Process Analysis and Applications Module

Operational Measures: Time T, Inventory I, Throughput rate R
» Link to Financial Measures
» Link through Little’s Law
» CRU Computer Rentals

Capacity and Flow Time Analysis
»
»
»
»
»
Pizza Pazza Company
Levers for Improvement
Optimal Capacity Investment
Multi-product Capacity Management
National Cranberry Cooperative
Lin/Operations/Process Analysis & Apps
1
Operational Performance Measures
 Flow

time T
Throughput rate R
 Inventory
I

Process Cost

Quality
Lin/Operations/Process Analysis & Apps
2
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
Financial metrics
Lin/Operations/Process Analysis & Apps
-
x
Weighted average
cost of capital
Price
x
Quantity
Reduce time
Operational metrics
3
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
Lin/Operations/Process Analysis & Apps
= Throughput / Inventory
= 1/ T
4
Process Flow Examples
Monetary Flow: Wim Duisenberg must decide how many Euro notes to print
by 2002. Euroland’s central banks’ cash handling is estimated at €2,400
billion per year. The average cash holding time by consumers and
businesses is estimated at 2 months. How many Euro notes should
Duisenberg print?
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”.
Lin/Operations/Process Analysis & Apps
5
Process Flow Examples
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?
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?
Lin/Operations/Process Analysis & Apps
6
CRU Computer Rentals
Linking Financial and Operational Flows
&
Targeting Areas for Improvement
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
Lin/Operations/Process Analysis & Apps
8
Process Analysis and Applications Module

Operational Measures: Time T, Inventory I, Throughput rate R
»
»
»

Link to Financial Measures
Link through Little’s Law
CRU Computer Rentals
Capacity and Flow Time Analysis
»
»
»
»
»
Pizza Pazza Company
Levers for Improvement
Optimal Capacity Investment
Multi-product Capacity Management
National Cranberry Cooperative
Lin/Operations/Process Analysis & Apps
9
Pizza Pazza
Flow Chart
Lin/Operations/Process Analysis & Apps
10
Process Architecture is defined and
represented by a process flow chart:
Process = network of activities performed by resources
1. Process Boundaries:
– input
– output
2. 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)
Lin/Operations/Process Analysis & Apps
11
Pizza Pazza: Flow Time vs. Throughput/Capacity
1.
2.
Flow Time:

What is the minimum time to fill a rush order, assuming that all steps of
the process are started only after the order is received?

Without spending money, how would you reduce this response time?
Maximal throughput = capacity:

What is the maximum number of orders that PP can fill per hour in
steady state?
Lin/Operations/Process Analysis & Apps
12
Operational Measure: Flow Time
Driver: Activity Times
 Flow
Time: Theoretical vs. Average

Critical Activity

Flow Time efficiency
Lin/Operations/Process Analysis & Apps
13
Most Time Inefficiency Comes from Waiting:
Flow Times in White Collar Processes
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%
Lin/Operations/Process Analysis & Apps
14
Levers for Reducing Flow Time

Decrease the work content of critical activities.
– work smarter.
– work faster.
– do it right the first time.

Move work content from critical to non-critical activities.
– to non-critical path or to “outer loop.’’

Reduce waiting time.
Lin/Operations/Process Analysis & Apps
15
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]
Lin/Operations/Process Analysis & Apps
16
A Recipe for Capacity Measurements
Resource Unit Load
Resource Capacity
(time/job) Unit Capacity # of units Total
Process Resource
Capacity Utilization*
* assuming system is processing at full capacity
Lin/Operations/Process Analysis & Apps
17
Pizza Pazza: Flow Rate/Capacity
Analysis
1.
What is the minimum number of pizza pans needed to ensure
that no order has to wait for a pan?
2.
If the Jacqueline calls in sick one day, what is the maximum
number of orders that PP can fill?
Lin/Operations/Process Analysis & Apps
18
Pizza Pazza:
What if demand changes over time?


After operating for a few weeks, Jean realizes that
hourly orders follow a predictable pattern:
1. during a 2 hour busy period in the evening, the restaurant
receives 6 orders/hr and some customers have to wait a
little for their pizza.
2. After this peak period, the order rate falls to 2 orders/hr.
Draw a build-up diagram showing how the backlog (unfilled
orders) changes throughout the evening. What is the
maximum backlog during the day? When is the backlog
cleared?
Pizza Pazza’s Backlog Diagram
# of unfilled orders
Pricing: Wages and Quantity Discounts
1.
2.
Assume Jean and Jacqueline decide to hire two employees to perform
their respective tasks; each paid €8 per hour. What is the contribution
margin (revenue - variable costs) generated per hour of operation of the
process if pizzas sell for €5 each? What is the minimum amount that Jean
can charge per pizza, and still make a profit?
– Resource cost =
– Material cost =
– Contribution margin if sale price is €5 =
– Minimum sale price =
Is it worth offering any discount to encourage all orders to be for three
pizzas? If so, how much?
Lin/Operations/Process Analysis & Apps
21
Capacity Investments: Another oven? Task
reallocation
1.
2.
The pizzas have become wildly popular and Jean feels that they can easily
sell twenty pizzas per hour. To increase capacity, he is thinking of
renting another industrial oven, which would cost €10 for each hour that
the oven is used. Do you think it is worthwhile for Jean to rent the oven
if the rest of the process is kept as is (assume that Jean and Jacqueline are
doing the tasks)? What would be the contribution margin from each hour
of operation of the process?
– Resource cost =
– Material cost =
– Contribution margin if sale price is €5 =
Can you think of ways to increase profits by reallocating tasks between
the employees?
Lin/Operations/Process Analysis & Apps
22
Levers for Increasing Process Capacity

Decrease the work content of bottleneck activities
– work smarter
– work faster
– do it right the first time

Move work content from bottlenecks to non-bottlenecks
– create flexibility to handle tasks originally assigned to bottleneck
– to non-critical resource or to third party

Increase Net Availability
–
–
–
–
work longer: increase scheduled availability
increase scale (invest)
increase size of load batches/reduce or eliminate setups & changeovers
eliminate availability waste
Lin/Operations/Process Analysis & Apps
23
Product Mix Decisions:
Pizza Pazza offers 2 pizza types
Sale Price of thin crust:
Cost of Materials:
€5
€1.40
Sale Price of deep dish:
Cost of Materials:
€7.50
€1.90
Which of these two products should Jean push to customers that
call in and are undecided?
Suppose they take the same processing except that deep dish
require 5 min (vs 2) in sauce prep and 29 min (vs 15) in baking.
Lin/Operations/Process Analysis & Apps
24
Product Mix Decisions
Margin of thin crust pizza = €3.60
Margin of deep dish pizza = €5.60
Margin per oven minute from thin crust
= €3.60 / 16 min = € 0.225/min
Margin per oven minute from deep dish
= €5.60 / 30 min = € 0.180/min
Lin/Operations/Process Analysis & Apps
25
Solver Model for Optimal Product Mix
Selection
xt:
xd:
Number of thin crust pizzas sold.
Number of deep dish pizzas sold.
Max
3.60 xt + 5.60 xd
subject to
16 xt +
30 xd <
…
<
…
<
xt
xd
<
<
Assume we work 20 hrs
= 1200min per week
1200
…
…
Technology/Resource
Constraints

100
50
Market/Demand
Constraints
Assume this is maximal weekly
demand
Lin/Operations/Process Analysis & Apps
26
National Cranberry Cooperative
Lin/Operations/Process Analysis & Apps
27