Matching Supply with Demand:
An Introduction to Operations Management
Gérard Cachon
ChristianTerwiesch
All slides in this file are copyrighted by Gerard Cachon and Christian
Terwiesch. Any instructor that adopts Matching Supply with
Demand: An Introduction to Operations Management as a required
text for their course is free to use and modify these slides as desired.
All others must obtain explicit written permission from the authors to
use these slides.
Slide ‹#›
Estimating and Reducing Labor Costs
Slide ‹#›
Subway – Firm Level Information
Started as Pete’s Super Submarines in Connecticut in 1965
Now, largest sandwich chain with 34,000+ stores in 98 countries
Estimated revenue: $12 Billion (compared to McDonald’s at $23 Billion)
Franchise model – each restaurant is independently owned and operated
Goal: “to become the number one Quick Service Restaurant in the World”
Average revenue per store: $445k (compared to $2.3M at McDonald’s)
Slide ‹#›
Subway – The Franchisee’s Perspective
Relatively inexpensive to open a new store:
Start-up costs for a restaurant are $100k to $200k
No cooking, no grills, and no fryolators
Potentially very small stores (as little as 600sqft is possible)
Compares to about $1 Million to open a McDonald’s
Franchise model
8 percent of revenue as royalty fee
4.5 percent of revenue as a marketing fee
Initial Franchise fee of $15k
Detailed training and instructions provided by franchiser (Doctor’s Associates)
Two week training course
Detailed operations manual
Slide ‹#›
Subway – Assembly Line for Sandwiches
What is the capacity of this line?
What are the costs of direct labor?
What is the labor content?
How would you run this process assuming
a demand of 180 sandwiches per hour?
Slide ‹#›
The Product Process Matrix and the Industrialization of Work
Low Volume
(unique)
Medium Volume
(high variety)
High Volume
(lower variety)
Very high volume
(standardized)
Unit variable costs
generally too high
Job Shop
Batch Process
Worker-paced line
Machine-paced line
Continuous process
Utilization of fixed capital
generally too low
Examples from History:
 In the matrix above, history has forced all industries to go down the diagonal
 Examples: Eye Surgery, vehicle production, financial services
Slide ‹#›
Source of pictures:
www.bbc.co.uk
www2.isye.gatech.edu
www.travelpod.com
Machine Paced Process and Worker Paced Process:
How Long Does it Take to Produce X units?
Worker Paced Process
Machine Paced Process
No fundamental difference in productivity (except potential savings in handling time)
Machine paced process forces a common takt / eliminates inventory pile-up
How Long Does it Take to Produce X units?
• Time to Produce X units = X/R if system has a “full pipeline”
• Time to produce X units = Time through empty system +
X - 1 units
Flow Rate
- worker paced line: Time through empty system is the sum of all activity times
- assembly line: Time through empty system =(#steps) * cycle time
- (X-1)/R for remaining X-1 units (see above)
Slide ‹#›
Source of pictures:
www.bbc.co.uk
www2.isye.gatech.edu
www.travelpod.com
Mortgage Exercise
Applications
Preparation
Analysis 1
Analysis 2
Underwriting
Four team members
Preparation
Work as fast as you can (calculators ok, no Excel)
Write down the results of your step on the mortgage application
and then pass them on to the next step
Have FUN
Slide ‹#›
Mortgage Exercise: Score your Team
Quality
(percentage of
decisions
correct)
100%
95%
<90%
5
10
15
20
>20
Efficiency (number of loans completed)
Compute the following two measures:
How many loans did you complete (reject or approve)
What percentage of your decisions was correct?
Also: what was the average time for completion of the last three loans?
Slide ‹#›
Basic Process Vocabulary
Completed
applications
Applications
Preparation
Analysis 1
Inventory
Activity time
Capacity
Bottleneck /
Process capacity
Flow Rate
Utilization
Flow Time
Slide ‹#›
Analysis 2
Underwriting
Labor Productivity Measures
Bottleneck
Activity Time
a4
=Idle Time
=Activity time
a2
Labor Productivity Measures
a1
• Direct Labor Content=a1+a2+a3+a4
a3
• If one worker per resource:
Direct Idle Time=(a4-a1) +(a4-a2) +(a4-a3)
1
2
3
4
• Average labor utilization

Review of Capacity Calculations
Number of Resourcesi
Activity Timei
• Process Capacity=Min{Capacityi}
labor content
labor content  direct idle time
• Capacityi =
• Flow Rate = Min{Demand, Capacity}
• Utilizationi=
Flow Rate
Capacityi
• Cost of direct labor
Total wages per unit of time

Flow Rate per unit of time
Slide ‹#›
5
30 seconds
Line Balancing and Staffing to Demand
3
Time
43
43
Takt
19
1
21
16
2
3
4
5
Operator
Labor content: 116 seconds / unit
Demand: 670 units per day
Work 8h shifts
4
30
2
3
2
1
43 seconds
27
116 seconds
33
43 seconds
Time
1
2
3
Operator
1
8h=3600*8seconds=28,800 sec/shift
Takt: 28,800sec / 670units=43 sec/unit
116 sec/unit
Target manpower= 43 sec/unit
= 2.7 => round up
• With waste in the current process, we can either increase capacity or reduce the number of operators
• Better to leave all idle time concentrated on the last operator as opposed to spreading it equally
• Staff to demand: start with the takt time and design Slide
the process
from there
‹#›
Line Balancing and Staffing to Demand
Actual Demand
Volume
60
Takt time 2 minutes
Step
1
30
Step
2
Step
3
Step
4
Step
5
Step
6
Time
Leveled Demand
Volume
60
Takt time 1 minute
60
Step
1
Step
2
Step
3
Step
4
Step
5
Step
6
30
Takt time*
Takt
2
1
Volume flexibility
Ability to adjust to changing demands
1
Resource planning
Man
power
Often implemented with temporary workers
6
6
Keeps average labor utilization high
3
Slide ‹#›
Line Balancing and Labor Productivity: Summary
Labor Productivity is key for cost and for revenue reasons
Work has become increasingly standardized (process driven)
Improve productivity by:
Staffing to demand (increases utilization, avoids lost demand)
Balancing the line (increases utilization, frees up capacity)
Standardization of work / careful design
=> Reducing labor content
=> Lower skilled labor (lower wages)
=> Enables replication (growth / flexibility)
Slide ‹#›