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 Levers for Improvement CRU Computer Rentals S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows 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. S. Chopra/Process Flows S. Chopra

Operational Performance Measures Flow time Throughput Inventory Process Cost Quality S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows The business imperative: creating economic value Improvement levers Price Increase price Increase throughput Revenues x Quantity Profit - Material + Labor Costs + Reduce costs Improve quality Economic value added (EVA) Energy + - Overhead PP&E Capital invested + Reduce capital intensity Reduce inventory Inventory + Opportunity cost x Other Reduce time Weighted average cost of capital Financial metrics Operational metrics S. Chopra/Process Flows S. Chopra

Relating operational measures (flow time T, throughput R & inventory I) with Little’s Law Flow rate/Throughput R [units/hr] Inventory I [units] ... ... ... ... ... Flow Time T [hrs] Inventory = Throughput x Flow Time I = R x T Turnover = Throughput / Inventory = 1/ T S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows 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? S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows 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/Process Flows S. Chopra

MBPF Inc.: Consolidated Statement Notes: S. Chopra/Process Flows S. Chopra

MBPF Inc.: Balance Sheet Notes: S. Chopra/Process Flows S. Chopra

MBPF Inc.: Inventory and Cost of Goods Notes: S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows MBPF Business Process Flows Raw Materials (roofs) Fabrication $60.2/yr Assembly $25.3/yr Purchased Parts (bases) Finished Goods $6.5 $50.1/yr $40.2/yr $8.6 $15.1 $10.6 $110.3/yr $175.8/yr $9.8 Notes: S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows MBPF Inc.: Flow Times Notes: S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows Flow rate R ($/week) 0.96 Flow Time T (weeks) Accounts Receivable Finished Goods Assembly Fabrication Raw Materials Purchased Parts 11.12 6.75 7.12 3.14 2.90 5.80 0.77 2.12 3.38 5.0 Notes: S. Chopra/Process Flows S. Chopra

Why the Difference in Performance? S. Chopra/Process Flows

S. Chopra/Process Flows CRU Computer Rentals S. Chopra/Process Flows S. Chopra

Case: CRU Computer Rentals Flow Chart Status 40 Ship Receiving 30% Repairs 70% Status 24 15% Parts places order Receives from Supplier Customer Pre-Config Status 41 Status 32 Ship Config Repairs S. Chopra/Process Flows Status 20 Status 42 S. Chopra

S. Chopra/Process Flows CRU Situation in Previous Year: Customer term = 8 wks, Demand = 1000 units/wk S. Chopra/Process Flows S. Chopra

CRU Situation in Previous Year: 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 = $126,870-$92,340 = $34,530 Notes: S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows CRU Situation in Current Year: flow times unchanged, Demand = 1400 units/wk S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows CRU Situation in Current Year: 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 = $97,618 - $108,763 = -$11,145 Notes: S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows CRU Potential situation in Current Year: without sales drive, Demand = 600 units/wk S. Chopra/Process Flows S. Chopra

S. Chopra/Process Flows CRU Potential situation in Current Year: 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 = $76,122 - $55,404 = $20,718 Notes: S. Chopra/Process Flows S. Chopra

Learning Objectives Basic 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 Targeting areas and performance measures for improvement; link financial and operational flows Notes: S. Chopra/Process Flows S. Chopra