”

• To bring together people, machines and materials to provide goods or services, in order to satisfy wants of the customers

Production system• The production system has the following characteristics:1. Production is an organized activity, so every production system has an objective.2. The system transforms the various inputs to useful outputs.3. It does not operate in isolation from the other subsystems in the organization.4. There exists a feedback about the activities, which is essential to control and improve system performance.

Production System Concepts

• Production System: A system which converts a set of inputs into a set of desired outputs.• Conversion Sub- System: A sub-system of the larger

production system where, inputs are converted into outputs.• Control Sub- System: A sub-system of the larger

production system where, a portion of the output is monitored for feedback signals to provide corrective action.

Production Management• Production Management refers to the application of management principles to the production function in a factory. • Production management is a process of planning, organizing,

directing and controlling the activities of the production function. • It combines and transforms various resources used in the

production subsystem of the organization into value added product in a controlled manner as per the policies of the organization.• “Production management deals with decision making related

to production processes so that the resulting goods or services are produced according to specifications, in the amount and by the schedule demanded and out of minimum cost.” (E.S. Buffa)

2. Production as an Organizational Function

• Conversion Sub- System is the Core/ Heart of Production System.

• Every Organization irrespective of its purpose, has a production function where departments and personnel play a central role in achieving the objectives of the organization.

Decision Making in Production

General Categories Of Decision Making:-1. Strategic Decisions : Relating to products,

processes & manufacturing facilities. Have strategic importance, long term significance.

2. Operating Decisions : Relating to planning production to meet demand.

3. Control Decisions: Relating to planning & controlling operations, these decisions concern the day-to-day activities of workers, quality of products & services, production & overhead costs & maintenance of machines.

Type of decisions

Area of Involvement

Nature of Activities

Strategic Decisions(Planning products, Processes, and Facilities)

1. Production Processes

2. Production Technology

3. Facility Layout

4. Allocating resources to strategic alternatives

5. Long range capacity planning & facility location

Developing long range production plans including process designSelecting & managing production technology

Planning the arrangement of facilitiesPlanning for the optimal distribution of scarce resources among product lines

Answering ‘how much’ & ‘where’ about long range production capacity

Type of decisions

Area of Involvement


Operating Decisions(Planning production to meet demand)

1. Production Planning Systems

2. Independent demand Inventory Systems

3. Resource requirements planning systems

4. Shop floor planning & control

5. Material Management

Aggregate planning & master production scheduling

Planning & controlling finished goods inventories

Planning materials & capacity requirements

Short range decisions about what to produce & when to produce at each work CentreManaging all facets of materials system

Type of decisions

Area of Involvement


Control Decisions(Planning & Controlling operations)

1. Productivity & Employees

2. Total Quality Control

3. Project planning & Control Techniques

4. Maintenance Management & Reliability

Planning for the effective & efficient use of HR in operations

Planning & controlling the quality of products & services

Planning & controlling projects

Planning for managing the machines & facilities of production

Types of Production processes

• Continuous • Semi-continuous • Intermittent • Project

Continuous Production Process

• Continuous in nature• Set-up time for starting such processes is usually very long, and once

started, they continue for a long duration• The products manufactured by such a process are highly standardized

with almost no variety.• Output is measured on a continuous basis (tonnes per day, meter

lengths per hour)• Fertilizers, chemicals, steel, plastic, sugar, textiles etc are examples

for this type of process (Process industries)

Semi-continuous Production Process

• These are assembly processes, which are repetitive in nature• Production volume is high and the products have little variety• These processes require highly specialized machines,

semi-skilled/skilled workers.• Automobiles, electronic items, refrigerators, fans ec.,

Intermittent Production Process

• Processes that stop at regular intervals of time, because the product requires processing on a variety of machines• Products manufactured are of different varieties, thus making the

production process slow in comparison to the continuous and semi-continuous processes• Intermittent processes are of two types: Batch process and job shop

Batch Processing

• Lots or batches of items are manufactured using the same set of machines in the same sequence.• Bakery: batch of salted biscuits,

followed by a batch of chocolate, orange cream, sugar-free biscuits etc.,• Equipment used is the same,

but cleaning and adjustments of the equipment required after each production run.

Batch Processing

Batch processing

Job Shop• This process can handle a

larger variety of products than the batch process• Products may be so

different from each other that their processing requirements may be varied processes on different machines.• Batches of items produced

in job shop may vary in size from large, comprising many units, to very small comprising a single unit.

Job shop examples

• Job shop results in low volume of output at a given time and thus costlier products compared to continuous processes.• Examples: restaurant serving guests with different variety of dishes,

which are prepared by different cooks using different utensils, ovens, recipes• Veterinarian treating different animals• Beauty parlours catering to different needs

Functional Areas in a Business Organization

FIRM

FINANCE

PERSONNEL

MARKETING

PRODUCTION

Marketing Function: Aims to promote products and services among customers

Finance Function: Controls all other subsystems to utilize money more effectively. Monitors cash flows and variance from the budgetary provisions.

Personnel Function: Plans and provides manpower to all other subsystem.

Production Function: Step by Step conversion of one form of materials into another.

Human Resource Development:Attract best talent and help the manufacturing function Enhance the capabilities of the people through training. Create coherence between the people’s attitudes and organization’s objectives.Marketing:Provide relevant market feedback Marketing Strategy may lead to company’s technology strategyManufacturing strategy should provide backup for the customer service goals.Research and Development: R&D functions helps in bringing additional flexibility in the design of new

processes and in the design of new products in the existing operational facilities.

Finance and Accounting:Raise appropriate finance through an aggressive finance strategyThe accounting, budgeting and control system should be supportive to the

manufacturing strategy.

Interfaces between the production system other functional Areas

Excellent Marketing

Inter Linkages between the Functions

LowProduction

Unsatisfied Customer

Poor Sales

ExcellentMarketing

Full Capacity Production

Poor SupplyOf Working

Capital(Finance)


Full Capacity Production

Availability of sufficient

Working Capital

Lack of Personnel


Excellent Marketing

Operations

• Operations are purposeful actions (or activities) methodically done as part of a plan of work (a strategy) by a process that is designed to achieve practical ends (objectives)

What does Operations include?• Production, Manufacturing and Services• A shift from the conventional perspective• “Operations” denotes a more general concept (as compared to

production/ manufacturing)• “Operations” – either in manufacturing or in service – are purposeful

activities of an organization.• An operation is “the process of changing inputs into outputs and

thereby adding value to the product or service”

Operations as a transformation function…

• Outputs can be categorized in several different ways.• Tangible• Intangible (emotional or experiential results such as satisfaction,

relaxation, convenience, and ambience).• Generally we think in terms of goods or services, but often outputs

are a combination of both, on a continuum from mostly service to mostly goods.• On one end of the spectrum (mostly service) is an airplane ticket

that represents a transportation service; in addition to the service, you may receive a drink and possibly a meal as goods. The ticket itself is a facilitating good, something that enables you to receive the service. • On the other end of the spectrum is the purchase of a new

refrigerator. You are buying the product as well as the delivery service that will enable you to use the product in your home.

Operations Management (OM)• Operations management refers to the systematic design, direction,

and control of processes that transform inputs into services and products for internal, as well as external customers.• OM makes sure the work is done methodically- that is characterized

by method and order.• OM uses methodology that consists of procedures, rules of thumb

and algorithms for analysing situations and setting policies.• Operations management seeks to increase the quality, efficiency, and

responsiveness of the firm.• Seeks to provide a competitive advantage. • Customer Contact-customers actively participate in transformation

processes, self-service• Performance Feedback-repair records, customer comments

Operations Management (Hellriegel, Jackson & Slocum, 1999)

• Systematic direction, control, and evaluation of the entire range of processes that transform inputs into finished goods or services.• Environmental factors-culture, political, and market

influences• Inputs-HR, capital, materials, land, energy, information,

customer• Transformations-convert inputs into outputs

Approaches to Operations Management

1. Transformation Approach

2. Value Driven Approach

1. Transformation Approach• OM is the business function that manages that part of business that transforms RM into goods & services of higher value

Inputs

Process

Output

Performance

Measurement

Inputs Transformation Output

OUTPUT> cost of inputs + cost related to investments in the process .

Effective execution of Transformation Process• OM has a number of functions to carry out the transformation process effectively.• The functions incorporate different roles that are interdependent, which can be grouped as,• Product: the product is manufactured as per specifications and the plan.• Plant: OM has to consider that the plant meets the specifications and is in keeping with the requirements.• Process: OM has the responsibility to chose the best way.• Program: production program ensures that the schedules of production are met• People: OM has to ensure that skilled & motivated workers are available.• Inputs can come in conventional forms as direct labor, direct materials, and

other direct costs. • Apart from investment capital, the transformation requires human capital,

intellectual capital and social capital.

Operations as a Conversion/ transformation process• Every organization can be considered as a conversion system,

involved in converting inputs to outputs through the conversion process (or operations)

•Think of Manufacturing units, Educational institutions, Hotels, Entertainment media

2. Value Driven Approach• Starts by recognizing that a business is a ‘set of processes’, each of which has inputs, outputs and structure.• Each process has a job to do and each process should be measured on how effective it is in achieving the desired outcomes.• Process Approach: Businesses are organized not on the basis of business functions, but on the basis of business processes. Business processes are outward looking & are based on providing greater value to customers by providing fast responses & exceptional services.

How can operations help to make an organization more competitive?• Put simply, an operation provides a competitive advantage

by delivering products and services better, faster, and/or cheaper than the competition.• Better comes from higher quality.• Faster is achieved by being more responsive and flexible. • Cheaper is the result of reducing costs.

Nine Categories of Operations Management Decisions

• Product plans• Competitive Priorities• Positioning Strategies• Location• Technological Choices•Quality management and control• Inventory management and control•Materials Management•Master production scheduling

21.4

Scope of Production and Operations Management

Objectives in Operations Management (OM)

• General objectives: To produce the goods/ services in required quantities and of acceptable quality, as per schedule and at a minimum cost.• Thus, we can regroup the objectives into Performance- and cost-

related.

Performance objectives Efficiency- ‘doing things right’; The amount of input to

produce a given output. Obtaining certain output with the least amount of inputs.▪ Less input reduces cost and waste.

Productivity -(OUTPUT PER UNIT OF INPUT). Several categories of productivity are associated with manufacturing and service: Labour productivity; material productivity; factor productivity etc.

Effectiveness- whether a right set of outputs is being produced (‘doing the right things’); Obtaining the desired results- how do you produce and at what cost becomes secondary

Quality

Performance objectives (contd)

•Lead times- Manufacturing lead time or throughput time•Capacity utilization – percentage utilization of manpower, machines etc.•Flexibility – in producing a combination of outputs Three types of flexibility are encountered: Product flexibility (customization), Volume flexibility (meet varying demands) and Process flexibility (ability to manufacture a variety of goods in a short time, adjust to product mix over time, ability to accommodate changes in raw material over time)

Cost objectives

• Explicit (visible) costs• Material cost• Direct and indirect labour cost• Scrap/rework cost• Maintenance cost

• Implicit (invisible/ hidden costs)• Inventory carrying cost• Cost of stockouts,

shortages, backlogging, lost sales• Cost of delayed deliveries• Cost of material handling• Downtime costs• Opportunity costs• Cost of grievances,

dissatisfaction

Project

•Projects are processes that handle very complex and unique sets of activities which have to be completed in a limited span of time.

•Example: R&D projects, Construction of plants, Building Complexes, implementation of specialized software in an organization.

Projects versus Operations

• Organizations perform work - either• Operations, or• Projects

• Shared characteristics of projects and operations• Performed by people• Constrained by limited resources• Planned, executed and controlled

Projects vs Operations

Operations

• Ongoing• Repetitive

Projects

• Temporary (with definite beginning and end) • Unique (different in some or

several distinguishing characteristics

• Examples: Constructing a building; Developing a new product or service; Effecting a change in structure, staffing or culture in an organization

Approaches to OM

• Functional field approach: In this approach OM is explained with minimum reference to other parts of the business – such as marketing and finance. • It concentrates on the specific tasks that must be done to make the

product or deliver the service• Systems approach: This approach integrates OM decisions with those of

all other functions. The challenge is to make the firm perform as a team• The systems approach entails having all participants cooperate in solving

problems that require mutual involvement.• It begins with strategic planning and moves to tactical accomplishments. • The systems approach is needed because it produces better solutions

than other approaches.

Systems concept in OM• System is an assembly or combination of things or parts forming a

complex or unitary as a whole.• Purposeful and interacting collection of people, machines and processes

for operating within an environment.• A systems approach to operations management problems places strong

emphasis upon the integrative nature of management responsibilities, recognizing both the interdependence and the hierarchical nature of subsystems. In essence, systems theory stresses the understanding and re lationships of the whole system, recognizing that a combined effect of components can be greater than the sum total of individual effects, that is, can be synergistic. Problems must first be abstracted from the overall (macro) environment, then they can be broken down into parts (micro), analyzed, and solutions proposed. But ul timately the components must again be restructured or synthesized (macro) to discover and evaluate the impact of new interrelationships that arise from proposed changes in the system.

Difference Between Production Management & Operation Management

PM is generally used for a system where tangible goods are produced.

OM is more frequently used where various inputs are transformed into intangible services as well as tangible goods.

It Covers Service organizations such as Banks, Airlines, Utilities, Production Control Agencies, Super Bazars, Educational Institutions, Libraries, Consultancy firms & Police Depts. in addition to manufacturing enterprises.

Theory of Constraints

• The theory was developed 3 decades ago by Eli Goldratt, a business system analyst.

• The TOC is a systematic management approach that focuses on actively managing those constraints that impede a firm’s progress toward its goals of maximizing profits & effectively using its resources.

• It outlines a deliberate process for identifying & overcoming constraints.

• TOC methods increase the firms’ profits more effectively

by making materials flow rapidly through the entire

system.

• They help firms to know how process can be improved to

increase overall workflow & how inventory & work force

levels can be reduced while still effectively utilizing critical

resources.

• It is important to understand the relevant performance &

capacity measures at the operational level & their

relationship with the financial measures at the firm level.

Theory of Constraints- Key terms

A Constraint is any factor that limits the performance of a system and restricts its output. Bottleneck (a special type of constraint): A capacity constraint resource (CCR) whose available capacity limits the organization’s ability to meet the product volume, product mix, or demand fluctuation required by the marketplace.

• Bottleneck is what happens if capacity is less than demand placed on resource• Non bottleneck is what happens when capacity is greater than demand placed

on resource• Capacity-constrained resource (CCR) is a resource where the capacity is close

to demand placed on the resource A business process or system would have at least one constraint or a bottleneck; otherwise its output would be limited by the marketplace. When constraint exists at any step, capacity can become imbalanced- too high in some departments- too low in others. As a result, the overall performance of the system suffers.

TOC-Key terms

• Capacity is the maximum rate of output of a process or system.

• Throughput time is the total elapsed time from the start to the finish of a job or a customer being processed at one or more work stations.

Operational Measures

TOC view Relationship to financial measures

Inventory(I) All the money invested in the system in purchasing things that it intends to sell

A decrease in I leads to an increase in net profit, ROI & cash flow

Throughput(T)

Rate at which a system generates money through sales

An increase in T leads to an increase in net profit, ROI & cash flow

Operating Expenses(OE)

All the money a system spends to turn inventory into throughput

A decrease in OE leads to an increase in net profit, ROI & cash flow

Utilization(U)

The degree to which equipment, space, or workforce is currently being used & is measured as the ratio of average output rate to maximum capacity expressed as a percentage

An increase in U at the bottleneck leads to an increase in net profit, ROI and cash flows

• According to the TOC view, every capital investment in the system, including machines & WIP materials, represents inventory because they could all potentially be sold to make money.

• Producing a product/ service that does not lead to a sale will not increase a firm’s throughput, but will increase its inventory & operating expenses

Managing Constraints Across the Organization

• Make appropriate capacity choices at the individual process level & at the organization level.

• Hence this process involves inter-functional cooperation

• Relieving bottleneck in one part of an organization might not have the desired effect unless a bottleneck in another part of an organization is also addressed.

• Ex: sales dept. not getting enough sales• Loan dept. not processing loans fast

enough • Lack of capital or equipment• It could be in planning or scheduling

Kinds of Constraints• Constraints can occur up or down

the supply chain, with either the firm’s suppliers or customers or within one of the firm’s processes like service/product development or order fulfillment.

• Physical –machine, labor, work station capacity, material shortage, space, quality

• Market- demand is less than capacity

• Managerial- policy metrics, mind set that creates constraints that impede work flow.

Seven Key Principles of TOC1. The focus should be on balancing flow, not

on balancing capacity2. Maximizing the output & efficiency of every

resource may not maximize the throughput of the entire system

3. An hour lost at a bottleneck or a constrained resource is an hour lost for the whole system. In contrast an hour saved at a non bottleneck resource is a mirage because it does not make the whole system more productive.

4. Inventory is needed only in front of the bottlenecks in order to prevent them from sitting idle, and in front of assembly & shipping points in order to protect customer schedules. Building inventory else where should be avoided.5.Work, which can be materials, information, documents or customers should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses.

6. Activation of non-bottleneck resources cannot increase throughput, nor promote better performance on financial measures.

7. Every capital investment must be viewed from the perspective of its global impact on overall throughput (T), inventory (I), and operating expense (OE).

Practical application of TOC involves the implementation of following steps:

1. Identify the system bottlenecks

2. Exploit the bottlenecks

3. Subordinate all other decisions to step2

4. Elevate the bottlenecks

5. Do not let the inertia set in

Identification & Management of Bottlenecks

Bottlenecks can be both internal or External to the firm. They represent a process, a step or a work station with the lowest capacity.A workstation in a process is a bottleneck if-a) It has the highest total time/unit processedb) It has the highest average utilization &

workloadc) A reduction of even a single minute in

its processing time would reduce the average throughput time for the entire process.

Example

It takes 10 + 20 + max (15, 12) + 5 + 10 = 60 minutes to complete a loan application. Unless more resources are added at step B, the bank will be able to complete only 3 loan accounts per hour, or 15 new load accounts in a five-hour day.

1. Check loan documents and

put them in order(10 minutes)

2. Categorize

loans(20 minutes)

3. Check for credit rating(15 minutes)

6. Complete paperwork for

new loan(10 minutes)

4. Enter loan application data into the system

(12 minutes)

Customer

5. Is loan

approved?(5 min)

Yes

No

Bottleneck

Identifying the bottleneck in a batch process- Diablo Electronics

• Diablo Electronics manufactures four unique products (A,B,C and D) that are fabricated and assembled in 5 different workstations (V,W,X,Y and Z) using a small batch process. Each station is staffed by a worker who works a single shift per day. Batch set up times have been reduced and these can be ignored. A flow chart denotes the path each product follows through the manufacturing process, where each product’s price, demand per week, and processing times per unit are indicated. Diablo can make and sell up to the limit of its demand per week, and no penalties incurred for not being able to meet all the demand. Which of the five work stations has the highest utilization, and thus serves as the bottleneck for Diablo.

• Each week consists of 2400 minutes of available production time.

Identifying the BottleneckProduct A

$5Raw materials

Purchased parts

Product: APrice: $75/unitDemand: 60 units/wk

Step 1 at workstation V

(30 min)

Finish with step 3

at workstation X

(10 min)

Step 2 atworkstation Y

(10 min)

$5

Product C

Raw materialsPurchased parts

Product: CPrice: $45/unitDemand: 80 units/wk

Finish with step 4

at workstation Y

(5 min)

Step 2 atworkstation Z

(5 min)

Step 3 at workstation X

(5 min)

Step 1 atworkstation W

(5 min)

$2

$3

Product B


Product: BPrice: $72/unitDemand: 80 units/wk

Finish with step 2

at workstation X

(20 min)

Step 1 atworkstation Y

(10 min)

$3

$2

Product D


Product: DPrice: $38/unitDemand: 100 units/wk

$4 Step 2 atworkstation Z

(10 min)

Finish with step 3

at workstation Y

(5 min)

Step 1 atworkstation W

(15 min)

$6

Flowchart for Products A, B, C, and DOverhead Costs: $8,500; Labor Costs: $18/hr (8hrs/day; 40 hrs/week)

Identifying the Bottleneck

These calculations show that workstation X is the bottleneck, because the aggregate work load at X exceeds the available capacity of 2,400 minutes per week (available production time).

60 30 = 1800 0 0 0 1,800

0 0 80 5 = 400 100 15 = 1,500 1,900

60 10 = 600 80 20 = 1,600 80 5 = 400 0 2,600

60 10 = 600 80 10 = 800 80 5 = 400 100 5 = 500 2,300

0 0 80 5 = 400 100 10 = 1,000 1,400

Workstation Load from Product A

Load from Product B

Load from Product C

Load from Product D

Total Load (min)

V

W

X

Y

Z

Traditional method

• Decision rule 1: Select the best product mix according to the highest overall contribution margin of each product.

Step 1: Calculating the Contribution margin (CM) for each product

Parameter Product

A B C D

Price ($) 75.00 72.00 45.00 38.00

Raw material & purchased parts ($)

5+5=10 3+2=5 2+3=5 4+6=10

CM per unit product ($)

65 67 40 28

Step 2 Allocation of resources

• Allocate resources (machines/workstations)• V, W, X, Y, Z to the products in the order

decided in step 1. • Satisfy each demand until the bottleneck

source (work station X ) is encountered.• Subtract minutes away from 2400 min

available for each week at each stage.

Allocation of resourcesWork station

Minutes (Min) at the start

Min left after making 80B

Min left after making 60A

Can only make 40C

Can still make 100D

V 2400 2400 2400-1800=600

600 600

W 2400 2400 2400 2400-200=2200

2200-1500=700

X 2400 80X20=16002400-1600=800

60X10=600800-600=200

40X5=200200-200=0

0

Y 2400 2400-800=1600

1600-600=1000

1000-200=800

800-500=300

Z 2400 2400 2400 2400-200=2200

2200-1000=1200

Conclusion after step 2

• The best product mix according to the traditional approach is : 80B +60A+40C+100D

Our nagging doubt?? How we got 2400 min at each work station?

• We can calculate for each individual work station separately. But all work stations work on all 5 days and 8 hours a day. We convert the time into minutes, because our data of each product being processed at each work station is in minutes.

• 8 days x 5 hours x 60 min = 2400 min for all work stations V, W, X, Y, and Z

Our nagging doubt?? How we got 2400 min at each work station?

• Suppose you want to calculate for all the work stations:• 8 days x 5 hours x 5 work stations x 60 min = 12,000 min• For each work station= 12,000/5 = 2400 min• Conclusion: the machine time available at each work

station (2400 min) is dependent on number of working days per week, number of hours per shift.

• It does not depend on number of working stations. • But total machine time available for the entire process

depends on the number of working stations.

Step 3: Compute profitability for the selected product mix

Parameter Calculation Amount ($)

Revenue

Raw materials + purchased parts

Labour

Overhead 8500 8500

Profit

TOC – Bottleneck method

• Decision rule 2: Select the best product mix according to the dollar contribution margin per minute of processing time at the bottleneck workstation X.

Step 1: Calculating CM/minute of processing time at bottleneck workstation X

Parameter Product

A B C D

CM per unit ($)

Time at bottleneck X (min)

CM per min ($)

Manufacturing sequence as per the TOC

• When ordered from highest to lowest CM/min at the bottleneck, the manufacturing sequence of these products is

Step 2: Allocation of workstations

• Allocate workstations V, W, X, Y, Z to the products in the sequence obtained in step 1.

• Satisfy each demand until the bottleneck resource (workstation X) is encountered

• Subtract minutes away from 2400 units available for each week at each stage.

Allocation of workstationsWork station

Minutes Can only make 70B

At the start

After making 100D

After making 80C

After making 60A

V 2400

W 2400

X 2400

Y 2400

Z 2400

Step 3: Profitability for the select product mix

Parameter 60A+ 70B+ 80C+ 100D Total

Revenue ($)

Raw materials + Purchased parts ($)Labour ($)

Overhead ($)

Profit

Canine Kernels Company

• Two products A and B, sold in 1,000 count boxes

• Three work statops• 8 hour shift per day, 40 hours/week.• Available machine time at each work station is

40 x 60 = 2400 min• Operator wages $ 6 per week• Variable overhead costs $ 3,500 per week

Identifying the bottleneckWork station Load (minutes) from Total load

(minutesA B

W

X

Y

Contribution margin for each unit per minute

Indicator Product A Product B

Selling price ($)

Raw materials + Purchased parts ($)

Contribution margin per unit ($)

Time at bottle neck (min)

Contribution margin per unit per minute ($)

Allocating resourcesWork station Minutes at the

startMinutes left after making 90 A

Minutes left after making (?) B

W 2400

X 2400

Y 2400

Profitability for the select product mixParameter Product A + Product B Total

Revenue ($)

Raw materials + purchased parts ($)

Labour ($)

Overhead ($) 3500 3500

Profit ($)

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