Balancing production, equipment usage a 'critical ratio'

Among the many worries of manufacturers is the lifespan of their equipment. Regardless of the product they are manufacturing, equipment declines over time, reducing the quantity of finished products a manufacturer can create. Maintenance must then be performed to return the equipment back to an optimal state.

This worry is heightened when manufacturers make multiple products on deteriorating equipment. In these scenarios, some items produced in the same batch are likely to be defective. Until now, researchers have only considered this deterioration problem with regards to the manufacturing of one product, and focused only on how much to produce in order to offset the amount of products that will be defective.

In reality, however, firms typically make more than one product. Even more importantly, these products often vary in terms of their quality (e.g., high-end vs. low-end). This means that each product has a different impact on the deterioration of the equipment. For example, semi-conductor manufacturers make computer chips that vary in their speed and quality. High-speed (high-end) products contaminate the equipment more than low-speed (low-end) products, thus accelerating the deterioration process.

New research by Burak Kazaz, associate professor of Supply Chain Management in the Whitman School of Management at Syracuse University, takes into consideration all of these factors by asking, “in each state of equipment deterioration, which product (e.g., high-end computer chips or the low-end) should be produced."

“We expect a high-end product to earn more revenue than a low-end product. However, a high-end product will also speed up the deterioration and will have fewer yields than a low-end product,” says Kazaz. “The manufacturer’s trade-off is to produce a high-end product and earn higher revenue but increase the risk of the machine deteriorating more rapidly. Or produce a low-end product and earn lower revenue and have fewer risks of process deterioration.”

Kazaz’s research, recently published in IIE Transactions and co-authored with Thomas W. Sloan of the University of Massachusetts at Lowell, introduces the concept of "critical ratio" of revenues – that is, a comparison of the revenues of each product at various stages in the lifespan of the equipment to determine the best production policy.

“The critical ratios enable a manufacturer to evaluate the ‘reservation price’ of a product,” says Kazaz. “In other words, they allow a manufacturer to determine the minimum revenue he or she needs to earn to justify the production of one item over another.”

This is important because it helps determine what products can be manufactured at various stages of deterioration, and when to switch from one product to another.

Kazaz’s findings shed light on decisions regarding product mix, pricing, and process technology. His current research focuses on prescribing solutions for the pricing and production planning problems of firms that experience exchange-rate fluctuations, supply and demand uncertainties.