D30 Process Analysis

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




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.




What is Improvement?

Operational Performance Measures

Flow time

Throughput

Inventory

Process Cost

Quality




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

-




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]




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?


http://slidepdf.com/reader/full/d30-process-analysis 7/35S. Chopra/Operations/Process Analysis & Apps 7

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?



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




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






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


MBPF Business Process Flows





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




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





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




CRU Computer Rentals




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




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




Operational Performance Measures

How to measure and decrease flow times?

How to measure and increase throughput?




Pizza Pazza

Flow Chart




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)




Operational Measure: Flow Time

Driver: Critical Activity Times

(Theoretical) Flow Time

Critical Activity

Flow Time efficiency




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




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.




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]




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




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 =




Cost Capacity Profile

Capacity [units/time]

Marginal Investment Cost [$/unit/time]

Resource x NCX-10 Furnaces

Demand

Process Capacity




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




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




Other factors affecting Process Capacity

Batch (Order) Sizes

Product Mix

other managerial policies ...




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




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




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




National Cranberry Cooperative



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

Documents

D30 Process Analysis