Capacity, time, and more

Session 2

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Early Amazon: delivering books
• Customers want
• Large selection
• Fast delivery
• Low price

• It was hard for Amazon in the early days to satisfy customers.

• Inventory management was a huge headache.
• Amazon had to balance lost sales from insufficient inventory and holding costs from excessive
inventory.

• As a solution, Amazon did not keep any inventory of books.

• The supplier Ingram kept the books for Amazon.
• Once Amazon received an order, it was transmitted to Ingram.
• Ingram would ship the book directly to the consumer.

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Early Amazon: delivering books

Amazon’s Ingram’s
Order Order

Ingram’s Book
Amazon’s Post Inventory Ingram’s Post
Order Process Order Process

Shared inventory between Amazon and Ingram

à Risk pooling

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Early Amazon: delivering books
• Advantages of risk pooling
• The shared inventory is facing less uncertainties than the sum of uncertainties faced by each
company’s inventory if they were to keep one’s own inventory.
• Small note on the inventory management [this subject will be covered later in the semester]
• Suppose Amazon and Ingram order a supply of books once a month. Do they only care the average
monthly demand? NO
• They care about the standard deviation in the monthly demand as each month have different
number of books sold.
• When managing inventory, we keep a buffer to face this variability which is proportional to the
standard deviation.
• Let the standard deviation of this monthly demand for Amazon and Ingram be 𝜎! and 𝜎" ,
respectively. Together, they will face the standard deviation of 𝜎!# + 𝜎"# .
• 𝜎!# + 𝜎"# < 𝜎! + 𝜎" , so the buffer will be if the inventory is shared and hence more efficient
inventory management.
• Disadvantages of the arrangement between Amazon and Ingram
• Allocation priority in the sense that which company’s order is processed first

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Measuring business processes
• Internal perspective
• Employee satisfaction
• Cost efficiency

• Customer perspective
• Customer satisfaction and retention
• New customer introduction
• Per customer profitability

• Business process defines

• Competitive advantage
• Financial metrics such as the operating income or ROI

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Analyzing business processes

Inputs Outputs
(customers (goods
Transformation process
and/or and/or
materials) services)

• Our purpose is to examine the transformation process from the perspective of

flows.

• The unit being transformed is typically referred to as a job and can represent a
customer, an order, material, money, information, etc.

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Measure: flow rate
• Inflow rate (in other words, demand): a rate at which orders arrive

• Outflow rate (or throughput rate): a rate at which orders are completed
• In this lecture, when we say flow rate, this means the throughput rate.
• Note that the throughput rate depends on the inflow rate.
• For example, a factory can make 100 cars per month and the demand for the car is 50 cars
per month. The throughput rate of this factory is not 100 but 50 cars per month.

• Calculating the flow rate

• Let’s call the average time between two successive order completions the cycle time (CT).
• Flow rate = 1/CT

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Measure: capacity
• Capacity is defined as the number of unit that can be processed per unit of time.
• A cashier can serve 20 customers per hour.
• The capacity of a web server is 30000 hits per min.
• A doctor can perform 300 surgeries per year.
• A stove can cook 20 hamburgers per min.

• Throughput rate of the process = min(demand, capacity of the process)

• Note that the capacity is a rate and therefore it is very important to indicate a
unit.
• Per hour, per minute, per month, …

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Measure: capacity
• When a process involves multiple steps, how do we calculate the capacity of the
entire process?
• Consider the following process from a burger joint.

Raw
Material Cook Assemble Deliver

• Patties cook in 60 seconds; the stove holds 20 patties.

• Assembly of a hamburger takes 27 seconds per hamburger.
• 10 workers are available to assemble hamburgers.
• Assume the patty is the only ingredient that needs cooking.

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 Measure: capacity
• To calculate the capacity of the burger joint’s capacity, suppose there are
unlimited demand of hamburgers. Let’s see what is happening?

1:27 1:54 2:27 2:54 3:27 3:54 4:27 4:54

Assembly 10 10 10 10 10 10 10 10
Continued
Cooking First 20 Second 20 Third 20 Fourth 20

1:00 2:00 3:00 4:00

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Measure: capacity
• The stove can push out 20 hamburgers per one minute and the workers can push
out 10 hamburgers per 27 seconds which is 22.2 hamburgers per one minute.
• Therefore, the capacity of the joint is 20 hamburgers per one minute.

• The stove is the bottleneck resource as it processes orders at the slowest rate.

• Identifying the bottleneck resource is important because

Bottleneck resource’s capacity = the capacity of the process

• Is it wise to invest on non-bottleneck resources (hiring more workers in this

example)?

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Measure: utilization rate
• Utilization rate is defined to be
Capacity used
Capacity available

• Suppose the capacity of a cashier in a coffee shop is 96 customers per shift and the inflow
rate of customers is 72 customers per shift.
• The cashier’s utilization rate = 72/96 = 75%, i.e., the cashier is busy 75% of the shift.

• Utilization rate is a measure of efficiency.

• If there are 10 workers whose utilization rates are only 10%, the manager should consider
laying some of them off.

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Measure: utilization rate
• Can utilization be greater than 1?
• NO!
• A resource’s capacity cannot be used more than it can provide.

• Would a bottleneck resource always operate 100% of the time (i.e, have the
utilization rate of 1)?
• NO!
• When the demand is lower than the process capacity, even the bottleneck resource is not
operated 100% of the time.

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Measure: utilization and bottleneck
• Another definition of bottleneck is the resource with the highest utilization rate.

• In the burger joint example (recall that the bottleneck was the stove), suppose
the demand for hamburgers is 10 per minutes.
• The utilization rate of the stove = 10/20 = 50%
• The utilization rate of the workers = 10/22.2 = 45%
• The stove has a higher utilization rate and therefore is the bottleneck resource.

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Measure: flow time
• The flow time is defined to be the average time it takes a flow unit (a product or
service to be delivered) to get through the process.
• We need the notion of the average because different units can stay in the process

• The flow time is a tricky number to measure. To see, consider the burger joint
example.
• Assume the demand 1 order per every three seconds and the oven operates only when there
are 20 patties to be cooked.

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 Measure: flow time
(Times are measured in seconds.)
Order Wait time Cooking Wait time Assembly Total
number before cooking time before assembly time time
Different orders spend
1 57 60 0 27 144
2 54 60 0 27 141
different amount of
3 51 60 0 27 138
the times.
4 48 60 0 27 135
5 45 60 0 27 132 There is a pattern in the
6 42 60 0 27 129 total times which is
7 39 60 0 27 126 repeated every 20
8 36 60 0 27 123 orders.
9 33 60 0 27 120
10 30 60 0 27 117 The flow time can be
11 27 60 27 27 141
calculated by averaging
12 24 60 27 27 138
the total times of the
13 21 60 27 27 135
… … … … … …
first 20 orders.
20 0 60 27 27 114
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21 57 60 0 27 144
Measure: flow time
• Other illustrations of the flow time
• Average time a customer spends in a bank
Waiting Processing

Customer arrives Service begins Service ends

Flow Time
• Average time a book stays at Amazon warehouse

Book arrives Stored Order arrives Picked Packaged Shipped

Flow Time

• We do not want to have customers or orders wait too much before delivery.
• In general, it is desirable to come up with a way to reduce the flow time without hurting the
quality.

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Measure: work in process
• Work in process (WIP) is the number of units waiting to be processed or being
processed in the system at a point in time.

• WIP at the 𝑡 + 1 $% period

= (WIP at the 𝑡 $% period) + (New orders at the 𝑡 $% period)
- (Completions at the 𝑡 $% period)

• WIP needs not be a constant and let’s draw the WIP for the burger joint example.

• WIP and the flow time are closely related via a celebrated law named the Little’s
law about which we will learn soon.

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Next class
• Gantt chart: a tool for an easy process analysis and management

• Flexibility as a way to improve the capacity

• Practice examples

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