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This lesson is about utilization, capacity utilization.

Capacity utilization is a concept that you're all probably familiar with, right.

We talk about the utilization of ourselves during the day.

I have six hours worth of work and I only have five hours available,

my utilization is greater than 100%.

Physically not possible, but what you're going to say there is that, I'm not

going to be able to accomplish everything that I was set out to do today, right?

So that's the concept of utilization.

Putting it in definitional terms, it is how much a resource would be used, or

how much a resource is being used compared to how much it's capable of being used.

So when we talk about utilization,

a couple of things to keep in mind as you get into computations of utilization.

One is, what is going into this idea of resource is being used or would be used?

For example, if you're talking about a process,

are we including the time that it's going to take to set up the machine?

Are we including the time that it takes for the machine to have to stop

between two different batches that are going to be run on that machine?

Is that something that we're including in the calculation?

Similarly when you're looking at the ability of the machine, are we talking of

the ability of the machine from eight hours in a day perspective?

Or are we saying, we expect a certain percentage of time for

it to be down for maintenance reasons?

Maybe it has a history of breaking down every so often,

so we allow a little bit of buffer for that.

So what is it exactly that you have included in your capacity utilization

number is going to be critical information when you are looking at the analysis

of that process and saying, this is the capacity utilization of this process.

What exactly went into the numerator and the denominator of that calculation is

something that you should be reflecting on, you should be thinking about.

Now lets take a look at the formulas calculating capacity utilization.

And here, we're going to distinguish between actual utilization and

implied utilization.

So actual utilization, the basic idea behind this

is how much I make divided by how much I can make.

Right, so actual production divided by how much I would've made based on the capacity

that I have.

To put it from a different perspective, although you should be able to

convert one perspective from the other based on information that you have,

it's also the notion of how much time did I utilize doing something divided

by how much time did I have available for me to do that thing.

So if I have eight hours in a day working in the office, and

if i utilize four hours doing a particular task,

my utilization was 50% for that particular task.

Right, so we said, we're going to differentiate between actual utilization

and implied utilization.

And the only difference there is were saying,

were looking at utilization based on what the actual demand rate is.

So were not saying how much we can or how much we did divided by how much we can do,

we're saying how much we should be doing, right, what is the demand?

What's the demand on my time?

What is the demand in terms of the number of units that are required

from this process?

And if that's, let's say for example, the demand rate is 500 units per day and

the actual production capacity is 250 units per day,

we know that the implied utilization is 200%, right.

So what do we mean by it being 200%?

It's saying that you either have to double capacity, or

you have to find a way off of reducing the time that it's taking for it to be done.

So implied utilization is a number that's telling you if you were

to fulfill this demand, what would your utilization be?

Similarly with time, we're saying if I wanted to complete

all the tasks that I was suppose to complete, what would my utilization be?

So that's the difference between implied utilization and actual utilization.

Actual Utilization is what you would actually get done.

And coming back to the idea of implied utilization, it's what you would have

got done if you were to fulfill demand that you from that particular process.

Now let's take this concepts and we will apply them to a couple of examples,

but before we get to that, let's look at the idea of a bottleneck.

We may have talked about this earlier.

But just to revisit what a bottleneck means, and

how it relates to capacity utilization.

So bottleneck is any resource whose

capacity is less than the demand that's placed upon it, right.

And this notion is telling us that the capacity of any

process is going to be determined by the bottleneck.

So that's the idea that we want to take forward as we get into some of these

capacity utilization calculations, which we'll get into next.

So let's take this first example of computing capacity

utilization based on a three activity process.

What we have here is Activity 1, it's taking 9 minutes to get the activity done.

Activity 2 is taking 6, and Activity 3 is taking 8 minutes.

We have the cycle times for each one of these calculated and we have the rate

per hour, which is the capacity for each one of these as being calculated.

All right, let's take a look at capacity utilization measured based on no

information being given to you about the demand.

So you only have the cycle times off the three activities that we have over here.

And you have to calculate capacity utilization based on that.

So we're going to assume that the best this task can do

is going to be based on the bottleneck task.

That we have demand enough to consume whatever we're making, so

we're going to take the bottleneck task, which in this case is Activity 1,

that is our bottleneck task.

So the flow rate or the capacity of this activity is 6.67 units per hour.

So we're going to treat that as the rate at which the process will operate.

So we'll calculate utilization for each activity based on that.

And just going by that, the first one is going to be 6.67 being

what we are making, and what we can do, in this case,

is going to be 6.67 as well because it's the bottleneck task.

So the bottleneck task is going to be working at 800% capacity

utilization in this case.

And then, we will look at the next task, so it is actually

making 6.67 units per hour, when it can make 7.5.

So the capacity utilization based on that is going to be 88.93 closed to 89%.

Similarly, when we go to activity number two,

which is taking 6 minutes of cycle time.

There, we're going to say that it is 6.67

divided by its potential flow rate of 10, so

6.67 divided by 10 gives us 66.7% capacity utilization.

2-2.3a Capacity Utilization

Operations Management

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