Koç University
OPSM 301 Operations Management
Class 4:
Business process flows:
Measurement
Zeynep Aksin
zaksin@ku.edu.tr
Announcements
 New module: business process flows
 Chapter 3
 Study questions and examples
Performance Measurement
 External performance strongly depends on
output, input, and resource markets, and
transformation effectiveness of the process
 Internal performance measures: processing
cost, flow time, variety, service availability...
The Dynamics of a Process
 We examine processes from the perspective of flow
 To study process flows, we first answer three important
questions:
– On average, how many flow units pass through the process
per unit time?
– On average, how much time does a typical flow unit spend
within process boundaries?
– On average, how many flow units are within process
boundaries at any point in time?
Operational Measures
 On average, how many flow units pass
through the process per unit time?
THROUGHPUT or FLOW RATE
(R)
Terminology
Throughput or Flow Rate (R)
The average output of a production process per
unit time. At the firm level, it is defined as the
production per unit time that is sold.
1
2
3
4
Operational Measures
 On average, how much time does a typical
flow unit spend within process
boundaries?
FLOW TIME (T)
Terminology
Flow Time (T)
The flow time (also called variously throughput time, cycle time) of
a given routing is the average time from release of a job at the
beginning of the routing until it reaches an inventory point at the end
of the routing.
Flow time
1
2
3
4
Operational Measures
 On average, how many flow units are
within process boundaries at any point in
time?
INVENTORY (I)
Terminology
Work in Process inventory (I)
The average inventory between the start and
end point of a product is called work in process
Inventory
1
2
3
WIP (9 for this realization)
4
Slope (R), verical distance (I), horizontal
distance(T)
Question
 Koç University as a process:
X students
enrolled
600 new students
admitted on average
600 students
graduate on average
 How many students are enrolled on average? (within the
process)
 Need more information? Program length is 4 year.
 What if program length were 6 years?

Inventory= Throughput x Flow Time
12
LITTLE’S LAW
 Relating throughput rate, flow time, and inventory
Inventory
Throughput Rate 
Flow Time
Inventory I
...
... ...
[units]
... ...
Throughput Rate
Flow Time T [hrs]
[units/hr]
Understanding Little’s Law:
Consider a first come first served Queue
Inventory I
Time=0 ...
... ...
[units]
... ...
Throughput Rate
Flow Time T [hrs]
Time=t
...
[units/hr]
Inventory I
... ...
[units]
... ...
Throughput Rate
Flow Time T [hrs]
[units/hr]
Inventory I
Time=FT
...
... ...
[units]
... ...
Throughput Rate
Flow Time T [hrs]
[units/hr]
An Intuitive Argument for Little's Law
 Consider a process with the FCFS queue discipline
 An order departs the process: At this moment there are I (Inventory)
orders within the process
 The orders that are in the process now are the ones that came after
our departing order had arrived, in other words, they arrived during
the waiting period of the departing order
 Since order arrival rate is equal to the throughput rate, we have the
following relationship:
Inventory = Throughput Rate x Flow Time
Little’s Law basics
 Little’s Law is for a system in steady
state:
input rate = output rate
 Applies to most systems, even those with
variability
 Uses AVERAGE values
Example: flow unit is material
 Fast food restaurant processes an average of
5000kgs, of hamburgers per week. Typical
inventory of raw meat in cold storage is 2500kg.
 Throughput R=5000kg/week
 Average Inventory I=2500 kg.
 Average flow time T=I/R=2500/5000=0.5 weeks
Example: flow unit is customers
 A café in Beyoglu serves on average 60
customers per night. A typical night is about 10
hours. At any point there are on average 18
customers in the café.
 Throughput R=60 customers/night; 6
customers/hour
 Average Inventory I=18 customers
 Average flow time T= I/R= 3 hours
Example: flow unit is cash
 A steel company processes $400 million of iron ore per
year. The cost of processing is $200 million per year.
The average inventory is $100 million. How long does a
typical dollar spend in the process?
 R=$600 million/year
 I=$100 million
 T=I/R=1/6 year or 2 months
Example: Auto-Moto Financial Services
 Auto-moto provides loans to qualified
customers. The company receives about
1000 loan applications per 30-day working
month and makes accept/reject decisions
based on an extensive review of each
application
Auto-Moto Financial Services
 Currently, Auto-Moto processes each application
individually. On average, 20% of all applications
received approval. An internal audit showed that, on
average, Auto-Moto had about 500 applications in
process at various stages of the approval procedure, but
on which no decisions had yet been made.
 In response to customer complaints about the time taken
to process each application, Auto-Moto called in OPSM
Consulting Inc.
Current System
1000/month
20%
accept
80%
reject
200/month
review
500
800/month
Example: cont’d
 OPSM Consulting found out that although most
applications could be processed rather quickly, some took
a disproportionate amount of time because of insufficient
and/or unclear documentation. They suggested the
following Process II:
 Because, the percentage of approved applications is fairly
low, and Initial Review Team should be set up to preprocess all applications according to strict but fairly
mechanical guidelines.
Auto-Moto Financial Services
 Each application would fall into one of three categories:
type A (looks excellent), type B (needs more detailed
evaluation), and type C (reject summarily). Type A and
B applications would be forwarded to different specialist
subgroups
 Each subgroup would then evaluate the applications in
its domain and make accept/reject decisions
Example: (cont’d)
 Process II was implemented on an
experimental basis. The company
found out that, on average, 25% of all
applications were of type A, 25% were
of B, and 50% were of C. Typically,
about 70% of type A and 10% of B were
approved on review.
Example (cont’d)
 Internal audit checks showed that, on average, 200
applications were with the Initial Review Team
undergoing preprocessing. Only 25 were with the
Subgroup A Team undergoing the next stage of
processing and approximately 150 were with the
Subgroup B Team
 Auto-moto would like to determine if the implemented
changes have improved service performance.
Proposed System
Subgroup A
review
25%
1000
/month
initial
review
200
25
25% Subgroup B
review
50%
150
70%
30%
accept
200
/month
reject
800
/month
10%
90%
C
27
Proposed System
Subgroup A
review
25%
R=1000
/month
initial
review
I=200
I=25
25% Subgroup B
review
50%
I=150
70%
30%
accept
200
/month
reject
800
/month
10%
90%
C
28
New process








Flow units: applications
Initial review: R=1000, I=200 T=0.2 months or 6 days
Team A: R=250, I=25, T=3 days
Team B: R=250, I=150, T=18days
Type A: 9 days
Type B: 24 days
Type C: 6 days
Average: R=1000, I=375, T=11.25 days
29
New process: different flow unit definition
 Flow units: approved/rejected applications
 Approved: 70% of Type A and 10% of Type B=
0.7(250)+0.1(250)=175+25=200 applications/month
 Tapproved=175/(175+25)*(TIR+TA)+ 25/(175+25)*(TIR+TB) =
(175/200)*9 +(25/200)*24=10.875 days
 Rejected: 30% of Type A and 90% of Type B and all C=
75+225+500=800 applications/month
 Treject=11.343 days
30
Key learnings: Little’s Law
 Relates three leading performance measures based on
process flows: throughput, inventory, flow time
 Applies to processes in steady state
 Important to
– First determine process boundaries for analysis
– Then identify appropriate flow unit for your analysis