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Operations Management:

Process Analysis and Applications Module

Changing Sources of Competitive Advantage Targeting Improvement: Operational Measures - Time T, Inventory I, Throughput rate R
Link through Littles Law Link to Financial Measures Targeting improvement: CRU Computer Rentals

Capacity and Flow Time Analysis


Pizza Pazza Levers for Improvement

Multi-product Capacity Management and Investment


Joint Marketing & Production Decisions Optimal Capacity Investment National Cranberry Cooperative

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How can operations help a company compete? The changing sources of competitive advantage

Low Cost & Scale Economies (< 1960s) You can have any color you want as long as it is black Focused Factories (mid 1960s) Flexible Factories and Product variety (1970s) A car for every taste and purse.

Quality (1980s) Quality is free. Time (late 1980s-1990s) We love your product but where is it? Dont sell what you produce. produce what sells.
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What is Improvement? Operational Performance Measures


Flow time Throughput Inventory Process Cost Quality

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The business imperative: creating economic value


Improvement levers Revenues Price x Quantity Material + Labor + Energy + Overhead 1. 2. Increase price Increase throughput

Profit

Costs Economic value added (EVA) -

3. 4.

Reduce costs Improve quality

Capital invested Opportunity cost x Weighted average cost of capital

PP&E + Inventory + Other

5. 6.

Reduce capital intensity Reduce inventory

Reduce time
Operational metrics
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Financial metrics
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Relating operational measures (flow time T, throughput R & inventory I) with Littles Law
Inventory I Flow rate/Throughput R

...

... ...

[units]

... ...

[units/hr]

Flow Time T [hrs]

Flow time = Inventory / Throughput T = I/R Turnover = Throughput / Inventory = 1/ T


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Process Flow Examples


Customer Flow: Taco Bell processes on average 1,500 customers per day (15 hours). On average there are 75 customers in the restaurant (waiting to place the order, waiting for the order to arrive, eating etc.). How long does an average customer spend at Taco Bell and what is the average customer turnover? Job Flow: The Travelers Insurance Company processes 10,000 claims per year. The average processing time is 3 weeks. Assuming 50 weeks in a year, what is the average number of claims in process.

Material Flow: Wendys processes an average of 5,000 lb. of hamburgers per week. The typical inventory of raw meat is 2,500 lb. What is the average hamburgers cycle time and Wendys turnover?

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Process Flow Examples


Cash Flow: Motorola sells $300 million worth of cellular equipment per year. The average accounts receivable in the cellular group is $45 million. What is the average billing to collection process cycle time? Question: A general manager at Baxter states that her inventory turns three times a year. She also states that everything that Baxter buys gets processed and leaves the docks within six weeks. Are these statements consistent?

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Targeting Improvement MBPF Inc.: Consolidated Statement


Net Sales Costs and expenses Cost of Goods Sold Selling, general and administrative expenses Interest expense Depreciation Other (income) expenses TOTAL COSTS AND EXPENSES INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME RETAINED EARNINGS, BEGINNING OF YEAR LESS CASH DIVIDENDS DECLARED RETAINED EARNINGS AT END OF YEAR NET INCOME PER COMMON SHARE DIVIDEND PER COMMON SHARE
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250.0

175.8 47.2 4.0 5.6 2.1 234.7 15.3 7.0 8.3 31.0 2.1 37.2 0.83 0.21
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Targeting Improvement MBPF Inc.: Balance Sheet


CURRENT ASSETS Cash Short-term investments at cost (approximate mkt.) Receivables, less allowances of $0.7 mil Inventories Other current assets TOTAL CURRENT ASSETS PROPERTY, PLANT AND EQUIPMENT (at cost) Land Buildings Machinery and equipment Construction in progress Subtotal Less accumulated depreciation NET PROPERTY, PLANT AND EQUIPMENT Investments Prepaid expenses and other deferred charges Other assets TOTAL ASSETS 2.1 3.0 27.9 50.6 4.1 87.7

2.1 15.3 50.1 6.7 74.2 25.0 49.2 4.1 1.9 4.0 146.9

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Targeting Improvement MBPF Inc.: Inventory and Cost of Goods


INVENTORY Raw materials (roof) Fabrication WIP (roof) Purchased parts (base) Assembly WIP Finished goods TOTAL COST OF GOODS SOLD Raw materials Fabrication (L&OH) Purchased parts Assembly(L&OH) TOTAL 6.5 15.1 8.6 10.6 9.8 50.6

50.1 60.2 40.2 25.3 175.8

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Targeting Improvement

MBPF Business Process Flows


$60.2/yr $25.3/yr

$50.1/yr

$6.5
Raw Materials (roofs)

$15.1
Fabrication (roofs)

$110.3/yr

$10.6
Assembly

$175.8/yr

$9.8

$175.8/yr

$40.2/yr

$8.6
Purchased Parts (bases)

Finished Goods

$40.2/yr

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Targeting Improvement MBPF Inc.: Flow Times

Raw Materials Throughput R $/Year $/Week Inventory I ($) Flow Time T = I/R (weeks) 50.1 0.96 6.5 6.75

Fabrication

Purchased Parts 40.2 0.77 8.6 11.12

Assembly

Finished Goods 175.8 3.38 9.8 2.90

110.3 2.12 15.1 7.12

175.8 3.38 10.6 3.14

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Targeting Improvement
Flow rate R ($/week)
5.0

3.38

Accounts
Assembly

2.12 0.96 0.77


Fabrication

Receivabl e
Finished Goods

Purchased Parts
11.12

Raw Materials

6.75

7.12

3.14

2.90

5.80

Flow Time T (weeks)


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Why the Difference in Performance?


Inventory Over Last 8 Quarters (Ending Q3 2001)
6000

5000

4000

Inventory

3000

Nokia Ericsson Motorola

2000

1000

0 0 1 2 3 4 5 6 7 8 9

Quarter
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CRU Computer Rentals

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Learning Objectives Basic Process Analysis


Process Measures: time, inventory, and throughput What is an improvement?

Link financial and operational measures Good operational measures are leading indicators of financial performance

Using Littles law for process flow analysis Targeting areas and performance measures for improvement

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Operations Management:

Process Analysis and Applications Module

Changing Sources of Competitive Advantage Operational Measures: Time T, Inventory I, Throughput rate R
Link through Littles Law Link to Financial Measures Targeting Improvement: CRU Computer Rentals

Capacity and Flow Time Analysis


Pizza Pazza Levers for Improvement

Multi-product Capacity Management and Investment


Joint Marketing & Production Decisions Optimal Capacity Investment National Cranberry Cooperative

S. Chopra/Operations/Process Analysis & Apps

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Operational Performance Measures


How to measure and decrease flow times? How to measure and increase throughput?

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Pizza Pazza Flow Chart

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Process Architecture is defined and represented by a process flow chart:


Process = network of activities performed by resources 1. Process Boundaries:
input output

2. Flow unit: the unit of analysis 3. Network of Activities & Storage/Buffers


activities with activity times routes: precedence relationships (solid lines)

4. Resources & Allocation 5. Information Structure & flow (dashed lines)


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Operational Measure: Flow Time Driver: Critical Activity Times


(Theoretical) Flow Time Critical Activity Flow Time efficiency

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Most time inefficiency comes from waiting:


E.g.: Flow Times in White Collar Processes
Industry Life Insurance Consumer Packaging Commercial Bank Hospital Automobile Manufacture Process New Policy Application New Graphic Design Average Flow Theoretical Flow Flow Time Efficiency Time Time 72 hrs. 18 days 7 min. 2 hrs. 34 min. 3 hrs. 5 hrs 0.16% 0.14% 2.36% 3.75% 5.60%

Consumer Loan 24 hrs. Patient Billing Financial Closing 10 days 11 days

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Levers for Reducing Flow Time

Decrease the work content of critical activities


work smarter work faster do it right the first time change product mix

Move work content from critical to non-critical activities


to non-critical path or to ``outer loop

Reduce waiting time.


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Operational Measure: Capacity Drivers: Resource Loads


(Theoretical) Capacity of a Resource Bottleneck Resource (Theoretical) Capacity of the Process Capacity Utilization of a Resource/Process =
throughput [units/hr] capacity [units/hr]

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A Recipe for Capacity Measurements


Resource Unit Load Resource Capacity (time/job) Unit Capacity # of units Total Process Resource Capacity Utilization*

* assuming system is processing at full capacity

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Pricing and Capacity Investment: Pans + Rent another oven at 10/hr?


Resource cost = 8/hour Material cost = 1.4/pizza

Minimum

sale price =

Contribution margin if sale price is 5 / pizza =

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Cost Capacity Profile


Demand Capacity
[units/time]

Process Capacity

Resource x

NCX-10

Furnaces

Marginal Investment Cost


[$/unit/time]

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Levers for Increasing Process Capacity

Decrease the work content of bottleneck activities


work smarter work faster do it right the first time change product mix

Move work content from bottlenecks to non-bottlenecks


to non-critical resource or to third party

Increase Net Availability


work longer increase scale (invest) increase size of load batches eliminate availability waste: decrease changeover time
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Increasing Process Capacity in The Goal


is

to increase the capacity of only the bottlenecks


increase availability of bottleneck resources eliminate non-value added work from bottlenecks

ensure the bottlenecks time is not wasted

reduce/eliminate setups and changeovers reduce starvation & blockage

synchronize flows to & from bottleneck

the load of the bottlenecks (give it to non-bottlenecks)


move work from bottlenecks to non-bottlenecks need resource flexibility

unit capacity and/or


invest

#of units.
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Other factors affecting Process Capacity


Batch (Order) Sizes Product Mix other managerial policies ...

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Product Mix Decisions: Pizza Pazza offers 2 products


Sale Price of thin crust pizza: Cost of Materials: Sale Price of deep dish pizza: Cost of Materials: 5.00/pizza 1.40/pizza 7.50/pizza 1.90/pizza

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Product Mix Decisions


Processing Times Thin Crust Prepare sauce 2 mins. Prepare dough 3 mins Prepare pizza 1 min Load Oven & Set 1 Bake Pack Receive Total

15

25

Deep Dish

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Resource

Jean

Jean

Jean

Jacq+ Oven

Oven

Jacq

Jacq

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Product Mix Decisions


Margin per thin crust pizza = 3.60 Margin per deep dish pizza = 5.60 Margin per oven minute from thin crust = 3.602 / 16 = 0.450 Margin per oven minute from deep dish = 5.602 / 30 = 0.373

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National Cranberry Cooperative

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Learning Objectives: Multi-Product Process Analysis & Apps

Process measures:
Flow time manage critical activities Capacity manage bottleneck resources

Levers for improving


Flow time manage critical activities
Decrease time in critical activities Perform activities in parallel Decrease waiting time

Capacity & Throughput manage bottleneck resources


Decrease unit load of bottleneck resource Move work from bottleneck to non-bottleneck resource Increase availability of bottleneck resource

Shifting bottleneck

Bottleneck affected by product mix, batch size and other factors Product profitability based on $ per unit time on bottleneck
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