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
Levers for Improvement
CRU Computer Rentals
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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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Operational Performance Measures
•
•
•
•
•
Flow time
Throughput
Inventory
Process Cost
Quality
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The business imperative: creating
economic value
Improvement levers
1.
2.
Increase price
Increase throughput
Costs
Material
+
Labor
+
Energy
+
Overhead
3.
4.
Reduce costs
Improve quality
Capital
invested
PP&E
+
Inventory
+
Other
5.
6.
Reduce capital intensity
Reduce inventory
Revenues
Profit
Economic
value added
(EVA)
-
-
Opportunity
cost
x
Weighted average
cost of capital
Price
x
Quantity
Reduce time
Operational metrics
Financial metrics
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Relating operational measures (flow time T,
throughput R & inventory I) with Little’s Law
Inventory I
...
... ...
Flow rate/Throughput R
[units]
[units/hr]
... ...
Flow Time T [hrs]
• Inventory = Throughput x Flow Time
I = RxT
• 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: 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
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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MBPF Inc.: Consolidated Statement
Net Sales
250.0
Costs and expenses
Cost of Goods Sold
Selling, general and administrative expenses
Interest expense
Depreciation
Other (income) expenses
TOTAL COSTS AND EXPENSES
175.8
47.2
4.0
5.6
2.1
234.7
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
15.3
7.0
8.3
RETAINED EARNINGS, BEGINNING OF YEAR
LESS CASH DIVIDENDS DECLARED
RETAINED EARNINGS AT END OF YEAR
31.0
2.1
37.2
NET INCOME PER COMMON SHARE
DIVIDEND PER COMMON SHARE
0.83
0.21
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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
2.1
3.0
27.9
50.6
4.1
87.7
PROPERTY, PLANT AND EQUIPMENT (at cost)
Land
Buildings
Machinery and equipment
Construction in progress
Subtotal
Less accumulated depreciation
NET PROPERTY, PLANT AND EQUIPMENT
2.1
15.3
50.1
6.7
74.2
25.0
49.2
Investments
Prepaid expenses and other deferred charges
Other assets
TOTAL
ASSETS
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4.1
1.9
4.0
146.9
9
MBPF Inc.: Inventory and Cost of
Goods
INVENTORY
Raw materials (roof)
Fabrication WIP (roof)
Purchased parts (base)
Assembly WIP
Finished goods
TOTAL
6.5
15.1
8.6
10.6
9.8
50.6
COST OF GOODS SOLD
Raw materials
Fabrication (L&OH)
Purchased parts
Assembly(L&OH)
TOTAL
50.1
60.2
40.2
25.3
175.8
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MBPF Business Process Flows
$60.2/yr
$50.1/yr
$6.5
Raw Materials
(roofs)
$40.2/yr
$25.3/yr
$110.3/yr
$15.1
Fabrication
(roofs)
$8.6
$10.6
Assembly
$175.8/yr
$9.8
$175.8/yr
Finished Goods
$40.2/yr
Purchased Parts (bases)
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MBPF Inc.: Flow Times
Throughput R
$/Year
$/Week
Inventory I ($)
Flow Time T =
I/R (weeks)
Raw
Materials
Fabrication
Purchased
Parts
Assembly
Finished
Goods
50.1
0.96
6.5
6.75
110.3
2.12
15.1
7.12
40.2
0.77
8.6
11.12
175.8
3.38
10.6
3.14
175.8
3.38
9.8
2.90
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Flow rate R
($/week)
5.0
3.38
Accounts
Assembly
Receivable
2.12
Fabrication
0.96
0.77
Purchased Parts
11.12
Finished
Goods
Raw Materials
6.75
7.12
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3.14
2.90
5.80
Flow Time T
(weeks)
13
Why the Difference in Performance?
Inventory Over Last 8 Quarters (Ending Q3 2001)
6000
5000
Inventory
4000
Nokia
Ericsson
Motorola
3000
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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Case: CRU Computer Rentals
Flow Chart
Status 40
Ship
Receiving
30%
Repairs
70%
Status 24
Customer
15%
Status 41
Pre-Config
Parts
places
order
Receives
from
Supplier
Status 32
Ship
Config
Status 20
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Flows
Repairs
Status 42
16
CRU Situation in Previous Year:
Customer term = 8 wks, Demand = 1000 units/wk
Customer
Throughput 1,000
(units/week)
Receiving
Status
24
Status Parts Suppliers
40
Status 41 Status 42
Status 20
1,000
700
300 +
105 =
405
405
405
405
405
1,000
Inventory
(units)
8,000
500
1,500
1,000
500
405
500+405
= 905
500
2,000
Flow Time
(weeks)
8.0
0.5
2.14
2.47
1.23
1
2.23
1.23
2
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•
•
•
•
•
CRU Situation in Previous Year:
Financial Performance
Number of units on rent = 8,000
Total number of units = 14,405
Utilization = 0.56 (56%)
Revenue rate = 8,000 x 30 = $240,000/wk
Variable Cost rate = 25 x 1,000 (R) + 25 x 1,000 (S) +
4x700x.85 + 150 x 405 = $113,130/wk
• Contribution Margin = $126,870/wk
• Depreciation = 14,405 x ($1000/156wks) = $92,340/wk
– bottomline = $126,870-$92,340 = $34,530
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CRU Situation in Current Year:
flow times unchanged, Demand = 1400 units/wk
Customer
Throughput 1,400
(units/week)
Receiving
Status
24
Status Parts Suppliers
40
Status 41 Status 42
Status 20
1,400
980
567
567
567
567
567
1,400
Inventory
(units)
8,000
700
2,100
1,400
700
567
1,267
700
2,800
Flow Time
(weeks)
5.7
0.5
2.14
2.47
1.23
1
2.23
1.23
2
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CRU Situation in Current Year:
flow times unchanged, Demand = 1400 units/wk
•
•
•
•
•
Number of units on rent = 8,000
Total number of units = 16,967
Utilization = 0.47 (47%)
Revenue = 4,800 x 30 + 3,200 x 35 = $256,000/wk
Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4 x 980x .85 + 150 x 567
= $158,382/wk
• Contribution Margin = $97,618/wk
• Depreciation = 16,967 x (1000/156) = $108,763/wk
– bottomline = $97,618 - $108,763 = -$11,145
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CRU Potential situation in Current Year:
without sales drive, Demand = 600 units/wk
Customer Receiving
Status
24
Status
40
Parts
Suppliers Status 41 Status 42
Status 20
Throughput
(units/week)
600
600
420
243
243
243
243
243
600
Inventory
(units)
4,800
300
900
600
300
243
543
300
1,200
Flow Time
(weeks)
8
0.5
2.14
2.47
1.23
1
2.23
1.23
2
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CRU Potential situation in Current Year:
•
•
•
•
•
without sales drive, Demand = 600 units/wk
Number of units on rent = 4,800
Total number of units = 8,643
Utilization = 0.56 (56%)
Revenue = 4,800 x 30 = $144,000/wk
Cost = 25 x 600 (R) + 25 x 600 (S) + 4x420x .85 + 150 x 243
= $67,878/wk
• Contribution Margin = $76,122/wk
• Depreciation = 8,643 x (1000/156) = $55,404/wk
– bottomline = $76,122 - $55,404 = $20,718
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Learning Objectives
Basic Process Analysis
• Process Measures: time, inventory, and throughput
• What is an improvement?
– Link financial measures to operational ones
– Good operational measures are leading indicators of financial
performance
• Using Little’s law for process flow analysis
• Targeting areas and performance measures for
improvement; link financial and operational flows
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