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```Chapter 4: Estimating and Reducing Labor Costs
The objective of any process should be to create value (make profits),
not to maximize the utilization of every resource involved in the process.
We should not attempt to produce more than what is demanded from the
market, or from the resource downstream in the process, just to increase
the utilization measure.
Yet, underutilization provides opportunity to improve the process:
• If we can reduce the excess capacity at some process step, the overall
process becomes more efficient (lower cost for the same output).
• If we can use capacity from the underutilized process steps to increase
the capacity at the bottleneck step, the overall process capacity
increases.
Objective: Discuss line balancing, which strives to avoid mismatches
between what is supplied by one process step and what is demanded
from the following process step.
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4.1 Analyzing an Assembly Operation
It is March 2000 and
Novacruz faced a
demand of 125 / week.
Figure 4.1: The Xootr by Novacruz
1400
1200
1000
800
600
400
Figure 4.2. : Lifecycle demand trajectory for Xooters
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January
December
November
October
September
August
July
June
May
0
April
200
March
Weekly
demand
A Labor Intense Process
Components
Finished Xootrs
Activity 1
Activity 2
Activity 3
Activity Time
13 min/unit
Activity Time
11 min/unit
Activity Time
8 min/unit
Bottleneck = resource with
the lowest capacity.
Capacity 
Num berof resources
Activitytim e
1
Capacity 
 .0769scooter/ min
13min / scooter
 4.6 scooter/ hour
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4.2 Time to Process a Quantity X Starting with an Empty Process
Worker-paced system: each worker is free to work at his or her own pace;
if the first worker finishes before the first worker is ready to accept the parts,
then the first worker puts the completed work in the inventory between them.
Time through an empty worker-paced process = Sum of the activity times
= 13 + 11 + 8 = 32 minutes
Machine-paced system: all the steps must work at the same rate.
Time through an empty machine-paced process =
Number of resources in sequence x Activity time of the bottleneck step
= 3 x 13 = 36 minutes
Time to make X units = Time through empty system +
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X  1 unit
Flow rate
Exhibit 4.1
TIME TO PROCESS A QUANITY X STARTING WITH AN EMPTY PROCESS
1.
2.
Find the time it takes the flow unit to go through the empty system:
•
In worker-paced line, this is the sum of the activity times
•
In machine-paced line, this is the cycle time x the number of stations
Compute the capacity of the process (see previous methods). Since we are
producing X units as fast as we can, we are capacity constrained; thus,
Flow rate = Process capacity
3.
Time to finish X units
X  1 unit
Time to make X units = Time through empty system +
Flow rate
Conveyor Belt
Components
Finished Xootrs
Activity 1
Activity 2
Activity 3
Figure 4.4. : A machine paced process lay-out (Note:
conveyor belt is only shown for illustration)
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Q 4.1 a.
4.3 Labor Content and Idle Time
Labor content = sum of activity times with
labor = 13 min/unit + 11 + 8 = 32 min/unit
Cost of direct labor =
Total wages per unit of tim e
Flowrate per unit of tim e
Wages per week
Scooters produced per unit of tim e
3 x \$12 / h x 35 h / wk

125 scooters/ wk

To correctly compute the cost of
direct labor, we need to look at two
measures:
• The number of scooters produced per
unit of time (the flow rate).
• The amount of wages we pay for the
same time period.
 \$10.08 / scooter
Q 4.1 d.
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Exhibit 4.2
SUMMARY OF LABOR COST CALCULATIONS
1.
Compute the capacity of all resources; the resource with the lowest capacity is the
bottleneck (see previous methods) and determines the process capacity.
2.
Compute Flow rate = Min {Available input, Demand, Process Capacity};
compute Cycle time =
3.
Compute the total wages (across all workers) that are paid per unit of time:
Cost of direct labor =
4.
1
Flow rate
Total wages
Flowrate
Compute the idle time of each worker for each unit:
Idle time for worker at resource i = Cycle time x (Number of workers at resource i) –
Activity time at resource i
5.
Compute the labor content of the flow unit: this is the sum of all activity times
involving direct labor
6.
Add up the idle times across all resources (total idle time); then compute
Average labor utilization 
Labor content
Labor content  Total idle tim e
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Table 4.1 Basic Calculations Related to Idle Time
Worker 1
Worker 2
Worker 3
Activity time
13 min/unit
11 min/unit
8 min/unit
Capacity
1/13 unit/minutes
= 4.61 units/hr
1/11 units/minutes
= 5.45 units/hr
1/8 unit/minutes
= 7.5 units/hr
Process capacity
Minimum {4.61 units/h, 5.45 units/h, 7.5 units/h} = 4.61 units/h
Flow rate
Demand = 125 units/week = 3.57 units/hr
Flow rate = Minimum {demand, process capacity} = 3.57 units/hr
Cycle time
1/3.57 hours/unit = 16.8 minutes/unit
Idle time
16.8 minutes/unit
- 13 minutes/unit
= 3.8 minutes/unit
16.8 minutes/unit
- 11 minutes/unit
= 5.8 minutes/unit
16.8 minutes/unit
- 8 minutes/unit
= 8.8 minutes/unit
Utilization
3.57 / 4.61 = 77%
3.57 / 5.45 = 65.5%
3.57 / 7.5 = 47.6%
Average Labor
Utilization
= 1/3 x (77.4% + 65.5% + 47.6%) = 63.5%
Or = 32 / (32 + 18.4) = 63.5%
{Total = 18.4
min/unit}
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Q 4.1
4.4 Increasing Capacity by Line Balancing
Comparing the utilization levels in table 4.1 reveals a strong imbalance
between workers. Imbalances within a process provide micro-level
mis-matches between what could be supplied by one step and what is
demanded by the following steps. Line balancing is the act of
reducing such imbalances. It provides the opportunity to:
• Increase the efficiency of the process by better utilizing the various
resources
• Increase the capacity of the process by reallocating either workers
from underutilized resources to the bottleneck or work from the
bottleneck to the underutilized resources.
Utilization
Worker 1
Worker 2
Worker 3
3.57 / 4.61 = 77%
3.57 / 5.45 = 65.5%
3.57 / 7.5 = 47.6%
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Based on a demand rate of 125 units per week and the assumption that all
three workers are a fixed cost for 35 hours per week, line balancing would
change neither the flow rate (process is demand-constrained) nor the cost of
direct labor (assuming the 35 hours per week are fixed).
Consider if demand reaches 200 units per week. Now the process is capacity
constrained, specifically by worker 1 who can produce a scooter every 13
minutes while the market demand in one every 10.5 minutes. Worker 1 has a
utilization of 100%, yet workers 2 & 3 have idle time:
worker 2: utilization is 1/13 / 1/11 = 84.6%
worker 3: utilization is 1/13 / 1/8 = 61.5%
Cost of direct labor:
Total wages per unit of tim e
Flowrate per unit of tim e
Wages per week

Scootersproduced per week
3 x \$12 / h x 35 h / wk

161.5 scooters/ wk
 \$7.80 / scooter
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Example Line Balancing
In an ideal scenario, we could just take the amount of work that goes into
building a scooter, which is the direct labor content (32 minutes/unit), and split
it up evenly between three workers = 32/3 =10.66 minutes/unit = 640
seconds/unit
Moving tasks as shown in figure 4.5 the final activity times are:
Worker 1: 623 seconds per unit
Worker 2: 602 seconds per unit
Worker 3: 665 seconds per unit
Average labor utilization = Labor content / (Labor content + Total idle time) =
1,890 / (1,890 + 42 + 63 + 0) = 94.7%
New bottleneck is worker 3 resulting in a process capacity of 189.5 units / wk
Have reduced the cost of direct labor to \$6.65 / unit.
Within the scope of this book we only consider cases where the sequence of tasks is given. Also,
algorithms and heuristics exist that support line balancing in more complex settings, but that is not
the focus for this text and course.
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Figure 4.5: Graphical Illustration of Line Balance Line
Cycle Time Before Line Balancing
900
800
12
700
Activity time [seconds]
10
11
20
9
600
19
500
8
400
7
6
300
5
18
26
17
25
15
200
16
4
2
100
23
24
22
14
3
1
13
21
Step 2
Step 3
0
Step 1
Cycle Time After Line Balancing
900
800
700
Activity time [seconds]
10
26
9
600
17
8
500
7
400
15
16
23
24
6
300
5
200
4
22
14
13
100
25
2
21
20
3
1
12
19
11
18
Q 4.2
0
Step 1
1: Prepare cable
2: Move cable
3: Assemble washer
4: Apply fork, threading cable end
6: Steer pin nut
7: Brake shoe, spring, pivot bolt
8: Insert front wheel
9: Insert axle bolt
10: Tighten axle bolt
11: Tighten brake pivot bolt
12: Assemble handle-cap
13: Assemble brake lever + cable
14: Trim and cap cable
15: Place first rib
16: Insert axles and cleats
17: Insert rear wheel
18: Place second rib and deck
19: Apply grip tape
20: Insert deck fasteners
21: Inspect and wipe-off
22: Apply decal and sticker
23: Insert in bag
24: Assemble carton
25: Insert Xootr and manual
26: Seal carton
Step 2
Step 3
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4.5 Scale Up to Higher Volume
• Increasing capacity by replicating the line
• Increasing capacity by selectively adding workers
• Increasing capacity by further specializing tasks
Components
Step 1
Step 2
Step 3
Step 1
Step 2
Step 3
Step 1
Step 2
Step 3
Step 1
Step 2
Step 3
Finished Xootrs
Four identical lines using the initial process lay-out, 1 worker per step
Components
4 workers
4 workers
4 workers
Step 1
Step 2
Step 3
Finished Xootrs
Finished Xootrs
Components
1
2
3
4
5
6
7
8
9
10
One line, 1 worker per step; inventory between step not shown
Figure 4.6. : Three process lay-outs for high volume production
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11
12
200
180
160
Activity time [seconds]
140
120
100
80
60
40
20
0
Worker
1
2
3
4
5
6
7
8
9
Figure 4.7 : Line balance in a highly specialized line (different
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10
11
12
Labor Productivity
(Xooters per employee)
Largely automated process
likely to be operated in
high wage region
High labor
productivity
Improvement because
of line-balancing
High capability
frontier
Largely manual process,
Likely to be operated in
low wage region
Low labor
productivity
Low capability
frontier
Low
High
Return on assets
(sales per \$ of equipment)
Figure 4.10.: Trade-off between labor productivity and capital investment
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