Operations Management:
Process Analysis and Applications Module


Changing Sources of Competitive Advantage
Targeting Improvement: Operational Measures - Time T, Inventory I,
Throughput rate R
» Link through Little’s Law
» Link to Financial Measures
» Targeting 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
S. Chopra/Operations/Process Analysis & Apps
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.
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What is Improvement?
Operational Performance Measures
 Flow
time
 Throughput
 Inventory
 Process Cost
 Quality
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The business imperative: creating
economic value
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
Financial metrics
S. Chopra/Operations/Process Analysis & Apps
x
Weighted average
cost of capital
Price
x
Quantity
Reduce time
Operational metrics
4
Relating operational measures (flow time T,
throughput R & inventory I) with Little’s Law
Inventory I
...
Flow rate/Throughput R
[units]
... ...
[units/hr]
... ...
Flow Time T [hrs]

Flow time = Inventory / Throughput
T = I/R

Turnover
= Throughput / Inventory
= 1/ T
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5
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?
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”.
Material Flow: Wendy’s processes an average of 5,000 lb. of hamburgers per
week. The typical inventory of raw meat is 2,500 lb. What is the average
hamburger’s cycle time and Wendy’s turnover?
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Process Flow Examples
Cash Flow: Motorola sells $300 million worth of cellular equipment per year.
The average accounts receivable in the cellular group is $45 million. What
is the average billing to collection process cycle time?
Question: 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?
S. Chopra/Operations/Process Analysis & Apps
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Targeting Improvement
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
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Targeting Improvement
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
S. Chopra/Operations/Process Analysis & Apps
4.1
1.9
4.0
146.9
9
Targeting Improvement
MBPF Inc.: Inventory and Cost of Goods
INVENTORY
Raw materials (roof)
Fabrication WIP (roof)
Purchased parts (base)
Assembly WIP
Finished goods
TOTAL
COST OF GOODS SOLD
Raw materials
Fabrication (L&OH)
Purchased parts
Assembly(L&OH)
TOTAL
S. Chopra/Operations/Process Analysis & Apps
6.5
15.1
8.6
10.6
9.8
50.6
50.1
60.2
40.2
25.3
175.8
10
Targeting Improvement
MBPF Business Process Flows
$60.2/yr
$50.1/yr
$6.5
Raw Materials
(roofs)
$40.2/yr
$25.3/yr
$110.3/yr
$15.1
Fabrication
(roofs)
$8.6
$10.6
Assembly
$175.8/yr
$9.8
$175.8/yr
Finished Goods
$40.2/yr
Purchased Parts (bases)
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Targeting Improvement
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
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Targeting Improvement
Flow rate R
($/week)
5.0
3.38
Assembly
Accounts
2.12
Fabrication
0.96
0.77
Purchased Parts
11.12
Receivabl
e
Finished
Goods
Raw Materials
6.75
7.12
3.14
2.90
5.80
Flow Time T
(weeks)
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Why the Difference in Performance?
Inventory Over Last 8 Quarters (Ending Q3 2001)
6000
5000
Inventory
4000
Nokia
Ericsson
Motorola
3000
2000
1000
0
0
1
2
3
4
5
6
7
8
9
Quarter
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CRU Computer Rentals
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Learning Objectives
Basic Process Analysis
 Process
Measures: time, inventory, and throughput
 What is an improvement?
– Link financial and operational measures
– Good operational measures are leading indicators of
financial performance
Using Little’s law for process flow analysis
 Targeting areas and performance measures for
improvement

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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
» Targeting 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
S. Chopra/Operations/Process Analysis & Apps
17
Operational Performance Measures
 How
to measure and decrease flow times?
 How to measure and increase throughput?
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Pizza Pazza
Flow Chart
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19
Process Architecture is defined and
represented by a process flow chart:
Process = network of activities performed by resources
1. Process Boundaries:
– input
– output
2. Flow unit: the unit of analysis
3. Network of Activities & Storage/Buffers
– activities with activity times
– routes: precedence relationships (solid lines)
4. Resources & Allocation
5. Information Structure & flow (dashed lines)
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20
Operational Measure: Flow Time
Driver: Critical Activity Times
 (Theoretical)
Flow Time

Critical Activity

Flow Time efficiency
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Most time inefficiency comes from waiting:
E.g.: Flow Times in White Collar Processes
Industry
Process
Average Flow Theoretical Flow Flow Time Efficiency
Time
Time
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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22
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.
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23
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]
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24
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
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25
Pricing and Capacity Investment:
Pans + Rent another oven at €10/hr?

Resource cost = €8/hour

Material cost = €1.4/pizza

Minimum sale price =

Contribution margin if sale price is €5 / pizza =
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26
Cost Capacity Profile
Demand
Capacity
[units/time]
Process Capacity
Resource x
S. Chopra/Operations/Process Analysis & Apps
NCX-10
Furnaces
Marginal Investment Cost
[$/unit/time]
27
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
– to non-critical resource or to third party

Increase Net Availability
–
–
–
–
work longer
increase scale (invest)
increase size of load batches
eliminate availability waste: decrease changeover time
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28
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
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Other factors affecting Process Capacity

Batch (Order) Sizes

Product Mix
 other
managerial policies ...
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30
Product Mix Decisions:
Pizza Pazza offers 2 products
Sale Price of thin crust pizza:
Cost of Materials:
€5.00/pizza
€1.40/pizza
Sale Price of deep dish pizza:
Cost of Materials:
€7.50/pizza
€1.90/pizza
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31
Product Mix Decisions
Processing
Times
Prepare
sauce
Prepare
dough
Prepare
pizza
Thin Crust
2 mins.
3 mins
Deep Dish
5
Resource
Jean
S. Chopra/Operations/Process Analysis & Apps
Bake
Pack
Receive
Total
1 min
Load
Oven &
Set
1
15
1
2
25
3
1
1
29
1
2
42
Jean
Jean
Jacq+
Oven
Oven
Jacq
Jacq
32
Product Mix Decisions
Margin per thin crust pizza = € 3.60
Margin per deep dish pizza = € 5.60
Margin per oven minute from thin crust = 3.60×2 /
16 = € 0.450
Margin per oven minute from deep dish = 5.60×2 / 30
= € 0.373
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33
National Cranberry Cooperative
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34
Learning Objectives:
Multi-Product Process Analysis & Apps

Process measures:
– Flow time  manage critical activities
– Capacity  manage bottleneck resources

Levers for improving
– Flow time  manage critical activities
» Decrease time in critical activities
» Perform activities in parallel
» Decrease waiting time
– Capacity & Throughput  manage bottleneck resources
» Decrease unit load of bottleneck resource
» Move work from bottleneck to non-bottleneck resource
» Increase availability of bottleneck resource

Shifting bottleneck
» Bottleneck affected by product mix, batch size and other factors
» Product profitability based on $ per unit time on bottleneck
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