III. Operational Measures Flow Time Capacity and Flow Rate

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 output Inventory could take the form of the number of insurance claims or tax returns at the IRS, patients, students. How do these measures relate to the idea of matching supply with demand? Why no mention of profit? Higher flow rate increases supply and translate into more revenue if you have sufficient demand. Shorter flow time reduces delay btw the occurrence of demand and its fulfillment in the form of supply.

Flow Time Active Non-Active Flow Time = Meas. & Mix Spoon Clean & Hash Spread Toppings Pick Fillings Load & Set Timer Bake Box Payment Take Orders 1 min. 5 min. 3 min. 2 min. 8 min. Theoretical vs. Actual Flow Time Actual = Value-Added and Non-Value-Added Activities Active and Non-Active Times VA NVA Active Non-Active Flow Time efficiency

Flow Time Efficiency

Performance in Auto Industry GM Ford Daimler-Chrysler 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 1.45 Market Share 28% 21% 13.2% Profit/car in 2001 $367 < 0 In Jan, 2000, 43% of GM cars were flunking inspection as soon as they rolled off the line. Today, it is down to 16%. These improvement + strong balance sheet + lower cost structure = sell more at 0% financing campaign. Market share for GM is steady at 28% while Ford dropped 1.1% and DC dropped 1.3%. “Finally, Skid Control at GM”, BusinessWeek, March 25, 2002. Most data are for 2001. “Pick Me as Your Strike Target! No, Me!”, BusinessWeek, April 21, 2003 Business Week, March 25, 2002 GM Ford Daimler-Chrysler Japanese Automakers Flow Time (hrs) 26 27 31 17-22 Business Week, April 21, 2003

Levers for Reducing Flow Time See page 73-76: 4.5 – 4.6 Flow time: Levers:

Capacity (units/unit time) Capacity: maximal units a process can process per unit of time Capacity of a Single Resource Capacity of the oven = Capacity of c Identical Resources capacity of bake operation = Capacity of a network of resources (system capacity) Process time Tp oven Process time Tp c ovens From a supply perspective, the most important question that arises is how much a process can supply in a given unit of time, say one day. This measure is called process capacity.

Flow Rate (units/unit time) Flow rate R = Cycle time = Process utilization = Pipeline Principle: In the long run, on average, input rate = output rate R Flow rate: the units that a process actually does process per unit of time Input rate Output rate R The process actually does produce, not what it can produce.

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 = R Process time Tp c

Bottlenecks 10 min. 20 min. 8 min. 5 min. c = 2 c = 1 c = 3 c = 1 Tp

Bottlenecks: Multiple types of flow units 10 min. 20 min. 8 min. 5 min. 15 min. 40 min. 12 min. 7 min. Cookies Pizzas 2 1 3

Bottlenecks: Multiple flows 15 min. 10 min. 1 min. Mix Bake bread Spoon Bake cookies Pay 20 min. 8 min.

Levers for Increasing Throughput See page 99: 5.7. Levers for Managing Flow Rate Throughput: Levers:

Case Discussion: Manzana Insurance 1991 Second Quarter Performance

Manzana Insurance (cont.) 28.4 min./request Distribution Clerks (4) Underwriting Team #1 Underwriting Team #3 Raters (8) Underwriting Team #2 Policy Writers (5) 41 min./request 70.4 min./request 54.8 min./request Weighted average

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) Articles: Can Marketing and Manufacturing Coexist? – HBR Competing on Capabilities: The New Rules of Corporate Strategy – HBR