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Mass Customization

B7801: Operations Management24 March 2000

•Burger King & McDonald’s

•Tuffy Bike•Queuing fundamentals

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By Greg Sandoval Staff Writer, CNET News.com

March 21, 2000, 12:25 p.m. PT

update Kozmo.com, the online convenience store that promises to deliver goods in less than an hour, filed today to raise $150 million in an initial public offering.

New York City-based Kozmo sells entertainment, food and household products online and dispatches delivery people in vans, on bicycles and on motor scooters to carry the purchases to customers' doors.

The IPO filing follows an announcement yesterday by Amazon.com that it invested $60 million in a private

round of financing for Kozmo and signed a three-year agreement to ship some entertainment items to

customers via Kozmo.

The public filing showed that Amazon owns a 31 percent stake in Kozmo, which intends to use the IPO

proceeds to fund expansion to at least 10 new cities this year. Among the company's other investors are

Chase Capital Partners, Oak Investments and Flatiron Partners.

Analysts have predicted that Kozmo, which operates in six U.S. cities including New York, San Francisco

and Los Angeles, will gain a foothold in the same-day delivery business. Amazon ships

most of its goods through the U.S. Postal Service, an Amazon spokesman said yesterday.

Kozmo's SEC filing provided few surprises about the company, founded by co-chief executives Joseph Park, 28, and Yong Kang, 27.

Like so many other Internet companies, Kozmo is experiencing huge growth as its losses mount. The company is recording a 30 percent rise in new customers each month, but it has accumulated a $27 million deficit.

In a deal announced this month, Kozmo agreed to pay Starbucks about $150 million during the next five years for the right to offer the giant coffee merchant's products on its site.

As for its short-term prospects, Kozmo said in the public filing, "We expect that we will continue to incur substantial losses for the foreseeable future."

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Purposes of process flow analysis

• Document the process– What gets done? Where? By whom?– In what sequence?

• Assess basic performance measures– Cost– Capacity– Inventory– Throughput time (delay)

• Identify bottlenecks and improvement opportunities

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1) Capacity (per time) = maximum sustainable output per unit of time

= (# produced per cycle)/(cycle time)

set-up run

Ex: Calculating capacity of a batch process- batch of 36 parts (lot size = 36)- 6 hours to run a batch- 1 hour of set-up/batch

1 hr. 6 hrs.

parts/hr. 14.5hrs./batch 61

hparts/batc 36

batch of timecycle

hparts/batc # Capacity

set-up run set-up run

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2) Utilization

Ex (cont): - batch process produces 35 parts/day - 8 hrs./day production time

What is the utilization?

.%1.85%100 x hrs/day) 8( x parts/hr.) 14.5(

parts/day 35

capacity

parts/time # actual n Utilizatio

%100per timeCapacity

per timeoutput Actual

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3) Bottleneck = the resource that limits the capacity of the overall process

Why are bottlenecks important? (The Goal)

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4) Cycle stock = the average inventory level resulting from batch production or ordering = 1/2 x (batch or lot size)

Ex: Produce a batch of 36 parts every 7 hours. Demand = Production = 36/7=5.14 parts/hr.What is the average cycle stock?

inventory

36

0 timet t+7 t+14 t+21

18

Average inventory (cycle stock) = 1/2 x 36 = 18 parts

NOTE: Increasing the lot size increases cycle stocks for the same production rate.

slope = - 5.14

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5) Little’s Law Relates avg. throughput time (delay), inventory and production rate

rate production average

delay) (avg. t time throughpuaverage

levelinventory average

W

N

WN

Little’s Law says ….

That is, given any two of these measures of performance, the remaining one is uniquely determined.

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Ex (cont.): Produce a batch of 36 parts every 7 hours. Demand = Production = 36/7=5.14 parts/hr.

Q:What is the delay (throughput time) at this stage of production?

A: From before, we know the average cycle stock is 18, so N=18.The production rate is = 5.14 parts/hr. So by Little’s Law, the average throughput time is W = N/ = 3.5 hrs.

Ex:Bread is produced at a rate of 7,000 loaves/hr.Loaves take 20 min. to cool on the cooling rack.

Q:How many loaves must the cooling rack hold?

A: We know that the average time to cool is W=20 min. = 1/3 hrs.The production rate is given as = 7,000 loaves/hr. So by Little’s Law, the average number of loaves in the coolingrack is N = W = 7,000/hr. x 1/3 hrs. = 2,333 loaves. The cooling rack must hold at least this many loaves.

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Throughput vs. Cycle Time:Lincoln Tunnel Example

W=20 min.

= 0.1 cars/min.

cycle time = 10 min.

throughput time = 20 min.

N = 2 cars

W=20 min.

= 1 car/min.

cycle time = 1 min.

throughput time = 20 min.

N = 20 cars

Case 1:

Case 2:

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Throughput time vs. cycle time

• Cycle time– The time between completion of units– The inverse of production rate (for unit production)– Answers the question:

• How much time is there between each car that is exiting the tunnel?

• Throughput time– The time an individual units spends in the system. – Also called waiting time, sojourn time, flow time– Answers the question:

If you painted an arriving car orange and put it in the tunnel, how much time would elapse before the orange car exited the tunnel?

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Tuffy Bike

• Customized bicycles• Demand: 600 units/month, $750/unit; 20% increase

next year• Work force

– 3 supervisory workers, $50,000 each– 13 hourly production workers, at standard rate $18/hr– 6 hourly skilled production workers (welders) at $30/hr– 8 hr shift, 5 days/wk, 48 weeks/yr

• Operating expenses– Rent, insurance, utilities, etc.: $20,000/month– Materials costs: $550/unit

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Tuffy Bike: Basic steps

tube stock cutting welding

paintingassembly

ship

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Tuffy Bike (continued)

• Cutting and finishing– 3 hourly workers, standard rate, 30 minutes/unit

• Welding– 6 skilled workers, $30/hr, 45 minutes for setup,

45 minutes welding– On average, 250 units waiting to be welded

• Painting– 3 workers, standard rate, 30 minutes/unit– 8 hours drying time/unit

• Assembly– 7 workers, standard rate, 90 minutes/unit

• Shipping– 7 days, $25/unit

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Waiting Time Calculation

cutting weldingWIP

waiting!

rate: 600 units/month= 30 units/day

250 units

waiting time = 250/30 = 8.3 days

Throughput time for Tuffy Bike = 8.5+8.3 = 16.8 days

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Tuffy Bike current process

cutting3 workers30 m in. cycle6 frames/hr

order database

tube stock inv.

com ponent inv.

drying W IP8 hrs drying time30-40 units avg.

welding6 workers45 m in set-up45 m in welding4 fram es/hr($30/hr)

painting3 workers30 m in cycle6 frames/hr

final assem bly7 workers90 m in cycle4.67 fram es/hr

cut fram e W IP250 units avg

phone orders from dealersdealer

shipping7 days$25/unit

Demand: 600 units/mo. (160 hrs/mo. Production)

Assets: 1 month of receivables $1M in plant & equipment

(Other data see note.)

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Operating Profits

Annual Revenue 5,400,000$ 100.0%Mat.&Comp. (3,960,000)$ -73.3%Labor (648,000)$ -12.0%Shipping (180,000)$ -3.3%Net Contrib. 612,000$ 11.3%Super. Labor (150,000)$ -2.8%Rent & Equip (240,000)$ -4.4%Oper. Profit 222,000$ 4.1%

Rev/Unit 750.00$ Mat.&Comp. (550.00)$ Gross Margin 200.00$

Cut Labor (9.00)$ Weld Labor (45.00)$ Paint Labor (9.00)$ Assemble Labor (27.00)$ Shipping (25.00)$ Contrib. Marg. 85.00$

600 units/month X 12 months X $/unit

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Tuffy Bike: Base Case

Mon. Prod. 600 unit/monthProd. Rate 3.75 units/hr. (600 units/mo. / 160 hrs/mo.)

Batch Size 1 units

set-up (min) cycle (min) total min./unit $/hr. $/unit #workers cap. (#/hr.) utilizationcut 0 30 30.0 $18.00 $9.00 3 6.00 63%weld 45 45 90.0 $30.00 $45.00 6 4.00 94%paint 0 30 30.0 $18.00 $9.00 3 6.00 63%assemble 0 90 90.0 $18.00 $27.00 7 4.67 80%

$90.00

Income Leadtime (working days)Rev/Unit 750.00$ Welding WIP 8.3 (1)

Mat.&Comp. (550.00)$ Processing 1.5 (2)

Gross Margin 200.00$ Transport 7Total 16.8

Cut Labor (9.00)$ (1) Caculated in case: N=250 units in inventory divided by production rate of 30 units/day.

Weld Labor (45.00)$ (2) 4 hrs of processing time + 8 hrs of drying time

Paint Labor (9.00)$ Assemble Labor (27.00)$ Inventory #units cost/unit costShipping (25.00)$ Orders 0 0 -$ Contrib. Marg. 85.00$ Cut Frames 250 559.00$ 139,750.00$ (1)

Welded Frames 0 604.00$ -$ Painted Frames 0 613.00$ -$ Finished Goods 0 640.00$ -$

Annual Revenue 5,400,000$ 100.0% Total 139,750.00$ Mat.&Comp. (3,960,000)$ -73.3% (1) 250 units given

Labor (648,000)$ -12.0%Shipping (180,000)$ -3.3% AssetsNet Contrib. 612,000$ 11.3% Accts. Rec. 450,000$ (1 month of sales)

Super. Labor (150,000)$ -2.8% Inventory 139,750$ Rent & Equip (240,000)$ -4.4% Plant & Equip 1,000,000$ Oper. Profit 222,000$ 4.1% Total Assets 1,589,750$

ROA 14%

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Tuffy Bike: Batch production scenario

1) Product variety:

2 lengths2 heights2 wheel diameters5 color schemes5 equipment packages (assembly options)

200 Total Variants

2) Assume all 200 variants are equally popular(unrealistic but simple)

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3) Produce in batches (lots) of 30.

Batch production data:

set-up (min.) cycle time (min.)

cut 30 25 weld 45 45

paint 120 20

assembly 120 70

4) Assets1 month of receivables$1M in plant and equipment

Tuffy Bike: Batch production scenario

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Is this alternative any better?

Issues to consider:

• Unit cost• Capacity/bottlenecks• Throughput time (leadtime to customers)• Product variety• Level of investment (inventories)• ROA