1. 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
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2. 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.
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3. Operational Performance Measures
Flow time
Throughput
Inventory
Process Cost
Quality
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4. 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
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5. 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
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6. 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?
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7. 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?
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8. MBPF Inc.: Consolidated Statement
Notes:
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9. MBPF Inc.: Balance Sheet
Notes:
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10. MBPF Inc.: Inventory and Cost of Goods
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11. 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
$9.8
Notes:
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12. S. Chopra/Process Flows
MBPF Inc.: Flow Times
Notes:
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13. S. Chopra/Process Flows
Flow rate R
($/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
Notes:
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14. Why the Difference in Performance?
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15. S. Chopra/Process Flows
CRU Computer Rentals
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16. 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
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Status 20
Status 42
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17. S. Chopra/Process Flows
CRU Situation in Previous Year: Customer term = 8 wks, Demand = 1000 units/wk
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18. 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) x700x 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:
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19. S. Chopra/Process Flows
CRU Situation in Current Year: flow times unchanged, Demand = 1400 units/wk
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20. 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 ,200 x 35 = $256,000/wk
Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4 x 980x 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
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21. S. Chopra/Process Flows
CRU Potential situation in Current Year: without sales drive, Demand = 600 units/wk
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22. 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 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
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23. 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
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