Operations Management:

Process Analysis and Applications

Module
 Changing Sources of Competitive Advantage
 Targeting Improvement: Operational Measures - Time T, Inventory I,
Throughput rate R
» Link through Little’s Law
» Link to Financial Measures
» Targeting improvement: CRU Computer Rentals
 Capacity and Flow Time Analysis
» Pizza Pazza
» Levers for Improvement
 Multi-product Capacity Management and Investment
» Joint Marketing & Production Decisions
» Optimal Capacity Investment
» National Cranberry Cooperative

S. Chopra/Operations/Process Analysis & Apps 1

 How can operations help a company compete?
The changing sources of competitive advantage
 Low Cost & Scale Economies (< 1960s)
– You can have any color you want as long as it is black

 Focused Factories (mid 1960s)

 Flexible Factories and Product variety (1970s)

– A car for every taste and purse.

 Quality (1980s)
– Quality is free.

 Time (late 1980s-1990s)

– We love your product but where is it?
– Don’t sell what you produce. produce what sells.
S. Chopra/Operations/Process Analysis & Apps 2
 What is Improvement?
Operational Performance Measures
 Flow time
 Throughput
 Inventory
 Process Cost
 Quality

S. Chopra/Operations/Process Analysis & Apps 3

 The business imperative: creating
economic value
Improvement levers
Price 1. Increase price
Revenues x 2. Increase
Quantity throughput

Profit - Material
+
Labor
Costs + 3. Reduce costs
Economic Energy 4. Improve quality
value added - +
(EVA) Overhead
PP&E
Capital + 5. Reduce capital intensity
Inventory
invested 6. Reduce inventory
+
Opportunity x Other
cost
Weighted average Reduce time
cost of capital

Financial metrics Operational metrics

S. Chopra/Operations/Process Analysis & Apps 4

 Relating operational measures (flow time T,
throughput R & inventory I) with Little’s Law
Flow rate/Throughput R
Inventory I [units/hr]
... ... ... [units] ... ...

Flow Time T [hrs]

 Flow time = Inventory / Throughput

T = I/R

 Turnover = Throughput / Inventory

= 1/ T
S. Chopra/Operations/Process Analysis & Apps 5
 Process Flow Examples
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?

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”.

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?

S. Chopra/Operations/Process Analysis & Apps 6

 Process Flow Examples
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?

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?

S. Chopra/Operations/Process Analysis & Apps 7

 Targeting Improvement
MBPF Inc.: Consolidated Statement
Net Sales 250.0

Costs and expenses

Cost of Goods Sold 175.8
Selling, general and administrative expenses 47.2
Interest expense 4.0
Depreciation 5.6
Other (income) expenses 2.1
TOTAL COSTS AND EXPENSES 234.7

INCOME BEFORE INCOME TAXES 15.3

PROVISION FOR INCOME TAXES 7.0
NET INCOME 8.3

RETAINED EARNINGS, BEGINNING OF YEAR 31.0

LESS CASH DIVIDENDS DECLARED 2.1
RETAINED EARNINGS AT END OF YEAR 37.2

NET INCOME PER COMMON SHARE 0.83

DIVIDEND PER COMMON SHARE 0.21

S. Chopra/Operations/Process Analysis & Apps 8

 Targeting Improvement
MBPF Inc.: Balance Sheet
CURRENT ASSETS
Cash 2.1
Short-term investments at cost (approximate mkt.) 3.0
Receivables, less allowances of $0.7 mil 27.9
Inventories 50.6
Other current assets 4.1
TOTAL CURRENT ASSETS 87.7

PROPERTY, PLANT AND EQUIPMENT (at cost)

Land 2.1
Buildings 15.3
Machinery and equipment 50.1
Construction in progress 6.7
Subtotal 74.2
Less accumulated depreciation 25.0
NET PROPERTY, PLANT AND EQUIPMENT 49.2

Investments 4.1
Prepaid expenses and other deferred charges 1.9
Other assets 4.0
TOTAL 146.9
ASSETS

S. Chopra/Operations/Process Analysis & Apps 9

 Targeting Improvement
MBPF Inc.: Inventory and Cost of Goods

INVENTORY
Raw materials (roof) 6.5
Fabrication WIP (roof) 15.1
Purchased parts (base) 8.6
Assembly WIP 10.6
Finished goods 9.8
TOTAL 50.6

COST OF GOODS SOLD

Raw materials 50.1
Fabrication (L&OH) 60.2
Purchased parts 40.2
Assembly(L&OH) 25.3
TOTAL 175.8

S. Chopra/Operations/Process Analysis & Apps 10

 Targeting Improvement
MBPF Business Process Flows

$60.2/yr $25.3/yr

$50.1/yr $110.3/yr
$6.5 $15.1
Raw Materials Fabrication
(roofs) (roofs) $175.8/yr $175.8/yr
$10.6 $9.8

$40.2/yr Assembly Finished Goods

$8.6
$40.2/yr
Purchased Parts (bases)

S. Chopra/Operations/Process Analysis & Apps 11

 Targeting Improvement
MBPF Inc.: Flow Times

Raw Fabrication Purchased Assembly Finished

Materials Parts Goods
Throughput R
$/Year 50.1 110.3 40.2 175.8 175.8
$/Week 0.96 2.12 0.77 3.38 3.38
Inventory I ($) 6.5 15.1 8.6 10.6 9.8
Flow Time T = 6.75 7.12 11.12 3.14 2.90
I/R (weeks)

S. Chopra/Operations/Process Analysis & Apps 12

 Targeting Improvement

Flow rate R
($/week)

5.0

3.38
Accounts
Receivable

Assembly
2.12
Finished
Goods
0.96 Fabrication
Raw Materials
0.77 Purchased Parts
11.12 6.75 7.12 3.14 2.90 5.80
Flow Time T
(weeks)
S. Chopra/Operations/Process Analysis & Apps 13
 Why the Difference in Performance?
Inventory Over Last 8 Quarters (Ending Q3 2001)

6000

5000

4000

Nokia
Inventory

3000 Ericsson
Motorola
2000

1000

0
0 1 2 3 4 5 6 7 8 9

Quarter

S. Chopra/Operations/Process Analysis & Apps 14

 CRU Computer Rentals

S. Chopra/Operations/Process Analysis & Apps 15

 Learning Objectives
Basic Process Analysis
 Process Measures: time, inventory, and throughput
 What is an improvement?
– Link financial and operational measures
– Good operational measures are leading indicators of
financial performance
 Using Little’s law for process flow analysis
 Targeting areas and performance measures for
improvement

S. Chopra/Operations/Process Analysis & Apps 16

Operations Management:
Process Analysis and Applications
Module
 Changing Sources of Competitive Advantage
 Operational Measures: Time T, Inventory I, Throughput rate R
» Link through Little’s Law
» Link to Financial Measures
» Targeting Improvement: CRU Computer Rentals
 Capacity and Flow Time Analysis
» Pizza Pazza
» Levers for Improvement
 Multi-product Capacity Management and Investment
» Joint Marketing & Production Decisions
» Optimal Capacity Investment
» National Cranberry Cooperative

S. Chopra/Operations/Process Analysis & Apps 17

 Operational Performance Measures
 How to measure and decrease flow times?
 How to measure and increase throughput?

S. Chopra/Operations/Process Analysis & Apps 18

 Pizza Pazza
Flow Chart

S. Chopra/Operations/Process Analysis & Apps 19

 Process Architecture is defined and
represented by a process flow chart:
Process = network of activities performed by resources
1. Process Boundaries:
– input
– output
2. Flow unit: the unit of analysis
3. Network of Activities & Storage/Buffers
– activities with activity times
– routes: precedence relationships (solid lines)
4. Resources & Allocation
5. Information Structure & flow (dashed lines)
S. Chopra/Operations/Process Analysis & Apps 20
 Operational Measure: Flow Time
Driver: Critical Activity Times
 (Theoretical) Flow Time

 Critical Activity

 Flow Time efficiency

S. Chopra/Operations/Process Analysis & Apps 21

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

Industry Process Average Flow Theoretical Flow Flow Time Efficiency

Time Time

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

Application

Consumer New Graphic 18 days 2 hrs. 0.14%

Packaging Design

Commercial Bank Consumer Loan 24 hrs. 34 min. 2.36%

Hospital Patient Billing 10 days 3 hrs. 3.75%

Automobile Financial 11 days 5 hrs 5.60%

Manufacture Closing

S. Chopra/Operations/Process Analysis & Apps 22

 Levers for Reducing Flow Time
 Decrease the work content of critical activities
– work smarter

– work faster

– do it right the first time

– change product mix

 Move work content from critical to non-critical activities

– to non-critical path or to ``outer loop’’

 Reduce waiting time.

S. Chopra/Operations/Process Analysis & Apps 23

 Operational Measure: Capacity
Drivers: Resource Loads
 (Theoretical) Capacity of a Resource

 Bottleneck Resource

 (Theoretical) Capacity of the Process

 Capacity Utilization of a Resource/Process =

throughput [units/hr]
capacity [units/hr]

S. Chopra/Operations/Process Analysis & Apps 24

 A Recipe for Capacity Measurements
Resource Unit Load Resource Capacity Process Resource
(time/job) Unit Capacity # of units Total Capacity Utilization*

* assuming system is processing at full capacity

S. Chopra/Operations/Process Analysis & Apps 25

 Pricing and Capacity Investment:
Pans + Rent another oven at €10/hr?

 Resource cost = €8/hour

 Material cost = €1.4/pizza

 Minimum sale price =

 Contribution margin if sale price is €5 / pizza =

S. Chopra/Operations/Process Analysis & Apps 26

 Cost Capacity Profile

Demand
Capacity
[units/time]

Process Capacity

Resource x NCX-10 Furnaces Marginal Investment Cost

[$/unit/time]

S. Chopra/Operations/Process Analysis & Apps 27

 Levers for Increasing Process Capacity
 Decrease the work content of bottleneck activities
– work smarter
– work faster
– do it right the first time
– change product mix

 Move work content from bottlenecks to non-bottlenecks

– to non-critical resource or to third party

 Increase Net Availability

– work longer
– increase scale (invest)
– increase size of load batches
– eliminate availability waste: decrease changeover time

S. Chopra/Operations/Process Analysis & Apps 28

 Increasing Process Capacity in The Goal
 “is to increase the capacity of only the bottlenecks”
– “ensure the bottlenecks’ time is not wasted”
» increase availability of bottleneck resources
» eliminate non-value added work from bottlenecks
 reduce/eliminate setups and changeovers
» synchronize flows to & from bottleneck
 reduce starvation & blockage
– “ the load of the bottlenecks (give it to non-bottlenecks)”
» move work from bottlenecks to non-bottlenecks
» need resource flexibility
– unit capacity and/or #of units.
» invest
S. Chopra/Operations/Process Analysis & Apps 29
 Other factors affecting Process Capacity
 Batch (Order) Sizes

 Product Mix

 other managerial policies ...

S. Chopra/Operations/Process Analysis & Apps 30

 Product Mix Decisions:
Pizza Pazza offers 2 products
Sale Price of thin crust pizza: €5.00/pizza
Cost of Materials: €1.40/pizza

Sale Price of deep dish pizza: €7.50/pizza

Cost of Materials: €1.90/pizza

S. Chopra/Operations/Process Analysis & Apps 31

 Product Mix Decisions
Processing Prepare Prepare Prepare Load Bake Pack Receive Total
Times sauce dough pizza Oven &
Set
Thin Crust 2 mins. 3 mins 1 min 1 15 1 2 25

Deep Dish 5 3 1 1 29 1 2 42

Resource Jean Jean Jean Jacq+ Oven Jacq Jacq

Oven

S. Chopra/Operations/Process Analysis & Apps 32

 Product Mix Decisions
Margin per thin crust pizza = € 3.60
Margin per deep dish pizza = € 5.60

Margin per oven minute from thin crust = 3.60×2 /

16 = € 0.450
Margin per oven minute from deep dish = 5.60×2 /
30 = € 0.373

S. Chopra/Operations/Process Analysis & Apps 33

 National Cranberry Cooperative

S. Chopra/Operations/Process Analysis & Apps 34

 Learning Objectives:
Multi-Product Process Analysis & Apps
 Process measures:
– Flow time  manage critical activities
– Capacity  manage bottleneck resources
 Levers for improving
– Flow time  manage critical activities
» Decrease time in critical activities
» Perform activities in parallel
» Decrease waiting time
– Capacity & Throughput  manage bottleneck resources
» Decrease unit load of bottleneck resource
» Move work from bottleneck to non-bottleneck resource
» Increase availability of bottleneck resource
 Shifting bottleneck
» Bottleneck affected by product mix, batch size and other factors
» Product profitability based on $ per unit time on bottleneck

S. Chopra/Operations/Process Analysis & Apps 35