1. 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
Levers for Improvement
CRU Computer Rentals
Capacity and Flow Time Analysis
Pizza Pazza
Multi-product Capacity Management and Investment
Joint Marketing & Production Decisions
Optimal Capacity Investment
National Cranberry Cooperative

2. How can operations help a company compete
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. P V Q T

5. Operational Performance Measures
Flow time T
Throughput rate R
Inventory I
Process Cost

6. Relating operational measures
(flow time T, throughput R & inventory I)
with Little’s Law
Flow rate/Throughput R
[units/hr]
Inventory I
[units]
...
...
...
...
...
Flow Time T [hrs]
Inventory = Throughput x Flow Time
I = R x T
Turnover = Throughput / Inventory
= 1/ T

7. 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?
Monetary Flow: A major manufacturer sells $300 million worth of cellular equipment per year. Average amount in accounts receivables is $45million. How long does it take to process a sales order in accounts receivable?
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”?

8. Process Flow Examples
Is she right? 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?

9. EXAMPLE 3.2 : MBPF Inc. MBPF Inc. manufactures prefabricated garages.
Purchase sheet material, forms and assembles the finished product. Each garage needs a roof, a base.
Goal : To understand how long and where a $ spends time in MBPF process.
Where should we improve the flow time?

10. MBPF Inc.: Consolidated Income Statement

11. MBPF Inc.: Balance Sheet

12. Raw Materials
(roofs)
Fabrication
Assembly
Purchased Parts (bases)
Finished Goods

13. MBPF Inc.: Flow Times
I = R * T

14. MBPF Business Process Flows
$60.2/yr
$25.3/yr
$110.3/yr
$50.1/yr
$6.5
$15.1
$175.8/yr
Raw Materials
(roofs)
Fabrication
(roofs)
$175.8/yr
$10.6
$9.8
$40.2/yr
Assembly
Finished Goods
$8.6
$40.2/yr
Purchased Parts (bases)

15. MBPF Inc.: Flow Times Flow Time T (weeks) Flow rate R ($/week)
5.0
3.38
Accounts
Receivable
2.12
Assembly
Finished
Goods
0.96
Fabrication
Purchased Parts
Raw Materials
0.77
Flow Time T (weeks)

16. (to be distributed in class)
CRU COMPUTER
RENTALS
(to be distributed in class)

17. Capacity & Flow Time Analysis Pizza Pazza: Flow Chart
start
Take Order
Sauce Prep
Dough Prep
Spread
Activity time: 2 3 1
Resource:
Jean
Jean, Pan
Batch size:
end
Bill
Unload &
Pack
Bake
Load & Set
timer 15
Jaqueline
Jaqueline, Pan
Oven, Pan
Jaqueline, Oven, Pan
cool
Time for order of 2 pizzas: 2 3 15 1

18. Pizza Pazza: Flow Time Analysis
What is the minimum time to fill a rush order, assuming that all steps of the process are started only after the order is received? Without spending money, how would you reduce this response time?
What is the maximum number of orders that PP can fill per hour in steady state?
Assume that there are four orders waiting to be processed, Jean is just about to start mixing the sauce for another two pizzas (a fifth order) and Jacqueline is just about to start loading two pizza pans into the oven (a sixth order). A customer calls in with a new pizza order and wants to know when she can pick up her order. What due-date time should Jean promise assuming that she processes all orders in the sequence received?

19. Operational Measure: Flow Time Driver: Activity Times
Critical Path:
Theoretical Flow Time:
Average Flow Time:

20. Most Time Inefficiency Comes from Waiting: Flow Times in White Collar Processes

21. 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.

22. A Recipe for Capacity Measurements
* assuming system is processing at full capacity

23. A Recipe for Capacity Measurements
* assuming system is processing at full capacity

24. A Recipe for Capacity Measurements
* assuming system is processing at full capacity and order size = 2 pizzas

25. Pizza Pazza: Flow Rate/Capacity Analysis
What is the minimum number of pizza pans needed to ensure that no order has to wait for a pan?
If the Jacqueline calls in sick one day, what is the maximum number of orders that PP can fill?

26. A Recipe for Capacity Measurements
* assuming system is processing at full capacity

27. A Recipe for Capacity Measurements
* assuming system is processing at full capacity

28. Pricing: Wages and Quantity Discounts
Assume Jean and Jacqueline decide to hire two employees to perform their respective tasks; each paid €8 per hour. What is the contribution margin (revenue - variable costs) generated per hour of operation of the process if pizzas sell for €5 each? What is the minimum amount that Jean can charge per pizza, and still make a profit?
Resource cost =
Material cost =
Contribution margin if sale price is €5 =
Minimum sale price =
Is it worth offering any discount to encourage all orders to be for three pizzas? If so, how much?

29. A Recipe for Capacity Measurements
* assuming system is processing at full capacity

30. Capacity Investments: Another oven? Task reallocation
The pizzas have become wildly popular and Jean feels that they can easily sell twenty pizzas per hour. To increase capacity, he is thinking of renting another industrial oven, which would cost €10 for each hour that the oven is used. Do you think it is worthwhile for Jean to rent the oven if the rest of the process is kept as is (assume that Jean and Jacqueline are doing the tasks)? What would be the contribution margin from each hour of operation of the process?
Resource cost =
Material cost =
Contribution margin if sale price is €5 =
Can you think of ways to increase profits by reallocating tasks between the employees?

31. A Recipe for Capacity Measurements
* assuming system is processing at full capacity

32. Other factors affecting Process Capacity
Batch (Order) Sizes:
Is it worth offering any discount to encourage all orders to be for 3 pizzas if we have 2 ovens? If so, how much?
Product Mix: see later
other managerial policies ...

33. 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]

34. 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
create flexibility to handle tasks originally assigned to bottleneck
to non-critical resource or to third party
Increase Net Availability
work longer: increase scheduled availability
increase scale (invest)
increase size of load batches/reduce or eliminate setups & changeovers

35. 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

36. Product Mix Decisions: Pizza Pazza offers 2 pizza types
Sale Price of thin crust: €5
Cost of Materials: €1.40
Sale Price of deep dish: €7.50
Cost of Materials: €1.90
Which of these two products should Jean push to customers that call in and are undecided?

37. A Recipe for Capacity Measurements
* assuming system is processing at full capacity
Suppose they take the same processing except that deep dish require 5 min (vs 2) in sauce prep and 29 min (vs 15) in baking.

38. Product Mix Decisions Margin of thin crust pizza = €3.60
Margin of deep dish pizza = €5.60
Margin per oven minute from thin crust
= 2*€3.60 / 16 min = € 0.45/min
Margin per oven minute from deep dish
= 2*€5.60 / 30 min = € 0.36/min

39. National Cranberry Cooperative

40. Learning Objectives Module 2: Multi-Product Process Analysis & Apps
Manage better with the three key operational measures and an inter-functional macro process view of the organization:
Process measures:
Flow time  manage critical activities
Capacity  manage bottleneck resources
Levers for improving
Capacity & Throughput
Process capacity depends on a zillion things
Effect of product mix decisions on process capacity
marginal contribution per unit of bottleneck capacity used
Bottleneck may shift on adding capacity
diminishing returns to capacity investment