Lin/Operations/Process Analysis & Apps1 Process Analysis and Applications Module u Operational...

Lin/Operations/Process Analysis & Apps 1

Process Analysis and Applications Module Operational Measures: Time T, Inventory I, Throughput rate R

» Link to Financial Measures

» Link through Little’s Law

» CRU Computer Rentals

Capacity and Flow Time Analysis» Pizza Pazza Company

» Levers for Improvement

» Optimal Capacity Investment

» Multi-product Capacity Management

» National Cranberry Cooperative


Operational Performance Measures

Flow time T

Throughput rate R

Inventory I

Process Cost

Quality


Price

Quantity

Material

Labor

Energy

Overhead

PP&E

Inventory

Other

Revenues

Costs

Capital invested

Weighted average cost of capital

x

+

+

+

+

+x

Profit

Opportunity cost

-

Economic value added (EVA)

Financial metrics Operational metrics

1. Increase price2. Increase

throughput

Improvement levers

3. Reduce costs4. Improve quality

5. Reduce capital intensity6. Reduce inventory

Reduce time

-

The business imperative: creating economic value


Relating operational measures (flow time T, throughput R & inventory I) with Little’s Law

Inventory = Throughput x Flow Time

I = R x T

Turnover = Throughput / Inventory

= 1/ T

Inventory I[units]

Flow rate/Throughput R

[units/hr]... ...... ......

Flow Time T [hrs]


Process Flow ExamplesMonetary Flow: Wim Duisenberg must decide how many Euro notes to print by

2002. Euroland’s central banks’ cash handling is estimated at €2,400 billion per year. The average cash holding time by consumers and businesses is estimated at 2 months. How many Euro notes should Duisenberg print?

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”.


Process Flow Examples

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?

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?

CRU Computer Rentals

Linking Financial and Operational Flows&

Targeting Areas for Improvement


Learning ObjectivesBasic Process Analysis

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


Process Analysis and Applications Module Operational Measures: Time T, Inventory I, Throughput rate R

» Link to Financial Measures» Link through Little’s Law» CRU Computer Rentals

Capacity and Flow Time Analysis» Pizza Pazza Company

» Levers for Improvement

» Optimal Capacity Investment

» Multi-product Capacity Management

» National Cranberry Cooperative


Pizza Pazza Flow Chart


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)


Pizza Pazza: Flow Time vs. Throughput/Capacity

1. Flow Time: What is the minimum time to fill a rush order, assuming that all steps

of the process are started only after the order is received?

Without spending money, how would you reduce this response time?

2. Maximal throughput = capacity: What is the maximum number of orders that PP can fill per hour in

steady state?


Operational Measure: Flow TimeDriver: Activity Times

Flow Time: Theoretical vs. Average

Critical Activity

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%

Most Time Inefficiency Comes from Waiting: Flow Times in White Collar Processes


Levers for Reducing Flow Time

Decrease the work content of critical activities.

– work smarter.

– work faster.

– do it right the first time.

Move work content from critical to non-critical activities.

– to non-critical path or to “outer loop.’’

Reduce waiting time.


Operational Measure: CapacityDrivers: 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]


A Recipe for Capacity Measurements

Resource Unit Load Resource Capacity Process Resource(time/job) Unit Capacity # of units Total Capacity Utilization*

* assuming system is processing at full capacity


Pizza Pazza: Flow Rate/Capacity Analysis

1. What is the minimum number of pizza pans needed to ensure that no order has to wait for a pan?

2. If the Jacqueline calls in sick one day, what is the maximum number of orders that PP can fill?

Pizza Pazza:What if demand changes over time?

After operating for a few weeks, Jean realizes that hourly orders follow a predictable pattern: 1. during a 2 hour busy period in the evening, the restaurant

receives 6 orders/hr and some customers have to wait a little for their pizza.

2. After this peak period, the order rate falls to 2 orders/hr. Draw a build-up diagram showing how the backlog (unfilled

orders) changes throughout the evening. What is the maximum backlog during the day? When is the backlog cleared?

Pizza Pazza’s Backlog Diagram

# of unfilled orders


Pricing: Wages and Quantity Discounts

1. Assume Jean and Jacqueline decide to hire two employees to perform their respective tasks; each paid €8 per hour. What is the contribution margin (revenue - variable costs) generated per hour of operation of the process if pizzas sell for €5 each? What is the minimum amount that Jean can charge per pizza, and still make a profit?

– Resource cost =– Material cost =– Contribution margin if sale price is €5 =– Minimum sale price =

2. Is it worth offering any discount to encourage all orders to be for three pizzas? If so, how much?


Capacity Investments: Another oven? Task reallocation

1. The pizzas have become wildly popular and Jean feels that they can easily sell twenty pizzas per hour. To increase capacity, he is thinking of renting another industrial oven, which would cost €10 for each hour that the oven is used. Do you think it is worthwhile for Jean to rent the oven if the rest of the process is kept as is (assume that Jean and Jacqueline are doing the tasks)? What would be the contribution margin from each hour of operation of the process?

– Resource cost =– Material cost =– Contribution margin if sale price is €5 =

2. Can you think of ways to increase profits by reallocating tasks between the employees?


Levers for Increasing Process Capacity

Decrease the work content of bottleneck activities– work smarter– work faster– do it right the first time

Move work content from bottlenecks to non-bottlenecks– create flexibility to handle tasks originally assigned to bottleneck– to non-critical resource or to third party

Increase Net Availability– work longer: increase scheduled availability– increase scale (invest)– increase size of load batches/reduce or eliminate setups & changeovers– eliminate availability waste


Product Mix Decisions:Pizza Pazza offers 2 pizza types

Sale Price of thin crust: €5

Cost of Materials: €1.40

Sale Price of deep dish: €7.50

Cost of Materials: €1.90

Which of these two products should Jean push to customers that call in and are undecided?

Suppose they take the same processing except that deep dish require 5 min (vs 2) in sauce prep and 29 min (vs 15) in baking.


Product Mix Decisions

Margin of thin crust pizza = €3.60

Margin of deep dish pizza = €5.60

Margin per oven minute from thin crust

= €3.60 / 16 min = € 0.225/min

Margin per oven minute from deep dish

= €5.60 / 30 min = € 0.180/min


Solver Model for Optimal Product Mix Selection

xt: Number of thin crust pizzas sold.

xd: Number of deep dish pizzas sold.

Max 3.60 xt + 5.60 xd

subject to

16 xt + 30 xd < 1200

… < …

… < …

xt < 100

xd < 50

Technology/Resource Constraints

Market/Demand Constraints

Assume we work 20 hrs = 1200min per week

Assume this is maximal weeklydemand


National Cranberry Cooperative

Lin/Operations/Process Analysis & Apps1 Process Analysis and Applications Module u Operational...

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