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Chapter 3 Manufacturing Models and Metrics

A variety of metrics help manage the operations of manufacturing companies. Manufacturing metrics are divided into two basic categories: 1. Production performance measures Production rate, plant capacity, proportion uptime on equipment (reliability measure), manufacturing lead time 2. Manufacturing costs Labor and material costs, the costs of producing the products, the costs of operating a given piece of equipment

3.1 MATHEMATICAL MODELS OF PRODUCTION PERFORMANCE

3.1.1 Production Rate

Cycle time Tc: The time that one work unit spends being processed or assembled. It is the time between when one work unit begins processing or assembly and when the next unit begins. Typical cycle time for a production operation: Tc = To + Th + Tth where Tc = cycle time (min/pc), To = processing time for the operation (min/pc), Th = handling time (min/pc), (e.g., loading and unloading the production machine), and Tth = tool handling time (min/pc), (e.g., time to change tools).

3.1.1 Production Rate

Batch production: batch time Tb = Tsu + QTc where Tb = batch processing time (min), Tsu = setup time to prepare for the batch (min), Q = batch quantity (pc), Tc = cycle time per work unit (min/cycle). Average production time per work unit Tp = Tb/Q Production rate (pc/min) Rp = 1/Tp or Production rate (pc/hr) Rp = 60/Tp

3.1.1 Production Rate

Job shop production: For quantity Q = 1, Tp = Tsu + Tc


where Tp = production time per work unit, Tsu = setup time, Tc = cycle time. For job shop production when Q is greater than one, the production rate is determined as in batch production case.

3.1.1 Production Rate

For high quantity production or mass production, the production rate equals the cycle rate of the machine (reciprocal of operation cycle time) because the effects of setup time become insignificant, i.e., as Q becomes very large, Tsu/Q 0.
Rp = Rc = 60/Tc where Rc = operation cycle rate of the machine (pc/hr), Tc = operation cycle time (min/pc).

3.1.1 Production Rate

For flow line production, the production rate approximates the cycle rate of the production line, i.e., neglecting setup time. Tc = Tr + Max To and Rc = 60/Tc
where Tc = cycle time of the production line (min/cycle), Tr = time to transfer work units between stations each cycle (min/cycle), Max To = operation time at the bottleneck station (the maximum of the operation times for all stations on the line, min/cycle), Rc = theoretical or ideal production rate or cycle rate (cycle/hr).

3.1.2 Production Capacity

Definition The maximum rate of output that a production facility (or production line, work center, or group of work centers) is able to produce under a given set of a assumed operation conditions. It usually refers to a plant or factory so that it is also termed plant capacity.

3.1.2 Production Capacity Plant capacity for facility in which parts are made in one operation (no = 1):

PCw = nSwHshRp
where PCw = weekly plant capacity (unit/wk), n = number of machines or work centers in the facility, Sw = number of shifts per week, Hsh = number of hours per shift, Rp = hourly production rate of each work center (unit/hr).

Plant capacity for facility in which parts require multiple operations (no > 1): nS w H sh R p
no where no = number of operations in the routing.

PCw =

3.1.2 Production Capacity

Example 3.1 Production Capacity


The turret lathe section has six machines, all devoted to the production of the same part. The section operates 10 shift/wk. The number of hours per shift averages 8. Average production rate of each machine is 17 unit/hr. Determine the weekly production capacity of the turret lathe section.

Solution PC = 6 10 8 17 = 8160 output unit/wk

3.1.2 Production Capacity

For short term:


Change the number of shifts per week Sw to affect plant capacity Change the number of hours worked per shift Hsh to affect plant capacity

For long term:


Increase the number of work centers n in the shop to increase plant capacity Reduce the number of operations no required per work unit by using combined operations, simultaneous operations, or integration of operations to increase plant capacity

3.1.3 Utilization and Availability

Utilization U
It refers to the amount of output of a production facility relative to its capacity.

U=

Q PC

where Q = quantity actually produced, PC = plant capacity

Utilization can be assessed for an entire plant, a single machine in the plant, or any other productive resources, i.e., labor. It is also defined as the proportion of time that the facility is operating relative to the time available under the definition of capacity.

3.1.3 Utilization and Availability

Example 3.2 Utilization


A production machine operates 80 hr/wk (2 shifts, 5 days) at full capacity. Its production rate is 20 unit/hr. During a certain week, the machine produced 1000 parts and was idle the remaining time. (a) Determine the production capacity of the machine. (b) What was the utilization of the machine during the week under consideration?

3.1.3 Utilization and Availability Solution


(a) PC = 80 20 = 1600 unit/wk (b) The ratio of the number of parts made by the machine relative to its capacity U = 1000/1600 = 0.625 = 62.5% or The hours required to produce the given output

1000 H 50 hr 20
H is the time during the week that the machine was actually used.

50 U 0.625 62.5% 80

3.1.3 Utilization and Availability Availability A It is a common measure of reliability for equipment. It is especially appropriate for automated production. Mean time between failure (MTBF)
Average length of time the piece of equipment runs between breakdowns

Mean time to repair (MTTR) Average time required to service the equipment and put it back into operation when a breakdown occurs.

3.1.3 Utilization and Availability

MTBF MTTR Availability: A = MTBF

3.1.3 Utilization and Availability Example 3.3 Effect of Utilization and Availability on Plant Capacity
The turret lathe section has six machines, all devoted to the production of the same part. The section operates 10 shift/wk. The number of hours per shift averages 8. Average production rate of each machine is 17 unit/hr. The availability of the machine is 90% and the utilization of the machine is 80%. Determine the weekly production capacity of the turret lathe section.

Solution
Q = AU (nSwHshRp) = 0.9 0.8 6 10 8 17 = 5875 output unit/wk

3.1.4 Manufacturing Lead Time


Definition: Manufacturing lead time (MLT) is the total time required to process a given part or product through the plant, including any lost time due to delays, time spent in storage, reliability problems, and so on.

Activities of production:
Operation Performed on a work unit when it is in the production machine Nonoperation Handling, temporary storage, inspection, and other sources of delay when the work unit is not in the production machine

3.1.4 Manufacturing Lead Time

MLTj Tsuji Q jTcji Tnoji


noj i 1

where MLTj = manufacturing lead time for Part or Product j (min), Tsuji = setup time for operation i (min), Qj = quantity of part or product j in the Batch being processed (pc), Tcji = operation cycle time for operation i (min/pc), and Tnoji = nonoperation time associated with operation i (min), and i indicates the operation sequence in the processing; i = 1, 2,, noj, noj = number of operations on part j.

3.1.4 Manufacturing Lead Time


Simplified model: All setup times, operation cycle times, and nonoperation times are equal for the noj machines. Batch quantities of all parts or products processed through the plant are equal and they are processed through the same number of machines, i.e., noj = no.

MLT= no (Tsu + QTc + Tno)

where MLT = manufacturing lead time for a part or product, no = number of operations, Tsu = setup time, Q = batch quantity, Tc cycle time per part, and Tno = nonoperation time

3.1.4 Manufacturing Lead Time

Averaging procedure In an actual batch production factory, the terms no, Q, Tsu, Tc, and Tno would vary by product and by operation. These variations can be accounted for by using properly weighted average vales of the various terms. The average procedure is explained in Appendix.

3.1.4 Manufacturing Lead Time Example 3.4 Manufacturing Lead Time


A certain part is produced in a batch size of 100 units. The batch must be routed through 5 operations to complete the processing of the parts. Average setup time is 3 hr/operation and average operation time is 6 min (0.1 hr). Average nonoperation time due to handling, delays, inspections, etc., is 7 hr for each operation. Determine how many days it will take to complete the batch, assuming that the plant runs one 8 hr shift/day.

Solution MLT= no (Tsu + QTc + Tno) = 5 (3 + 100 0.1 + 7) = 100 hr = 100/8 days = 12.5 days

3.1.4 Manufacturing Lead Time For job shop production, Q = 1 MLT= no (Tsu + Tc + Tno)

For mass production, Q term in the MLT equation is very large and dominates the other terms. In the case of no = 1, the MLT simply becomes the operation cycle time. MLT= QTc

3.1.4 Manufacturing Lead Time

For Flow Line mass production, the entire production line is set up in advance. Also, the nonoperation time between processing steps is simply the transfer time Tr to move the part or product from one workstation to the next.
MLT= no (Tr + MAX To) = noTc or MLT= n (Tr + MAX To) = nTc where MLT= time between start and completion of a given work unit on the line, no = number of operations on the line, n = number of stations on the line, no = n, because each station completes one operation, Tr = transfer time, Max To = operation time at the bottleneck station, Tc = cycle time of the production line.

3.1.5 Work-in-Process Definition: Work-In-Process (WIP) is the quantity of parts or products currently located in the factory that either are being processed or are between processing operations. It is inventory that is in the state of being transformation from raw material to finished product.
AU PC MLT WIP = S w H sh
where WIP = work-in-process (pc), A = availability, U = utilization, PC = ideal plant capacity (pc/wk), MLT = manufacturing lead time (hr), Sw = shifts per week, Hsh = hours per shift (hr/shift).

3.2 MANUFACTURING COSTS 3.2.1 Fixed and Variable Costs


Two major categories of manufacturing costs: 1. Fixed costs - Remain constant for any output level, cost of the factory building and production equipment, insurance, property taxes 2. Variable costs - Vary in proportion to production output level; increase with output, direct labor, raw materials, electric power to operate the production equipment

3.2.1 Fixed and Variable Costs

Adding fixed and variable costs


TC = FC + VC(Q) where TC = total costs, FC = fixed costs (e.g., building, equipment, taxes), VC = variable costs (e.g., labor, materials, utilities), Q = output level. When comparing automated and manual production methods, it is typical that the fixed cost of the automated method is high relative to the manual method, and the variable cost of automation is low relative to the manual method.

3.2.1 Fixed and Variable Costs


Fixed and variable costs as a function of production output

3.2.2 Direct Labor, Material, and Overhead

Alternative classification of manufacturing costs: 1. Direct labor - Wages and benefits paid to workers 2. Materials - Costs of raw materials 3. Overhead - All of the other expenses associated with running the manufacturing firm Factory overhead Corporate overhead

3.2.2 Direct Labor, Material, and Overhead

Typical factory overhead expenses

3.2.2 Direct Labor, Material, and Overhead

Typical corporate overhead expenses

3.2.2 Direct Labor, Material, and Overhead Costs for a manufactured product

3.2.2 Direct Labor, Material, and Overhead

Allocation of overhead costs: Direct labor cost Material cost Direct labor hours Space
Most common in industry is direct labor cost, which will be used to illustrate how overheads are allocated and subsequently used to compute factors such as selling price of the product.

3.2.2 Direct Labor, Material, and Overhead Overhead rates


Factory overhead rate (FOHR):

FOHR =

FOHC DLC

Corporate overhead rate (COHR):

COHR =

COHC DLC

where DLC = annual direct labor costs, FOHC = annual factory overhead costs, COHC = annual corporate overhead costs. If material cost were used as the allocation basis, then material cost would be used as the denominator in both ratios.

3.2.2 Direct Labor, Material, and Overhead

Example 3.5 Determining Overhead Rates


Suppose that all costs have been compiled for a certain manufacturing firm for last year. The summary is shown in the table below. The company operates two different manufacturing plants plus a corporate headquarters. Determine (a) the factory overhead rate for each plant, and (b) the corporate overhead rate. These rates will be used by the firm to predict the following years expenses.

3.2.2 Direct Labor, Material, and Overhead

3.2.2 Direct Labor, Material, and Overhead Solution


(a) For plant 1,
FOHC1 2 106 FOHR1 2.5 250% 5 DLC1 8 10

For plant 2,
FOHC2 1.1106 FOHR2 2.75 275% DLC2 4 105

(b)
COHC 7.2 106 COHR 6 600% DLC 1.2 106

3.2.2 Direct Labor, Material, and Overhead

Example 3.6 Estimating Manufacturing Costs and Establishing Selling Price


A customer order of 50 parts is to be processed through plant of Example 3.5. Raw materials and tooling are supplied by the customer. The total time for processing the parts (including setup and other direct lobor) is 100 hr. Direct labor cost is $ 10/hr. The factory overhead rate is 250% and the corporate overhead rate is 600%. (a) Compute the cost of the job. (b) What price should be quoted to a potential customer if the company uses a 10% markup.

3.2.2 Direct Labor, Material, and Overhead Solution


(a) The direct labor cost for the job is 100 10 = $1000. The allocated factory overhead charge, at 250% of direct labor, is 1000 2.5 = $2500. The total factory cost of the job, including allocated factory overhead is 1000 + 2500 = $3500. The allocated corporate overhead charge, at 600% of direct labor, is 1000 6 = $6000. The total cost of the job including corporate overhead is $3500 + $6000 = $9500. (b) If the company uses a 10% markup, the price quoted to the customer would be 1.1 9500 = $10450.

3.2.3 Cost of Equipment Usage

Deficiency of overhead rates


Based on labor cost only Equipment factor neglected

Therefore, it is appropriate to divide the cost of a worker running a machine into two components:
Direct labor Machine

These costs apply not to the entire factory operations, but to individual work centers.

3.2.3 Cost of Equipment Usage

A work center can be any of the following:


One worker and one machine One worker and several machines Several workers operating one machine Several workers and machines

The direct labor cost consists of the wages and benefits paid to operate the work center.

3.2.3 Cost of Equipment Usage

Applicable factory overhead expenses allocated to direct Labor cost include


State taxes Certain fringe benefits Line supervision The machine annual cost is the initial cost of the machine apportioned over the life of the asset at the appropriate rate of return used by the firm.

3.2.3 Cost of Equipment Usage

Equivalent uniform annual cost is expressed as

UAC IC A / P, i, n
where IC = initial cost of the machine, (A/P, i, n) = capital recovery factor that converts initial cost at year zero into a series of equivalent uniform annual year-end values, where i = annual interest rate and n = number of years in the service life of the equipment.

i 1 i A / P, i , n n 1 i 1
n

3.2.3 Cost of Equipment Usage

The uniform annual cost can be expressed as an hourly rate by dividing the annual cost by the number of annual hours of equipment use. The machine overhead rate is based on those factory expenses that are directly assignable to the machine, including power to drive the machine, floor space, maintenance and repair expenses, and so on. The total cost rate for the work center is the sum of labor and machine costs.

3.2.3 Cost of Equipment Usage

For a work center consisting of one worker and one machine, hourly cost of worker-machine system: Co = CL(1 + FOHRL) + Cm(1 + FOHRm)
where Co = hourly rate to operate the work center, CL = direct labor wage rate, FOHRL = factory overhead rate for labor, Cm = machine hourly rate, FOHRm = factory overhead rate applicable to the machine.

3.2.3 Cost of Equipment Usage Example 3.7 Hourly Cost of a Work Center
The following data are given for a work center consisting of one worker and one machine: direct labor rate = $10/hr, applicable factory overhead rate on labor = 60%, capital investment in machine = $105, service life of the machine = 8 yr, rate of return = 20%, salvage value in 8 yr = 0, and applicable factory overhead rate on machine = 50%. The work center will be operated one 8 hr shift, 250 day/yr. Determine the appropriate hourly rate for the work center.

3.2.3 Cost of Equipment Usage

Solution
Labor cost per hour is CL(1 + FOHRL) = 10 (1 + 0.6) = $16/hr
n

A / P, i, n i1 ni 0.21 08.2 0.2606 1 i 1 1 0.2 1


8

UAC IC A / P, i, n 105 0.2606 $26060


The number of hours per year = 8 250 = 2000 hr/yr.

26060 C m $13.03 /hr 2000

3.2.3 Cost of Equipment Usage

Machine cost per hour is Cm(1 + FOHRm) = 13.03 (1 + 0.5) = $19.55/hr Total cost rate for the work center is Co = CL(1 + FOHRL) + Cm(1 + FOHRm) = 16 + 19.55 = $35.55/hr