Littlefield Technologies Simulation

• Team Project: managers at an assembly shop– Procure materials, Plan for productions, Sales

– Overview posted on Bb

• Grading: 25% of final grade– Team performance (cash position) – 30%

– Group report – 70%

• Purchase the access code online by Oct. 28– Check Announcement on Bb for details

– Have your individual code information available in the next class

1

Product Design

Purchasing / Sourcing

Production Fulfillment

• Define user needs• Translate to specs• Generate concepts• Select concepts• Engineer / develop• Project management• Design-to-cost

• Obtain quotes • Work with suppliers• Streamline supply base• Evaluate total cost of ownership

• Design and Improve internal processes• Manage throughput• Improve efficiency• Quality• Lean operations• Toyota

• Deliver goods to the customer• Forecasting of demand• Dealing with demand uncertainty• Risk reduction and management

For physical goods

Product Design

Purchasing / Sourcing

Production and fulfillment

For services

Typical OM Decision Phases

Inputs:CapitalMaterialsEquipmentFacilitiesSuppliersLaborKnowledgeTime

TransformationSystem:

Production Transportation

Storage Inspection

Output:Goods

Services

Monitoring &Controlling

Environment:Customer Competitors SuppliersGovernment Technology Economy

Operations as a Process…

A Successful Operations Process:

4

• Supply vs. Demand• Demand management• Supply management

• Capacity Planning

• Waiting Line Management (Service Operations)

• Inventory Control

• Supply Chain Management

• Quality Management, Lean Manufacturing…

Mismatch can take one of the following two forms

Demand waits for supply(inventory=waiting customers)

Supply waits for demand(inventory=goods or resources)

Analyzing processes helps us to create a better match

Dilemma of Almost Every Firm: Supply Does Not Match Demand

Objective of the Class• The objective of this class is to understand how

organizations can improve business processes to produce and deliver products/services that better meet customer demands/expectations

• What Can Ops Management (this course) Do to Help?Providing analytical tools to

– Step 1: Make Operational Trade-Offs

– Step 2: Overcome Inefficiencies

– Step 3: Evaluate Proposed Redesigns/New Technologies

A Call Center Example

• Objective: 80% of incoming calls wait less than 20 seconds

• Now: 30% of incoming calls wait less than 20 seconds

Problem: trade-off between service level and operation costs

OM measures responsiveness and labor productivity:– Is current system efficient?

– Benefit/Cost analysis for additional staffing

– Evaluate new opportunities: develop/purchase technology X?

8

Strategy/Marketing

EngineeringAccounting

IndustrialEngineering

Purchasing/Logistics

Finance

Information Management

OrganizationalBehavior

Operations Management

Manufacturing Strategy

Business Process Redesign

Product Integration

Process Management

MIS

CIMTQM

Supply Chain Management

Performance Measuring &

Planning

Service Management

Improvement Programs

Cash flow planning

Simultaneous Engineering

Voss, C.A. (1995) ‘Operations management – from Taylor to Toyota – and Beyond?, British Journal of Management

Operations As Part of the Organization

Job Shop

Batch Process

Worker-paced line

Machine-paced line

Continuous process

Low Volume(unique)

Medium Volume(high variety)

High Volume(lower variety)

Very high volume(standardized)

Utilization of fixed capitalgenerally too low

Unit variable costsgenerally too high

Commercial Printer

Apparel Production

High volumeAuto assembly

Oil refinery

Product-Process Matrix (Hayes and Wheelwright)

Low volumeAuto Assembly

Types of Processes

Process Performance Measures

• Inventory (or work-in-process): units or $ at any time

• Flow time

• Flow rate (throughput rate)– Capacity = Max (Flow rate)

• Fundamental Relationship of Little’s Law:

Inventory = Throughput Rate x Flow TimeI (units) = R (units/unit time) x T (time)

On Average…

Examples…

• Cars arrive to the drive-thru of a fast food restaurant, on average every two minutes. If a car spends on average 5 minutes in the drive-thru (either waiting or being served), how many cars on average are there at the drive-thru?

• 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?

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Little’s Law: more powerful than you think...

• When does it hold?

• Implications:

• Underlying measures for inventory:– Days of Supply/Inventory = T (in days) = I/R

– Inventory Turns = 1/ T = R/I

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

Compute the Days of inventory and Turns:

Throughput: 5000kg/weekInventory: 2500kg

More Examples

Cost of Goods sold: 25,263 mill $/yearInventory: 2,003 mill $

Cost of Goods sold: 20,000 mill $/yearInventory: 391 mill $ R = COGS

Turns = COGS/IDays=I/COGS *365

0

1

2

3

4

5

6

7

8

9

10

0% 10% 20% 30% 40% 50%

Gross Margin (%)

Inve

nto

ry T

urn

s

Retailer CC

Retailer BBInventory Cost Calculation

Compute per unit inventory costs as:

Per unit Inventory costs= turnsInventory

costsinventory Annual

Example:

• Annual inventory costs=30%• Inventory turns=6

Per unit Inventory costs= %5

year per turns 6

year per 30%

Source: Gaur, Fisher, Raman

Inventory Costs in Retailing and Its Link to Inventory Turns

Compare per unit Inventory cost for BB and CC

15

More Exe.: Costco vs. Wal-Mart

Assume that both companies have an average annual holding cost rate of 30%

1)How many days does a product stay in Costco’s inventory before it is sold? (Assume that stores are operated 365 days a year)1)How much lower is the inventory cost for Costco compared to Wal-Mart of a household cleaner valued at $5 COGS?

Costco Wal-MartWholesale ($ Millions) Stores ($ Millions)

Inventories $ 3,643 $ 29,447Sales (net) $48,106 $286,103COGS $41,651 $215,493

InputsOutputs

Goods

Services

Resources Labor & Capital

Process

Goods

Services

Resources Labor & Capital

The Proess View of an Organization

Flow units(raw material, customers)

Waiting / Buffers•No Value added•No Capacity•Inventory

Arrows• Indicate the flow direction

Activities/Resources•Value added step•Have Capacity

Process Flow Diagram

Identify the flow unit

Capacity, Bottleneck

• Line flow

• Bottleneck =

• Process Capacity =

Flow Rate vs. Capacity

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• Demand < Supply: demand-constrained • Demand > Supply:

• Capacity < Input: Capacity-constrained• Input < Capacity: Input-constrained

Flow Rate =

units/hour Scenerio 1 Scenerio 2 Scenerio 3Input 100 100 80Capacity 120 80 100Demand 80 120 120Flow

Example: Process at Circored Plant

1st Reactor: 28 tons, 15 minutes

2nd Reactor: 400 tons, 4 hours

3 briquetting machines, each 55 t/h

Process Capacity =

Bottleneck (assume input and demand not constrained) =

19

Flash HeaterDischargeBriquetting

Lock Hoppers

1st Reactor 2nd ReactorPre-Heater

Pile of Iron ore fines

Finished Goods

(120 t/h) (110 t/h)

(135 t/h)(118 t/h)

UtilizationProcess utilization = Flow rate/Process capacity

Resource utilization = Flow rate/ Capacity of resource

If Demand = 657,000 t/year, compute process/resource utilizations

20

Preheater LockHoppers

CFB StationaryReactor

Flashheater

Pressurelet-downsystem

Briquettingmachine

Totalprocess

Imbalance relativeTo bottleneck

Mismatch between demand andsupply at the process level

Bottleneck

Preheater LockHoppers

CFB StationaryReactor

Flashheater

Pressurelet-downsystem

Briquettingmachine

Totalprocess

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Imbalance relativeTo bottleneck

Mismatch between demand andsupply at the process level

Bottleneck

Utilization

What if D = 125 t/hProcess U = ?

Another Process

1. Process capacity2. Bottleneck

Assume that input and demand are not constraining the process

Other Related Measures

• Cycle Time = 1/ Flow Rate

• Idle Time = Cycle Time – Activity Time

• Utilization = activity time/ cycle time

Eg: It takes a machine 15 minutes to process a unit. Demand is 2 units/hour.

Cycle Time =

Idle Time =

Utilization =

22

Summary

• Measures of Process Performance– Little’s Law: I=RT

• Measures of Inventory– Turns and Days of Inventory

– Inventory cost: annual and per unit costs

• Process Analysis– Process flow diagram

– Process/Resource capacity and utilization, bottleneck

– Cycle, activity and idle time

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Readings and Assignment

• Chapter 2: p.10 ~23• Chapter 3: p.32 ~42• CRU case• Assign 1 (Bb: under Drop Box in the content area)

– Turn in a hard (paper) copy before next class

24

• What percentage of cost of a Dell computer reflects inventory costs? Assume Dell’s yearly inventory cost is 40% to account for the cost of capital for financing the inventory, the warehouse space, and the cost of obsolescence. In 2001, Dell’s 10-k reports showed that the company had $400 million in inventory and COGS of $26,442 million.

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More exe.

• Mt. Kinley is a strategy consulting firm that divides its consultants into three classes: associates, managers, and partners. The firm has been stable in size for the last 20 years. Specifically, there have been, and are expected to be, 200 associates, 60 mangers, and 20 partners.

• The work environment at Mt. Kinley is rather competitive. After four years of working as an associate, a consultant goes” either up or out”; that is, becomes a manager or is dismissed from the company. Similarly, after six years, a manager either becomes a partner or is dismissed. The company recruits MBAs as associate consultants; no hires are made at the manager or partner level. A partner stays with the company for another 10 years (a total of 20 years with the company).

• A) How many new MBA should be hired per year?

• B) What are the odds that a new hire will become partner?

26

Consider a process consisting of three resources below. What is the bottleneck? What is the utilization of each resource if demand is eight units per hour?

27

Resource Activity Time (min/unit) # workers

1 10 2

2 6 1

3 16 3

28

What are the process capacity (tons/hour) and bottleneck? Assume input and demand are not constraining the process.

B D F

E

(60) (140)(100)

(40)

2 parts

1 pa

rt

C

A

1 pa

rt

1 part

(100)

(50)