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Example 1 – Theory of constraints
Demand for a product made by P Ltd is 500 units per week. The product is made in three consecutive processes – A, B, and C. Process capacities are:Process
A
B
C
Capacity per week
400
300
250
The long-run benefit to P Ltd of increasing sales of its product is a present value of $25,000 per additional unit sold per week.
Investigations have revealed the following possibilities:
(1) Invest in a new machine for process A, which will increase its capacity to 550 units per week. This will cost $1m.
(2) Replace the machine in process B with an upgraded machine, costing $1.5m. This will double the capacity of process B.
(3) Buy an additional machine for process C, costing $2m. This will increase capacity in C by 300 units per week.SOLUTION:
Financial viability
Buy C
Additional Sales = 50
$000
Benefit = 50 × $25,000
1,250
Cost
2,000
–––––
Net cost
750
Buy C and B
Additional sales from current position = 150
$000
Benefit = 150 × $25,000
3,750
Cost ($2m + $1.5m)
3,500
–––––
Net benefit
250
Buy C, B and A
Additional sales from current position = 250
$000
Benefit = 250 × $25,000
6,250
Cost ($2m +$1.5m +$1m)
4,500
–––––
Net benefit
1,750
The company will benefit by $1,750,000 by investing in all three machines.
Dear Sir! What i cannot understand here is that the weekly demand is 500 units.
By buying additional machine for C we get 50 additional sales.By buying C and B machines we get 150 additional sales(50 from C and 100 from B).Finally by buying machines for C,B and A we should get 200 additional sales(50 from C,100 from B and 50 from A).
But as you can see above the solution offered in kaplan text is giving us 250 additional sales from C,B and A.I cannot figure out how he came up with 50 additional sales?
P.S Please don,t close the thread so i can ask further if i don,t understand.Currently they are limited to 250 units (because of process C)
If the do all three actions, then the capacities are:
Process A: 550 units
Process B: 600 units
Process C: 550 units.That would then limit the capacity to 550 units, but since the demand is for only 500 units they will then produce 500 units.
This is 500 – 250 = 250 units more than they are currently able to produce and sell..
why are we going back to C once we eliminated the bottleneck of C.Secondly once A,B and C are produced combined there will be no bottleneck.
Both A and C will be able to produce 550 units and B will produce 600 units.
So i cannot understand the logic we deducted 500 from 250 .B and A will still be be adding 100 and 50 units respectively where will they go?The bottleneck is the one capable of producing the fewest.
Just because they are capable of producing more does not mean that they will produce more! There is no point in producing more than they can sell, so the most they will ever try to produce is the demand of 500 units.
@johnmoffat said:
The bottleneck is the one capable of producing the fewest.Just because they are capable of producing more does not mean that they will produce more! There is no point in producing more than they can sell, so the most they will ever try to produce is the demand of 500 units.
Got it so that means even after we eliminate the bottlenecks new ones appear.But in situations like above still lowest produce is the bottleneck.
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