Manufacturing Metrics and

Economics
Chapter Contents

3.1 Production Performance Metrics

3.1.1 Cycle Time and Production Rate
3.1.2 Production Capacity and Utilization
3.1.3 Manufacturing Lead Time and Work-in-Process

3.2 Manufacturing Costs

3.2.1 Fixed and Variable Costs
3.2.2 Direct Labor, Material, and Overhead
3.2.3 Cost of Equipment Usage
3.2.4 Cost of a Manufactured Part
3.1 Production Performance Metrics
Metrics are use:
 To Manage factory operations

 Quantitative metrics allow a company to estimate part and product costs, track
performance in successive periods (e.g., months and years), identify problems
with performance, and compare alternative methods

 Manufacturing metrics can be divided into two basic categories:

(1) production performance measures and
(2) manufacturing costs
3.1.1 Cycle Time and Production Rate
 Cycle time Tc is the time that one work unit spends being processed or assembled
 Cycle time Tc is the time interval between when one work unit begins processing (or
assembly) and when the next unit begins
 Tc is the time an individual part spends at the machine, but not all of this is processing
time

Tc = cycle time, min/pc;

To = time of the actual processing or assembly operation, min/pc;
Th = handling time, min/pc; and
Tt = average tool handling time, min/pc
3.1.1 Cycle Time and Production Rate
 The production rate for a unit production operation is usually expressed as an
hourly rate, that is, work units completed per hour (pc/hr)
 The production rate for the three production types (Batch, Job shop, and Mass
production) is determined based on the Tc as follow:

Tp = average production time, min/pc;

Tsu = setup time to prepare the machine to produce the part, min/pc; and
Tc = cycle time from Equation
3.1.1 Cycle Time and Production Rate
 The production rate for the unit operation is simply the reciprocal of
production time, usually expressed as an hourly rate:

Rp = hourly production rate, pc/hr;

Tp = production time from Equation
3.1.1 Cycle Time and Production Rate
 In sequential batch processing, the time to process one batch consisting of Q
work units is the sum of the setup time and processing time, where the
processing time is the batch quantity multiplied by the cycle time

Tb = batch processing time, min/batch

Tsu = setup time to prepare the machine for the batch, min/batch
Q = batch quantity, pc/batch
Tc = cycle time per work unit
3.1.1 Cycle Time and Production Rate
 In simultaneous batch processing, the time to process a batch consisting of Q
work units is the sum of the setup time and processing time, where the
processing time is the time to simultaneously process all of the parts in the
batch

Tb = batch processing time, min/batch;

Tsu = setup time, min/batch;
Tc = cycle time per batch, min/cycl
3.1.1 Cycle Time and Production Rate
 The average production time per work unit T

 For quantity-type mass production, the production rate equals the cycle rate of the
machine (reciprocal of operation cycle time) after production is underway and the
effects of setup time become insignificant.

Since

Rc = operation cycle rate of the machine, pc/hr,

Tc = operation cycle time, min/pc.
3.1.1 Cycle Time and Production Rate
 The cycle time of a Flow-line mass production line is the longest processing (or
assembly) time plus the time to transfer work units between stations

Tc = cycle time of the production line, min/cycle;

Max To = the operation time at the bottleneck station (the maximum of the operation times for all stations on the
line, min/cycle)
Tr = time to transfer work units between stations each cycle, min/cycle

 The production rate can be determined by taking the reciprocal of Tc

Rc = theoretical or ideal production rate, cycles/hr,

Tc = cycle time
3.1.1 Cycle Time and Production Rate
 Equipment Reliability
 Lost production time due to equipment reliability problems reduces the
production rates determined by the previous equations
 The most useful measure of reliability is availability, defined as the uptime
proportion of the equipment; that is, the proportion of time that the
equipment is capable of operating (not broken down) relative to the scheduled
hours of production.
 Availability can also be defined using two other reliability terms, mean time
between failures (MTBF) and mean time to repair (MTTR)
3.1.1 Cycle Time and Production Rate
 Equipment Reliability

A = availability (proportion)
MTBF = mean time between failures, hr
MTTR = mean time to repair, hr.
 The mean time to repair may include waiting time of the broken-down
equipment before repairs begin. Availability is typically expressed as a
percentage
3.1.1 Cycle Time and Production Rate
 Equipment Reliability

Time scale showing MTBF and MTTR used to define availability A

 3.1.2 Production Capacity and Utilization
 Production capacity:
 is defined as the maximum rate of output that a production facility (or
production line, or group of machines) is able to produce under a given set of
assumed operating conditions
 The production facility usually refers to a plant or factory, and so the term
plant capacity is often used for this measure

PC = production capacity, pc/period;

n = number of machines;
Hpc = the number of hours in the period being used to measure production
capacity (or plant capacity)
 3.1.2 Production Capacity and Utilization
 Production capacity:
 The plant output for a given period of interest (e.g., week, month, year) can be
determined based on the average hourly production rate. For example, weekly
plant output is given by the following:

Rppw = weekly plant production rate for the plant, pc/wk

Rpph = average hourly production rate for the plant, pc/hr
Hpw = number of hours in the week
 3.1.2 Production Capacity and Utilization
 Utilization:
 Utilization is the proportion of time that a productive resource (e.g., a
production machine) is used relative to the time available under the definition
of plant capacity

Ui = utilization of machine i,
fij = the fraction of time during the available hours that machine i is processing
part style j
 3.1.2 Production Capacity and Utilization
 Utilization:
 An overall utilization for the plant is determined by averaging the Ui values
over the number of machines:

Ui = Utilization of machine i,
fij = The fraction of time during the available hours that machine i is processing
part style j
n= Number of machines
 3.1.2 Production Capacity and Utilization
 Workload:
 Is defined as the total hours required to produce a given number of units
during a given week or other period of interest

WL = workload, hr
Qij = number of work units produced of part style j on machine i during the period
of interest
Tpij = average production time of part style j on machine i
 3.1.3 Manufacturing Lead Time and Work-In-
Process
 Manufacturing Lead Time:
 MLT is defined as the total time required to process a given part or product through the
plant, including any time due to delays, parts being moved between operations, time
spent in queues, and so on
 Manufacturing lead time for a given batch is defined as

MLTj = manufacturing lead time for a batch of part or product j, min;

Tsuij = setup time for operation i on part or product j, min;
Qj = quantity of part or product j in the batch being processed, pc;
Tcij = cycle time for operation i on part or product j, min/pc;
Tnoij = nonoperation time associated with operation i, min; and
i = indicates the operation sequence in the processing, i = 1, 2, c, noj
 3.1.3 Manufacturing Lead Time and Work-In-
Process
 Manufacturing Lead Time:
 The average manufacturing lead time over the number of batches to be
averaged:

MLT = average manufacturing lead time, min,

nb = batches (parts or products) over which the averaging procedure is carried out
MLTj = lead time for batch j
 3.1.3 Manufacturing Lead Time and Work-In-
Process
 Manufacturing Lead Time:
 Average manufacturing lead time for all parts or products in the plant

MLT = manufacturing lead time,

no = number of operations,
Tsu = setup time,
Q = batch quantity,
Tc = cycle time per part,
Tno = non-operation time
 3.1.3 Manufacturing Lead Time and Work-In-
Process
 Work-in-Process:
 WIP is inventory that is in the state of being transformed from raw material to
finished part or product

WIP = work@in@process in the plant, pc;

Rpph = hourly plant production rate, pc/hr
MLT = average manufacturing lead time, hr
 3.2 Manufacturing costs
 Manufacturing costs can be classified into two major categories
 (1) fixed costs and
 (2) variable costs
 3.2.1 Fixed and Variable Costs
 Manufacturing costs can be classified into two major categories:
 Fixed cost is one that remains constant for any level of production output.
Examples include the cost of the factory building and production equipment,
insurance, and property tax
 Variable cost is one that varies in proportion to production output. As output
increases, variable cost increases. Examples include direct labor, raw materials,
and electric power to operate the production equipment

TC = total annual cost, $/yr;

Cf = fixed annual cost, $/yr;
Cv = variable cost, $/pc; and
Q = annual quantity produced, pc/yr.
 3.2.1 Fixed and Variable Costs

Fixed and variable costs as a function of production output for manual and
automated production methods.
 3.2.1 Fixed and Variable Costs
 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, as
pictured in the previous slide. Consequently, the manual method has a cost
advantage in the low quantity range, while automation has an advantage for high
quantities
 3.2.2 Direct Labor, Material, and Overhead
 Fixed versus variable are not the only possible classifications of costs in
manufacturing.
 An alternative classification separates costs into (1) direct labor, (2) material,
and (3) overhead
 Direct labor cost is the sum of the wages and benefits paid to the workers who
operate the production equipment and perform the processing and assembly
tasks
 Material cost is the cost of all raw materials used to make the product. In the
case of a stamping plant, the raw material consists of the sheet stock used to
make stampings
 Factory overhead consists of the costs of operating the factory other than direct
labor and materials. Factory overhead is treated as fixed cost, although some of
the items in the list could with the output level of the plant
 3.2.2 Direct Labor, Material, and Overhead
 Corporate overhead is the cost not related to the company’s manufacturing
activities, such Sales and marketing, Research and Development, heat and air
conditioning, etc.

Breakdown of costs for a manufactured product

 3.2.2 Direct Labor, Material, and Overhead
 The factory overhead rate is calculated as follow:

FOHR = factory overhead rate

FOHC = annual factory overhead costs, $/yr
DLC = annual direct labor costs, $/yr

 The corporate overhead rate is calculated as follow:

COHR = corporate overhead rate,

COHC = annual corporate overhead costs, $/yr;
DLC = annual direct labor costs, $/yr
 3.2.3 Cost of Equipment Usage
 The total cost rate for the machine:

Co = hourly rate to operate the machine, $/hr;

CL = direct labor wage rate, $/hr;
FOHRL = factory overhead rate for labor;
Cm = machine hourly rate, $/hr; and
FOHRm = factory overhead rate applicable to the machine.