Question

Part I – Process and Capacity Analysis

Mortgage, Inc. processes loan applications in a “back-office” service facility. Each loan application must undergo a sequence of three separate processing activities before

Mortgage, Inc. can make a decision to approve or decline the application. That is, a loan application first passes through Activity 1, then Activity 2, and finally Activity 3. Each activity has a fixed number of workers (given below). For example, there are three workers assigned to Activity 1 and these three workers only perform Activity 1. An application only needs to be processed by one worker at an activity; therefore, different applications can be processed simultaneously by different workers assigned to the same activity. Each activity has an associated processing time (given below). For example, it takes one worker 18 minutes to perform Activity 1 for an application. Ignore startup and shutdown effects in answering the questions below. Applications arrive at a rate of 7 per hour. (This is the demand rate.)

Note the following definitions from class (or in addition to those provided in class).

Process capacity = bottleneck capacity

Process flow rate (or “Flow rate”) = minimum of demand rate and process capacity

Utilization of stage n = Flow rate / Capacity of stage n

Activity	Processing time (min/unit)	Number of workers
1	18	3
2	15	2
3	22	4

1) What is the capacity of each activity, measured in applications per hour?

2) Which activity is the bottleneck?

3) What is the capacity of the facility in applications per hour?

4) What is the flow rate of the facility, and what are the utilizations of each Activity?

5) If they hired an additional worker for Activity 1, what would be the capacity of the

facility? What explains this result?

6) What would the utilizations of each Activity be in this case? Provide a brief

explanation of your result.

7) If they hired an additional worker for Activity 2, but kept Activity 1 at 3 workers,

what would be the capacity of the facility? What explains this result?

8) Use the number of workers in Question 7. If the demand rate increased to 11

applications per hour, what would be the flow rate of the facility, and the utilizations

of each Activity?

Part II – Claims Processing

An insurance agency wants to analyze its claims process. There are two steps in the process: evaluation and payment processing. When a customer claim arrives at the agency, it is first evaluated to see if it is a legitimate claim, where the customer would receive a payment. If it is indeed legitimate, the claim goes to payment processing, where additional checks are performed and the agency cuts a check to the customer. The agency on average receives 30 claims per day. There are on average 15 cases under evaluation and 24 cases in payment processing every day. Only 40% of the cases will pass evaluation and enter payment processing; the other cases are denied payment and terminated. What is the average total processing time per case in this agency?

Answer 1

1. No of apps each worker can process in an hour : 60/processing time

Capacity of each activity : No of worker x no of apps processed in hr by each worker

Using above arithmetic, we get capaciy of each unit as :

Activity	Processing time (min/unit)	Number of workers	Hourly Capacity of Activity (no of apps)
1	18	3	10
2	15	2	8
3	22	4	10

2. Actitivy 2 is the bottleneck as it has minimum capacity

3. Capacity of the process is the capacity of the bottleneck i.e. 8 unit per hour

4. Flow rate is the minimum of demand and process capacity. Whilst capacity of the process is 8 apps per hour but demand is only 7 apps per hours. Hence flow rate is 7 apps per hr.

5. There will be no impact to process capacity (stays at 7 apps per hr) if a person is hired for Activity 1 as it is not a bottleneck.

6. With additional hire for activity 1, utilization and capacity will be as :

Activity	Processing time (min/unit)	Number of workers	Hourly Capacity of Activity (no of apps)
1	18	4	13
2	15	2	8
3	22	4	10

7. If additional worker is hired for activity 2 then capacity will change as per below

Activity	Processing time (min/unit)	Number of workers	Hourly Capacity of Activity (no of apps)
1	18	3	10
2	15	3	12
3	22	4	10

This will improve the process capacity from 8 to 10.

8. If the demand rate increased to 11, then we will compare the process rate and demand and the lower of the two will be the flow rate. In this case, flow rate will be 10.

Part II

No of cases post evaluation is 40% of assessment capacity = 0.4*15 = 6 cases per day.

Even against a higher payment processing capacity of 24 cases, only 6 cases can be processed per day.

Lower of process capacity of 6 Vs demand of 30 applications per day, gives us a flow rate of 6 applications per day. In a day of 8 hrs, processing time per case will be (8*60)mins/6 i.e. 80 minutes per application.