Operations Management & Performance Modeling
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Operations Strategy
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2
Class 1a: Introduction to OM
Class 1b: Strategic Operational Audits
Process Analysis
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Class 2a: Process Flow Analysis
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Classification of Processes
Changing sources of competitive advantage: time
Operational Measures: time, inventory and throughput
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3
4
5
6
7
Little’s Law
Link to Financial Measures
CRU Computer Rentals
Lean Operations
Supply Chain Management
Capacity Management in Services
Total Quality Management
Business Process Reengineering
OM&PM/Class 2a
1
Michigan Manufacturing Corp:
OH Burden rates: Economies of Scale?
Mfg OH Burden Rates
10
Pontiac
Total Mfg OH Burden Rate
Lima
Essex
Saginaw
Sandusky Tiffin
Fremont
Lebanon
Maysville
1
10
100
1000
Plant Sales (M$)
Total Mfg OH burden rate = Mfg OH / DL
OM&PM/Class 2a
2
Economies of Scale versus
Diseconomies of Flexibility/Complexity
Mfg OH Burden Rates
10
Pontiac (>20)
Total Mfg OH Burden Rate
Lima (4)
Saginaw (6)
Essex (4)
Sandusky (5)
Tiffin (4) Fremont(10)
Lebanon (2)
Maysville (2)
1
10
100
1000
Plant Sales (M$)
OM&PM/Class 2a
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Class 1b Learning Objectives
 How

do a strategic operational audit
Relationship between process choice and strategy
– operational focus

Price vs. Variety Competition
– trade off scale economies with variety diseconomies
OM&PM/Class 2a
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Classification of Processes
by process architecture
 Project

Job Shop
Job Shop
 Batch

Line Flow

Continuous Flow
Flow Shop
OM&PM/Class 2a
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Characteristics of Processes:
Job Shop vs. Batch vs. Flow Shop
Type of
Process
Product
Volume
Specialized
Equipment
Product
Variety
Machine
Setup
Frequency
Labor
Skills
Variable
Cost
Job Shop
Batch
Flow Shop
OM&PM/Class 2a
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Matching Products and Processes with
the Product-Process Matrix
Product
Process
Jumbled Flow.
Process segments
loosely linked.
Low volume
Low Standardization
One of a kind
Low volume
Higher volume
Many Products
Few Major Products
High volume
High Standardization
Commodity Products
Scheduling,
Materials Handling,
Shifting Bottlenecks
JOB SHOP
(Commercial Printer)
Disconnected Line
Flow/Jumbled Flow
but a dominant flow
exists.
BATCH
Worker Motivation,
Balance,
Maintaining Flexibility
(Heavy Equipment)
LINE FLOWS
Connected Line
Flow (assembly line)
(Auto Assembly)
Continuous, automated,
rigid line flow.
Process segments tightly
linked.
CONTINUOUS
FLOW
(Oil Refinery)
Bidding, delivery,
product design flexibility
Quality & Product Differentiation,
output volume flexibility
OM&PM/Class 2a
Price
Capital Investment for big
chunk capacity,
Technological Change,
Vertical Integration
Managerial
Challenges
7
Michigan Manufacturing Corp.:
using the Product-Process Matrix
Product
Process
1.
Low volume
Low Standardization
One of a kind
Low volume
Higher volume
Many Products
Few Major Products
(Designed Dollar) Volume per
family
10.
0
10 0
0
High volume
High Standardization
Commodity Products
100.
0
Jumbled Flow.
Process segments
loosely linked.
Job Shop
Batch
Connected Line
Flow (assembly line)
# routes (product families)
Disconnected Line
Flow/Jumbled Flow
but a dominant flow
exists.
Pontiac
Fremont
1
0
Sagina
w
Essex
Tiffin
Lima
Sandusk
y
Line Flow
Continuous, automated,
rigid line flow.
Process segments tightly
linked.
Lebanon Maysvill
e
1
Continuous Flow
OM&PM/Class 2a
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Classification of Processes:
by Positioning Strategy
 Functional
Focus:
Product 1
Product 2
A
B
C
D
= resource pool (e.g., X-ray dept, billing)

Product Focus:
Product 1
Product 2
OM&PM/Class 2a
A
D
B
C
B
A
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Classification of Processes:
by Customer Interface

Make to Stock

Make to Order
OM&PM/Class 2a
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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.
OM&PM/Class 2a
11
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]

Inventory = Throughput x Flow Time
I = RxT

Turnover
= Throughput / Inventory
= 1/ T
OM&PM/Class 2a
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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?
OM&PM/Class 2a
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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?
OM&PM/Class 2a
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CRU Computer Rentals
Case: CRU Computer Rentals
Flow Chart
Status 40
Ship
Receiving
30%
Repairs
70%
Status 24
Customer
15%
Status 41
Pre-Config
Parts
places
order
Receives
from
Supplier
Status 32
Ship
Config
Repairs
Status 20
OM&PM/Class 2a
Status 42
16
CRU Situation in 1996:
Customer term = 8 wks, Demand = 1000 units/wk
Customer
Throughput 1,000
(units/week)
Receiving Status
24
Status Parts Suppliers
40
Status 41 Status 42
Status 20
1,000
700
300 +
105 =
405
405
405
405
405
1,000
Inventory
(units)
8,000
500
1,500
1,000
500
405
500+405
= 905
500
2,000
Flow Time
(weeks)
8.0
0.5
2.14
2.47
1.23
1
2.23
1.23
2
OM&PM/Class 2a
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CRU Situation in 1996:
Financial Performance
Number of units on rent = 8,000
 Total number of units = 14,405
 Utilization = 0.56 (56%)
 Revenue rate = 8,000 x 30 = $240,000/wk
 Variable Cost rate = 25 x 1,000 (R) + 25 x 1,000 (S)
+ 4x700x.85 + 150 x 405 = $113,130/wk
 Contribution Margin = $126,870/wk
 Depreciation = 14,405 x ($1000/156wks) =
$92,340/wk

– bottomline =
OM&PM/Class 2a
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CRU Situation in 1997:
buffer sizes unchanged, Demand = 1400 units/wk
Customer
Throughput 1,400
(units/week)
Receiving Status
24
Status Parts Suppliers
40
Status 41 Status 42
Status 20
1,400
980
567
567
567
567
567
1,400
Inventory
(units)
8,000
500
1,500
1,000
500
405
905
500
2,800
Flow Time
(weeks)
5.7
0.36
1.53
1.76
0.88
0.71
1.60
0.88
2
OM&PM/Class 2a
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CRU Situation in 1997: Financials
buffer sizes unchanged, Demand = 1400 units/wk
 Number
of units on rent = 8,000
 Total number of units = 15,205
 Utilization = 0.53 (53%)
 Revenue = 4,800 x 30 + 3,200 x 35 = $256,000/wk
 Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4x980 x .85
+ 150 x 567 = $158,382/wk
 Contribution Margin = $97,618/wk
 Depreciation = 15,205 x (1000/156) = $97,468/wk
– bottomline =
OM&PM/Class 2a
20
CRU Situation in 1997:
flow times unchanged, Demand = 1400 units/wk
Customer
Throughput 1,400
(units/week)
Receiving
Status
24
Status Parts Suppliers
40
Status 41 Status 42
Status 20
1,400
980
567
567
567
567
567
1,400
Inventory
(units)
8,000
700
2,100
1,400
700
567
1,267
700
2,800
Flow Time
(weeks)
5.7
0.5
2.14
2.47
1.23
1
2.23
1.23
2
OM&PM/Class 2a
21
CRU Situation in 1997:
flow times unchanged, Demand = 1400 units/wk
 Number
of units on rent = 8,000
 Total number of units = 16,967
 Utilization = 0.47 (47%)
 Revenue = 4,800 x 30 + 3,200 x 35 = $256,000/wk
 Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4 x 980x .85
+ 150 x 567 = $158,382/wk
 Contribution Margin= $97,618/wk
 Depreciation = 16,967 x (1000/156) = $108,763/wk
– bottomline =
OM&PM/Class 2a
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CRU Potential situation in 1997:
without sales drive, Demand = 600 units/wk
Customer Receiving
Status
24
Status
40
Parts
Suppliers Status 41 Status 42
Status 20
Throughput
(units/week)
600
600
420
243
243
243
243
243
600
Inventory
(units)
4,800
300
900
600
300
243
543
300
1,200
Flow Time
(weeks)
8
0.5
2.14
2.47
1.23
1
2.23
1.23
2
OM&PM/Class 2a
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CRU Potential situation in 1997:
without sales drive, Demand = 600 units/wk
Number of units on rent = 4,800
 Total number of units = 8,643
 Utilization = 0.56 (56%)
 Revenue = 4,800 x 30 = $144,000/wk
 Cost = 25 x 600 (R) + 25 x 600 (S) + 4x420x .85 +
150 x 243 = $67,878/wk
 Contribution Margin = $76,122/wk
 Depreciation = 8,643 x (1000/156) = $55,404/wk

– bottomline =
OM&PM/Class 2a
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Lecture 2a Learning Objectives
 Classification
of processes
– Match with strategy
Process Measures: time, inventory, and throughput
 What is an improvement?

– Link financial measures to operational ones
– Good operational measures are leading indicators of
financial performance
 Using
Little’s law for process flow analysis
OM&PM/Class 2a
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