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Now let's take a look

at this same example,

but we're going to tweak it a little bit by adding

some more information to it about the demand rate.

So, here we have the demand given to us as 48 units per day.

If we were to assume eight hours in a day,

480 minutes, in a day.

We're saying that we are demanding six units per hour, right?

480 minutes in the day, so six units per hour,

is the demand that we have.

So, we can use this to calculate our capacity utilization.

Now, what you see over here is two different calculations for the same concept.

And this is where you can see that you can rely on the time required divided by time

available or the quantity that you are making divided by the quantity that you can make.

Both of those should get you to the same solution.

So, let's take a look at what we're doing in terms of time required,

divided by time available.

So, you have nine minute cycle time for one of the activities, activity A.

So, the time required is going to be 9 by 48 gives us 432 minutes,

which is the time required to fulfill demand.

You divide that by 480 and you get 90%,

right? .90 or 90%.

Similarly, if you look at Task 2,

you are also going to make only 48 units,

even if you are capable of making more,

because that's the demand per day and that gives us 384 units,

giving us a capacity utilization of 80%,.

And similarly for our third task or in this case Task B,

which takes 6 minutes and 48 units,

so we're going to make.

We're going to use 280 minutes of the 480 minutes of time available.

And that gives us a 60% utilization.

Now, the same calculation can,

the same results can be achieved through a different calculation and

that's going to be your actual rate divided by the actual capacity.

So, here we're saying that we are producing at the rate of 6 per hour,

dividing that by 6.67 will give you that utilization.

And as you can see if we were to go through these calculations you get the same results.

90%, 80%, 60%.

The same results going by both calculations.

But here, what we have done is we have incorporated the information about the demand.

The demand is less than the maximum that can be done from this process.

So, in some sense we're saying that

the demand is the bottleneck in this case and we're treating

that as what is constraining the whole process and computing utilization based on that.

One more thing about computing capacity utilization,

sometimes you're interested in simply looking

at the utilization of the whole process, right?

You're saying you have hired three people to work on these three different tasks A,

B, and C, and all I care about is the utilization of this whole process.

So, this can be calculated based on,

well we are producing 48 units.

Each unit represents a nine plus six which is 15,

plus 8, 23 minutes of time.

So, we have 23 minutes that are utilized for every unit that we

make and that gives us 1104 minutes of time utilized.

So, this is a person minutes going into the production of the daily demand.

And then the total time available,

we simply had three people available,

so we're going to take the three full-time people

that were available for eight hours and that's

going to give us our time available which is 1440 minutes, right?

1440 minutes.

So our capacity utilization works out to 77%.

Now, if you compare this to the capacity utilization that we calculated

earlier for each one of the three different tasks it was 90,80, and 60,

and what you can see is that 77% is the average of

those three capacity utilizations that we calculated for each one of them individually.

In both cases, we were treating the demand as being the bottleneck.

So, this is more useful from the point of view of saying,

if you're looking at how you are utilizing the resources that you have.

You have three people who are working eight hours a day.

The average utilization of those people is 77%.

So, here are the calculations that you just saw about capacity utilization,

the average capacity utilization.

So, so far we've looked at

everything that we've looked at has been based on averages, right?

We've looked at average flow rate,

average flow time, average inventory.

In reality, that's not the case.

We have some variability in processes,

some variability in activities for

different reasons and we'll get into those reasons later.

However, we know that there is going to be some variability in processes and how is

that going to affect the available capacity of a process,

the available capacity of an activity.

So, let's take a minute and think about how variability would

affect availability of capacity.

All right, when we have variability in a process

and variability can be above the average or below the average.

Below the average is going to be beneficial in terms of it taking less time,

the activity is more idle, the process is more idle,

if it's taking less than the average.

But if it goes higher than the average,

if it goes on the higher side.

Even if you have a process that is completely balanced that is made up

of multiple activities that are have the same average processing time,

the moment one of them goes above that average,

what is going to happen is that all of the tasks

behind it are going to have blockage, right?

They're going to be, the next task is having a delay therefore,

they're going to have inventory that is going to get accumulated,

because the next task is not able to take it up.

So, the delays will get passed on to the next task.

Now, once that activity speeds up and recovers from that being above the average,

the speed up is not going to get passed on.

So, what can happen when there is variability and

it's on the higher side from the average,

is that the delays will get passed on to the next task, the next activities.

Whereas, the speed up or catching up may not get passed on to the subsequent activities.

So you'll have a backlog.

What does that mean in terms of capacity?

The available capacity will get reduced.

And when you're planning capacity utilization,

you have to keep that variability into account,

because the actual available capacity is going to be less

based on the variability that you're expecting in the different processes,

in the different tasks in the process.

So, there's this perspective of the theory of constraints that is based

on the idea of incorporating the notion of bottlenecks,

as well as the notion of variability,

when you're talking about improving a process.

So, what is this perspective?

It comes from this book called The Goal,

and it's a highly recommended book if you're

interested to learn more about operations management.

It takes this idea of bottlenecks,

throughput time, flow rate, throughput rate,

and talks about it from a very down to earth perspective.

It explains it in a very nice way.

Anyways, coming back to the idea of the theory of constraints,

the crux of this is that you should always

focus on the bottleneck task when you are trying to improve a process.

So, if you have many activities and you have a task that

has more demand than it can handle,

then that's going to be the bottleneck and you should focus on improving that bottleneck.

Why? Because, the total flow rate,

throughput rate from the whole process is going to be determined by the bottleneck.

So any kind of problem with that bottleneck task,

any kind of variability going above the average is going

to affect the total throughput rate of the whole process.

So, as a continuous improvement initiative,

what this talks about is focus on the bottleneck and get the most out of it,

try to improve it,

and subordinate all the other tasks to this bottleneck task.

So, even if other tasks have to sit idle for

a little bit or have to use up their capacity in things such as multiple set ups,

and its not delaying your input into

the bottleneck then it's okay to have that for the non-bottleneck tasks.

So, the perspective is absolutely treat the bottleneck

as the time of the bottleneck as being very

very critical and use that in the most productive way.

From a continuous improvement perspective,

what this talks about is that once you've improved your processes,

once you've improved the bottleneck that will be

the only way to improve the process would be to improve the bottleneck,

which means you have gotten more capacity out of it.

You have been able to get more throughput, more product,

going out of the bottleneck task,

what can happen is some other task might turn up as being the bottleneck.

So, you've reduced the cycle time on

the bottleneck task and some other task becomes the bottleneck.

In which case you focus on improvements on that because,

now you have a new bottleneck.

So, that in short is a way of

continuous improvement that starts off with the basic idea of focusing on bottlenecks.

So, in closing this lesson on capacity,

what we should take away from this is that when you're thinking about capacity,

when you're thinking about capacity utilization,

two concepts, two ideas which is the bottleneck and how

much variability are we talking about in the processing times of all the activities,

are two crucial concepts that we want to keep in mind as

we try to plan for a certain capacity utilization.