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Chapter 10 – Capacity Management
Multiple Choice
1. In service organizations, capacity is more often viewed as _____.
a. the minimum rate of output per unit time
b. the units of resource availability
c. the ability to meet any customer demand
d. the amount of overtime scheduled
2. When the average unit cost of a good or service decreases as the capacity and/or volume of
throughput increases, it is known as _____.
a. economies of scale
b. diseconomies of scale
c. cost cushioning
d. capacity cushion
3. A focused factory is least likely to focus on a:
a. few key products.
b. specific technology.
c. certain process design and capability.
d. seasonal demand good.
4. _____ occur when the average unit cost of the good or service begins to increase as the
capacity and/or volume of throughput increases.
a. Economies of scale
b. Diseconomies of scale
c. Costs of cushioning
d. Capacity cushions
5. Average safety capacity (%) is computed as:
a. Average resource utilization (%) − 100%.
b. 100% − Average resource utilization (%).
c. [maximum safety capacity (%) + minimum safety capacity (%)]/2.
d. 100% − maximum resource utilization (%).
6. Safety capacity or a capacity cushion is _____.
a. needed for processes with little demand variability
b. the amount of capacity reserved for anticipated events
c. the amount of capacity reserved for unanticipated events
d. not appropriate for service organizations
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6. A pharmacy lab is used for only two high volume prescriptions, A and B. The time per setup
(in minutes), processing time (in seconds), and order size (in units) is given below. Using the
information, determine the total capacity required for this lab (i.e., how much work in minutes do
these two jobs require) in minutes. One setup is incurred per order.
Prescription
SETUP TIME
(MINUTES)
PROCESSING
TIME
(SECONDS)
ORDER
SIZE
(UNITS)
A
75
84
700
B
60
54
1,500
a. Less than 2000 minutes
b. Equal to or greater than 2000 but less than 2200 minutes
c. Equal to or greater than 2200 but less than 2400 minutes
d. Greater than 2400 minutes
7. Safety capacity is most closely related to _____.
a. bottlenecks
b. economies of scale
c. unanticipated events
d. focused factory
8. C&M Machining is developing plans for a dedicated production line and needs to determine
how many drill presses will be needed. Engineering estimates are that one drill press will be able
to process 120 parts per hour. Daily demand is 2,400 parts. C&M operates one 8-hour shift per
day. How many drill presses are needed to meet the capacity requirements?
a. 2 drills
b. 3 drills
c. 4 drills
d. 5 drills
9. Average safety capacity or a capacity cushion for a factory is computed:
a. over a year.
b. over a month.
c. twice a year.
d. twice a month.
10. A pharmacy lab is used for only two high volume prescriptions, A and B. The time per
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setup (in minutes), processing time (in seconds), and order size (in units) is given below.
Using the information, determine the total capacity required for this lab in minutes.
Prescription
SETUP TIME
(MINUTES)
PROCESSING
TIME
(SECONDS)
ORDER
SIZE
(UNITS)
A
80
84
700
B
50
54
500
a. Less than 2000 minutes
b. Equal to or greater than 2000 but less than 2200 minutes
c. Equal to or greater than 2200 but less than 2400 minutes
d. Greater than 2400 minutes
11. A pharmacy lab is used for only two high volume prescriptions, A and B. The time per
setup (in minutes), processing time (in seconds), and order size (in units) is given below. Using
the information, determine the total capacity required for this lab (i.e., how much work in minutes
do these two jobs require) in minutes. One setup is incurred per order.
Prescription
SETUP TIME
(MINUTES)
PROCESSING
TIME
(SECONDS)
ORDER
SIZE
(UNITS)
A
75
84
1,000
B
85
54
1,500
a. Less than 2000 minutes
b. Equal to or greater than 2000 but less than 2200 minutes
c. Equal to or greater than 2200 but less than 2400 minutes
d. Greater than 2400 minutes
Problem (use to answer questions #13 to #15)
Steve, an operations manager at Clan Corp. is promoted to manage the process defined by the
four stages A to D below. This process could be human resource management, marketing,
accounting, finance, or engineering process, and Steve is the manager. This is his chance to
impress his boss and get promoted again. After three months on the job, Steve realizes something
is not right with the process. His employees experience big pile up of work, things take too long
to be processed, the opportunity for error is increasing, and the entire process is almost chaotic.
Do a process and capacity analysis of this process. The numbers in parenthesis (#) are the time in
minutes to complete one unit of work. Demand on the process averages 30 units per hour and
each unit must be worked on by all four stages. Administrative clerk(s) do Stage A work. The
assistant manager(s) are cross-trained to do both Stages C and D work. The coding specialist(s)
do Stage B work.
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13. How many administrative clerks should be hired to do Stage A work, assuming a target
utilization of 85 percent?
a. One
b. Two
c. Three
d. Four
14. What is the current labor utilization of the coders at Stage B if two coding specialists are
currently on duty?
a. Less than 90 percent
b. More than 90% but less than or equal to 95%
c. More than 95% but less than or equal to 100%
d. More than 105 percent
15. The total process (throughput) capacity in units per hour for the four-stage process A
to D assuming 3 administrative clerks, 3 coding specialist, and 3 assistant managers on duty is:
a. less than 10 units per hour.
b. more than 10 units but less than or equal to 20 units.
c. more than 20 units but less than or equal to 30 units.
d. more than 30 units but less than or equal to 40 units.
Problem for Questions #16, #17, and #18
Perform a capacity analysis of the process given below and answer questions #16, #17, and #18 to
Stage A (5)
Stage C (4)
Stage B (6)
Stage D (4)
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help fix the process. The numbers in parenthesis (#) are the time in minutes to complete one unit
of work. Demand on the process averages 27 units per hour and each unit must be worked on by
all five stages. Administrative clerks do Stages A and B. The assistant manager does Stages D
and E. The coding specialist does Stage C.
16. How many administrative clerks should be hired assuming a target utilization of 90 percent?
a. One
b. Two
c. Three
d. Four
17. What is the current labor utilization of the coders, if two coding specialists are currently on
duty?
a. Less than 90 percent
b. More than 90% but less than or equal to 95%
c. More than 95% but less than or equal to 100%
d. More than 100%
18. The total process (throughput) capacity in units per hour for the five stage process, A to D,
assuming 3 administrative clerks, 2 coding specialist, and 4 assistant managers on duty is:
a. less than 10 units per hour.
b. more than 10 units but less than or equal to 20 units.
c. more than 20 units but less than or equal to 30 units.
d. more than 30 units but less than or equal to 40 units.
Stage B (3)
Stage A (5)
Stage D (4)
Stage C (6)
Stage E (4)
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Problem (use to answer questions #19 to #22)
Perform a capacity analysis of the process given below. The numbers in parenthesis (#) are the
time in minutes to complete one unit of work. Demand on the process averages 20 units per hour
and each unit must be worked on by all four stages. Administrative clerk(s) do Stage A work. The
assistant manager(s) do Stages C and D work and are cross-trained to do both jobs. The coding
specialist(s) do Stage B work.
19. How many administrative clerks should be hired to do Stage A work, assuming a target
utilization of 85 percent?
a. One
b. Two
c. Three
d. Four
20. What is the current labor utilization of the coders at Stage B if two coding specialists are
currently on duty?
a. Less than 90 percent
b. More than 90% but less than or equal to 95%
c. More than 95% but less than or equal to 100%
d. More than 100% but less than or equal to 105%
21. The process (throughput) capacity in units per hour for the four stage process, A to D,
assuming 2 administrative clerks, 3 coding specialists, and 3 assistant managers on duty is _____.
a. less than 10 units per hour
b. more than 10 units but less than or equal to 20 units
c. more than 20 units but less than or equal to 30 units
d. more than 30 units but less than or equal to 40 units
Stage A (5)
Stage C (4)
Stage B (6)
Stage D (4)
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22. Given the base case information and resource levels in question #21, which process
improvement option given below is best to maximize (increase) process (throughput) capacity?
(Each option is independent of any other option; that is, consider each option below as the base
case plus the one option.)
a. Add one clerk to help do the work at Stage A.
b. Add one assistant manager to help do the work at Stages C and D.
c. Transfer one coder from coding to an assistant manager job.
d. Speed up the service time for coders (Stage B) from 6 minutes/unit to 5 minutes/unit.
Problem (use to answer questions #23 and #24)
23. A hospital lab is used for three types of cancer tests, A, B, and C. The time per setup,
processing time, and batch size (in units) is given below. Using the information, determine the
total demand in minutes for this lab.
Job Type
SETUP TIME
(MINUTES)
PROCESSING
TIME
(MINUTES)
BATCH (JOB)
SIZE (UNITS)
A
25
4.5
50
B
60
6.0
80
C
30
5.0
40
a. Less than 500 minutes
b. Equal to or greater than 500 but less than 1000 minutes
c. Equal to or greater than 1000 but less than 2000 minutes
d. Greater than 2000 minutes
24. Given the results in Question #22 and a capacity of 900 minutes, the best short-term capacity
option for the lab is:
a. to buy extra equipment and hire one more lab technician.
b. to sell unused capacity.
c. to add an extra shift of two technicians and related equipment.
d. to work overtime to finish the job.
Problem for Questions #25 to #28
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A medical equipment testing and calibration service is depicted in Figure 1. The customer usually
brings the equipment to the service center. The service process requires service technicians to
perform three process steps #1 to #3. Each technician is cross-trained so they can perform any of
the three steps. The inspector does Step # 4 alone. After step #4, two parallel work activities are
performed. That is, a shipping clerk packs the work (step 7) while a billing clerk prepares the
invoice (step 5) simultaneously, and the customer is contacted by phone for pick-up (step 6). The
average throughput is 3 equipment units per hour.
1
6
2 3
5
4End
7
Start
Figure 1 Flow chart of the medical equipment testing and calibration service process
The table below shows the work content of the process steps, activity times in minutes per unit,
shared and non-shared work activities, and the type of resource required. There are 3 service
technicians on duty: 1 inspector, 1 billing clerk, and 1 shipping clerk.
25. The labor utilization rate (%) for the billing clerk is _____.
a. 25%
b. 50%
c. 75%
d. 100%
26. The labor utilization rate (%) for the service technician is closest to _____.
Activity
Activity
Time
(minutes)
Activity Performed By
Start —
1 8 Service technician
217 Service technician
325 Service technician
412 Inspector
5 3 Billing clerk
6 7 Billing clerk
725 Shipping clerk
End —
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a. 20%
b. 40%
c. 60%
d. 80%
27. The service rate in units per hour for the service technician is _____ units per hour.
a. 1.2
b. 2.4
c. 3.6
d. 7.5
28. An order fulfillment process normally operates two shifts a day, six days per week. Under
normal conditions, 380 orders can be processed per shift. The weekly capacity is _____.
a. less than 1,000 orders per week
b. more than 1,000 orders but less than or equal to 2,000 order per week
c. more than 2,000 orders but less than or equal to 3,000 orders per week
d. more than 3,000 orders per week.
29. The job that represents the bottleneck in this process is that of the _____.
a. service technician
b. inspector
c. billing clerk
d. shipping clerk
30. A work order includes all of the following EXCEPT:
a. the quantity to be produced.
b. the processing requirements.
c. resources needed.
d. worker’s health status.
31. _____ strategy matches the capacity additions with the demand as closely as possible.
a. Capacity lag
b. Capacity straddle
c. Capacity lead
d. Capacity reduction
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32. _____ is a capacity-expansion strategy with the goal of maintaining sufficient capacity to
minimize the chances of not meeting demand.
a. Capacity lag
b. Capacity straddle
c. Capacity lead
d. Capacity reduction
33. A firm will encounter short periods of over- and underutilization of resources with the _____
strategy.
a. capacity lag
b. capacity straddle
c. capacity lead
d. capacity reduction
34. _____ is a strategy that waits until demand has increased to a point where additional
capacity is necessary.
a. Capacity lag
b. Capacity lead
c. Capacity reduction
d. Capacity match
35. Which of the following is a short-term capacity decision?
a. Expanding the capacity and the number of beds in a hospital
b. Determining the amount of warehouse space to rent for a new promotional item
c. Closing down a distribution center
d. Changing the cooking technology in a chain of fast-food restaurants
36. All the following are means to manage capacity by changing or stimulating demand
EXCEPT:
a. varying price of goods or services.
b. adding peripheral goods and/or services.
c. providing reservations.
d. shifting work to slack periods.
37. All the following are means to adjust short-term capacity EXCEPT:
a. adding peripheral goods and/or services.
b. adding or sharing equipment.
c. selling unused capacity.
d. changing labor skill mix.
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38. Which of the following is NOT a component of revenue management system (RMS)?
a. Marketing
b. Forecasting
c. Pricing
d. Allocating
39. Revenue management systems (RMS):
a. consist of standard and static methods to forecast demand.
b. rely solely on overbooking.
c. are cost minimization models.
d. maximize the revenue generated by a perishable asset.
40. Revenue management system (RMS) consists of all of the following EXCEPT:
a. forecasting demand.
b. allocating perishable assets.
c. deciding when to overbook and by how much.
d. adding peripheral goods.
41. A doctor’s office charges no-show patients $30 if they do not cancel their appointment 24
hours ahead of the appointment because:
a. insurance will pay the no-show fee anyway.
b. the appointment time and associated revenue is perishable, and the doctor may lose revenue.
c. the doctor’s office does a poor job of forecasting demand.
d. the no-show price of $30 can be added to medical fees for reimbursement.
42. An organization that would typically use a revenue management system (RMS) is a:
a. computer manufacturer.
b. fast-food restaurant.
c. car rental company.
d. package delivery service.
43. According to the Theory of Constraints, _____ is the amount of money generated per time
period through actual sales.
a. throughput
b. nonbottleneck (NBN) work activity
c. nonphysical constraint
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d. utilization
44. Idle capacity exists in a _____ activity.
a. bottleneck work
b. booking
c. nonbottleneck work
d. nonphysical
45. Which of the following is NOT a correct statement about bottleneck resources?
a. Work at all times to maximize throughput and resource utilization.
b. An hour lost is an hour lost for the entire process or factory output.
c. Use small order sizes.
d. Work-in–process buffer inventory is placed in front of workstations to maximize
resource utilization.
46. For a nonbottleneck activity:
a. utilization must be near 100%.
b. an hour lost has no effect on total process or factory output.
c. use large order sizes to minimize setups.
d. work-in–process buffer inventory should be placed in front of nonbottleneck
workstations.
True/False Questions
1. A measure of capacity is the number of seats in an airplane per flight.
2. Average rate of output per unit of time is a formal definition of capacity.
3. Short-term capacity decisions usually involve adjusting schedules or staffing levels.
4. Economies of scale occur when the average unit cost of a good or service begins to increase as
the capacity and/or volume of throughput increases.
5. Focused factories are often devoted to a specific technology or particular market segments or
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customers.
6. Diseconomies of scale is also known as capacity cushion.
7. The strategy of matching capacity additions with demand as closely as possible is often called
a capacity straddle strategy.
8. An example of safety capacity would be planning additional capacity to account for employee
summer vacations.
9. Capacity costs depend primarily on annual operating and maintenance costs.
10. Complementary goods or services balance seasonal demand cycles and therefore use excess
capacity available.
11. Capacity lag strategy results in constant capacity shortages.
12. It is never appropriate to expand capacity in advance of growing demand because the excess
capacity will always be underutilized.
13. Offering complementary goods or services is an example of a short-term capacity
strategy.
14. Long-term capacity planning must be closely tied to the strategic direction of an
organization.
15. Complementary goods and services are those that require different resources than the
organization’s other goods and services.
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16. Large capacity increases help to spread fixed costs of construction and operating system
setup over one large project.
17. Changing labor skill mix is a means to adjust short-term capacity.
18. Varying the price of goods or services is a way of influencing demand patterns.
19. The ideas and methods surrounding nonbottleneck work activity are often called yield
management.
20. Reservations reduce the uncertainty for both the good or service provider and the customer.
21. An unsold broadcast advertising space is an example of a perishable asset.
22. Revenue management systems allocate nonperishable assets across market segments.
23. The earliest revenue management systems focused solely on overbooking.
24. The Theory of Constraints is focused on eliminating all bottlenecks in a process.
25. Constraints determine the throughput of a facility.
26. A physical constraint is associated with the capacity of a resource.
Case Study Questions (To reward students who attend class, listen and learn, and take good
class notes on the case discussion and/or student team presentation.)
1. According to the David Christopher, Orthopedic Surgeon, case study, which of the following
statements is TRUE?
a. Total setup and changeover time for both surgeons was 15 percent of total workload time.
b. The best option to fix the demand-capacity shortage is to eliminate hip and shoulder
replacement surgeries.
c. The surgery mix is analogous to a product mix.
d. The best option to fix the demand-capacity shortage is to hire a third surgeon.
2. Which of the following statements based on the David Christopher, Orthopedic Surgeon, case
study is TRUE?
a. Hiring a third surgeon allowed all three surgeons to barely meet demand for the surgery mix.
b. The workload of surgeons A and B could be rebalanced and equalized by moving three surgery
procedures from surgeon B to A.
c. To fix the surgeon demand—capacity shortage, one option is to increase the surgeon’s
workday from five to six hours.
d. Setup/changeover time represented 48 percent of the two surgeon’s total surgery time and
workload.
Problems for Manual Grading, Take-Home Exams and Partial Credit (Also, review the OM
Instructor’s Manual for end-of-chapter questions/problems)
1. Define capacity including the two ways it can be viewed. Provide an example of each way.
2. Define economies of scale and diseconomies of scale. Explain how they relate to capacity
decisions.
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3. Explain the concept of a focused factory. Include different ways a factory can be focused.
4. An assembly line normally operates two shifts a day, five days per week. Each shift can
produce 475 assemblies. What is the weekly capacity?
5. An order fulfillment process normally operates two shifts a day, five days per week. Under
normal conditions, 380 orders can be processed per shift. What is the daily capacity?
6. What is safety capacity? Discuss reasons for using it.
7. For a Marriott hotel call center, the expected service rate was 3.0 minutes per telephone call per
customer service representative (CSR). With 3 telephone CSRs on-duty during the 6:30 to 7:00
am time period, and assuming a 90% target CSR labor utilization rate, how many telephone calls
can these 3 CSRs handle during this time period?
8. An assembly line normally operates two shifts a day, five days per week. The planned capacity
of the assembly line is 380 units/shift. Determine the average safety capacity if 700 items are
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assembled a day, on average.
9. A machine in a job shop is used for only two parts, A and B. The time per setup (in minutes),
processing time (in seconds), and order size (in units) is given below. Using the information,
determine the total capacity required for this machine in minutes.
Part
Machine Setup Time (minutes)
Processing Time (seconds)
Order Size (units)
A
55
54
600
B
30
64
700
10. C&M Machining is developing plans for a dedicated production line and needs to determine
how many drill presses will be needed. Engineering estimates are that one drill press will be able
to process 150 parts per hour. Daily demand is 4,000 parts. C&M operates one 8-hour shift per
day. How many drill presses are needed to meet the capacity requirements?
11. A food packaging plant has planned shipments over the next six weeks of 9,500, 8,500,
10,000, 8,800, 8,200, and 9,000 packages. The plant normally operates 2 shifts per day, five days
per week. During each shift, 1000 food products can be packaged and ready to ship. What is the
plant’s weekly capacity? At what percentage of capacity is the plant actually operating?
12. A pharmacy lab is used for only two high volume prescriptions, A and B. The time per setup
(in minutes), processing time (in seconds), and order size (in units) is given below. Using the
information, determine the total capacity required for this lab in minutes.
Prescription
Setup Time (minutes)
Processing Time (seconds)
Order Size (units)
A
75
84
700
B
60
54
1,500
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13. Jack’s Ice Cream Parlor produces two types of ice cream on a contract basis for a major
restaurant chain using a large blender. A batch of ice cream A requires a setup time of 45
minutes, a process mixing time of 1.2 minutes per gallon, and 50 gallons are made per day. Ice
cream B requires the same machine to be cleaned and setup which takes 30 minutes, a process
mixing time of 2 minutes per gallon, and 100 gallons are produced per day.
a. a. Compute the capacity required.
b. What percentage of total capacity required is setup time?
For multiple products, total capacity is C = ∑Ci = ∑ [Si + Pi × Qi]
C = 45 + 1.2(50) + 30 + 2.0(100) = 335 minutes
overtime, subcontracting and productivity losses that occur as the firm scrambles to satisfy
14. What are complementary goods and services and why do firms have them?
15. Discuss each of the four strategies for capacity expansion. Include the risks and
benefits of each.
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16. Discuss the following:
a. Approaches to adjust short-term capacity
b. Approaches for shifting and stimulating demand
shifting work to slack periods.
17. Define a revenue management system (RMS) and explain how it works. Give several
examples of assets that can be managed using RMS.
18. Define the Theory of Constraints (TOC). How does TOC view throughput differently from
the traditional OM perspective?