1. Targeting Improvement Module
Key Operational Metrics: Time T, Inventory I, Throughput rate R
Link through Little’s Law
Link Operational Metrics to Financial Metrics
Levers for Improvement
Firm & Divisional Level: MBPF Inc.
Mkt-Ops: CRU Computer Rentals
J.A. Van Mieghem/Operations/Process Analysis & Apps

2. Strategic fit & competencies Financials & process view
What is an improvement?
Strategic fit & competencies
Financials & process view
J.A. Van Mieghem/Operations/Process Analysis & Apps

3. Operational Performance Measures
Flow (Cycle) time - T
Throughput / flow rate – R
Takt Time
Inventory - I
Process Cost
Quality
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4. The business imperative: economic value creation
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

5. What is Toyota doing now?
Taiichi Ohno’s answer was very simple:
“All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes.”
Simple but brilliant.
(Taiichi Ohno. Toyota Production System: Beyond Large-Scale Production. p. ix.)
J.A. Van Mieghem/Operations/Strategy

6. How reduce flow time? There are only two available levers
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7. Takt Time Willys Jeep Takt time = Example:
Total time available
Customer demand
“The rhythm of the conductor to keep the orchestra in time”
Takt time =
Takt time yields the rate at which customers demand product
and the production rate to stay synchronized with demand
Example:
Demand = 150,000 cars per year
Total available production time = 2 x 8 hrs/day x 250 days/yr = 4,000 hrs/year
Takt = 4,000 hrs/150,000 cars = 1hr/37.5 cars = 96 sec / car
What does Little’s Law say about takt time?
metronome
Key: Takt Time = 1/Throughput
Thus, LL says: Flow time = Inventory x Takt Time
Willys Jeep 
J.A. Van Mieghem/Operations/Strategy

8. Linking operational measures: 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
Inventory Turnover = Throughput / Inventory
= 1/ T
J.A. Van Mieghem/Operations/Process Analysis & Apps

9. A Process Example using Little’s Law
25% quit
4 patients/hr
Patient
checks in
Wait
Initial doctor
consultation
Doctor
requests
tests for
patient
Wait
Nurse takes
tests
75%
5 min
2 patients
12 min
5 min
1 patient
30 min
J.A. Van Mieghem/Operations/Strategy

10. Targeting Improvement Module
Key Operational Metrics: Time T, Inventory I, Throughput rate R
Link through Little’s Law
Link Operational Metrics to Financial Metrics
J.A. Van Mieghem/Operations/Process Analysis & Apps

11. Inventory Turns in Retailing and Its Link to Inventory Costs
Home Depot (1/30/2011)
Wal-Mart (1/31/2011)
Net Sales
$67,997
$418,952
Cost of sales
$44,693
$315,287
Net Income
$ 3,338
$ 15,355
Inventories
$10,625
$ 36,318
Months of Inventory
If Wal-Mart carried the same months of inventory as Home Depot, its inventories would be
I =
This would tie up about $ billion extra in inventory.
MOI: 10625/44693 *12 = 2.85 months = 4.2 times/year
36318/315287*12 = 1.38 months = 8.7 times/year
If Wal-Mart carried 2.85 months of inventory,
I = RT = ($315,287/12)*2.85 = $74,880
it would have about $39 billion extra in inventory
J.A. Van Mieghem/Operations/Strategy

12. Cash-to-Cash Cycle Inventory Accounts Accounts Receivable Payable Cash
Cash Conversion Cycle
Measures duration between purchase of inventory and collection of accounts receivable:
Cash Conversion Cycle=
Days of Inventory Days of Receivables Days of Payables
How long does it take between outlay of cash and collecting the reward?
J.A. Van Mieghem/Operations/Strategy

13. MBPF Inc.: Consolidated Statement
Notes:
J.A. Van Mieghem/Operations/Process Analysis & Apps

14. MBPF Inc.: Balance Sheet
Notes:
J.A. Van Mieghem/Operations/Process Analysis & Apps

15. Business Process Flows at MBPF, Inc: Cash to Cash cycle
C2C = - Days payable + Days of inventory + Days receivables
J.A. Van Mieghem/Operations/Process Analysis & Apps

16. Amazon Income Statement
Period Ending
Dec 31, 2010
Total Revenue
34,204,000  
Cost of Revenue
26,561,000  
Gross Profit
7,643,000  
Selling General and Administrative
6,237,000  
Operating Income or Loss
1,406,000  
Income from Continuing Operations
Total Other Expenses Net
130,000  
Earnings Before Interest And Taxes
1,536,000  
Interest Expense
39,000  
Income Before Tax
1,497,000  
Income Tax Expense
352,000  
Net Income From Continuing Ops
1,152,000  
Net Income

17. Amazon Balance Sheet Period Ending Dec 31, 2010
Cash And Cash Equivalents
3,777,000  
Short Term Investments
4,985,000  
Net Receivables
1,783,000  
Inventory
3,202,000  
Total Current Assets
13,747,000  
Property Plant and Equipment
2,414,000  
Goodwill
1,349,000  
Intangible Assets
-  
Other Assets
1,265,000  
Deferred Long Term Asset Charges
22,000  
Total Assets
18,797,000  
Accounts Payable
10,372,000  
Short/Current Long Term Debt
Total Current Liabilities
Long Term Debt
Other Liabilities
1,561,000  
Total Liabilities
11,933,000  
Total Stockholder Equity
6,864,000  
Net Tangible Assets
5,515,000  

18. MBPF Inc.: Inventory and Cost of Goods
Notes:
J.A. Van Mieghem/Operations/Process Analysis & Apps

19. MBPF Inc.: Detailed Financial Flows
$60.2/yr
Labor & OH
$25.3/yr
Labor & OH
$50.1/yr
$110.3/yr
$6.5
$15.1
Raw Materials
(roofs)
Fabrication
(roofs)
$175.8/yr
$175.8/yr
$10.6
$9.8
$40.2/yr
Notes:
Assembly
Finished Goods
$8.6
$40.2/yr
Purchased Parts (bases)
J.A. Van Mieghem/Operations/Process Analysis & Apps

20. MBPF Inc.: Detailed Flow Times
Notes:
J.A. Van Mieghem/Operations/Process Analysis & Apps

21. Where target improvement?
Flow rate R
($/week)
0.96
Flow Time T (weeks)
Accounts
Receivable
Finished
Goods
Assembly
Fabrication
Raw Materials
Purchased Parts
0.77
2.12
3.38
5.0

22. Case: CRU Computer Rentals Linking Financial and Operational Flows & Targeting Areas for Improvement
Handouts to be distributed in class
J.A. Van Mieghem/Operations/Process Analysis & Apps