Process Analysis and Applications Module 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 S. Chopra/Operations/Process Analysis & Apps

How can operations help a company compete 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/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

What is Improvement? Operational Performance Measures Flow time Throughput Inventory Process Cost Quality S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Flow rate/Throughput R 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] Flow time = Inventory / Throughput T = I / R Turnover = Throughput / Inventory = 1/ T S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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 S. Chopra/Operations/Process Analysis & Apps

Targeting Improvement MBPF Inc.: Consolidated Statement Notes: S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Targeting Improvement MBPF Inc.: Balance Sheet Notes: S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Targeting Improvement MBPF Inc.: Inventory and Cost of Goods Notes: S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

MBPF Business Process Flows Targeting Improvement 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/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Targeting Improvement MBPF Inc.: Flow Times Notes: S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Targeting Improvement 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/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Why the Difference in Performance? S. Chopra/Operations/Process Analysis & Apps

CRU Computer Rentals S. Chopra/Operations/Process Analysis & Apps

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 Notes: S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Process Analysis and Applications Module 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 S. Chopra/Operations/Process Analysis & Apps

Operational Performance Measures How to measure and decrease flow times? How to measure and increase throughput? S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Pizza Pazza Flow Chart S. Chopra/Operations/Process Analysis & Apps

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) S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Operational Measure: Flow Time Driver: Critical Activity Times (Theoretical) Flow Time Critical Activity Flow Time efficiency S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Most time inefficiency comes from waiting: E. g Most time inefficiency comes from waiting: E.g.: Flow Times in White Collar Processes S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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. S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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] S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

A Recipe for Capacity Measurements * assuming system is processing at full capacity S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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 = S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Cost Capacity Profile Capacity Resource x NCX-10 Furnaces Demand [units/time] Marginal Investment Cost [$/unit/time] Resource x NCX-10 Furnaces Demand Process Capacity S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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 S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

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 S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Other factors affecting Process Capacity Batch (Order) Sizes Product Mix other managerial policies ... S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Product Mix Decisions: Pizza Pazza offers 2 products Sale Price of thin crust pizza: €5.00/pizza Cost of Materials: €1.40/pizza Sale Price of deep dish pizza: €7.50/pizza Cost of Materials: €1.90/pizza S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Product Mix Decisions S. Chopra/Operations/Process Analysis & Apps

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 S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

National Cranberry Cooperative S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps

Learning Objectives: Multi-Product Process Analysis & Apps Process measures: Flow time  manage critical activities Capacity  manage bottleneck resources Levers for improving 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 S. Chopra/Operations/Process Analysis & Apps S. Chopra/Operations/Process Analysis & Apps