Harvard Business School 9-687-019

Rev. September 7, 1994

A Glossary of TOM Terms

In the Technology and Operations Management course, we introduce a number of concepts
and terms. These simple concepts have a great deal of power in helping us develop an understanding
of a process and how it performs. These terms do not have a single precise definition which applies to
all processes; instead, their precise meanings will reflect the specifics of the process in question. In
practice, different firms sometimes define these terms in slightly different ways for their own
internal use. This variation is reflected in some of our case materials. However, for the purposes of
class discussion, it makes sense to try to adhere to a common vocabulary. A brief discussion of
some of the key concepts and terms introduced to date are presented below.

Cycle Time: The cycle time of a process is the time between completion of successive units. In
other words, cycle time answers the question "How often does a unit complete the process?" Cycle
time can be similarly defined for portions of a process. The cycle time of a particular task in a process
reflects the time between the finish of the task for one unit and the finish of the task for the next unit.
There is not a one-to-one relationship between the cycle times of tasks in a process and the cycle time
of the process itself. The relationship depends on the way in which the machines are arranged. A
simple example illustrates this point:

Process 1 sends a finished unit to Finished Goods Inventory every 5 minutes. Although the
worker at Task B only needs 2 minutes, he or she is paced by the worker at Task A. The way this
process is arranged the worker at Task B spends 3 minutes of idle time during the 5 minute period in
which the worker at Task A is working on the previous unit. Task A is the bottleneck. The cycle time
for the entire process is therefore 5 minutes. Now suppose we were to set up two stations to perform
Task A.

This note was prepared as a basis for class discussion.

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 687-019 A Glossary of TOM Terms

In this process we can send a finished unit to Finished Goods Inventory every 2.5 minutes;
the cycle time for Process 2 is 2.5 minutes. Each unit still spends 5 minutes being worked on at Task A
but now we finish 2 units every 5 minutes for an average of 2.5 minutes per unit. In fact, we could
stagger the operations so that we actually finish a unit every 2.5 minutes.

All of this discussion has assumed that yields are 100%, i.e., that every unit that starts
through the process goes all the way through every step of the process without mishap. The presence
of rejects and/or rework complicates the analysis. The impact of defects which result in yields of less
than 100% will be explored later in the term.

Bottleneck: The bottleneck of a process is the factor which limits production. Usually, we will
speak of the task with the longest cycle time as a bottleneck, e.g., Task A in Process 1. In other
situations, the way in which labor has been assigned to the various tasks may make labor the
bottleneck, as would be the case if Process 1 were staffed by only one worker handling both tasks. In
some settings, information, raw materials flow, or even a specific order may be a bottleneck. As the
neck of a bottle limits the rate at which the liquid inside can be poured, a process bottleneck sets a
ceiling on how quickly products can move through the process, and thus determines the process cycle
time. Because bottlenecks pace a process and limit its capacity they are important focal points for
management attention.

Capacity: Capacity is a measure of how much can be produced or serviced in a specified

period of time, e.g., tons per day, parts per minute, customers per hour. The capacity of a process will
be determined by the process bottleneck. Capacity utilization is a measure of how much output was
actually achieved relative to capacity (how much output could have been achieved in an ideal
situation). If the capacity of a process were 500 units per day and on a given day we produced 480,
then on that day capacity utilization was 96% (480 units/500 units = 0.96). We may speak of the
capacity of a task, a machine, a worker, a work area, or an entire process.

Capacity seems a straightforward measure and for a specific task producing a specific
product it often will be. But finding relevant capacity measures of a process is difficult. Returning to
Process 1, what is the capacity of Task B? Task B produces a unit every 2 minutes (30 units per hour).
But because it is dependent on the slower output of Task A, the most Task B will be able to produce is
12 units per hour. The system capacity will also depend on the size and mix of orders. The capacity of
an entire process is affected by product mix, staffing, labor contract issues, maintenance time, etc.
Capacity, and capacity utilization, will depend on the way in which the process is managed.

Balance/Imbalance: If every step in a process had the same cycle time (and performed
consistently at that precise cycle time, with no variability), then the process would be in perfect
balance. This is virtually never achieved in practice. The processes shown above are both imbalanced.

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 A Glossary of TOM Terms 687-019

Process 1 (with a unit coming out of Task A every 5 minutes) is more imbalanced than Process 2 (with
a unit coming out of Task A every 2.5 minutes). If a system is not perfectly balanced there will be a
potential for idle time and bottlenecks.

Idle Time: Idle time is time in which useful work is not being performed. We can speak of the
idle time of a worker, as we did in the earlier process examples. Time spent waiting to receive or
deliver a unit is idle time unless there is some other useful task to be performed in the interim. Idle
time can be present even in a perfectly balanced process. If the worker at Task B, for example, merely
loaded a machine and then stood by while it ran, this time might be idle time for the worker (unless
he or she was needed to monitor the equipment's performance).

We can also speak of idle time for equipment. If Process 1 were staffed by one operator who
had to spend first, 5 minutes at Task A, then 2 minutes at Task B, there would be no idle time for the
worker at all. The equipment, however, would be idle for a large portion of the day (specifically, the
equipment for Task A would be idle for 2 out of every 7 minutes, the equipment for Task B for 5 out
of every 7 minutes).

Direct Labor Content: There are a number of different questions which are of interest
concerning labor's role in product costs. Different organizations and disciplines use the term "direct
labor content" in different ways. For our purposes "direct labor content" refers to the actual amount of
work "contained" in the product. The units produced by Process 1 have a direct labor content of 7
minutes. "Direct" labor content means that indirect labor hours (maintenance, materials handling,
management, etc.) are not included in the calculation.

Direct labor content is not the same as direct labor cost. Content refers to the work done in
actually manufacturing the product or performing the service (or setting up to do so), not to the
wages paid. Labor cost differs from labor content due to imbalance, vacation pay, paid breaks, etc. For
example, in Process 1, the cycle time is 5 minutes while the total labor time per cycle is 10 minutes (2
workers X 5 minutes/cycle). However, the direct labor content is only 7 minutes; the worker at Task
B sits idle for 3 minutes for every unit produced. This idle time adds to labor costs, but does not affect
labor content. With two stations (each staffed with one worker) performing Task A, Process 2 has a
lower direct labor cost per unit than Process 1 but direct labor content has not changed.1 Direct labor
content is still 7 minutes per unit.

Direct Labor Utilization: Rather than measure idle time or direct labor content in minutes, it is
often more useful to talk in percentage terms. Direct labor utilization is a measure of the percentage
of time that workers are actually working on the product or performing the service, i.e.,
Direct labor content
Direct Labor Utilization =
Total available labor time2

In Process 1, from the calculations above, direct labor utilization is 70% ([7 minutes/10 minutes] X
100). What is direct labor utilization for Process 2? (Answer: 93 1/3%, or [7 minutes/7.5 minutes] X
100).

1 Process 1 produces a unit every 5 minutes, or 12 units per hour. Two workers staff the line so we paid for 2
hours of work to get 12 units. This means we paid for 10 minutes of labor for each unit (alternatively, we could
have said: 7 minutes of work plus 3 minutes of idle time gives 10 minutes). Process 2 produces a unit every 2.5
minutes, or 24 units per hour. Three workers staff the line so we paid for 3 hours (180 minutes) of work to get 24
units. This means we paid for 7.5 minutes of labor for each unit.
2 Total available labor time consists of direct labor content plus idle time.

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 687-019 A Glossary of TOM Terms

Throughput Time: Cycle time refers to how often a unit "drops off" the end of the process.
Throughput time refers to the length of time spent in the process. For Process 1 the cycle time is 5
minutes. The throughput time would be 7 minutes. For Process 2 the cycle time is 2.5 minutes;
throughput time is still 7 minutes.

For a single task the cycle time and throughput time may be equal if there is only one station
performing the task. More often, the concepts of cycle and throughput time are quite different, as
Process 2 shows.

The throughput time for a process may be far greater than the sum of the throughput times of
its individual tasks if units must wait between process steps or tasks. The way in which a process is
managed (e.g., depending on lot sizes, the size of inventory buffers between process steps or tasks,
etc.) will dramatically affect the process throughput time.

Lot Size (also called Batch Size): Most processes produce more than one product type. Suppose
a process produced three products: P1, P2, and P3. The process could produce one unit of P1, then
one unit of P2, then one unit of P3, then one unit of P1 and so on until we had 100 units each of P1,
P2, and P3. Alternatively the process could produce one hundred units of P1 before beginning
production on 100 units of P2. If time must be expended setting up the equipment in making the
transition from producing P1 to producing P2, then these two different sequences may have quite
different impacts on the system's performance. The number of units of a particular product type
which will be produced before beginning production of another product type is the lot size. Different
product types in the same plant may have different lot sizes.

Setup Time/Run Time: Setup time refers to the time spent arranging tools, changing dies,
setting machine speeds, etc. in preparation for the beginning of work on a product. When there are
several product types, it might be necessary to spend hours setting up to make the process ready for
the transition from producing one product type to producing another product type. Setup time does
not necessarily mean idle time for the task or process. Often, much of the setup for the production of
a second product type can be accomplished by the worker(s) during the production of the first
product type, with minimal idle time during the changeover. However, this is only the case if labor is
not the bottleneck. For our purposes, setup time refers to any time which is necessary for production
but is independent of the number of units to be produced. In this respect, for production of a given lot the
setup time is fixed and the run time is variable. This is a useful distinction. Long setup times, for
example, may make it attractive to produce in large lot sizes because the fixed cost can be spread over
a larger production volume.

Run time per unit is the amount of time actually spent manufacturing the item (or
performing the service) independent of the time required to set up the equipment. Run time per lot is
the run time per unit multiplied by the number of units in a lot, i.e., the time the units in the
particular lot are actually "running" on the equipment. This simple calculation is more complicated if
the equipment produces in batches or if there are multiple equipment stations involved.

As with all the terms in this note, it is best not to apply setup and run time in a "cookbook"
fashion. Focus on the managerial question you seek to answer and avoid a slavish application of rote
definitions or calculations.

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