1. Chapter 2: The Process View of an Organization

2. Process Structures Continuous Processing Repetitive (assembly lines)
Batch processing
Job Shops
“continuous or semi-continuous”
“intermittent”

3. The Product-Process Matrix
Low Volume
(unique)
Medium Volume
(high variety)
High Volume
(lower variety)
Very high volume
(standardized)
Job Shop
Unit variable costs
generally too high
CABG Surgery
Batch Process
Exec. Shirt
Manzana Insurance
Worker-paced line
Toshiba
Machine-paced line
Toyota
Utilization of fixed capital
generally too low
National
Cranberry
Continuous process
Categorizes processes into one of five clusters
Similar processes tend to have similar problems
There exists a long-term drift from the upper left to the lower right

4. Exercise Form a group of 2-3 students
From your experience/observation, select a product produced for each of these processing models:
Job shop
Batch processing
Assembly line
Continuous processing
Share results with the class

5. Three Measures of Process Performance
First choose an appropriate flow Unit – a customer, a car, a scooter, etc.
Inventory (WIP in a process)
Flow time
Time it takes a unit to get through the process
Flow rate (throughput rate)
Rate at which the process is delivering output
Maximum rate that a process can generate supply is called the capacity of the process
Inputs
Outputs
Goods
Services
Resources Labor & Capital
Process
Flow units
(raw material, customers)

6. Example Topic Flow Unit Flow Rate Flow Time Inventory U.S. Immigration
Applications
Approved/rejected cases (6.3 MM/year)
Average processing time (7.6 months)
Pending cases (4.0 MM)
Champagne Industry
Bottles of Champagne
260 MM bottles per year
3.46 years in cellar
900 Million bottles
MBA Program
MBA Student
600 students/year
2 years
1200 students
Muhlenberg College
Outback Steak House

7. Little’s Law What it is: Inventory (I) = Flow Rate (R) * Flow Time (T)
Implications:
Out of the three performance measures (I,R,T), two can be chosen by management, the other is GIVEN by nature
Hold throughput (flow rate) constant: Reducing inventory = reducing flow time
7:00
8:00
9:00
10:00
11:00
12:00
13:00
14:00
15:00
16:00
17:00
18:00 11 10 9 8 7 6 5 4 3 2 1
Flow Time
Inventory
Inventory=Cumulative Inflow – Cumulative Outflow
Cumulative
Inflow
Outflow
Time
Patients

8. Examples
Suppose that from 12 to 1 p.m. 200 students per hour enter the GQ and each student is in the system for an average of 45 minutes. What is the average number of students in the GQ?
Inventory = Flow Rate * Flow Time
= 200 per hour * 45 minutes (= 0.75 hours)
= 150 students
If ten students on average are waiting in line for sandwiches and each is in line for five minutes, on average, how many students are arrive each hour for sandwiches?
Flow Rate = Inventory / Flow Time = 10 Students / 5 minutes = hour
= 120 students per hour
Problem 2.2: Airline check-in data indicate from 9 to 10 a.m. 255 passengers checked in. Moreover, based on the number waiting in line, airport management found that on average, 35 people were waiting to check in. How long did the average passenger have to wait?
Flow Time = Inventory / Flow Rate = 35 passengers / 255 passengers per hour = hours
= 8.24 minutes

9. Queuing Theory Waiting occurs in Service facility
Fast-food restaurants
post office
grocery store
bank
Manufacturing
Equipment awaiting repair
Phone or computer network
Product orders
Why is there waiting?

10. Measures of System Performance
Average number of customers waiting
In the queue (Lq)
In the system (L)
Average time customers wait
In the queue (Wq)
In the system (W)
System utilization (r)

11. Number of Servers Single Server Multiple Servers
Multiple Single Servers

12. Some Models 1. Single server, exponential service time (M/M/1)
2. Multiple servers, exponential service time (M/M/s)
A Taxonomy
M / M / s
Poisson Arrival Exponential Number of
Distribution Service Dist Servers
where
M = exponential distribution (“Markovian”)
(Both Poisson and Exponential are Markovian – hence the “M” notation)

13. l = customer arrival rate
Given
l = customer arrival rate
m = service rate (1/m = average service time)
s = number of servers
Calculate
Lq = average number of customers in the queue
L = average number of customers in the system
Wq = average waiting time in the queue
W = average waiting time (including service)
Pn = probability of having n customers in the system
r = system utilization
Note regarding Little’s Law: L = l * W and Lq = l * Wq

14. Model 1: M/M/1 Example
The reference desk at a library receives request for assistance at an average rate of 10 per hour (Poisson distribution). There is only one librarian at the reference desk, and he can serve customers in an average of 5 minutes (exponential distribution). What are the measures of performance for this system? How much would the waiting time decrease if another server were added?

15. Example: One Fast Server or Many Slow Servers?
Beefy Burgers is considering changing the way that they serve customers. For most of the day (all but their lunch hour), they have three registers open. Customers arrive at an average rate of 50 per hour. Each cashier takes the customer’s order, collects the money, and then gets the burgers and pours the drinks. This takes an average of 3 minutes per customer (exponential distribution). They are considering having just one cash register. While one person takes the order and collects the money, another will pour the drinks and another will get the burgers. The three together think they can serve a customer in an average of 1 minute. Should they switch to one register?

16. 3 Slow Servers 1 Fast Server
W is less for one fast server, so choose this option.

17. Application of Queuing Theory
We can use the results from queuing theory to make the following types of decisions:
How many servers to employ
Whether to use one fast server or a number of slower servers
Whether to have general purpose or faster specific servers
Goal: Minimize total cost = cost of servers + cost of waiting

18. Cost/Benefit Analysis
Cost of service: # Servers * Cost of each server
Service cost = s * Cs
Cost of Waiting: Cost of waiting * Time waiting * number of customers/time unit
Waiting Cost = l * Cw * W
If you save more in waiting than you spend in service, make the change
Example
A fast food restaurant has three servers, each earning $10 per hour. Fifty customers per hour arrive and a server can serve a customer in three minutes. Should the restaurant add a fourth server if the cost of a customer waiting is estimated at $20 per hour?
Answer

19. Example: Southern Railroad
The Southern Railroad Company has been subcontracting for painting of its railroad cars as needed. Management has decided the company might save money by doing the work itself. They are considering two alternatives. Alternative 1 is to provide two paint shops, where painting is to be done by hand (one car at a time in each shop) for a total hourly cost of $70. The painting time for a car would be 6 hours on average (assume an exponential painting distribution) to paint one car. Alternative 2 is to provide one spray shop at a cost of $175 per hour. Cars would be painted one at a time and it would take three hours on average (assume an exponential painting distribution) to paint one car. For each alternative, cars arrive randomly at a rate of one every 5 hours. The cost of idle time per car is $150 per hour.
Estimate the average waiting time in the system saved by alternative 2.
What is the expected total cost per hour for each alternative? Which is the least expensive?
Answer: Alt 2 saves 1.87 hours. Cost of Alt 1 is: $ / hour and cost of Alt 2 is $ /hour.

20. Calculating Inventory Turns & Per Unit Inventory Costs
Annual inventory costs (as a % of item value) include financing costs, depreciation, obsolescence, storage, handling, theft
Obtaining data
Look up inventory value on the balance sheet
Look up cost of goods sold (COGS) from earnings statement – not sales!!
Common benchmark is inventory turns
Inventory Turns = COGS/ Inventory Value
Compute per unit inventory costs:
Per unit inventory costs =
Annual inventory costs (as a % of item cost) / Inventory turns

21. Example
Problem 2.3: A manufacturing company producing medical devices reported $60 million in sales last year. At the end of the year, they had $20 million worth of inventory in ready-to ship devices.
Assuming that units are valued at $1000 per unit and sold at $2000 per unit, what is the turnover rate?
Assume the company uses a 25% per year cost of inventory. What is the inventory cost for a $1000 (COGS) item. Assume that inventory turns are independent of price.
Answer
Sales = $60,000,000 per year / $2000 per unit = 30,000 units sold per $1000 COGS per unit
Inventory = $20,000,000 / $1000 per unit = 20,000 units in inventory
Turns = COGS/Inventory =
$30,000,000/$20,000,000 = 1.5 turns
Cost of Inventory: For a $1000 product, the total inventory cost (for one turn) is $1000* 25% or $250. This divided by 1.5 turns gives an absolute inventory cost of $

22. Why Hold Inventory? Pipeline inventory Seasonal Inventory Time
Cumulative
Number of
patients
1.5 Patients
7:00
8:00
9:00
10:00
1.5 hours
11:00
12:00 7 6 5 4 3 2 1

23. Why Hold Inventory? Cycle Inventory Decoupling inventory/Buffers
Safety Inventory
200
400
600
800
1000
1200 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Cumulative Inflow and outflow
Days of the month
Figure 2.12: Safety inventory at a blood bank
Safety inventory
Cumulative inflow
Cumulative outflow

24. Inventory Turnover Statistics
Industries with higher gross margins tend to have lower inventory turns
Wholesale
Groceries & related: 17.8
Vehicles & automotive: 6.9
Furniture & fixtures: 5.5
Sporting goods: 4.8
Drug store items: 8.5
Apparel & related: 5.5
Petroleum & related: 42.4
Alcoholic beverages: 8.5
Retail
Hardware stores: 3.5
Retail Nurseries & Garden Supply: 3.3
General Merchandise Stores: 4.7
Grocery Stores: 12.7
New & Used Car Dealers: 6.8
Gas stations & mini-marts: 39.3
Apparel & Accessories: 3.5
Furniture & home furnishings: 4.1
Drug Stores: 5.3
Liquor Stores: 6.6
Other Retail Stores: 4.3
Source: Bizstats.com