Process Analysis

Session 3
Today’s Class

• Inventory in process

• Little’s law and its application

• Inventory build-up diagram

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 Inventory in Process: T-shirt Production

Input rate = 15 units/hr Fabric Cutting Sewing Packing T-shirt

Resources: Worker A Worker B Worker C

Processing time: 3 min/unit 4 min/unit 3 min/unit

• On average, how many units are there in the process (inventory)?

• Why is inventory an important performance metric?

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Inventory in Process: T-shirt Production

Gantt Chart
Time (in minutes) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Worker A

Worker B

Worker C

• Average inventory in the first 3 min?

• The (long-run) average inventory is

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Little’s Law: Determining Inventory

Inventory = Flow Rate Flow Time

Process

Flow rate = 2 units/second

Flow time = 3 seconds

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Example: Insurance Company

• An insurance company processes 10,000 claims per year. The average

processing time is 3 weeks. How many claims are in the system on
average? (Assuming 50 weeks in a year)
• R= 200 claims / week, T = 3 Weeks, I = 600 claims

• Now, the company reduces its processing time by 80%. How many claims
are in the system on average?
• R= 200 claims / week, T = 0.6 Weeks, I = 120 claims

• A manager can influence any one of these measures by controlling the

other two.

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Little’s Law and Financial Performance

• By Little’s Law, Inventory ($)

Days of Inventory Cost of goods sold ($/year)
(Throughput Rate)

Inventory ($)
Days of Inventory = ––––––––––––––––
(Flow Time) Cost of goods sold ($/year)
Cost of goods sold ($/year)
Inventory Turnover = ––––––––––––––––
Inventory ($)

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Financial Performance: PC Industry

Dell Lenovo Apple HP

Revenue (billion $) $56.94 $33.87 $170.91 $111.85

Net income (billion $) $2.37 $0.64 $37.04 $5.11

Inventory (billion $) $1.38 $1.96 $1.76 $6.05

COGS (billion $) $44.75 $29.80 $106.61 $85.79

Days of inventory

Source: finance.yahoo.com

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Inventory Buildup Diagram

Capacity
Input rate 20
(units/hr)
10
5
Time
5pm 7pm 9pm 11pm 1am 3am
Inventory in the
Buffer (units) 20 Slope = 5 – 10
= – 5 units/hr
10

Slope = 20 – 10 0 Time
= 10 units/hr 5pm 7pm 9pm 11pm 1am 3am

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Inventory Buildup Diagram

• Input rate<Capacity • Input rate>Capacity • Input rate<Capacity

• No inventory • Inventory buildup
• Throughput rate = rate = Input rate -
Input rate Capacity
• Throughput rate =
Capacity
• Inventory deplete
rate = Capacity –
Input rate
• Throughput rate =
Capacity

Inventory in the
Buffer (units) 20

10

0 Time
5pm 7pm 9pm 11pm 1am 3am

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Practice Problem

• Gary manages a receiving station for peanuts. Farmers deliver their loads
of peanuts from 5 am to 5 pm. Gary can process them at a rate of 5 tons
an hour, and on a heavy day, a total of 90 tons can be expected.
• Draw the inventory buildup diagram. Assume that the peanuts arrive at the
station at an even pace all day.
• The station has room to hold only 10 tons of peanuts in raw material
inventory prior to processing. Once this space is filled, the farmers’ trucks
must wait to dump their contents.
• At what time will the trucks likely start to wait to unload?

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Practice Problem

Inventory (tons)

10

Time
5:00am 5:00pm

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Waiting Time

• As the manager, I am interested in knowing total customer hours spent in

waiting.

• How do we compute this from the buildup diagram?

Units of inventory
20

10

0 Time
5pm 7pm 9pm 11pm 1am 3am

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