III. Operational Measures
• Flow Time
• Capacity and Flow Rate
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Operational Measures and Direct Cost
Inputs
Outputs
• Inventory (in production setting, referred to as Working in Process WIP):
the number of units contained within the process.
– Working capital shown in your balance sheet
• Flow Time (throughput time): the time it takes a unit to get through
the process.
– Shorter flow times reduce the time delay between occurrence of
demand and its fulfillment in the form of supply
• Flow Rate (throughput rate, output rate): the rate at which the
process is delivering output.
– Higher flow rate generates more revenues shown in your income
statement when capacity is tight.
– The maximum rate with which the process can generate supply
is called the capacity of the process.
• Direct Cost: incurred when transforming a unit from input to output2
Flow Time
• Flow Time =
Meas. &
Mix
Spoon
1 min.
Take
Orders
1 min.
5 min.
Pick
Fillings
Clean &
Hash
3 min.
2 min.
Spread
Toppings
2 min.
Load & Set
Timer
1 min.
Bake
Box
8 min.
1 min.
Payment
1 min.
• Theoretical vs. Actual Flow Time
– Actual = Value-Added and Non-Value-Added Activities
– Active and Non-Active Times
VA
Active
NVA
Non-Active
• Flow Time efficiency
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Flow Time Efficiency
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%
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Performance in Auto Industry
GM
Ford
DaimlerChrysler
Toyota
Honda
Nissan
Flow Time
(hrs)
40.5
39.9
44.8
31.1
29.1
27.6
Quality
(probs/car)
1.46
1.62
1.54
Market Share
28%
21%
13.2%
Profit/car in
2001
$367
<0
<0
1.45
Business Week, March 25, 2002
Flow Time
(hrs)
GM
Ford
DaimlerChrysler
Japanese
Automakers
26
27
31
17-22
Business Week, April 21, 2003
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Levers for Reducing Flow Time
• See page 73-76: 4.5 – 4.6
• Flow time:
• Levers:
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Capacity (units/unit time)
•
Capacity: maximal units a process can process per unit of time
– Capacity of a Single Resource
oven
Process time Tp
• Capacity of the oven =
– Capacity of c Identical Resources
• capacity of bake operation =
c ovens
Process time Tp
– Capacity of a network of resources (system capacity)
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Flow Rate (units/unit time)
• Flow rate: the units that a process actually does process per unit of time
Input rate
Output rate R
• Flow rate R =
• Cycle time =
• Process utilization =
• Pipeline Principle: In the long run, on average,
input rate = output rate R
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Flow Rate (cont.)
• Time to produce X units =
• Time to complete X units starting with an empty system
• Utilization of a resource in the process
R
c
Process time Tp
r=
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Bottlenecks
Tp
c=2
c=1
c=3
c=1
10 min.
8 min.
20 min.
5 min.
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Bottlenecks: Multiple types of flow units
2
1
3
1
Cookies
10 min.
8 min.
20 min.
5 min.
Pizzas
15 min.
12 min.
40 min.
7 min.
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Bottlenecks: Multiple flows
8 min.
Spoon
Mix
10 min.
20 min.
Bake
cookies
Bake
bread
15 min.
1 min.
Pay
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Levers for Increasing Throughput
• See page 99: 5.7. Levers for Managing Flow Rate
• Throughput:
• Levers:
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Case Discussion: Manzana Insurance
1991 Second Quarter Performance
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Manzana Insurance (cont.)
Underwriting
Team #1
Distribution
Clerks (4)
Underwriting
Team #2
41 min./request
Weighted
average
Raters (8)
70.4 min./request
Policy
Writers (5)
54.8 min./request
Underwriting
Team #3
28.4 min./request
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Today’s Takeaways
Operational Measures:
– Flow Time
•
•
•
Critical path
Theoretical vs. actual, value added vs. non value added
Levers for improving flow time
– Flow Rate (cycle time)
•
•
•
Capacity, bottleneck, levers for improving throughput
Utilization, server or machine idle time
Pipeline principal
– Inventory (next lecture)
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