B7801: Operations Management
24 March 2000
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•
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Burger King & McDonald’s
Tuffy Bike
Queuing fundamentals
p. 1
By Greg Sandoval Staff Writer, CNET News.com
March 21, 2000, 12:25 p.m. PT
update Kozmo.com, the online convenience store that promises to deliver goods in less than an hour, filed
today to raise $150 million in an initial public offering.
New York City-based Kozmo sells entertainment, food and household products online and dispatches delivery
people in vans, on bicycles and on motor scooters to carry the purchases to customers' doors.
The IPO filing follows an announcement yesterday by Amazon.com that it invested $60 million in a private
round of financing for Kozmo and signed a three-year agreement to ship some entertainment items to
customers via Kozmo.
The public filing showed that Amazon owns a 31 percent stake in Kozmo, which intends to use the IPO
proceeds to fund expansion to at least 10 new cities this year. Among the company's other investors are
Chase Capital Partners, Oak Investments and Flatiron Partners.
Analysts have predicted that Kozmo, which operates in six U.S. cities including New York, San Francisco
and Los Angeles, will gain a foothold in the same-day delivery business. Amazon ships
most of its goods through the U.S. Postal Service, an Amazon spokesman said yesterday.
Kozmo's SEC filing provided few surprises about the company, founded by co-chief executives Joseph Park, 28,
and Yong Kang, 27.
Like so many other Internet companies, Kozmo is experiencing huge growth as its losses mount. The company
is recording a 30 percent rise in new customers each month, but it has accumulated a $27 million deficit.
In a deal announced this month, Kozmo agreed to pay Starbucks about $150 million during the next five years
for the right to offer the giant coffee merchant's products on its site.
As for its short-term prospects, Kozmo said in the public filing, "We expect that we will continue to incur
substantial losses for the foreseeable future."
p. 2
Purposes of process flow analysis
•
Document the process
–
–
•
Assess basic performance measures
–
–
–
–
•
What gets done? Where? By whom?
In what sequence?
Cost
Capacity
Inventory
Throughput time (delay)
Identify bottlenecks and improvement opportunities
p. 3
1) Capacity (per time) = maximum sustainable output per unit of time
= (# produced per cycle)/(cycle time)
Ex: Calculating capacity of a batch process
- batch of 36 parts (lot size = 36)
- 6 hours to run a batch
- 1 hour of set-up/batch
set-up
1 hr.
run
set-up
run
set-up
run
6 hrs.
# parts/batch
Capacit y
cycle timeof batch
36 parts/batch

 5.14 parts/hr.
1  6 hrs./batch
p. 4
Actualoutput per time
2) Utilization 
100%
Capacityper time
Ex (cont):
- batch process produces 35 parts/day
- 8 hrs./day production time
What is the utilization?
actual# parts/time
Utilization 
capacity

35 parts/day
x 100%  85.1%.
(5.14 parts/hr.) x (8 hrs/day)
p. 5
3) Bottleneck = the resource that limits the capacity of
the overall process
Why are bottlenecks important? (The Goal)
p. 6
4) Cycle stock = the average inventory level resulting
from batch production or ordering
= 1/2 x (batch or lot size)
Ex:
Produce a batch of 36 parts every 7 hours.
Demand = Production = 36/7=5.14 parts/hr.
What is the average cycle stock?
inventory
slope = - 5.14
36
18
0
time
t
t+7
t+14
t+21
Average inventory (cycle stock) = 1/2 x 36 = 18 parts
NOTE: Increasing the lot size increases cycle stocks for the same production rate.
p. 7
5) Little’s Law
Relates avg. throughput time (delay),
inventory and production rate
N  averageinventorylevel
W  average throughput time(avg.delay)
  averageproductionrate
Little’s Law says ….
N  W
That is, given any two of these measures of performance,
the remaining one is uniquely determined.
p. 8
Ex (cont.):
Produce a batch of 36 parts every 7 hours.
Demand = Production = 36/7=5.14 parts/hr.
Q:What is the delay (throughput time) at this stage of production?
A: From before, we know the average cycle stock is 18, so N=18.
The production rate is  = 5.14 parts/hr.
So by Little’s Law, the average throughput time is W = N/ = 3.5 hrs.
Ex:
Bread is produced at a rate of 7,000 loaves/hr.
Loaves take 20 min. to cool on the cooling rack.
Q:How many loaves must the cooling rack hold?
A: We know that the average time to cool is W=20 min. = 1/3 hrs.
The production rate is given as  = 7,000 loaves/hr.
So by Little’s Law, the average number of loaves in the cooling
rack is N = W = 7,000/hr. x 1/3 hrs. = 2,333 loaves. The cooling rack must
hold at least this many loaves.
p. 9
Throughput vs. Cycle Time:
Lincoln Tunnel Example
Case 1:
W=20 min.
throughput time = 20 min.
N = 2 cars
 = 0.1 cars/min.
cycle time = 10 min.
Case 2:
W=20 min.
throughput time = 20 min.
N = 20 cars
 = 1 car/min.
cycle time = 1 min.
p. 10
Throughput time vs. cycle time
•
Cycle time
–
–
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The time between completion of units
The inverse of production rate (for unit production)
Answers the question:
•
•
How much time is there between each car that is exiting the
tunnel?
Throughput time
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–
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The time an individual units spends in the system.
Also called waiting time, sojourn time, flow time
Answers the question:
If you painted an arriving car orange and put it in the tunnel, how
much time would elapse before the orange car exited the
tunnel?
p. 11
Tuffy Bike
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•
•
Customized bicycles
Demand: 600 units/month, $750/unit; 20% increase
next year
Work force
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–
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•
3 supervisory workers, $50,000 each
13 hourly production workers, at standard rate $18/hr
6 hourly skilled production workers (welders) at $30/hr
8 hr shift, 5 days/wk, 48 weeks/yr
Operating expenses
–
–
Rent, insurance, utilities, etc.: $20,000/month
Materials costs: $550/unit
p. 12
Tuffy Bike: Basic steps
tube stock
cutting
welding
ship
assembly
painting
p. 13
Tuffy Bike (continued)
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Cutting and finishing
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Welding
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3 workers, standard rate, 30 minutes/unit
8 hours drying time/unit
Assembly
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•
6 skilled workers, $30/hr, 45 minutes for setup,
45 minutes welding
On average, 250 units waiting to be welded
Painting
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•
3 hourly workers, standard rate, 30 minutes/unit
7 workers, standard rate, 90 minutes/unit
Shipping
–
7 days, $25/unit
p. 14
Waiting Time Calculation
cutting
WIP
welding
waiting!
250 units
rate:
600 units/month
= 30 units/day
waiting time = 250/30 = 8.3 days
Throughput time for Tuffy Bike = 8.5+8.3 = 16.8 days
p. 15
Tuffy Bike current process
order database
dealer
phone orders from dealers
tube stock inv.
shipping
7 days
$25/unit
component inv.
cutting
3 workers
30 min. cycle
6 frames/hr
cut frame WIP
250 units avg
welding
6 workers
45 min set-up
45 min welding
4 frames/hr
($30/hr)
painting
3 workers
30 min cycle
6 frames/hr
drying WIP
8 hrs drying time
30-40 units avg.
final assembly
7 workers
90 min cycle
4.67 frames/hr
Demand: 600 units/mo. (160 hrs/mo. Production)
Assets: 1 month of receivables
$1M in plant & equipment
(Other data see note.)
p. 16
Operating Profits
600 units/month X 12 months X $/unit
Rev/Unit
Mat.&Comp.
Gross Margin
$
$
$
750.00
(550.00)
200.00
Cut Labor
$
Weld Labor
$
Paint Labor
$
Assemble Labor$
Shipping
$
Contrib. Marg. $
(9.00)
(45.00)
(9.00)
(27.00)
(25.00)
85.00
Annual Revenue$ 5,400,000
Mat.&Comp.
$ (3,960,000)
Labor
$ (648,000)
Shipping
$ (180,000)
Net Contrib.
$
612,000
Super. Labor $ (150,000)
Rent & Equip $ (240,000)
Oper. Profit
$
222,000
100.0%
-73.3%
-12.0%
-3.3%
11.3%
-2.8%
-4.4%
4.1%
p. 17
Tuffy Bike: Base Case
Mon. Prod.
Prod. Rate
Batch Size
cut
weld
paint
assemble
set-up (min)
0
45
0
0
Income
Rev/Unit
Mat.&Comp.
Gross Margin
600 unit/month
3.75 units/hr.
1 units
cycle (min) total min./unit
30
30.0
45
90.0
30
30.0
90
90.0
$
$
$
750.00
(550.00)
200.00
Cut Labor
$
Weld Labor
$
Paint Labor
$
Assemble Labor $
Shipping
$
Contrib. Marg. $
(9.00)
(45.00)
(9.00)
(27.00)
(25.00)
85.00
Annual Revenue$ 5,400,000
Mat.&Comp.
$ (3,960,000)
Labor
$ (648,000)
Shipping
$ (180,000)
Net Contrib.
$
612,000
Super. Labor
$ (150,000)
Rent & Equip $ (240,000)
Oper. Profit
$
222,000
(600 units/mo. / 160 hrs/mo.)
$/hr.
$18.00
$30.00
$18.00
$18.00
$/unit
$9.00
$45.00
$9.00
$27.00
$90.00
#workers
3
6
3
7
Leadtime (working days)
Welding WIP
8.3
Processing
1.5
Transport
7
Total
16.8
cap. (#/hr.)
6.00
4.00
6.00
4.67
utilization
63%
94%
63%
80%
(1)
(2)
(1) Caculated in case: N=250 units in inventory divided by production rate of 30 units/day.
(2) 4 hrs of processing time + 8 hrs of drying time
Inventory
#units
Orders
Cut Frames
Welded Frames
Painted Frames
Finished Goods
100.0%
-73.3%
-12.0%
-3.3%
11.3%
-2.8%
-4.4%
4.1%
cost/unit
0
250
0
0
0
$
$
$
$
Total
0
559.00
604.00
613.00
640.00
cost
$
$ 139,750.00
$
$
$
$ 139,750.00
(1)
(1) 250 units given
Assets
Accts. Rec.
Inventory
Plant & Equip
Total Assets
ROA
$
450,000
$
139,750
$ 1,000,000
$ 1,589,750
14%
(1 month of sales)
p. 18
Tuffy Bike: Batch production scenario
1) Product variety:
2
2
2
5
5
200
lengths
heights
wheel diameters
color schemes
equipment packages (assembly options)
Total Variants
2) Assume all 200 variants are equally popular
(unrealistic but simple)
p. 19
Tuffy Bike: Batch production scenario
3) Produce in batches (lots) of 30.
Batch production data:
set-up (min.)
cut
30
weld
45
paint
120
assembly
120
cycle time (min.)
25
45
20
70
4) Assets
1 month of receivables
$1M in plant and equipment
p. 20
Is this alternative any better?
Issues to consider:
•
Unit cost
• Capacity/bottlenecks
• Throughput time (leadtime to customers)
• Product variety
• Level of investment (inventories)
• ROA
p. 21