Process & Little’s Law

Flow rate/Throughput R
Inventory I [units/hr]
... ... ... [units] ... ...

Flow Time T [hrs]

ƒ Inventory = Throughput x Flow Time

I = RxT

ƒ Inventory Turnover = Throughput / Inventory

= 1/ T

Process Analysis & Improvement Slide 1 © Van Mieghem

 Example: Little’s Law

ƒ Fast food outlet process : Material flow

ƒ Restaurant : Customer flow
ƒ Insurance Co. : Job flow
ƒ Steel company: Cash flow
ƒ Manufacturer: Cash flow (account receivable)
ƒ Bank: Flow time

Process Analysis & Improvement Slide 2 © Van Mieghem

 Little’s Law applied to different process flow examples

1. Monetary Flow: For the new euro introduction in 2002, Wim Duisenberg
had to decide how many new Euro coins to stamp by 2002. Euroland’s
central banks’ cash-in-coins handling was estimated at €300 billion per
year. The average cash-in-coins holding time by consumers and businesses
was estimated at 2 months. How many Euro coins were to be made?

2. Customer Flow: Taco Bell processes on average 1,500 customers per day
(15 hours). On average there are 75 customers in the restaurant (waiting to
place the order, waiting for the order to arrive, eating etc.). How long does
an average customer spend at Taco Bell and what is the average customer
turnover?

3. Job Flow: The Travelers Insurance Company processes 10,000 claims per
year. The average processing time is 3 weeks. Assuming 50 weeks in a
year, what is the average number of claims “in process”.

Process Analysis & Improvement Slide 3 © Van Mieghem

 Little’s Law applied to different process flow examples
4. Material Flow: Wendy’s processes an average of 5,000 lb. of hamburgers
per week. The typical inventory of raw meat is 2,500 lb. What is the
average hamburger’s cycle time and Wendy’s turnover?

5. Cash Flow: Motorola sells $300 million worth of cellular equipment per
year. The average accounts receivable in the cellular group is $45 million.
What is the average billing to collection process cycle time?

6. Question: A general manager at Baxter states that her inventory turns three
times a year. She also states that everything that Baxter buys gets
processed and leaves the docks within six weeks. Are these statements
consistent?

Process Analysis & Improvement Slide 4 © Van Mieghem

 Process Architecture (Structure):

Process = a transformation of inputs into outputs; or network of activities performed

by resources

Process Structure incorporates five elements:

1. Process Boundaries:
– Inputs refer to any tangible or intangible items that flow from the environment into the
process
– Outputs whether information, material, energy cash, or satisfied customers – flow from
the process back into the environment.
2. Flow unit: the unit of analysis
3. Network of Activities & Storage/Buffers
– Activities with activity times which are ordered so that output of the one becomes
Key for Capacity Analysis
become an input into another.
– Buffers with waiting flow times
– Routes: precedence relationships (solid lines) with throughputs
4. Resources & Allocation
- Who does what?
5. Information Structure & flow.

Process Analysis & Improvement Slide 5 © Van Mieghem

 Examples: Five Elements of Process
1). Inputs & Outputs
Example:
- Raw materials flow through a manufacturing process and exit as finished goods.
- Passengers waiting in Location A flow through an air transportation process and exit as
passengers at Location B.
- The jet fuel is transformed into energy and pollution.
- Data flow through an accounting process and exit as financial statements.
- Invoiced dollars (account receivable) flow through a billing and collection process and exit
as collected dollars (cash).

2). Flow units

- It maybe a unit of input (such as, a customer)
- A unit of output ( such as finished product)
- A unit of an intermediate product (such as, a seat in an auto assembly plant)
- A set of inputs or outputs in a multiproduct process (such as, a set of subassembled
components needed for the final assembly).

Note: Definition of flow unit is important for process performance evaluation or

analysis, and it also important when designing the process because, it directly
affects capacity and investment levels (see: Lists of some generic business
processes, and identifies flow units that move through the input-output transformation)..

Process Analysis & Improvement Slide 6 © Van Mieghem

 Some of Generic Business Process

Lists of Some Generic Business Processes

Process Flow Unit Input-output Transformation
Order fulfillment Orders From the receipt of an order to the delivery of the
product
Production Products From the receipt of materials to the completion of the
finished product
Outbound logistics Products From the end of production to the delivery of the
product to the customer
Supply cycle Supplies From issuing of a purchase order to the receipt of the
supplies
Customer service Customers From the arrival of a customer to the departure
New product Projects From the recognition of a need to the launching of a
development product
Cash cycle Cash From the expenditure of funds (costs) to the collection
of revenues.

Process Analysis & Improvement Slide 7 © Van Mieghem

 3). Network of activities & Buffers
Example:
- When studying a supply chain (interorganizational process that includes
consumers, suppliers, manufacturers, distributors, and retailers), it
suffices to view each organization (plant, warehouse or store) as one
activity or black box.
- When studying each organization more fully, we must study its particular
transformation process in more detail, such as spot welding sheet metal to
the auto chassis; checking in passengers at airport terminals; entering cost
data in accounting information systems; and receiving electronic fund
transfers at collection agencies.
- Buffers, between consecutive activities are allowed for storage of flow
units.
4). Resources
Examples:
- Capital or fixed assets, such as land building, equipment, machines, and information
systems.
- Labor, such as operators, customer-service representatives, workers, and clerks.
5). Information structures
It shows which information is needed and/or available to manage activities or make managerial
decisions.

Process Analysis & Improvement Slide 8 © Van Mieghem

 Most time inefficiency comes from waiting:
E.g.: Flow Times in White Collar Processes

Industry Process Average Theoretical Flow Time

Flow Time Flow Time Efficiency

Life Insurance New Policy 72 hrs. 7 min. 0.16%

Application

Consumer Packaging New Graphic 18 days 2 hrs. 0.14%

Design

Commercial Bank Consumer 24 hrs. 34 min. 2.36%

Loan

Hospital Patient Billing 10 days 3 hrs. 3.75%

Automobile Financial 11 days 5 hrs 5.60%

Manufacture Closing

Process Analysis & Improvement Slide 9 © Van Mieghem