1. Littlefield Technologies Simulation Team Project: managers at an assembly shop –Procure materials, Plan for productions, Sales –Overview posted on Bb Grading: 25% of final grade –Team performance (cash position) – 30% –Group report – 70% Purchase the access code online by Oct. 28 –Check Announcement on Bb for details –Have your individual code information available in the next class 1

2. Product Design Purchasing / Sourcing ProductionFulfillment Define user needs Translate to specs Generate concepts Select concepts Engineer / develop Project management Design-to-cost Obtain quotes Work with suppliers Streamline supply base Evaluate total cost of ownership Design and Improve internal processes Manage throughput Improve efficiency Quality Lean operations Toyota Deliver goods to the customer Forecasting of demand Dealing with demand uncertainty Risk reduction and management For physical goods Product Design Purchasing / Sourcing Production and fulfillment For services Typical OM Decision Phases

3. Inputs: Capital Materials Equipment Facilities Suppliers Labor Knowledge Time Transformation System: Production Transportation Storage Inspection Output: Goods Services Monitoring & Controlling Environment: CustomerCompetitorsSuppliers Government TechnologyEconomy Operations as a Process…

4. A Successful Operations Process: 4 Supply vs. Demand Demand management Supply management Capacity Planning Waiting Line Management (Service Operations) Inventory Control Supply Chain Management Quality Management, Lean Manufacturing…

5. Mismatch can take one of the following two forms Demand waits for supply (inventory=waiting customers) Supply waits for demand (inventory=goods or resources) Analyzing processes helps us to create a better match Dilemma of Almost Every Firm: Supply Does Not Match Demand

6. Objective of the Class The objective of this class is to understand how organizations can improve business processes to produce and deliver products/services that better meet customer demands/expectations What Can Ops Management (this course) Do to Help? Providing analytical tools to –Step 1: Make Operational Trade-Offs –Step 2: Overcome Inefficiencies –Step 3: Evaluate Proposed Redesigns/New Technologies

7. A Call Center Example Objective: 80% of incoming calls wait less than 20 seconds Now: 30% of incoming calls wait less than 20 seconds Problem: trade-off between service level and operation costs OM measures responsiveness and labor productivity: –Is current system efficient? –Benefit/Cost analysis for additional staffing –Evaluate new opportunities: develop/purchase technology X?

8. 8 Strategy/ Marketing EngineeringAccounting Industrial Engineering Purchasing/ Logistics Finance Information Management Organizational Behavior Operations Management Manufacturing Strategy Business Process Redesign Product Integration Process Management MIS CIM TQM Supply Chain Management Performance Measuring & Planning Service Management Improvement Programs Cash flow planning Simultaneous Engineering Voss, C.A. (1995) ‘Operations management – from Taylor to Toyota – and Beyond?, British Journal of Management Operations As Part of the Organization

9. Job Shop Batch Process Worker-paced line Machine-paced line Continuous process Low Volume (unique) Medium Volume (high variety) High Volume (lower variety) Very high volume (standardized) Utilization of fixed capital generally too low Unit variable costs generally too high Commercial Printer Apparel Production High volume Auto assembly Oil refinery Product-Process Matrix (Hayes and Wheelwright) Low volume Auto Assembly Types of Processes

10. Process Performance Measures Inventory (or work-in-process): units or $ at any time Flow time Flow rate (throughput rate) –Capacity = Max (Flow rate) Fundamental Relationship of Little’s Law: Inventory = Throughput Rate x Flow Time I (units) = R (units/unit time) x T (time) On Average…

11. Examples… Cars arrive to the drive-thru of a fast food restaurant, on average every two minutes. If a car spends on average 5 minutes in the drive-thru (either waiting or being served), how many cars on average are there at the drive-thru? 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? 11

12. Little’s Law: more powerful than you think... When does it hold? Implications: Underlying measures for inventory: –Days of Supply/Inventory = T (in days) = I/R –Inventory Turns = 1/ T = R/I

13. Inventory (I) = Flow Rate (R) * Flow Time (T) Compute the Days of inventory and Turns: Throughput: 5000kg/week Inventory: 2500kg More Examples Cost of Goods sold: 25,263 mill $/year Inventory: 2,003 mill $ Cost of Goods sold: 20,000 mill $/year Inventory: 391 mill $ R = COGS Turns = COGS/I Days=I/COGS *365

14. Retailer CC Retailer BB Inventory Cost Calculation Compute per unit inventory costs as: Per unit Inventory costs= Example: Annual inventory costs=30% Inventory turns=6 Per unit Inventory costs= Source: Gaur, Fisher, Raman Inventory Costs in Retailing and Its Link to Inventory Turns Compare per unit Inventory cost for BB and CC

15. 15 More Exe.: Costco vs. Wal-Mart Assume that both companies have an average annual holding cost rate of 30% 1)How many days does a product stay in Costco’s inventory before it is sold? (Assume that stores are operated 365 days a year) 1)How much lower is the inventory cost for Costco compared to Wal-Mart of a household cleaner valued at $5 COGS? CostcoWal-Mart Wholesale ($ Millions)Stores ($ Millions) Inventories$ 3,643$ 29,447 Sales (net)$48,106$286,103 COGS$41,651$215,493

16. Inputs Outputs Goods Services Resources Labor & Capital Process Goods Services Resources Labor & Capital The Proess View of an Organization Flow units (raw material, customers) Waiting / Buffers No Value added No Capacity Inventory Arrows Indicate the flow direction Activities/Resources Value added step Have Capacity Process Flow Diagram Identify the flow unit

17. Capacity, Bottleneck Line flow Bottleneck = Process Capacity =

18. Flow Rate vs. Capacity 18 Demand < Supply: demand-constrained Demand > Supply: Capacity < Input: Capacity-constrained Input < Capacity: Input-constrained Flow Rate =

19. Example: Process at Circored Plant 1 st Reactor: 28 tons, 15 minutes 2 nd Reactor: 400 tons, 4 hours 3 briquetting machines, each 55 t/h Process Capacity = Bottleneck (assume input and demand not constrained) = 19 Flash Heater DischargeBriquetting Lock Hoppers 1 st Reactor2 nd ReactorPre-Heater Pile of Iron ore fines Finished Goods (120 t/h)(110 t/h) (135 t/h)(118 t/h)

20. Utilization Process utilization = Flow rate/Process capacity Resource utilization = Flow rate/ Capacity of resource If Demand = 657,000 t/year, compute process/resource utilizations 20 What if D = 125 t/h Process U = ?

21. Another Process 1.Process capacity 2.Bottleneck Assume that input and demand are not constraining the process

22. Other Related Measures Cycle Time = 1/ Flow Rate Idle Time = Cycle Time – Activity Time Utilization = activity time/ cycle time Eg: It takes a machine 15 minutes to process a unit. Demand is 2 units/hour. Cycle Time = Idle Time = Utilization = 22

23. Summary Measures of Process Performance –Little’s Law: I=RT Measures of Inventory –Turns and Days of Inventory –Inventory cost: annual and per unit costs Process Analysis –Process flow diagram –Process/Resource capacity and utilization, bottleneck –Cycle, activity and idle time 23

24. Readings and Assignment Chapter 2: p.10 ~23 Chapter 3: p.32 ~42 CRU case Assign 1 (Bb: under Drop Box in the content area) –Turn in a hard (paper) copy before next class 24

25. What percentage of cost of a Dell computer reflects inventory costs? Assume Dell’s yearly inventory cost is 40% to account for the cost of capital for financing the inventory, the warehouse space, and the cost of obsolescence. In 2001, Dell’s 10-k reports showed that the company had $400 million in inventory and COGS of $26,442 million. 25 More exe.

26. Mt. Kinley is a strategy consulting firm that divides its consultants into three classes: associates, managers, and partners. The firm has been stable in size for the last 20 years. Specifically, there have been, and are expected to be, 200 associates, 60 mangers, and 20 partners. The work environment at Mt. Kinley is rather competitive. After four years of working as an associate, a consultant goes” either up or out”; that is, becomes a manager or is dismissed from the company. Similarly, after six years, a manager either becomes a partner or is dismissed. The company recruits MBAs as associate consultants; no hires are made at the manager or partner level. A partner stays with the company for another 10 years (a total of 20 years with the company). A) How many new MBA should be hired per year? B) What are the odds that a new hire will become partner? 26

27. Consider a process consisting of three resources below. What is the bottleneck? What is the utilization of each resource if demand is eight units per hour? 27 ResourceActivity Time (min/unit)# workers 1102 261 3163

28. 28 What are the process capacity (tons/hour) and bottleneck? Assume input and demand are not constraining the process. BD F E (60) (140) (100) (40) 2 parts 1 part C A (100) (50)