Reference no: EM131989542

Problem

Theory of Constraints Example

Wells Company produces two different metal components used in medical equipment (Component X and Y). The company has three processes: molding, grinding, and finishing. In molding, molds are created, and molten metal is poured into the shell. Grinding removes the gates that allowed the molten metal to flow into the mold's cavities. In finishing, rough edges caused by the grinders are removed by small, handheld pneumatic tools. In molding the setup time is one hour. The other two processes have no setup time required. The demand for Component X is 300 units per day, and the demand for Component Y is 500 units per day. The minutes required per unit for each product are as follows:

Product                 Molding                      Grinding                      Finishing                    
Component X        5 minutes                    10 minutes                   15 minutes
Component Y        10 minutes                   15 Minutes                  20 minutes

The company operates one 8 hour shift. The molding process employs 12 workers (who each work 8 hours). Two hours of their time each day, however, is used for setups (assuming that both products are produced). The grinding process has sufficient equipment and workers to provide 200 grinding hours per shift.

The finishing department is labor intensive and employs 35 workers who each work 8 hours per day. The only significant unit-level variable costs are materials and power. For Component X, the variable cost per unit is $40 and for Component Y it is $50. Selling Prices for X and Y are $90 and $110, respectively. Wells' policy is to use two set-ups per day: an initial setup to produce all that is scheduled for Component X and a second setup (changeover) to produce all that is scheduled for Component Y. The amount scheduled does not necessarily correspond to each product's daily demand.

Required:

Assuming that Wells could meet the daily demand for both products, compute the potential daily profit.

Compute the minutes needed for each process to meet the daily demand. Do they have a bottleneck?

Compute the product mix that would maximize the daily throughput.

How might Wells increase the capacity of the bottleneck? How much would they be willing to spend to do this?

If setups were reduced to 10 minutes each (240 total minutes), by how much would profit increase?