Midterm Notes.docx

Chapter 1: Process Management and Strategy 1.1 The Process View of Organizations Process – Any Transformation that converts inputs to outputs  – A  – A systematic series of actions directed to some end. Considers any organization to be a process with interconnected sub processes o Elements that characterize the transformation of a process: 1. Inputs & Outputs  – To  – To view an organization as a process, we must first identify its inputs and outputs o Inputs – Any tangible or intangible items that ‘flow’ into th e process from the environment. Includes RM, component parts, energy, data, a nd customers in need of service. Outputs – Any tangible or intangible items that flow from t he process back into the environment Finished products, pollution, processed information, or satisfied customers 2. Flow Units – Units  – The  The item being analyzed o May be an unit of input, or a unit of output Can also be the financial value of the input or output 3. Network of activities and buffers - Process activities are linked so the output of one becomes an input of o another Activity – The simplest form of transformation; it is the building block of a process Buffer – Stores flow units that have finished with one activity but are waiting for the next activity to start Inventory – Storage, the total number of f low units present within process boundaries Precedence Relationships Among Activities  – The sequential relationships that determine which activity must be finished before another can begin Strongly influence the time performance of the process o 4. Resources – Resources – Tangible  Tangible assets 1. Capital – Fixed assets such as land, buildings, facilities, equipment, machines, and IS 2. Labor – People such as engineers, operators, CSReps, and sales staff Facilitate the transformation of inputs into outputs during the process o 5. Information Structure - Shows what information is needed and is available to whom in order to perform activities or make managerial decisions Business Process – A network of activities separated by buffers and performed by resources that transform inputs into outputs Process Design – specifies the structure of a business process in terms of inputs, outputs, the network of activities and buffers, and the resources used Process Flow Management  – A set of managerial policies that specify how a process should be operated over time and which resources should be allocated to which activities Value Stream/Chain Mapping  – A tool used to map the network of activities and buffers i n a process identifying the activities that add value and those like waiting that are wasteful Goal : Enable process designers and managers to focus on process improvement by adding value to the final o product The Process View of View of organizations is our main tool for: 1. Evaluating processes o 2. Studying the ways in which processes can be designed, restructured, and managed to improve performance o 1.2 Performance Measures Effectiveness of a Process Is Determined By: o 1. Evaluation and measurement of the firm’s current and past performance o 2. Future goals as expressed by the firm’s strategy Quantitative Measurements: Financial, external, and internal 1.2.1 The Importance of Measurement: Management by Fact Professional Manager – Manager – Defined  Defined by General Motors Chairman Alfred Sloan  – Someone  – Someone who manages by fact rather than by intuition or emotion Performance measurement is essential in designing and implementing incentives for improving products and processes and for assessing the result of improvements 1.2.2 Types of Measures: Financial, External and Internal Solid financial performance depends on the ability of a process to effectively meet customer c ustomer expectations. Thus process management requires external measures that track customer expectations and internal measures that gauge the effectiveness of the process in meeting them. Financial Measures – Track the difference between the value provided to customers and the cost of producing and delivering the product or service. 

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Represents the goal of the organization but c annot be used as the sole measures to manage a nd control processes It is important to link financial measures to external measures that track customer satisfaction with the process output and internal measures that track operational effectiveness o Goal: Maximize the difference Quarterly Reports: o 1. Absolute Performances (revenues, Performances  (revenues, costs, net income, profit 2. Performance relative to asset utilization  (accounting ratios, ROA, ROI, inventory turns) 3. Survival strength (cash strength  (cash flow) External Measures Measures - indicate how customers view the organization’s products and services o Track customer expectations in terms of product or service cost, response time, variety, and quality, as well as customer satisfaction with performance along these dimension Can be used to estimate the value of goods or services to customers American Society for Quality UOMichigan  – American Customer Satisfaction Index  – tracks overall customer satisfaction in several mfging. And service ind ustries and public sectors. Score is weighed average of customer responses to questions relating to service, quality, value, and the extent to which products meet expectations Customer Expectations Defined in terms of a Process Output  Cost, response time, variety, and quality Customer Satisfaction: Satisfaction : linked to whether the performance of the product along with the four attributes meets or exceeds the customers’ expectations External market perspective that is objective and bottom-line oriented because it identifies competitive benchmarks at which the process manager can aim Measures satisfaction at an aggregate not individual level. More results oriented then action oriented. Lagging rather than leading indicators of success. Measures that track customer dissatisfaction can be used to guide future improvement  – Warranty  – Warranty repairs, recalls, field failures Organizations typically lose 20% of their unsatisfied customers forever. Attracting a new customer is about 5x that of serving a current o Internal Measures Measures - identify areas where the process is performing well and areas where improvement is necessary. How satisfied the customer is likely  to  to be with the process performance. Internal Measures Must: 1. Be linked to external measures that customers deem important 2. Be directly controllable by the process manager Can be a predictor of external measures of customer (dis)satisfaction, if the customer expectations have been identified accurately Performance can only be assessed through ac tual experience relative to expectations In order to meet customer expectations and improve financial performance, a manager requires internal operational measures that are detailed, can be controlled, a nd ultimately correlate with product and financial performance. Customer expectations in terms of product/service cost, response time, variety, and quality can be translated into internal measures that track the performance of the process in terms of processing cost, flow time, process flexibility, and output quality o Process Flexibility: Can be measured either by the time or cost needed to switch production from one type of product/service to another or by the # of different products/services that can be produced and delivered o Product Quality: Managers Quality:  Managers must be specific as to which quality dimensions are concerned with: product features, performance, reliability, serviceability, aesthetics, and conformance to customer expectations. Reliability  measured  measured in terms of durability an frequency of repair can be assessed by: Failure rate which measures probability of product fa ilure Mean time between failures ( MTBF), MTBF), which indicates how long a product is likely to perform satisfactorily before needing repair Serviceability: Measured using mean time to repair (M TTR), indicates how long a product is likely to be out of service while under repair 1.3 Products and Product Attributes Products – Desired set of process outputs o Service V Products o

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Services include tangible and intangible aspects experienced by the customer Some services are often produced and consumed simultaneously and ca nnot be produced in advance Product Attributes  – Properties that customers consider important that define customer expectations (external measures help identify product attributes)  – The total cost that a customer incurs in order to own and experience the product o 1. Product Cost  – Includes purchase prices plus any costs incurred during the lifetime of the product, including final disposal 2. Product delivery-response time – The  – The total time that a customer must wait for, before receiving a product for o which he or she has expressed a need to the provider Related to availability and accessibility  – reliability  – reliability and duration  – The range of choices offered to the customer to meet his or her needs o 3. Product Variety  – Level of customization offered, number of product lines or families offered 4. Product Quality  –  – The degree of excellence that determines how well the product performs. o A function of effective design and production that conforms to design Most difficult to define and measure mea sure because subjective judgment and perception Can be seen from customer and producer perspective Customer: Depends on products features (what I can do), performance (how well it functions), reliability (how consistently it functions over time), serviceability (how quickly is can be restored), aesthetics, and conformance to expectations o Product features and performance are influenced by quality of design o Reliability if influenced by how well the production process conforms to design  – durability and failure-free performance over time PRODUCT: Cost, Time, Variety, Quality PRODUCT SPACE: When SPACE: When CTVQ are measured and quantified EXTNERLA MEASURES: Well MEASURES: Well defined track product performance along CTVQ relative to competition and relative to customer expectations. PROUDCT VALUE: Measured VALUE: Measured by the utility that the customer derives from buying the combination of these attributes. The maximum price a specific customer is willing to pay for a product 1.4 Process and Process Competencies Manufacturing – Manufacturing – Process  Process of producing physical goods Service Operations – Operations  – Processes  Processes that perform services Operations – Operations – Business  Business processes that design, produce, and deliver goods and services Process Competencies – Competencies  – Determine  Determine the product attributes that the process is particularly good a t supplying Process Competence Measures 1. Process Cost  – The total cost incurred in producing and delivery outputs. Includes RM a nd both fixed and o variable cost of operation the process. 2. Process Flow Time  – The total time needed to transform a flow unit from input into output. Includes the actual o processing time as well as any waiting time a flow unit spends in buffers. Depends on the number of resource units and speed of processing by each resource unit o 3. Process Flexibility – Flexibility  – Measures  Measures the ability of the process p rocess to produce and deliver the desired product variety. Ability to deal with fluctuating demand. Depends on the flexibility of its resources Flexible Resources – Can perform multiple different activities and produce a verity of products Specialized Resources  – Can perform only a restricted set of activities, typically those designed for one product Process Quality  – The ability of the process to produce and deliver quality products. o Includes process accuracy (precision) in producing products that conform to design specifications, as well as reliability, and maintainability of the process 1.5 Enabling Process Success 1. What should the process design or architecture be? o During Process Design , managers select process architecture that best develops the competencies that will meet expectations of the product Planet location and capacity, product and process design, resource choice and investment, and scale of operation 2. What metrics should be used to track performance of a process? o Metric Identification  – Managers identify measurable dimensions along which the performance of the process will be tracked Process metrics – Derived from customer expectations and company’s st rategic goals, which should related to o desired process competencies  

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Goal: Provide managers with information about performance that allows them to plan, control, and

improve the process to better meet customer expectations about the product 3. What policies should govern process operations? Process Planning – Identifying targets for various metric and specifying managerial policies that support that o achievement of these targets o Managerial Policies – Specify the operation of the process and use of resources over time to best meet customer demand 4. How should process performance be controlled over time? o Process Control – The tactical aspect of process management that is focused on continually ensuring that in the short run, the actual process performance conforms to the planned performance Goal: continuously monitor process performance to identify instances where external factors may have intruded into process environment, limiting its ability to conform to the planned performance Monitoring and correcting product cost, delivery time, inventory levels, a nd quality defects 5. How should process performance be improved? o Process Improvement  – Managers identify metrics that need to be improved in the long run and work on changes in process design or planning that are required to a chieve this improvement 1.6 Some Base Process Architectures Process Architecture  – The types of resources used to perform the activities a nd their physical layout in the processing network o Spectrum: A flexible job shop process and a specialized flow shop process Job Shop: Uses flexible resources to produce low volumes of highly customized variety products Artisan bakeries, tool and die shops, management consulting firms, law firms, architectural and design companies Use general-purpose resources that can perform many different activities and locate similar resources together Functional/Process Layout  – Groups organizational resources by processing activities or functions in departments Simultaneously many products flowing through the process, each with its own resource needs and route Large amount of storage buffers and substantial waiting between activities Highly structured IS to direct work flow Because high variety, resources often need setups before they can be changed over - delays, loss of production, fluctuating workload Less process flexibility that permits product customization High processing costs and long flow times Flow Shops: Uses specialized resources that perform limited tasks but do so with high precision and speed Standardized product produced quickly in large volumes More consistent quality High fixed costs for plant and equipment, low variable processing cost, economics of scale Resources arranged according to sequence of activities needed to produce a product, limited storage space used between activities Product Layout – The location of resources is dictated by the processing requirements of the product, network layout Specialization of dedicated resources, duplication o o Shorter process flow times Low unit-processing cost, short flow time, consistent quality at high volumes o Summary Process – Network of activities and buffers that use r esources to transform inputs into outputs Effectiveness of a Process: Determined by financial performance  – difference between value provided to customer and cost of producing and delivering the product Financial measures are lagging – cannot be used to manage and control process o To improve, a firm must attrac t and retain customers by providing goods and services th at meet or exceed o expectations o To improve FP, firm must identify and deliver attributes that are valued by customers at a lower cost than the value delivered Customer Expectations – Cost, delivery-response time, variety, and quality Value: Measured by the utilized that the customer derives from buying the combination of CTVQ 

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Product attributes – Output of a process, can be measured only after the processing is complete Process performance – manager must manage competency in terms of cost, flow time, flexibility, and quality. o Competencies of a process determine the products that the process will be good at supplying o Different process architectures result in different process competencies Job Shop: High process flexibility, customization, but high processing cost, and long flow times Flow Shop: Low cost, short flow times, consistent quality, but cannot produce a wide variety of products  

Chapter 2: Operations Strategy and Management 2.1 Strategic Positioning and Operational Effectiveness Strategy – Derives from the Greek military term ‘strategia’ – ‘the general art.’ A plan to achieve an objective. Plan: Specifies precisely what managers must do to reach corporate objectives o o Implicit Objective of a Business Strategy:  Deliver sustained superior performance relative to the competition Competitive Product Space  – A representation of the firm’s product portfolio as measured along the four dimensions or product attributes (cost, time, variety, and quality) . o Strategic Positioning  – Defines those positions that the firm wants to occupy in its competitive product space. It identifies the product attributes that the firm wants to provide to its customers. To stay competitive, a firm must ensure its competition finds it difficult to imitate its chosen position Operational Effectiveness – possessing process competencies that support the given strategic position. Includes but is not limited to efficiency o Any number of practices that allow a company to better utilize its inputs, does not necessarily mean lowest-cost o process (operational efficiency) o Developing process competencies requires designing suitable business processes and operating policies. Sustaining a competitive advantage requires a firm to hav e a good strategic position and operational effectiveness to support that position 2.3 The Strategy Hierarchy Corporate Strategy  – Defines the scope of each division or business unit in terms of the attributes of the products that it will offer and market segments that it will serve o Goal: To differentiate the firm from its competition by establishing competitive priorities in terms of the four product attributes o Two-Pronged Analysis entailed by a Business S trategy: 1. Competitive analysis of the industry in which the BU will compete 2. Critical analysis of the unit’s competitive skills and resources Functional Strategies  – Define the purpose for marketing, operations, and finance  – the three main functions in most organizations o Marketing: Identifies and targets customers that the BU wants to serve, the products that It must supply to meet customer needs, and the competition that It will face in the marketplace. Operations: Designs, plans, and manages processes through which the BU supplies customers with desired o products Operations Strategy: Configures and develops business processes that best enable a firm to produce and deliver the products by the business strategy Includes selecting activities and resources and combining them into a network architecture that defines the key elements of a process, such as inputs and outputs, flow units, and information structure. Also, responsible for developing/acquiring the n ecessary process competencies  – process cost, flow time, flexibility, and quality – to support the firm’s business strategy. Business strategy choses products in which to compete  – Operations strategy focuses on the process competencies required to produce a nd deliver those product attributes Finance: Acquires and allocates resources needed to operate a unit’s business processes o The functions must translate the midlevel business strategy into its own functional requirements by specifying o what it must do well to support the higher-level strategy Business Strategy – Concerned with selecting external markets and products to supply them Operations – Strategy must establish operational objectives that are consistent with overall business goals and develop processes that will accomplish them Strategies and objectives o Business Strategy: Lowest cost Operations Strategy: Efficient and lea business processes, high utilization of assets, and high level of labor productivity Business Strategy: Product variety o Operations Strategy: Flexible processes to produce and deliver customized products o Business Strategy: Short response times Operations strategy: Greater investment in inventories or greater resource availability through excess capacity Business Strategy: Delivering high-quality products o Operations Strategy: High quality processes with precision equipment and highly trained workers 2.3 Strategic Fit 

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Cost Efficiency  – Achieving a desired level of outputs with a minimal level of inputs and resources Efficient – Operates at a low cost Effective – Supports the execution of the company’s strategy Key Condition for Process Effectiveness is the exi stence of a strategic fit among three main components of a firm’s strategy:

1. Its Strategic Position o 2. Its Process Architecture o 3. Its Managerial Polices Strategic Fit  – Consistency between the strategic position that a firm seeks and the competencies of its process architecture and managerial policies Market and Process-Driven Strategies : Transforming a company’s key processes into strategic competencies that consistently provide superior value to the customers o Market-Driven Strategy: A firm starts with key competitive priorates and then develops process to support them Commodity products Process-Driven Strategy: A firm starts with a given set of process competencies and then identifies a market o position that is best support by those processes Technology innovative products Strategic fit requires both market and process driven strategies o Entails identifying external market opportunities along with developing internal process competencies until the two are mutually consistent, repeatedly. Inextricably links a company’s internal competencies and its external industry environment 2.4 Focused Operations Focused Strategy and Focused Process: Focused Strategy  – Committing to a limited, congruent set of objectives in terms of demand (products and o markets) and supply (inputs, necessary process technologies and volumes). Concentrates on serving li mited market segments with business processes specifically designed and operated to meet their needs. Supported by a Focused Processed Focused Process – One whose products fall within a small region of the competitive product space o All products from a focused process hav e similar attributes Area occupied on the produce space by the product portfolio is small o Plant-within-a-Plant (PWP)  – The entire facility is divide d into several ‘miniplants’ each devoted to its own specific mission with a process that focuses strictly on accomplishing that mission Improve responsiveness, higher quality, lower cost Achieving strategic fit through focused operations provides firms with a powerful deterrent barrier against competitor’s efforts to imitate them. Greater number of activities involv ed, the harder the wholesale imitation becomes. Supporting a firm’s strategic position with multiple, mutually reinforcing activities creates sustainable competitive advantage becau se it is harder for a rival to match an array of interlocked activities than to imitate a particular activities. 2.5 Matching Products and Processes Product-Process Matrix  – Useful tool for matching processes to products. Connects only one product attribute with one process competency o Correlation between process flexibility and product cost: Standardizations typically results in economics of s cale o and thus lower variable product cost o Correlation between process flexibility and product response time: Flow shops typically have shorter flow times than job shops. Product quality bears no direct correlation to layout of resources and connecting routes o o

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2.6 The Operations Frontier and Trade-Offs Strategic position supported by consistent business processes that are managed effectively are essential for superior performance Sustained competitive advantage requires good strategic opposition and operational effectiveness Operations Frontier  – The smallest curve that contains all current industry positions 

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Represents the current best practices of world-class firms Firms located on the same ray share the same strategic priorities o o Firms operating at the frontier: Have the highest operational effectiveness- measure of how well a firm manages its processes Their processes provide superior related to the distance of the current position from the ( current) operations frontier o The closer a firm is to the frontier, measured along its direction of improvement (whose slope represents the relative strategic priorities assigned by the firm to the four dimensions), the higher its operational effectiveness Trade-off – A decreasing of one aspect to increase another o Any point on the frontier represents a trade-off o To increase performance along one product dimension, one must give up some performance along the other(s) Firms not on the frontier, do not face trade-offs  – they can improve multiple dimensions simultaneously o o Typically reflected most clearly in the strategies of world-class companies TPS – Toyota Production System – Produce exactly what you need, exactly when you need it  – instead of focusing on low cost and no variety, TPS allowed product variety through process flexibility o Permitted wide variety, high quality, low cost, a nd short response time Strategic Positioning defines the direction of improvement from the current position, improving Operational effectiveness reduces the distance of the current position to the current operations frontier along the direction of improvement o When a firm’s position of the operations frontier is developed according to the ‘state of best practices’ it represents the best attainable trade-off between the two dimensions at a given point in time Improvements in operational effectiveness bring a company closer to the f rontier or move the frontier itself along the direction of improvement specified by the strategic position 2.7 The Evolution of Strategy and Operations Management The factory system was the result of 3 innovations: 1. Division of Labor and Functional Specialization  – A process and organizational structure where people are o specialized by function, meaning each individual is dedicated to a specific task Lead to vast improvements in cost and quality, at the expense of flexibility Product Specialization  – People are specialized by product, meaning each individual is dedicated to performing all functions on a specific product line Steam Engine (James Watt)  – made it possible for powered machinery to replace human labor o o Work Centralization – facilitated economics of scale and led to growth of the assembly line and mass production  – large quantities of goods at a low cost o

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Standardization to Mass Production o o

1810 based on the innovations of Eli Whitney and Samuel Colt American System of Manufacturing  – Introduced the use of interchangeable parts, thereby eliminating the need to custom-fit parts during assembly Moving assembly line Technological advances – ‘bicycle boom’  

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Flexibility and the Productivity Dilemma o Flexible Mass Production  – A method of high-volume production that allows differences in products  – introduced o

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product variety as a second mode of competition in the automotive industry Productivity Dilemma  – Chose between the lower productivity entailed by frequent product changes or the higher productivity that was only possible if they declined to introduce variety into their product lines

From Scientific Management to Employee Involvement  Taylor Phiosphy: o

1. Scientific laws govern how much workers can produce per day 2. It is management’s function to discover and apply these laws to productive operations systems 3. It is the worker’s function to carry out management decisions without question Statistical Quality Control  – A management approach that relies on sampling a flow units and stastical theory to ensure the quality of the process   

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Competitive Decisions After WW2 o o o

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High demand and scale economies rose to the top of the American strategic agenda TQM, JIT, Time-based competition, business reengineering Computer-aided design and MFG, flexible mfg. systems, robotics, internet-based processes

Growth of IT  o

Information Technology  – The hardware and software used throughout business processes to support data gathering, planning, and operations

ERP – Gather and monitor information regarding materials, orders, schedules, finished goods inventory, receivables, and other business processes across a firm Facilitated coordination across business processes 2.8 The Opportunity Today In-Service Operations Technological advances have allowed service processes to be designed and executed in a manner that provides increased access while lowering the production and delivery costs, and improving the response time. Resulted in an explosion in new services being offered at high and low end of the economic spectrum o Improvement in communications have made the transfer of information goods both cheaper, and quicker, while increasing access Summary Strategic Positioning  – Deliberately performing activities different from or better than those of the competition Operations Strategy  – Plans to develop the desired process competencies Operational Effectiveness  – requires developing processes and operating policies that support the strategic position better than competitors o Both strategic positioning and operational effectiveness are necessary for gaining and sustain competitive advantage Determining Strategic Fit: 1. Determine the strategic positioning by prioritizing the targeted customer needs of product cost, quality, variety, o and response time o 2. Determine what the process should be good at to support the strategic position  – infer the necessary process competencies in terms of process cost, quality, flexibility, and flow time 3. Design a process whose competencies best support the strategy o o

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Process Flow Measures 3.1 The Essence of Process Flow Process Measures Flow – Three key internal process performance measures that together capture the essence of process flow: o Flow Time o Flow Rate Inventory o These three process flows directly affect process cost and response time, and are affected by process flexibility and o process quality Questions to be answered: o 1. On average, how much time does a typical flow unit spend within the process boundaries? o On average, how many flow units pass through the process per unit of time? o On average, how many flow units are within the process boundaries at any point in time? 3.2 Three Key Process Measures When a flow unit moves through the process, one of two things happen: 1. It undergoes an activity o 2. It waits in a buffer to undergo an activity o Flow Time – The total time spent by a flow unit within process boundaries o Indicates the time needed to convert inputs into outputs and includes any time spent by a flow unit waiting for processing activities to be performed Indicates how long working capital, in the form of inventory, is tied up in the process o Flow Rate – The number of flow units that flow through a specific point in the process per unit of time o Instantaneous Flow Rate: Flow rate at a specific point in time ‘t’ Ri(t) Inputs may enter a process from multiple points and outputs may exit from multiple points o Inventory – The total number of flow units present within process boundaries Process Inventory at Time t: The total number of flow units present within process boundaries at time t  o I(t) Count all the flow units within process boundaries at that moment Current Inventory: represents all flow units that have entered the process but have n ot yet exited o 3.3 Flow Time, Flow Rate, and Inventory Dynamics Instantaneous Inventory Accumulation (buildup) Rate - ∆R(t), the difference between instantaneous inflow rate and outflow rate o Inst. Inv. Acc. Rate ∆R(t) = Inst. Inflow Rate Ri(t)  – Inst. Outflow Rate R 0(t) If Ins Inflow Rate Ri(t) > Inst out Flow Rate R 0(t), then inventory is accumulated at a rate of ∆R(t) > 0 If Ins Inflow Rate Ri(t) = Inst out Flow Rate R 0(t), then inventory remains unchanged If Ins Inflow Rate Ri(t) < Inst out Flow Rate R 0(t), then inventory is depleted at a rate ∆R(t),< 0 o If we pick a time interval (t1, t2), during which inventory build rate ∆R is constant Inventory change = Buildup Rate X Length of time interval OR I(t2)-I(t1) = ∆R X (t2-t1) Inventory Build Diagram  – Depicts inventory fluctuation over time o Horizontal Axis: Plot time Vertical Axis: Plot the inventory of flow units at each point in time o 

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3.4 Throughput in a Stable Process Stable Process – One in which, in the long run, the average inflow rate is the same as the average outflow rate o Average Flow Rate/Throughput  – The average number of flow units that flow through (into and out of) the process per units of time R Tells us the average rate at which the process produces and delivers output If throughput is less than demand rate, some customers are not served Average Inventory Overtime o I Average Flow Time – the average (of the flow times) across all flow units that exit the process during a specific span of time o T  o Track the flow time of each flow unit over a long-time period and then compute its average Or compute it from the throughput and the average inventory o 3.5 Little’s Law: relating Average Flow Time, Throughput, and Average Invento ry 

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1. On average, how much time does a typical flow unit spend within the process boundaries? o  Average Flow Time T  1. On average, how many flow units pass through the process per unit of time? o Throughput R 3. On average, how many flow units are within the process boundaries at any point in time? o  Average Inventory I Little’s Law: Average Inventory = Throughput X Average Flow Time o Average inventory (I) = Throughput (R) X Average Flow Time (T) o I=RXT Allows us to derive the flow time averages of all flow units from the average throughput and inventory o T = I/R 

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Implications of Little’s Law:

1. Of the three operational measures of performance  – average flow time, throughput, and average inventory – a process manager needs only focus on two measure because the y directly determine the third measure from Little’s law. 2. For a given level of throughput in any process, the only way to reduce flow time is to reduce inventory and vice versa 3.6 Analyzing Financial Flows through Financial Statements Average time it takes for a dollar invested in the factory to leave the doors of finished goods Throughput / R = COGS o I = Inventory o Average time it between the time a dollar is billed to a customer and enters AR to the time it is collected as cash from the customers payment o R = Annual Sales (annual flow rate) o I+ AR Accounts Payable o R = RM I = AP Balance o Cash To Cycle Performance o Tfinishedgoods + TAR - TAP 3.7 Two Related Process Measures: Takt Time and Inventory Turns (Turnover Rate) Takt Time – The reciprocal of throughput and denotes the maximal ti me that each process resource can devote to a flow unit to keep up with demand o Takt Time = 1/R o Key concept behind lean operations Translates customer demand into synchronized process design and execution o Inventory Turns  – The ratio of throughput to average inventory COGS/I o =R/I = R/(RXT) = 1/T o Reciprocal of average flow time o o Operational measure o High inventory turns – small flow times Flow unit and measure inventory and throughput must be in same units o 3.8 Linking Operational To Financial Measures: Valuing a n Improvement NPV – A measure of expected aggregate monetary gain or loss that is computed by discounting all expected future cash inflows and outflows to their present value o Equivalent to a single present sum such that any risk-neutral investor who is in a position to choose between accepting a future sequence of cash flows on the one hand or the single sum today values both the same Rate of Return (r): The reward that an investor demands for accepting payment delayed by one period of time o NPV = C0+n{t=1, Ct/(1+r)t o True Throughput is measured by sales volume  – the number of units sold The minimum of its output and market demand o o Positive cash flows are correlated with throughput A change in the process can be called an improvement if and only if it increases NPV o 1. Has true process throughput (as measured by sales) risen without any increase in inventories or process cost? o 2. Has process inventory declined without any reduction in throughput or increase in process cost? 3. Has process cost declined without any reduction in throughput or increase in inventory? o ROE = Net income / Average Shareholder Equity = % 

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Measures the return on investment made by a firm’s shareholders ROA = Earnings before interest/ Average total assets = [ Net income + [ Interest expense X ( 1  – tax rate) ] / Average total assets o Measures the return earned on each dollar invested by the firm in assets Return on Financial Leverage (ROFL) - Difference between ROE and ROA o Captures the amount of ROE that can attributed to financial leverage (accounts payable, debt, etc.). Accounts Payable Turnover (APT) = COGS/AP o Define financial leverage o Small APT indicates firm was able to use money it owed suppliers to finance a considerable fraction of its operations 52/APT = weeks firm effectively financed own operations with its suppliers money o ROA can be written as the product of two ratios  – profit margin and asset turnover: ROA = Earnings before interest/Sales revenues X Sales revenue/Total Assets o =Profit Margin X Assets Turnover o Can increase ROA by growing the profit margin and/or increasing the asset turnover o

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Key Components of Asset Turnover 

ART (Accounts Receivable Turnover) = Sales Revenue / Accts. Receivable 52/ART = how quickly it collected its money from sales on average after making a sale INVT (Inv. Turnover) = COGS/Inventories o 52/INVT = Weeks on average inventory spent with firm o PPET( Plan and equipment turnover) = Sales Revenue / PP & E Each dollar invested in PPE support about $ of sales CASH TO CASH CYCLE: 52/INVT + 52/ART -52/APT o Can improve asset turnover by turning inventory quicker or using existing warehousing infrastructure to support a higher level of sales (or dec. warehousing infrastructure needed to support existing level of sales) Summary Key Operational Measures that characterize the flow of units through a process: o Throughput – Rate at which units flow through the process Measures the rate at which the output of the process is being sold An increase in throughput indicates increased revenues and also increased profits if the product has positive margin Higher throughput means a smaller takt time  – thus less available time for each resource to process a flow unit and keep up with demand Inventory – Number of flow units within the process boundaries o measure of tied-up capital or customers who are waiting A decrease in in indicates a drop in working capital requirements o Flow Time – Time it takes for a specific flow unit to be transformed from input to output Measures how long it takes to transform orders and invested cash into products Faster flow time means higher inventory turns and relatively lower working capital requirements Can be applied to processes with a variety of flow units, including money, customers, data, material, and orders o o Leading indicators of financial performance o Improvement in the three measures leads to an improvement in long -term financial measures, such as NPV and ROI Little’s Law: Relates the 3 measures in a stable process Average inventory is the product of average throughput and average flow time o Managers need to track and control only two of the three measures  – average throughput and average inventory, typically, which then determine flow time Equations & Symbols o

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Equations: 

Instantaneous Inventory Accumulation/buildup rate = ∆R(t) = R i(t) -R0(t)

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Inventory Change = Buildup rate X Length of time interval= I(t 2) - I(t 1) = ∆R(t) X (t2 - t1)

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Littles Law: I = R X T

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Takt Time = 1/R Maximum time that each process resource can devote to a flow unit to keep up with demand o

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Inventory Turns = R/I = 1/T

Symbols: R0(t) = Instantaneous outflow rate o

o o o o o

∆R(t) = Instantaneous inventory accumulation /buildup rate I(t) = Inventory at time t I: Average inventory R: Throughput / average flow rate T: Average flow time

Exercises 3.1 A bank finds that the average number of people waiting in line during lunch hour is 10. On average, during this period, 2 people per minute leave the bank after receiving service. On average, how long do bank customers wait in line? Average Inventory = I = 10 people, Throughput R = 2 people / ,in Average wait time T = I/R = 10 / 2min = 5 min 3.2 At the drive-through counter of a fast food outlet, an average of 10 cars wait in line. The manager wants to determine if the length of the line is having any impact on potential sales. A study reveals that on average, 2 cars per minute try to enter the drivethrough area, but 2t percent of the drivers of these cars are dismayed by the long lines and simply mo ve on without placing orders. Assume that no car that enters the line leaves without service. On average, how long does a car spend in the drive -through line? I = 10 cars, R = 2 cars P/min *60*.75 = 90 Cars P/hour T = I/R = 10/90 = .111 hr. = 6.67 minutes 3.3 Checking accounts at a local bank carry an average balance of $3,000. The bank turns over its balance 6 times a year. On average, how many dollars flow through the bank each month? I = $3000, INVT = 6 per year  – INVT = R/I, 6=R/3000, R = 18,000$ per year/ 12 months = $ 1500/month OR, I = $3000, INVT = 6, T = 1/turns = 1/6 year = 2 months, R = I/T = 3000/2 = $1500 / month 3.4 A hospital emergency room is currently organized so that all patients register through an initial check -in process. At his or her turn, each patient is seen by a doctor and then exists the process, either with a prescription or with admission to the hospital. Currently, 55 people per hour arrive at the ER, 10% of those who are admitted to the hospital. On average, 7 people are waiting to be registered and 34 are registered and waiting to see a doctor. The registration process takes on average, 2 minute per pati ent. Among patients who receive prescriptions, average time spent with a doctor is 5 minutes. Among those admitted to the hospital, average time is 30 minutes. On average, how long does a patient spend in the ER? On average, how many patients are being examined by doctors? On average, how many patients are there in the ER? Assume the process is stable, that is, average inflow rate equals average outflow rate. 

R = 55 patient / hr., R 1 = 55(.10) = 5.5/hr., R 2 = 55(.90) = 49.5/hr.

o o o o

Buffer 1: R = 55/hr., I=7, T=I/R = 7/55hr = .127hr or 7.6 minutes Registration: Flow Time T = 2 min = 2/60hr, R ==55/hr. I=RT = 55X2/60=1.83 patients Buffer 2: R = 55/hr, I = 34, T = I/R = 33/55hr = .62 hr. or 37.1 minutes Doctor Time: Depends on flow unit T1 = 30 minutes T2 = 5 minutes  

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1) How long does a patient spend in the ER? Calculate Flow Time o T1 = 76.7 minutes (10%), T 2 = 51.7 minutes (90%) o T = (.10*76.7minutes) + (.90*51.7 minutes) = 54.2 minutes

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2) On average how many patients are being examined by a doctor? (Average inventory at the doctors activity) o R1 = 5.5/hr, T= 30 minutes or .5 hr, I= RT = 5.5/hr*.5hr = 2.75 patients R2 = 49.5 patients / hr, T = 5 min or 5/60 hour, I = RT = 49.5*(5/60)=4.125 patients o 2.75+4.127 = 6.875 patients o

3) On average, how many patients are in the ER? Total Inv = B1 + inv in reg. + B2 + inv with doctor = 7+1.83+34+6.875 = 49.705 patients o 3.5 a triage system has been proposed for the ER described in 3.4. E ntering patients will be registered as before. They will then be quickly examined by a nurse who will classify them as Simple Prescriptions or Potential Admits. SP will move on to an area staffed for regular care, PA will be taken to the emergency area. Planners anticipate that the initial examination will tak e 3 minutes. T hey expect that on average, 20 patients will be waiting to register and 5 will be waiting to be seen by the triage nurse. Recall registration takes on average 2 minutes p/patient. The triage nurse is expected to take average of 1 minute per patient. Planners expect t he SP area to have on average 15 patients waiting to be seen. Once a patient’s turn comes, each will take 5 minutes of a doctor’s time. The hospital anticipates that ton average, the emergency area will only have 1patient waiting to be seen. As before, once a pati ent’s turn comes, he or she will tak e 30 minutes with the doctor. Assume that 90% patients are SP. Assume the triage nurse i s 100% accurate.. 

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1) On average, how many minutes will a patient spend in the ER?

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There are two flow units o (1) Those that are potential admits: flow rate = 55*10% = 5.5/hr. o (2) Those that get a simple prescription: flow rate = 55*90% = 49.5/hr. To find the average flow times, we use Little's law at each activity for which the flow time is unknown: o (1) Buffer 1: R = 55/hr (both flow units go through there), I = 20, so that waiting time in buffer 1 = T = I/R = 20/55 hr = 0.3636 hours = 21.82 minutes. (2) Registration: flow time T = 2 min = 2/60 hr. All flow units flow through this stage. Thus flow rate through this stage is R = 55 / hr. Average inventory at registration is given by I = RT = 55*2/60 = 1.83 patients. (3) Buffer 2: R = 55/hr (both flow units go through there), I = 5, so that waiting time in buffer 2 = T = I/R = 5/55 hr = 0.09 hours = 5.45 minutes. (4) Triage Nurse: flow time T = 1 min = 1/60 hr. All flow units flow through this stage. Thus flow rate through this stage is R = 55 / hr. Average inventory is given by I = RT = 55*1/60 = 0.92 pat ients. (5) Buffer 3: R = 5.5/hr , I = 1, so that waiting time in buffer 1 = T = I/R = 1/ 5.5 hr = 0.1818 hours = 10.91 minutes. (6) Potential Admits: flow time T = 30 min = 30/60 hr. Flow rate through this stage is R = 5.5 / hr. Average inventory is given by I = RT = 5.5*30/60 = 2.75 patients. (7) Buffer 4: R = 49.5/hr , I = 15, so that waiting time in buffer 1 = T = I/R = 15/ 49.5 hr = 0.3030 hours = 18.18 minutes. (8) Simple Prescription: flow time T = 5 min = 5/60 hr. Flow rate through this stage is R = 49.5 / hr. Average inventory is given by I = RT = 49.5*5/60 = 4.125 patients. o We find the flow time by adding the activity times on the path: (a) For a potential admit, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 3 + Potential Admits) = 21.82 + 2 + 5.45 + 1 + 10.91 + 30= 71.18 minutes (b) For a person ending up with a prescription, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 4 + Simple Prescription) = 21.82 + 2 + 5.45 + 1 + 18.18 + 5 = 53.45 minutes. o T = 10% * 71.18 + 90%*53.45 = 55.22 minutes. 

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2) On average, how many minutes will a Potential Admit spend in the ER? o For a potential admit, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 3 + Potential Admits) = 21.82 + 2 + 5.45 + 1 + 10.91 + 30= 71.18 minute

3) On average, how many patients will be in the ER? For a potential admit, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 3 + Potential o Admits) = 21.82 + 2 + 5.45 + 1 + 10.91 + 30= 71.18 minutes 3.7 Orange juice inc. produces and markets f ruit juice. During the heaviest seasons, trucks bring oranges from the fields to the processing plant during a workday that runs from 7 a.m. to 6 p.m. On peak day, approximately 10,000 kg of oranges are trucked per hour. Trucks dump their contents in a holding bin with a storage capacity of 6,000 kg. when the bin is full, incoming trucks must wait until it has sufficient available space. A conveyor moves oranges from the bins to the processing the plant. The plant is con figured to deal with an average harvesting day, and maximum throughput (flow rate) is 80 00 kg per/hr. Assuming oranges arrive continuously over time, construct an inventory buildup diagram for OJI. 

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1) In order to process all the oranges delivered during the day, how long must the plant operate on peak days? o 1. From 7am-6pm, oranges come in at a rate of 10,000kg/hr and are processed, and thus leave the plant, at 8000kg/hr. Because inflows exceed outflows, inventory will build up at a rate of ∆R = 10,000-8,000kg/hr = +2,000 kg/hr. Thus, because we cannot have oranges stored overnight, we start with an empty plant so that inventory at 7am is zero: I (7 am) = 0. Because inventory builds up linearly at 2,000kg/hr, the inventory at 6pm is I(6pm) = 2,000 kg/hr * 11 hr = 22,000kg.  

o

2. After 6pm, no more oranges come in, yet processing continues at 8000 kg/hr until the plant is empty. Thus, inflows is less than outflows so that inventory is depleted at a rate of ∆R = 0 - 8,000 kg/hr = - 8,000 kg/hr. Thus, since we have that I(6pm) = 22,000kg, we know that inventory depletes linearly from that level at a rate of -8,000 kg/hr. Thus, to empty the plant, inventory must reach zero and this will take an amount of time ∆t where: 22,000 kg - 8,000 kg/hr ∆t = 0, or ∆t = 22,000/8,000 hr = 2.75 hr = 2 hr 45min. Thus, the plant must operate until 6pm + 2hr 45min = 8:45pm.  

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At what point during the day must a truck first wait before unloading into the storage bin? o First inventory builds up in the bins. When the bin is full, then the trucks must wait. This happens at: 2,000 kg/hr ∆t  = 6,000kg, so that the first truck will wait after ∆t = 6,000/2,000 hr = 3 hr, which is at 10am. o 3.8 JVM is an auto dealership selling new and used cars. In an average month, JVM sells 160 cars. New vehicles represent 60% of sales, used vehciles represent 40%. Max recently took over the business from his father. Inventory financing was a significant expense for JVM. 

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JVM had been turning its inventory at a rate of 8 times per year. What is JVM’s av erage inventory? (including both new and used vehicles) TURNStotal = 1/Ttotal so Ttotal = 1/8 years = 1.5 months o o Itotal = RtotalTtotal = 160 vehicles/month * 1.5 months = 240 vehicles, o

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Turns of new vehicles are 7.2 per year, turns of used vehicles are 9.6 per year. Holding a new vehciles in inventory for a month cost $175. Holding a used car cost $145. What are JVM’s average monthly financing cost per vehicle? T new  = 1/7.2 years = 1.667 months and T used  = 1/9.6 years = 1.25 month o o

Inew=0.6*160vehicles/month*1.667months=160newvehicles

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I used  = 0.4 * 160 vehicles/month * 1.25 months = 80 new vehicles

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Total monthly financing costs then 160*$175 + 80*$145 = 28,000 + 11,600 = $39,600/month.

Consulting firm suggested JVM subscribe to its monthly market analysis service. They claim their program will allow JVM to maintain its current sales rate of new cars while reducing amount of time a new car sits in inventory before being sold by 20%. How much should Max be willing to pay? From Little’s Law, cutting time 20% while holding R unchanged will reduce inventory by 20%. From part b, average o monthly financing costs for new vehicles is 160*$175 = $28,000/month. A 20% drop gives $5,600 per month, which is the answer. 3.9 CCR rents cars. The market consist of two segments: short-term, which rents for an average of .5 wek, and the medium term, which rents on average of 2 weeks. CCR rents an average of 200 cars p/week to ST segment, and 100 cars p/week to MT segment. About 20% of cars returned are found to be defective and in need of repairs before renting again. On average there are 100 cars waiting to be cleaned. The average cost of this operation is 5$ per car. Cars needing repairs spend an average of 2 weeks in repair shop and incur an average cost of $150 per car. Assume cars are rented as soon as they are available for rent. ST renters pay $200 per week, MT renters pay 120$ p/week. 

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What is the throughput (cars/week) at the ‘customer’ stage? a. 300

2) What is the inventory (cars) at the "Customer" stage? a.

300

3) What is the flow time (weeks) at the "Customer" stage? a.

1 week

4) What is the throughput (cars/week) at the "Cleaning" stage? a.

240

5) What is the inventory (cars) at the "Cleaning" stage? a.

100

6) What is the flow time (weeks) at the "Cleaning" stage? a.

.42

7) What is the throughput (cars/week) at the "Repair" stage? a.

60

8) What is the inventory (cars) at the "Repair" stage? a.

120

9) What is the flow time (weeks) at the "Repair" stage? a. 2 10) What profit does Cheapest earn per week with the current system? Assume that each car loses $40 in value per week because of depreciation.

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How much money can Cheapest save per week with improvement #1? o

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Decreasing flow time in repairs by 1 week will lower the inventory in repairs from 120 to 60. This will reduce the number of cars required by 60 and thus weekly depreciation by $2400.

How much money can Cheapest save per week with improvement #2?

Decreasing repair cost by $30 lowers repair cost by 60X30 = $1800 3.10 The Evanstonian is an upscale independent hotel that caters to both business and leisure travelers. On average, one -third of the guests checking in each day are liesure travelers. Leisure travelers generally stay for 3.6 nights -twice a long as the average business customer o

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On an average day, 135 guests check into The Evanstonian. On average, how many leisure travelers are in the hotel on any given day? RL = 135/3 = 45 guests/night and T L = 3.6 nights → I L = RL T L = 45 × 3.6 = 162 guests o

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On an average day, 135 guests check into The Evanstonian. On average, how many business travelers are in the hotel on any given day? o For Business Travelers we have R L = 135 × 2/3 = 90 guests/night and T L = 1.8 nights → I L = RL T L = 90 × 1.8 = 162 guests

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How many times per month does the hotel turn over its inventory of guests (assume 30 days per month)?

o

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the total inventory is then I T  = 324. We then have Turns = R T  /IT  = 135/324 = 0.4167 turns per day = 12.5 turns per month.

The average business traveler pays a rate of $250 per night, while leisure travelers pay an average rate of $210 per night. What is the average revenue The Evanstonian receives per night per occupied room? o On average 324 rooms are occupied with half othe guests being leisure. Thus average rate received per occupied room is ½ X 250 + ½ X 210 = $230

POW 1 1. Each month a Bank carries an average balance of $3632 in all checking accounts. These accounts are being turned over 3 times a year. Based on this information, fill in the below data: I = $3632, T = 4 months On average, how much money is flowing through the bank each month? Hint: Keep in mind the conversion from year t o month. R = I/T = 3632 / 4 = $908/month o 2. A manager observes that on average, 5 students per minute enter the campus cafeteria. 10% of the students that enter the cafeteria see a long line and leave without entering the line. Given students are leaving before entering the process, t he manager must determine the rate at which students are entering the process. On average, 18 students are waiting in line and we can assume that any student that enters the line will not leave. I = 18, R = 4.5 (5*.90) On average how long does a student spend in the cafeteria line? T = I/R = 18/4.5 = 4 minutes o 3. A manager of a taco stand is interested in advertising to get more lunch time customers, but doesn't know how much time it takes to process a single customer. The amount of time it takes to process a single customer will help the manager determine the maximum amount of customers they can process in the lunch hour. On average, during lunch hour, there are 12 people in line waiting to order at the window. 4 people per minute leave the taco stand after receiving their food. I = 12, R = 4 On average how long do customers wait in line? Calculate answer in minutes. (Enter the value only. Do not enter text per Week 1 -> Important Instructions) 12/4 = 3 minutes o 4. Cheapest Car Rental rents cars at the Chicago airport. The rental market consists o f two segments: the short term segment, which rents for an average of 0 .5 weeks, and the medium-term segment, which rents for an average of 2 weeks. Cheapest currently rents an average of 200 cars a week to the short-term segment and 100 cars a week to the medium-term segment. How many customers per week go through the process? Total Inventory will be the sum of both segments. Hint: I = R * T can be calculated for both segments. Clean/Repair Data: Approximately 20 percent of the cars returned or going bac k into the process (evenly distributed across both segments) are found to be defective and in need of repairs before they can be made available for rent again. The remaining 80 percent of cars not needing repairs are cleaned, filled with gas ,and made available for rent when returned. On average, there are 100 cars waiting to be cleaned. The average cost of this operation is $5 per car. Cars needing repairs spent an average of 2 weeks in the repair shop and incur an average cost of $150 per car. Assume that cars are rented as soon as they are available for rent, that is , as soon as they have been cleaned or repaired. Short term renters pay $200 per week, while medium-term renters pay $120 per week. The flow of cars is shown in Figure 3.9. a. Identify throughput, inventory, and flow time at each stage.  

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Stage

Inventory (I) cars

Throughput(R) cars/week

Flowtime (T) week(s)

Customers

(.5*200)+(2*100)=300

200 + 100 = 300

I/R = 1

Cleaning

100

300*.8 = 240

I/R = .42

Repairs

R*T=120

300 * .2 = 60

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b. What profit does Cheapest earn per week with the current system? Assume that each car loses $40 in value per week because of depreciation.

Cars on rent for short * 200$/week +cars of Med. * $120 = (100 *$200) + (200*$120) = $44,000/ week is profit o Cleaning Cost is R or 240 * $5 = $1200/ week, Repair cost is R or 60 * $150 = $90 00/week o Depreciation is total cars owned or all I = 300+100+120=520*40=20,800 o Profit is 44000 – (1200+9000+20800) = 13,000/week 5. Jasper Valley Motors (JVM) is a family-run auto dealership selling both new and used vehicles. In an average month, JVM sells a total of 160 vehicles. New vehicles represent 60 percent of sales, and used vehicles represent 40 percent of sales. Max has recently taken over the business from his father. His father always emphasized the importance of carefully managing the dealership’s o

inventory. Inventory financing was a significant expense for JVM. Max’s father consequently taught him to keep inventory tur ns as high as possible. A. Examining the dealership’s performance over recent years, Max discovered that JVM has been turning its inventory (including both new and used vehicles) at a rate of 8 times per year. What is JVM’s a verage inventory (including bot h new and used vehicles)? o Turns = 1/8 year or T = 1.5 months (12/8 or 1/8*12) R = 160 vehciles/month o I = 160 vehicles/ month *1.5 months = 240 vehicles o Drilling down into the numbers, Max has determined that the dealership’s new and used business appear t o behave differently. He has determined that turns of new vehicles a re 7.2 per year, while turns of used vehicles are 9.6 per year. Holding a new vehicle in inventory for a month costs JVM roughly $ 175. Holding the average used vehicle in inventory for a month costs roughly $145. What a re the JVM’s average monthly financing costs per v ehicle? o New T = 1/7.2 yr = 1.67 moths, Used T = 1/9.6 yr = 1.25 months New I = 160 * .6 * 1.67 = 160.32 or 160 vehicles o Used I = 160*.4*1.25 = 80 vehicles o o Total cost = 160*175 + 80*145 or 28000 + 11600 = $39,600/month o Cost per vehicle = 39600/240 = 165$ A consulting firm has suggested that JVM subscribe to its monthly market analysis services. They claim that their program will allow JVM to maintain its current sales rate of new cars while reducing the amount of time a new car sits in inventory before being sold by 20 percent. Assuming the consulting firm’s claim is true, how much should Max be willing to pay for the service? o Reducing New T by 20% is 1.67 * .8 = 1.336 Now I = 160 * .6 * 1.336 = 128.256 or 128 o Same as 160 * .8 = 128 o Cost of new Cars was 160 * $175 or $28000 o o Changes to 128 * $175 = 22,400 o Difference is 28000-22400 = 5600$ per month 6. The Evanstonian is an upscale independent hotel that caters to both business and leisure travelers. On average, one-third of the guests checking in each day are leisure travelers. Leisure travelers generally stay for 3.6 nights -twice as long as the average business customer. a. On an average day, 135 guests check into The Evanstonian. On a verage, how many guests of each type are in the hotel on any given day? o Leisure T= R = 135 guest/ day / 3 = 45 guest/day 45 guest day * 3.6 nights = I or 162 guests o Business = 138 *(2/3) = 90 * 1.8 = I or 162 guests o b. How many times per month does the hotel turn over its inventory of guests (assume 30 days per month)? Total I = 162 * 2 = 324, Turns = R/I or 135/324 = .41666 per day * 30= o o Turns =12.5 turns per month c. The average business traveler pays a rate of $250 per night, while leisure travelers pay an average rate of $210 per night. What is the average revenue The Evanstonian receives per night per occupied room? o Average revenue = .5(250) + .5(210) = 230$ per room revnue 

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Chapter 4: Flow-Time Analysis Flow time – The total amount of time required by that unit to flow through the process from entry to exit. o The flow time of different flow units varies substantially Flow Time of a Process  – The average flow time of the individual flow units Reasons Process Flow Time is a Valuable Measure of Process Performance: o 1) Flow time affects delivery-response time  – Key product attribute that customers value. 2) Short flow times in the production and delivery process reduce the inventory and associated costs  – By Little’s o Law 3) A shorter flow time in a firm’s new product development process enables the firm to more quickly introduce o the produce to the market - A major source of competitive advantage. Enables the f irm to bring more generations of a product to a market. 4) In markets featuring shorter product life cycles, shorter mfg -process flow time allows firms to delay o production closer to the time of sale  – gain valuable market information, avoid product obsolescence, and minimize inventory required o 5) Short flow times result in fast feedback and correction in quality problems 6) It is an integrative measure of overall process performance  – short flow time frequently requires a high level of o overall operational excellence 4.1 Flow Time Measurement Flow time of a process can be determined by: o 1. Direct observation 1. Observe the process over a specified, extended period of time 2. Select a random sample of flow units over the specified period 3. Measure the flow time, from entry to exit, of each flow unit in the sample 4. Compute the average of the flow times measured o 2. Application of Little’s Law ( Indirect Approach) I=RXT Average Inventory could be measured by: 1. Observe the process over a specified, extended period of time 2. Select a random sample of points of time during the specified period 3. Measure the actual inventory within the system boundaries at each point in the sample 4. Compute the average of the inventory values measured Example: Golden Touch is charged with releasing research reports. The firm’s report s can be: new release and updates. In a typical month the department releases 20 new released, for a combined value (sales price) of $40,000, and 40 updates for a combined value of $20,000. On average, there are 10 open (unfinished) new releases and 8 open updates o Flow time of reports, irrespective of type , we can define the flow unit of the process as one report. Throughput R = 20+40 = 60 reports per month. Inventory = 10+8= 18 reports T = I/R = 18/60 = .3 month o Flow of sales dollars through the system , we can define the flow unit as a sales-dollar. The throughput R = 40,000+20,000 = $60,000 per month. Inventory = 10 X 2,000 + 8 X 500 = $24,000 T = I/R = 24k/60/ = .4 month 4.2 The Process Flowchart Elements of a Process: o Inputs and Outputs Flow units o Network of activities and buffers o o Resources allocated to activities o Information structure Process Flowchart  – A graphical representation of the network structure of the process. Originally developed to coordinate large projects involving complex sets of activities a nd considerable resources. o Activities = Rectangles Precedence Relationships = Arrows o Events = Ovals o o Buffers = Triangles - Designated locations within the process for the accumulation of inventory o Decisions = Diamonds – Activities at which flow is ‘routed’ into several continuing routes, resulting in splitting of the flows. 

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Roles of the various resources can be emphasized by partitioning the flowchart into several horizontally distinct bands, one for each resource. o Information can be distinguished from physical flows by using dashed arrows 4.3 Flow Time and Critical Paths Flow time of a given activity within the process is the time required by an average flow unit to flow through the activity o Can be measured by observing the specific activity over an extended time interval, or estimated based on experience. Flow time of the process, and of each of its activities, consists of periods of activity interspersed with periods of o waiting. Flow time of the various activities in the process, coupled with the sequence in the various activities performed, allow us to compute the flow time of the entire process. o For each path, the flow time along that path is the sum of the flow times of the activities that constitute the path. o A flow unit can exit the process only after all the activities along all the paths are completed. Flow time of a process must equal the flow time of the longest path in the process flowchart  – the critical path o Critical Activities - Activities that lie on the critical path. Determine the flow time of the entire process. A delay in completing any critical activity results directly in a corresponding delay in processing the flow unit. 4.4 Theoretical Flow Time and Role of Waiting As a flow unit travels through the various activities which make up the process, it undergoes periods of waiting interspersed with periods of activity. Thus, for each activity, we can break down the flow time of the activity into tis waiting and activ ity components Flow time = Activity Time + Waiting Time o Theoretical Flow Time  – The minimum amount of time required for a flow unit to flow through the process from entry to exist, without any waiting or interruptions. Can be computed from the flowchart of the process using the same approach as for computing the flow time, by o using data on activity time, instead of flow time. o Can be broken down: TFT = Value-adding flow time + Non-value adding flow time Reducing non-value-adding flow time is often a powerful way to save time and money Flow-Time Efficiency  – The ratio between theoretical flow time and the flow time of a given process o FTE = Theoretical Flow Time / Average Flow Time 4.5 Levers for Managing Theoretical Flow Time The only way to reduce flow time is to shorten the length of every critical path Flow Time = Waiting Time + Activity Time o Because these two components arise from different sources, the levers avai lable for managing each naturally distinct. Levers for reducing waiting time: Managing the effects of congestion Reducing batch sizes Reducing safety buffers Synchronizing flows Levers for managing the activity/theoretical part of flow time Basic Approaches: o Move work content off the critical path (‘work in parallel’) Restructuring – leaves the total amount of work per unit unaffected but manages the sequencing of the various activities to reduce the length of the critical path Moving work off the critical path and into paths that do not affect process flow time. 1. Move work off critical path to noncritical activity  – Redesigning the process so that critical activities are performed in p arallel rather than sequentially 2. Move work off critical path to the ‘out loop’ (pre - or post processing)  – Performing them either before the countdown for the process starts or a fter it ends, as defined by the process boundary, an approach that is also called pre or postprocessing. o Eliminate non-value-adding activities (‘work smarter’) Elimination – Leaves the network structure of the process as is, but reduces the total amount of work required for activities along the critical path o

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Value-adding Activities  – Activities that increase the economic value of a flow unit from the perspective of the customer. Non-value Adding Activities  – Activities that do not directly increase the value of a flow unit 1) Non-value adding work that is necessary to support the current process 2) Non-value adding work that does not Slack Time – Amount of time an activity can be delayed without affecting Process Flow Time Reduce the amount of rework (‘do it right the first time’) o Depends on setting a robust quality management system Decreasing the amount of work by process-improvement techniques such as SPC, design for manufacturability, process fool -proofing, workforce training. Modif y the product mix (‘do the quickest things first’) o Prioritization – Gives priority to flow units that can be processed faster  – to the extent allowed by the market o Increase the speed of operation (‘work faster’) Working at a faster rate Increasing the speed at which an activity is performed can be proved by acquiring faster equipment, increasing allocated resources, or offering incentives for faster work. Whatever approach is selected – it must be direct towards the critical path: reducing the work content of noncritical activities does no t reduce the theoretical flow time. 

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Exercises 1. Traffic court of King James County operates between 9-1pm. Each morning, roughly at 9am, 200 defendants show up for trial involving traffic violations. On Monday June 10, a sample of 10 defendants was selected at random by a consultant. For each defendant, the consultant recorded the actual time spent in discussion with the judge and time paying the fine (not waiting). Also recorded were times the defendant arrived and left court.

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Estimate the flow time of the process a. The average flow time of the process can be estimated by taking the average of the total time each defendant spent in the system. b. (9:30-8:45) + (9:45-8:45) + …… + (12:55-9:00) + (9:20-9:00) = 1200. c. Average Flow Time = 1200/10 = 120 min. b) Estimate the theoretical flow time of the process a. Average time with judge = (1+1.5+…..+ 1+1.5)/10 = 1.55 min. b. The average time to pay fine = (5+2+…..+ 2+3)/10 = 2.4 min. c. Theoretical flow time: 1.55 + 2.4 = 3.95 min. c) What is the flow-time efficiency? Number only without % sign. a. 3.95/120 = 3.3% 4.2 Wonder shed Inc. produces in addition to the standard model, a deluxe version for the discriminating customer. The production process for the two models is identical and is depicted in figure 4.1. The activity times for deluxe models is listed in tabl e 4.8 All times mentioned represent flow time at various activities and include the effects of waiting.

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Path 1 (roof): Start -> 1 -> 3 -> 5 -> 7 -> 8 -> End Path 2 (Base): Start -> 1 -> 2 -> 4 -> 6 -> 7 -> 8 -> End Activity 1 2 3 4 5 6 7 8

Separate Punch the base Punch the roof Form the base Form the roof Subassemble the base Assemble Inspect

Activity Time (Work Content) 20 35 45 10 45 30 25 40

1. What is the process flow time for producing a deluxe shed (in minutes)? Path 1 (roof) : = 20+ 45 +45 +25+ 40 = 175 minutes o o Path 2 (base): = 20+35+10 +30+25+ 40= 160 minutes 2. What is the process flow time for producing a deluxe shed (in minutes) if the flow time of Activity 2 is increased to 40 minutes? o Activity 2 is not on the critical path even it is increased to 40 minutes. 175 minutes 3. What is the process flow time for producing a deluxe shed (in minutes) if the flow time of Activity 3 is reduced to 40 minutes? The process flow time will be reduced to 170 minutes. o 4.3 The Evanstonian is a hotel that caters to both business and leisure travelers. When a g uest calls for room service, the room service manager takes down the order. The service manager then submits an order ticket to the ki tchen to begin preparing the food. She also gives an order to the sommelier to fetch wine from the caller. Finally, she assigns the order to a waiter. It takes 4 minutes to take down the order and to assign the work to the kitchen, sommelier, and waiter. I t takes the kitchen 18 minutes to prepare the typical order. It takes the sommelier 6 minutes to prepare the drinks for the order. While the kitchen and sommelier are doing their tasks, the waiter readies a cart – this takes 10 minutes per order. Once the food, wine, and cart are ready, the waiter delivers it to the gusset’s room. It takes the waiter 12 minutes to deliver the meal to the customer. It ta kes the waiter additional 4 minut es to return to the station and debit the guest’s account. All the t imes mentioned represent flow time at various time at the various activities, and include the effect of waiting. 

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1. What is the process flow time (in minutes, from receipt of order to debit the guest's account)? o The flow time is 4+18 + 12 + 4 = 38 minutes 2. What is the process flow time (in minutes, from receipt of order to debit the guest's account) if the waiter could prepare the cart in 8 minutes, instead of 10? o 38 cart preparation not on critical path 3. What is the process flow time (in minutes, from receipt of order to debit the guest's account) if the waiter could deliver the order in 10 minutes, instead of 12? The critical path will be reduced to 4+18 +10 + 4 = 36 minutes o 4.4 A home insurance application consists of two forms: F1 and F2 . On receipt, each application is processed and separated into F1 and F2; 10 min. F1 requires Activity A for 15 min and then Activity B for 10 min. F2 requires Activity C for 20 min. F1 and F2 are then combined and further processed by a loan officer for 15 min. All the times mentioned represent flow time at the variou s activities, and include the effects of waiting. 

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1. What is the process flow time (in minutes)? o The flow time is 50 minutes. The critical path is the one of F1 (process and separate, Activity A, Activity B, Loan Officer). 2. What is the effect on flow time if 50% of F1 forms must repeat activity A one more time due to quality problems? o Since activity A is on the critical path, the flow time will increase by 50%* 15 = 7.5 minutes, to 57.5 minutes. 4.5 The Vancouver International Airport Authority manages and operates Vancouver International Airport (YVR). To understand flow, management started with a single security line comprising an X-ray scanner for the carryon items and a screening station for passengers. Arriving customers first prepare themselves for the inspection by removing belts, coats and shoes, emptying their pockets, and separating electronic gear from other personal items. They then deposit all bags in trays on the scanner and proceed personally to the screening station. Once the screening is completed, passengers retrieve their belongings , put on their shoes, belts, and coats, and exit the facility. On average it takes passengers 30 seconds to prepare for the lines, and to place all carry-on items in the trays for the X-ray scanner. The X-ray scanner takes 40 seconds per tray, and the average passenger utilizes 1.5 trays. The personal screening station requires 30 seconds per person. Finally, retrieving of belongings and getting reorganized takes 60 seconds. 

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What is the theoretical process flow time (in seconds)? o The critical path is the one through the X-ray scanner. The flow time is 30 + 40*1.5 + 60 = 150 seconds. o A sample of 20 passengers was selected at random, and the time required for reach to clear security check was 530 seconds. What is the flow-time efficiency? Number only without % sign. o The flow time efficiency is 150/530 = 28% What is the impact on theoretical flow ti me of the process if the personal screening activity is expedited to 20 seconds? What is the theoretical process flow time (in seconds)? o The personal scanner is not on the critical path. 150 seconds

POW 1. Chic-ken Rulez is a food vendor at the state fair that only sells complete box meals which includes a sandwich (chicken or turkey), fries, and drink. Customers walk up to the counter at Chic-ken Rulez and place an order. The counter employee enters the order into the system which is displayed on several screens for all other employees to see the items that need to be made. In the kitchen sandwich makers assemble the selected sandwich once it displays on the order screen. The fry master will cook, salt, and scoop the ordered fries into a cup. Meanwhile, the employee that took the order, will prepare the requested drink. Once the sandwich and fries are complete, they are place in a window where the counter employee places all items in a box and delivers it to the cu stomer. Taking the order and entering it into the system takes 5 minutes. Once entered, the display screens instantly show the items to be made. The counter employee then takes an average of 3 minutes to make a drink. On average, it takes sandwich makers 8 minutes to complete a sandwich and place in the pick-up window. The fry maker takes 12 minutes on average to complete a cup of fries and place in the pick-up window. It takes the counter employee 10 minutes to box all items and hand to customer for delivery . All times listed are flow times for each activity and include the effects of waiting.

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a) What is the flow time of the process? o 5=12+10 = 27 minutes b) What is the process flow time if the company bought an automatic potato slicer and could reduce the amount of time it takes the fry master to make a cup of fries to 7 minutes, instead of 12? 5+8+10 = 23 minutes o c) Instead of the change listed in b, assume the sandwich assemblers streamlined their sub process and could make a sandwich in 5 minutes, instead of 8. What is process flow time now? 5+12+10=27 minutes o Using the original times listed in the question. Chic-k en Rulez wishes to improve the process by reducing the time to deliver a meal box. Customers often make an order and leave the counter area to find seating. This is the root cause for delivery times being so long because on average a customer's meal order is called 3 times before it is actually picked up which completes delivery. To reduce this process time, Chic-ken R ulez is going to provide customers with a miniature plastic chicken with a GPS tracker inside at the time of the order. The order process is the same except now the box and delivery activity will be two separate activities. Delivery is now performed by food runners that use a handheld device to locate the GPS plastic chickens, collect the plastic chicken for re- use, and deliver a customer’s ordered meal box. It now takes 2 minutes to box a meal. Based on preliminary tests, the average time to locate a GPS plastic chicken and deliver a meal box in the food area takes 7 minutes. d) What is the flow time of this redesigned process?

5+12+2+7= 26 minutes 3. Jeff and his roommate are in the cake baking business. When they receive an order over the internet, Jeff prepares a bowl and mixes cake batter according to the order (takes 6 minutes). He then pours the batter into a baking pan that holds 1 cake (2 minutes). His roommate then puts the cake pan in the oven and sets a timer (1 minute). Cakes bake in the oven for 9 m inutes and then are cooled outside the oven on a rack for 5 minutes. Finally the roommate takes 2 minutes to box the cake and then collects payment from the arriving customer (1 minute). Each cake order is composed of a two tier cake (2 cakes). Also Jeff and his roommate can only perform their assigned activities and cannot perform the other's. Although the mixing bowl can hold batter for two cakes at one time, assume the oven can only hold one cake pan at a time. As mentioned above, pouring batter into each pan takes 2 minutes, both cakes must be cooled before boxing, a nd each cake is put into the box separately one on top of the other . 

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a. Determine theoretical flow time from the order thru pay ment. Assume no waiting over the entire process. 45 o Now consider the effect on flow time given the following alternatives: b. Buy a second oven that can bake one cake pan (plus existing oven cooking 1 cake pan). 28 o c. Replace oven with one that can hold two cake pans at the same time (still 9 min bake). o 30 d. Replace oven with a faster convection oven that can bake one cake pan in 6 minutes (instead of 9). 30 o

Chapter 5: Flow Rate and Capacity Analysis 5.1 Flow Rate Measurement Throughput – Average flow rate of a stable process – the average number of flow units that flow through the process per unit of time o R – The average flow rate of a stable process 1. Observe the process over a given, extended period of time 2. Measure the number of flow units that are processed by the process over the selected per iod of time 3. Compute the average flow units per unit of time Capacity – The maximum sustainable throughput/ flow rate Measured by observing the system in periods of heavy congestion in which the flow rate i s limited by (and o therefore equal to) capacity Throughput and Capacity indicate a ‘scale’ of a process and are extremely important metrics of performance The higher the throughput, the greater the value generated by the process because the flow of units through the o process represents the creation of economic value o Capacity is important from the perspective of managing process flow times since insufficient process capacity may lead to congestion and excessive waiting time For these reasons – keeping track of the flow rate of a process is one of the most fundamental tasks of management in any organization Takt Time – The reciprocal of throughput o Useful in the context of synchronized assembly lines, where it represents the average activity time at each work station (takt times for the assembly of mass-produced cars are on the order of 1 minute) 5.2 Resources and Effective Capacity Capacity of a system depends on the level of resource deployed by the system and on the effectiveness at which these resources are utilized Capacity is difficult to analyze due to the subtle and complicated ways in which the various resources can interact Activities are performed by capital and labor resources Resource Pool – A collection of interchangeable resources that can perform an identical set of activities o Resource Unit – Each unit in a resource pool Resource Pooling – Combining separate resource pools into a single, more flexible, pool able to perform several activities o A powerful operational concept that can significantly affect not only process flow rate and process capacity but also flow time Unit Load of a Resource Unit – The average amount of time required by the resource unit to process one flow unit, given the way the resource is utilized by the process Effective Capacity of a Resource Unit  – The inverse of the unit load. Represents the maximum sustainable flow o rate through the resource unit, if it were to be observed in isolation Effective Capacity of a Resource Pool  – The sum of the effective capacities of all the resource units in that pool. Effective Capacity (of a resource pool i) = C i/Ti o I: Resource Pool Ti: Unit load at resource pool o Ci: # of resources o o If the various resource units are not identical in terms of their effective capacities, then the affective capacity of the resource pool will be the sum of the effective capacities of each resource unit in the pool Since all resource pools are required to process each flow unit, no process can produce output any faster than its o bottleneck Bottleneck – The ‘slowest’ resource pool of the process Effective capacity of a process  – The effective of the bottleneck 5.3 Effect of Product Mix and Effective Capacity and Probability of a Process o Effective capacity depends on the products produced and their proportions in the mix o Unit Contribution Margin of each flow – its revenue less all of its variable costs 5.4 Capacity Waste and Theoretical Capacity Theoretical Unit Load of a Resource Unit  – The minimal amount of time required to process a flow unit, if all waste were o eliminated o Theoretical Capacity of the Resource Unit  – The reciprocal of the theoretical unit load o Represents that maximum sustainable flow rate through the resource unit, if it were utilized without any waste Theoretical Capacity of a Process – Provides a highly idealized and seldom attainable notion of capacity o Usefulness devices from the fact that it provides an estimate of the waste in the system and forms the basis for o any action plan for waste elimination Theoretical Capacity: Effective Capacity / (1-CWF) o 

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Theoretical Capacity Utilization of a Resource Pool  = Throughput / theoretical capacity of the I th resource pool Defined by the bottleneck resource pool o 5.5 Levers for Managing Throughput o Throughput Profit multiplier = % change in profit / % change in throughput EX: The fixed costs of owning and operating the resources amount to $180,000 per month. The revenue is 22$ per o unit and the variable costs amount to $2 per unit. Thus the contribution margin is 20$ per unit. In july 2010, the process throughput was 10,000 units. The profit for july was: 20$perunit *10000units -$180000 fixed costs = $20000 profit A process improvement team was able to increase output in August by 1% to 10,100 units, without an increase in o fixed cost. The profit for august was: 20$ X 10,100 -$180,000 = $22,000 o Thus a 1% increase in throughput has resulted in a 10% increase in profit  – a throughput profit multiplier of 10! o =Contribution margin per unit / profit per unit 20/2 = 10 o Throughput Improvement Mapping  – A view of the big picture and identifying the most likely source of additional o throughput. o Throughput