1. Slide 1 Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon ChristianTerwiesch All slides in this file are copyrighted by Gerard Cachon and Christian Terwiesch. Any instructor that adopts Matching Supply with Demand: An Introduction to Operations Management as a required text for their course is free to use and modify these slides as desired. All others must obtain explicit written permission from the authors to use these slides.

2. Slide 2 Lean and Toyota

3. Slide 3 Assembly Operations Exercise

4. Slide 4 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Final Assembler’s cost Including Tier 1 Costs Including Tier 2 Costs Rolled-up Costs over ~ 5 Tiers Purchased parts and assemblies Parts and material costs Material costs Logistics costs Assembly and other Labor costs Quality Warranty Overhead Other While labor costs appear small at first, they are important - look relative to value added - role up costs throughout the value chain Implications - also hunt for pennies (e.g. line balancing) - spread operational excellence through the value chain Source: Whitney / DaimlerChrysler The Role of Labor Costs in Manufacturing: The Auto Industry

5. Slide 5 Product Requirements Design is specified by this drawing Product must function correctly (test: LED blinks 5 seconds) Aesthetics are welcome, but not considered in the supplier selection Material costs Buzzer$1.13 per unit Resistor$0.66 per unit Light Emitting Diode$0.23 per unit Breadboard$5.02 per unit Wire$0.01 per board

6. Slide 6 Process Requirements Four step worker paced line must be used Assembly steps have to be performed in the sequence indicated above Workers work 7 hours a day (this is net of breaks) Workers cannot be assigned to multiple steps / rotate between steps, etc One material handler moves parts between stages Overhead costs of $1000 per day Your management expects your plant to generate $1000 per day in profits Cut Wires Mount Wires Mount Components Inspect

7. Slide 7 Assignment 1. Measure activity times 2. Do cost calculations 3. Submit a sealed bid to me 20

8. Slide 8 The IMVP Studies

9. Slide 9 Lean Tool-box This set of slides summarizes a set of lean operations tools (there is much more): 1.Mapping the Process Flow 2.Identifying sources of wasted capacity 3.Understanding barriers to flow 4.Standardization of work / standard operating procedures 5.Balance resources and have demand drive the process 6.Overall Equipment Effectiveness / Effective Capacity Utilization

10. Slide 10 Tool 1: Mapping Out the Process Customer goes to broker Broker fills out forms 30 mins Transfer to ISC Place apps in in-boxes Non-Referrals 15 min target Referrals 20 min target Based on auto UW system List of tasks generated: Declaration signed Direct Debit Valuation Report Etc Telephone or in- person Check app - 55% non-referral - 45% full referral Call broker and provide list of required docs Record on electronic notepad Target 3hr return call for full referral 24 hrs (based on arrival time) from non- referral Sorted Allocated Not true FIFO Flags Shared Ownership Foreign national Sale and completion Not simultaneous Call Broker to speak directly Send Fax No answer Add to note pad Application 15/20 min target Post-Offer Pre-Offer Broker contacts customer Requests required information Materials submitted Chase Team CPS Team Phone duty Received via - Nexus - PC fax - Manual fax Review incoming post 24 hr target to review Targets to chase up docs (3/7/12/18/28 days) Review Case Check status Review post Call for info 13 min target Computer flags automatically Request materials Check for errors Application complete Make offer Application complete Make offer Call broker if there are document problems Automatic Call broker Give Up Completion of house Broker gets paid Automatic Call broken ??? Weeks to months Sales and marketing disconnected from operations Widely varying demand Large WIP and long lead times Variable performance amongst associates Lack of a value stream perspective Redundant work

11. Slide 11 Tool 2: Understand Sources of Wasted Capacity OverproductionTransportation Waiting Inventory Over-processingMotionRework The seven sources of waste (Muda) Potential eighth source of waste: The waste of intellect Not “orthogonal to each other” Poor flow – Waste of Customer’s time Poor use of capacity – Waste of the Resource’s time The first five sources are RESOURCE centric You find them by observing / attaching yourself to a resource Observation and data collection on the front line is key MyObserver

12. Slide 12 Tool 3: Understand the Barriers to Flow : The Customer’s Perspective Driving Parking Check-in Vitals Waiting PCP Appt. Check out Labs Drive home 20 minutes How much time does a patient spend on a primary care encounter? Two types of wasted time: Auxiliary activities required to get to value add activities (result of process location / lay-out) Wait time (result of bottlenecks / insufficient capacity) =>“Product has to flow like water”? Inventory: the symptom of poor flow - associated with (a) financing cost (b) customer wait (c) quality problems Waiting time: opposite side of the same coin (Little’s Law) Total value add time of a unit Total time a unit is in the process Flow Time Efficiency (or %VAT) =

13. Slide 13 Tool 4: Standard Operating procedures / Quartile Analysis Call durations Courtesy / Friendliness (qualitative information) long short Low courtesy High courtesy 2:00 min. 2:30 min. 3:00 min. 3:30 min. 4:00 min. 4:30 min. Operator NN Operator BK Operator BJ Operator KB Operator NJ Activity times by Operator KB NN BJ BK SD NJ CT Best Practice in team Operator CT Operator SD Quartile analysis is an easy tool to identify performance variation Variation in performance often reflects a poor process standardization

14. Slide 14 Tool 5: Balance Resources and Have Demand Drive the Process Balance the Line Staff to Demand Look for idle time and measure labor utilization Reduce idle time by: Staffing to demand (potentially eliminating excess process capacity) Balancing the line (reduce idle time created by excess capacity relative to bottleneck)

15. Slide 15 Tool 6: Overall equipment effectiveness (OEE) Net oper a- ting time Idling and minor stop- pages Re- duce d Spee d (quar tile plot) OEEDefe cts Start- up Avail - able time Brea k- dow n Chang e- overs Total plan ned up- time 30 55 100 45 Downtime losses Availability rate 55 % Speed losses Performance rate 82 % X X = OEE 30 % Quality losses Quality rate 67 % Improve- ment potential > 300%

16. Slide 16 Total paid timeTime in practiceTime booked For appointments Time with patients True value add time Vacation Sick Time not booked Cancelations Patients that don’t have to see MD Activities that don’t have to be done by MD Step 1: start with the “book-ends” (very left and very right bar) Step 2: Include the results from the previous steps - Wasted capacity - Customer wait time (can show up in the form of cancelations and complaints) - Quartile analysis - Idle time Tool 6: Overall equipment effectiveness (OEE)

17. Slide 17 Capital One Case: A Structured Approach Tool Step 1: Step 2: Step 3: Step 4: Step 5: Step 6: Map the process and understand the overall process flow (from beginning to end) Do we believe there is an improvement opportunity here? What overall (system level) targets exist? What is the status quo relative to this target? => Performance gap What does the overall target mean for each resource? What is the current capacity at each resource? => Performance gap for each resource What improvement potential exists at each resource individually? What other (system level) improvement potential do you see? What process changes do you recommend to close the performance gap(s)? What is the financial value of this improvement? Map the process Sources of Wasted capacity Flow Time Efficiency Understand demand target Staff to demand Quartile Analysis OEE Analysis KPI tree with incremental profit at the root

18. Slide 18 The Toyota Production System – An alternative to traditional mass production 1903 1st car 1908 1st Model T 1911 F.W. Taylor 1913 1st moving line 1923 2.1 million vehicles/ year Cos t US D/u nit 191619 04 1926 95 0 36 0 290 Key idea of TPS: systematic elimination of non-value-adding activities 1933 Founded 1946 Major strike 1950 Start of TPS 1960s Supplier develop- ment 1980s Trans- plants Mass production driven by economies of scale impossible – Low production volume (1950): GM 3,656,000 – Toyota 11,000 – Low productivity (Japan 1/9 of US) – Lack of resources Taylorism: Standardized parts and work patterns (time studies) Moving line ensuring working at same pace Process driven by huge, rapid machinery with inflexible batch production Source:McKinsey Key idea of Ford: cost reduction through cheap labor and economies of scale

19. Slide 19 More details on the Toyota Production System: See chapter in 2 nd edition “Matching Supply with Demand” Zero non-value added activities (muda) Zero defects, zero breakdowns, zero inventory, zero set-up Production flow synchronized with demand (JIT) One-unit-at-a-time flow Mixed model production (heijunka) Piece-by-piece transfer (ikko-nagashi) Match production demand based on Takt time Pull instead of push Supermarket / Kanban Make-to-order Quality methods to reduce defects Fool-proofing (poka-yoke) and visual feed-back Detect-stop-alert (Jidoka) Defects at machines (original Jidoka) Defects in assembly (Andon cord) Build-in-quality (tsukurikomi) Flexibility Standardization of work Worker involvement Quality circles (Kaizen) Fishbone diagrams (Ishikawa) Skill development / X-training Reduction of Variability Quartile Analysis Standard operating procedures Adjustment of capacity to meet takt-time Multi-task assignment (takotei-mochi) Reduce inventory to expose defects 8.28.4 8.5 8.6 8.7 8.9 8.8 Toyota Production System: An Overview

20. Slide 20 7 1 2 3 4 5 6 8 ITAT=7*1 minute 3 1 2 4 ITAT=2*1 minute Good unit Defective unit The Impact of Inventory on Quality Zero inventory is a really bad idea … Inventory leads to a longer ITAT (Information turnaround time) => slow feed-back and no learning Inventory takes pressure off the resources (they feel buffered): demonstrated behavioral effects Expose problems instead of hiding them Inventory in process Buffer argument: “Increase inventory” Toyota argument: “Decrease inventory” Assume a 1 minute takt time

21. Slide 21 Just-in Time Process Reduces Inventory and Drives Quality Pull: Synchronized production Pull: Kanban Visual way to implement a pull system Amount of WIP is determined by number of cards Kanban = Sign board Work needs to be authorized by demand Part produced for specific order (at supplier) shipped right to assembly real-time synchronization for large parts (seat) inspected at source Kanban Authorize production of next unit