Targeting Improvement Module
 Key Operational Metrics: Time T, Inventory I, Throughput rate R
 Link through Little’s Law
 Link Operational Metrics to Financial Metrics
 Levers for Improvement
 Firm & Divisional Level: MBPF Inc.
 Mkt-Ops: CRU Computer Rentals
Process Analysis & Improvement
Slide 1
© Van Mieghem
What is an improvement?
 Strategic fit & competencies
 Financials & process view
Process Analysis & Improvement
Slide 2
© Van Mieghem
Operational Performance Measures
 Flow (Cycle) time - T
 Throughput / flow rate – R
 Takt Time
 Inventory - I
 Process Cost
 Quality
Process Analysis & Improvement
Slide 3
© Van Mieghem
The business imperative: economic value creation
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
Reduce time
Operational metrics
Financial metrics
Process Analysis & Improvement
Price
x
Quantity
Slide 4
© Van Mieghem
What is Toyota doing now?
Taiichi Ohno’s answer was very simple:
“All we are doing is looking at the time line from the moment the
customer gives us an order to the point when we collect the cash. And
we are reducing that time line by removing the non-value-added
wastes.”
Simple but brilliant.
(Taiichi Ohno. Toyota Production System: Beyond Large-Scale Production. p. ix.)
Process Analysis & Improvement
Slide 5
© Van Mieghem
How reduce flow time?
There are only two available levers
Process Analysis & Improvement
Slide 6
© Van Mieghem
Takt Time
“The rhythm of the
conductor to keep the
Customer demand
orchestra in time”
– Takt time yields the rate at which customers demand product
metronome
– and the production rate to stay synchronized with demand

Takt time =

Example:
Total time available
– Demand = 150,000 cars per year
– Total available production time = 2 x 8 hrs/day x 250 days/yr = 4,000 hrs/year
– Takt = 4,000 hrs/150,000 cars = 1hr/37.5 cars = 96 sec / car

What does Little’s Law say about takt time?
Willys Jeep
Process Analysis & Improvement
Slide 7
© Van Mieghem
Linking operational measures:
Little’s Law
Inventory I
...
Flow rate/Throughput R
[units]
... ...
[units/hr]
... ...
Flow Time T [hrs]
 Inventory
I
= Throughput x Flow Time
= RxT
 Inventory Turnover = Throughput / Inventory
= 1/ T
Process Analysis & Improvement
Slide 8
© Van Mieghem
A Process Example using Little’s Law
25% quit
4 patients/hr
75%
Initial doctor
consultation
Patient
checks in
Wait
5 min
Process Analysis & Improvement
2 patients
12 min
Slide 9
Doctor
requests
tests for
patient
Wait
5 min
1 patient
Nurse takes
tests
30 min
© Van Mieghem
Targeting Improvement Module
 Key Operational Metrics: Time T, Inventory I, Throughput rate R
 Link through Little’s Law
 Link Operational Metrics to Financial Metrics
Process Analysis & Improvement
Slide 10
© Van Mieghem
Inventory Turns in Retailing and Its Link to Inventory Costs
Home Depot
(1/30/2011)
Wal-Mart
(1/31/2011)
Net Sales
Cost of sales
Net Income
$67,997
$44,693
$ 3,338
$418,952
$315,287
$ 15,355
Inventories
$10,625
$ 36,318
Months of Inventory
If Wal-Mart carried the same months of inventory as Home Depot,
its inventories would be
I=
This would tie up about $
Process Analysis & Improvement
billion extra in inventory.
Slide 11
© Van Mieghem
Cash-to-Cash Cycle
Inventory
Accounts
Receivable
Accounts
Payable
Cash
Cash Conversion Cycle
Measures duration between purchase of inventory and collection of
accounts receivable:
Cash Conversion Cycle=
Days of Inventory
+ Days of Receivables
- Days of Payables
How long does it take between outlay of cash and collecting the reward?
Process Analysis & Improvement
Slide 12
© Van Mieghem
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
Process Analysis & Improvement
Slide 13
© Van Mieghem
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
PROPERTY, PLANT AND EQUIPMENT (at cost)
Land
Buildings
Machinery and equipment
Construction in progress
Subtotal
Less accumulated depreciation
NET PROPERTY, PLANT AND EQUIPMENT
Investments
Prepaid expenses and other deferred charges
Other assets
TOTAL ASSETS
2.1
3.0
27.9
50.6
4.1
87.7
2.1
15.3
50.1
6.7
74.2
25.0
49.2
4.1
1.9
4.0
146.9
(Selected) CURRENT LIABILITIES
Payables
Process Analysis & Improvement
11.9
Slide 14
© Van Mieghem
Business Process Flows at MBPF, Inc:
Cash to Cash cycle

C2C = - Days payable + Days of inventory + Days receivables
Process Analysis & Improvement
Slide 15
© Van Mieghem
Amazon Income Statement
Period Ending
Dec 31, 2010
Total Revenue
34,204,000
Cost of Revenue
26,561,000
Gross Profit
7,643,000
Selling General and Administrative
6,237,000
Operating Income or Loss
1,406,000
Income from Continuing Operations
Total Other Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
130,000
1,536,000
39,000
1,497,000
352,000
Net Income From
Continuing Ops
1,152,000
Net Income
1,152,000
Process Analysis & Improvement
Slide 16
© Van Mieghem
Amazon Balance Sheet
Period Ending
Dec 31, 2010
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Total Current Assets
Property Plant and Equipment
Goodwill
Intangible Assets
Other Assets
Deferred Long Term Asset Charges
Total Assets
3,777,000
4,985,000
1,783,000
3,202,000
13,747,000
2,414,000
1,349,000
1,265,000
22,000
18,797,000
Accounts Payable
Short/Current Long Term Debt
Total Current Liabilities
Long Term Debt
Other Liabilities
10,372,000
10,372,000
1,561,000
Total Liabilities
11,933,000
Total Stockholder Equity
6,864,000
Net Tangible Assets
5,515,000
Process Analysis & Improvement
Slide 17
© Van Mieghem
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
Process Analysis & Improvement
50.1
60.2
40.2
25.3
175.8
Slide 18
© Van Mieghem
MBPF Inc.: Detailed Financial Flows
$50.1/yr
$60.2/yr
$25.3/yr
Labor & OH
Labor & OH
$6.5
Raw Materials
(roofs)
$40.2/yr
$110.3/yr
$15.1
Fabrication
(roofs)
$8.6
$10.6
Assembly
$175.8/yr
$9.8
Finished Goods
$40.2/yr
Purchased Parts (bases)
Process Analysis & Improvement
Slide 19
© Van Mieghem
$175.8/yr
MBPF Inc.: Detailed Flow Times
Throughput R
$/Year
$/Week
Inventory I ($)
Flow Time T =
I/R (weeks)
Process Analysis & Improvement
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
Slide 20
© Van Mieghem
Where target improvement?
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
3.14
2.90
5.80
Flow Time T
(weeks)
Process Analysis & Improvement
Slide 21
© Van Mieghem
Case: CRU Computer Rentals
Linking Financial and Operational Flows
&
Targeting Areas for Improvement
Handouts to be distributed in class
Process Analysis & Improvement
Slide 22
© Van Mieghem