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8/4/2019 D30 Process Analysis
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S. Chopra/Operations/Process Analysis & Apps 1
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 Little’s 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?
– Don’t 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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Price
Quantity
Material
Labor
Energy
Overhead
PP&E
Inventory
Other
Revenues
Costs
Capital
invested
Weighted averagecost of capital
x
+
+
+
+
+x
Profit
Opportunitycost
-
Economicvalue added(EVA)
Financial metrics Operational metrics
1. Increase price2. Increase throughput
Improvement levers
The business imperative: creating
economic value
3. Reduce costs4. Improve quality
5. Reduce capital intensity
6. Reduce inventory
Reduce time
-
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Relating operational measures (flow time T ,
throughput R & inventory I ) with Little’s Law
Flow time = Inventory / Throughput
T = I / R
Turnover = Throughput / Inventory
= 1/ T
Inventory I [units]
Flow rate/Throughput R [units/hr]... ...... ......
Flow Time T [hrs]
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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: Wendy’s 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
hamburger’s cycle time and Wendy’s 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 threetimes 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 250.0
Costs and expenses
Cost of Goods Sold 175.8
Selling, general and administrative expenses 47.2
Interest expense 4.0
Depreciation 5.6
Other (income) expenses 2.1TOTAL COSTS AND EXPENSES 234.7
INCOME BEFORE INCOME TAXES 15.3
PROVISION FOR INCOME TAXES 7.0
NET INCOME 8.3
RETAINED EARNINGS, BEGINNING OF YEAR 31.0LESS CASH DIVIDENDS DECLARED 2.1
RETAINED EARNINGS AT END OF YEAR 37.2
NET INCOME PER COMMON SHARE 0.83
DIVIDEND PER COMMON SHARE 0.21
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Targeting Improvement
MBPF Inc.: Balance Sheet
CURRENT ASSETSCash 2.1Short-term investments at cost (approximate mkt.) 3.0Receivables, less allowances of $0.7 mil 27.9Inventories 50.6Other current assets 4.1TOTAL CURRENT ASSETS 87.7
PROPERTY, PLANT AND EQUIPMENT (at cost)Land 2.1Buildings 15.3Machinery and equipment 50.1Construction in progress 6.7
Subtotal 74.2Less accumulated depreciation 25.0
NET PROPERTY, PLANT AND EQUIPMENT 49.2
Investments 4.1Prepaid expenses and other deferred charges 1.9Other assets 4.0TOTALASSETS
146.9
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Raw Materials
(roofs)
Fabrication
(roofs)
$60.2/yr
Assembly
$25.3/yr
Purchased Parts (bases)
Finished Goods
$6.5$50.1/yr
$40.2/yr $8.6
$15.1
$10.6
$110.3/yr
$40.2/yr
$175.8/yr$9.8
$175.8/yr
Targeting Improvement
MBPF Business Process Flows
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Targeting Improvement
MBPF Inc.: Flow Times
RawMaterials
Fabrication PurchasedParts
Assembly FinishedGoods
Throughput R$/Year 50.1 110.3 40.2 175.8 175.8$/Week 0.96 2.12 0.77 3.38 3.38
Inventory I ($) 6.5 15.1 8.6 10.6 9.8Flow Time T = I/R (weeks)
6.75 7.12 11.12 3.14 2.90
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Flow rate R
($/week)
0.96
Flow Time T
(weeks)
Accounts
Receivabl
e
Finished
Goods A
s s e m b l y
Fabrication
Raw MaterialsPurchased Parts
11.12 6.75 7.12 3.14 2.90 5.80
0.77
2.12
3.38
5.0
Targeting Improvement
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Why the Difference in Performance?
Inventory Over Last 8 Quarters (Ending Q3 2001)
0
1000
2000
3000
4000
5000
6000
0 1 2 3 4 5 6 7 8 9
Quarter
I n v e n t o r y
Nokia
Ericsson
Motorola
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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 Little’s law for process flow analysis
Targeting areas and performance measures forimprovement
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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 Little’s 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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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
– output2. 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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Industry Process Average Flow
Time
Theoretical Flow
Time
Flow Time Efficiency
Life Insurance New Policy
Application
72 hrs. 7 min. 0.16%
Consumer
Packaging
New Graphic
Design
18 days 2 hrs. 0.14%
Commercial Bank Consumer Loan 24 hrs. 34 min. 2.36%
Hospital Patient Billing 10 days 3 hrs. 3.75%
Automobile
Manufacture
Financial
Closing
11 days 5 hrs 5.60%
Most time inefficiency comes from waiting:
E.g.: Flow Times in White Collar Processes
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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 Process Resource
(time/job) Unit Capacity # of units Total 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
Capacity [units/time]
Marginal Investment Cost [$/unit/time]
Resource x NCX-10 Furnaces
Demand
Process Capacity
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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”
– “ensure the bottlenecks’ time is not wasted”
» increase availability of bottleneck resources
» eliminate non-value added work from bottlenecks reduce/eliminate setups and changeovers
» synchronize flows to & from bottleneck
reduce starvation & blockage
– “ the load of the bottlenecks (give it to non- bottlenecks)”
» move work from bottlenecks to non-bottlenecks
» need resource flexibility
– unit capacity and/or #of units.
» invest
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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: €5.00/pizza
Cost of Materials: €1.40/pizza
Sale Price of deep dish pizza: €
7.50/pizzaCost of Materials: €1.90/pizza
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Product Mix Decisions
ProcessingTimes
Preparesauce
Preparedough
Preparepizza
LoadOven &
Set
Bake Pack Receive Total
Thin Crust 2 mins. 3 mins 1 min 1 15 1 2 25
Deep Dish 5 3 1 1 29 1 2 42
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 = 3.60×2 /
16 = € 0.450
Margin per oven minute from deep dish = 5.60×2 /
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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