The Process View

Slide 1

Examples of processes
wood

Factory

guitars

students

University

alumni

bulk items

Distribution
center

small parcels

mortgage
applications

Calculate
credit risk

metal

approved loans
rejected loans

Processes can involve both goods and services.

Processes can have multiple inputs and/or multiple outputs.

Slide 2

Defining a process scope

A process is a set of activities that accepts inputs and produces outputs.

A process can be defined at an aggregate level:
mortgage
applications

approved loans

Calculate
credit risk

rejected loans

A process can be defined at a micro level, with multiple sub-processes:

mortgage
applications

Collect data
from client

Evaluate
loan metrics

Underwriting
decision

Communicate
decision to sales

Slide 3

approved loans
rejected loans

Defining a process flow unit

The flow unit is what is tracked through the process and generally defines
the process output of interest.

Processes

Flow unit

students

University

alumni

A person

milk

Processing
plant

milk powder

Lbs of milk powder

blood

Pints of type AB blood

people

Blood
donation
center

Slide 4

Metrics of process analysis

I = Inventory = how many flow units are in the process

R = Flow Rate = rate at which flow units enter or leave the process
T = Flow Time = total time a flow unit is in the process

Littles Law:

Inventory = Flow Rate x Flow Time

or
I=RxT

For example:
incoming
calls

Call center

completed
calls

R = On average 11 callers per

minute

I = Average number of callers on the

phone with the call center

T = On average a caller spends 2.5

minutes with the call center

= R x T = 11 x 2.5
= 27.5 callers
Slide 5

A Littles Law application: In-transit inventory

ONeill, based in California (CA), buys wetsuits from a supplier in Thailand:

Each month they order on-average 15,000 wetsuits, R = 15,000
Shipping between Thailand and CA takes on-average 2 months, T = 2
I = R x T = 15,000 x 2 = 30,000 units are in-transit on average

I = 30,000 wetsuits

R = 15000/month

R = 15000/month
T = 2 months

Slide 6

Four different ways to count inventory

In terms of flow units (The I in I = R x T):

Number of wetsuits, patients, tons of wheat, semiconductor chips, etc.
Useful when the focus is on one particular flow unit.

In terms of $s (The I in I = R x T):

The $ value of inventory
This is an intuitive measure of a firms total inventory.

In terms of days-of-supply:
The average number of days a unit spends in the system.
Also, the number of days inventory would last at the average flow rate if
no replenishments arrive.

In terms of turns:
The number of times the average amount of inventory exits the system.
Slide 7

Days-of-supply calculations

Days-of-supply is the T in I = R x T

Days-of-supply = I / R = Inventory / Average daily flow rate

Can also be measured in different time lengths (Keep units consistent):

Weeks-of-supply = Inventory / Average weekly flow rate
Months-of-supply = Inventory / Average monthly flow rate
Years-of-supply = Inventory / Average yearly flow rate

Our ONeill example:

T = 2 months-of-supply

R = 15000/month

I = 30,000 wetsuits
Slide 8

Inventory turns calculations

Inventory Turns = 1 / T = R / I

Different measures of turns:

Yearly turns = Average annual flow rate / Inventory
Monthly turns = Average monthly flow rate / Inventory
Weekly turns = Average weekly flow rate / Inventory
Daily turns = Average daily flow rate / Inventory
Keep units consistent!

ONeills annual turns:

R = 15000 x 12 = 180,000 per year
I = 30,000
T = 2 months = 1/6 year
Annual Turns = R / I = 180,000 / 30,000 = 6
Annual Turns = 1/T = 1 / (1/6) = 6
Slide 9

Turns and days-of-supply at Walmart in 2010*

* All figures in $Million from 2010 balance
sheet and income statement

R = COGS = $304,657
I = Inventory = $33,160

COGS = Cost of Goods Sold = Flow Rate

The Flow Rate is not Sales (which was $405,046) because inventory is
measured in the cost to purchase goods, not in the sales revenue that
may be earned from the goods.
Note: Some companies use the term Cost of sales to mean COGS

Annual turns = $304,657 / $33,160 = 9.19

Days-of-supply = $33,160 / ($304,657 / 365) = 39.7

Slide 10

(blue diamonds)

Slide 11

Days-of-supply

(red squares)

Annual turns

Walmarts turns change from year to year

Littles law: Its more powerful than you think...

What it is:

Inventory (I) = Flow Rate (R) * Flow Time (T)

How to remember it:

- units

Implications:
Out of the three fundamental performance measures (I,R,T), two can be chosen by
management, the other is GIVEN by nature
Hold throughput constant: Reducing inventory = reducing flow time
Given two of the three measures, you can solve for the third:
Indirect measurement of flow rate:

Inventory: 500 vehicles

Flow Time: 30 days on the lot
Indirect measurement of inventory:

Flow Time: 6 hours

Flow Rate: 200 patients per day
Indirect measurement of flow time

Flow Rate: 5000kg/week

Inventory: 2500kg Slide 12

Inventory Turns
Inventory Turns
Computed as:

Cost of Goods sold: 20,000 mill $/year

Inventory: 391 mill $

COGS
Inventory turns=
Inventory
Based on Littles law
Careful to use COGS, not revenues

Inventory Turns at Dell

Cost of Goods sold: 25,263 mill $/year

Inventory: 2,003 mill $

Slide 13