Question

Case 21.1 – Factors that Limit Capacity


We have made the point that managers often attempt to maximize the contribution margin per unit of a particular resource that limits output capacity. The following are five familiar types of businesses:

Small medical or dental practice
Restaurants
Supermarket.
Builder of residential housing.
Auto dealer’s service department.
Instructions:


Each student will be assigned one of the five familiar types of businesses
As an employee, write an internal memo to your manager addressing the following:

For each type of business, identify the factor that you believe is most likely to limit potential output capacity.
Suggest several ways (other than raising prices) the business can maximize the contribution margin per unit of this limiting resource. (Hint: These businesses often do implement the types of strategies you are likely to suggest. Thus, your solution to this case may explain basic characteristics of businesses that you personally have observed.)

Answer 1

All businesses are run through a process which may involve different activities. These processes depend on the type of business like a manufacturing set-up has very different process then a service industry.

We know that all business can cater to limited units and these output units depend on many factors. Every business has flow of various activities to achieve output. When each activity is studies in detail, we can find out constraints of each activity and activity which has lowest capacity is termed as limiting capacity.

For example: A manufacturing unit manufacturing cars involves 10 activities to complete a car. It is found that out of 10 activities, 9 activities involve processing/assembling 2 cars per hour but 10^th activity (say – paint shop) can paint only 1 car in one hour. Here paint shop is limiting factor and output can be limited to 1 car per hour despite all other activities have capacity of 2 cars per hour. While calculating profits or margins, normally this factor becomes more important as it will limit the output. This limiting factor may be different industries / services depending on processes involved.   

1. Small medical or dental practice:

In the small medical practice, time may be the limiting factor as dentist has to attend to each patient. There may other factors to like seating capacity, a machine’s capacity to perform certain procedures but it seems time of dentist may be only limiting factor as each patient has to be attended to including performing procedures etc. Dentist time can be saved by taking non-essential details / procedures by other staff which will save dentist’s time. In this way more patients can be attended to.

2. Restaurants:

We can observe that popular food joints have waiting time on certain occasions, and now seating capacity becomes limiting factor because more customers can be serviced but there is no seating available and customers are forced to wait. Other liming factors can be cooking of food, availability of waiters etc. To increase the efficient use of seating capacity, restraint should may take orders before customers are offered a seat and as soon as customers sit orders can be served fast and each customer will take less time in taking food.

3. Supermarket:

In supermarkets customer footfalls may be the limiting factor and other factors may be space to accommodate large number of customers, billing executives etc.

4. Builder of residential housing:

In a residential housing project area may be the limiting factor and utilisation of space may be improved by proper design of building.

5. Auto dealer’s service department:

In auto dealers service department availability of service engineers / mechanics may be limiting factor. There may be other limiting factor like washing process, or any other service which may have limited capacity.

It may be noted that these limiting factors are not always same for each industry but may vary depending on processes involved, designing of activities/processes etc.