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
• Capacity and Flow Time Analysis
• Pizza Pazza
• Levers for Improvement
• Multi-product Capacity Management and Investment
• Joint Marketing & Production Decisions
• Optimal Capacity Investment
• National Cranberry Cooperative
1
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.
P
V
Q
T
2
Another example of financial flows at
the corporate level: Mobile Handsets

Data:
– End of quarter inventory position from 10Q statements
– Sales from income statement (smooth 9month avg.)

How can financial flows help explain the difference in performance during
the downturn?
Nokia ($M) Inventory
Sales per month (9 month avg)
Time (months)
Ericson ($M) Inventory
Sales per month (9 month avg)
Time (months)
Motorola ($M) Inventory
Sales per month (9 month avg)
Time (months)
1999
12/31/99
$ 1,786
$ 1,437
1.24
$ 3,016
$
486
6.20
$ 3,707
$ 1,088
3.41
3/31/00
$ 1,925
$ 1,437
1.34
$ 4,031
$
486
8.29
$ 4,688
$ 1,088
4.31
2000
6/30/00
9/30/00
$ 2,290 $ 2,062
$ 1,437 $ 1,437
1.59
1.43
$ 4,612 $ 4,984
$
486 $
486
9.48
10.25
$ 5,446 $ 5,557
$ 1,088 $ 1,088
5.01
5.11
12/31/00
$ 2,014
$ 1,437
1.40
$ 4,671
$
486
9.60
$ 5,242
$ 1,088
4.82
3/31/01
$ 1,985
$ 1,692
1.17
$ 4,667
$
245
19.02
$ 4,533
$
830
5.46
2001
6/30/01
$ 1,622
$ 1,692
0.96
$ 2,947
$
245
12.01
$ 3,842
$
830
4.63
9/30/01
$ 1,774
$ 1,692
1.05
$ 2,647
$
245
10.79
$ 3,250
$
830
3.91
3
Mobile Handsets: How explain the
difference in performance?
$6B
Inventory
Flow Time
20wks
18
$5B
16
Motorola
$4B
14
Ericson
12
Ericson
$3B
10
8
$2B
Motorola
6
$1B
Nokia
4
2
$-
Nokia
0
8/28/99 12/6/99 3/15/00 6/23/00 10/1/00 1/9/01 4/19/01 7/28/01 11/5/01 8/28/99 12/6/99 3/15/00 6/23/00 10/1/00 1/9/01 4/19/01 7/28/01 11/5/01
4
Operational Performance Measures
•
•
•
•
Flow time T
Throughput rate R
Inventory I
Process Cost
5
Relating operational measures
(flow time T, throughput R & inventory I)
with Little’s Law
...
... ...
Inventory I
[units]
Flow rate/Throughput R
[units/hr]
... ...
Flow Time T [hrs]
• Inventory = Throughput x Flow Time
I = RxT
• Turnover = Throughput / Inventory
= 1/ T
6
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?
Monetary Flow: A major manufacturer sells $300 million worth of cellular
equipment per year. Average amount in accounts receivables is $45million.
How long does it take to process a sales order in accounts receivable?
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”?
7
Process Flow Examples
Is she right? 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?
8
EXAMPLE 3.2 : MBPF Inc.
MBPF Inc. manufactures prefabricated garages.
Purchase sheet material, forms and assembles the finished
product. Each garage needs a roof, a base.
Goal : To understand how long and where a $ spends time
in MBPF process.
Where should we improve the flow time?
9
MBPF Inc.: Consolidated Income
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
10
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
4.1
1.9
4.0
146.9
11
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
Raw Materials
(roofs)
50.1
60.2
40.2
25.3
175.8
Fabrication
(roofs)
Assembly
Purchased Parts (bases)
Finished Goods
12
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
I = R*T
13
MBPF Business Process Flows
$60.2/yr
$50.1/yr
$110.3/yr
$6.5
Raw Materials
(roofs)
$40.2/yr
$25.3/yr
$15.1
$175.8/yr
Fabrication
(roofs)
$8.6
$10.6
$9.8
Assembly
Finished Goods
$175.8/yr
$40.2/yr
Purchased Parts (bases)
14
MBPF Inc.: Flow Times
Flow rate R
($/week)
5.0
3.38
2.12
Fabrication
0.96
0.77
Assembly
Accounts
Receivable
Finished
Goods
Purchased Parts Raw Materials
11.12
6.75
7.12
3.14
2.90
5.80
Flow Time T
(weeks)
15
CRU COMPUTER
RENTALS
(to be distributed in class)
16
Pizza Pazza: Flow Time Analysis
2.
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?
3.
What is the maximum number of orders that PP can fill per
hour in steady state?
4.
Assume that there are four orders waiting to be processed,
Jean is just about to start mixing the sauce for another two
pizzas (a fifth order) and Jacqueline is just about to start
loading two pizza pans into the oven (a sixth order). A
customer calls in with a new pizza order and wants to know
when she can pick up her order. What due-date time should
Jean promise assuming that she processes all orders in the
sequence received?
18
Operational Measure: Flow Time
Driver: Activity Times
Critical Path:
Theoretical Flow Time:
Average Flow Time:
19
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%
20
Levers for Reducing Flow Time
• Decrease the work content of critical activities.
– work smarter.
– work faster.
– do it right the first time.
– change product mix.
• Move work content from critical to non-critical
activities.
– to non-critical path or to “outer loop.’’
• Reduce waiting time.
21
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
22
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
23
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?
25
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
26
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
27
Pricing: Wages and Quantity Discounts
1.
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 =
2.
Is it worth offering any discount to encourage all orders
to be for three pizzas? If so, how much?
28
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
29
Capacity Investments: Another oven?
Task reallocation
1.
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 =
2.
Can you think of ways to increase profits by reallocating tasks
30
between the employees?
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
31
Other factors affecting Process
Capacity
• Batch (Order) Sizes:
– Is it worth offering any discount to encourage all orders to
be for 3 pizzas if we have 2 ovens? If so, how much?
• Product Mix: see later
• other managerial policies ...
32
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]
33
Levers for Increasing Process Capacity
• Decrease the work content of bottleneck activities
– work smarter
– work faster
– do it right the first time
– change product mix
• 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
34
Increasing Process Capacity in The
Goal
• “is to increase the capacity of only the bottlenecks”
– “ensure the bottlenecks’ time is not wasted”
• increase availability of bottleneck resources
• eliminate non-value added work from bottlenecks
– reduce/eliminate setups and changeovers
• synchronize flows to & from bottleneck
– reduce starvation & blockage
– “ the load of the bottlenecks (give it to non-bottlenecks)”
• move work from bottlenecks to non-bottlenecks
• need resource flexibility
–
unit capacity and/or
#of units.
• invest
35
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?
36
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
Suppose they take the same processing except that deep dish
37
require 5 min (vs 2) in sauce prep and 29 min (vs 15) in baking.
Product Mix Decisions
Margin of thin crust pizza = €3.60
Margin of deep dish pizza = €5.60
Margin per oven minute from thin crust
= 2*€3.60 / 16 min = € 0.45/min
Margin per oven minute from deep dish
= 2*€5.60 / 30 min = € 0.36/min
38
National Cranberry Cooperative
39
Learning Objectives Module 2:
Multi-Product Process Analysis & Apps
• Manage better with the three key operational measures and an interfunctional macro process view of the organization:
• Process measures:
– Flow time  manage critical activities
– Capacity  manage bottleneck resources
• Levers for improving
– Flow time  manage critical activities
– Capacity & Throughput
• Process capacity depends on a zillion things
– Effect of product mix decisions on process capacity
• marginal contribution per unit of bottleneck capacity used
– Bottleneck may shift on adding capacity
 diminishing returns to capacity investment
40