Presentation on theme: "Operations Management Process Analysis and Applications Module"— Presentation transcript:
1Operations Management Process Analysis and Applications Module Changing Sources of Competitive AdvantageOperational Measures: Time T, Inventory I, Throughput rate RLink through Little’s LawLink to Financial MeasuresLevers for ImprovementCRU Computer RentalsCapacity and Flow Time AnalysisPizza PazzaMulti-product Capacity Management and InvestmentJoint Marketing & Production DecisionsOptimal Capacity InvestmentNational Cranberry Cooperative
2How can operations help a company compete How can operations help a company compete? The changing sources of competitive advantageLow Cost & Scale Economies (< 1960s)You can have any color you want as long as it is blackFocused 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.PVQT
5Operational Performance Measures Flow time TThroughput rate RInventory IProcess Cost
6Relating operational measures (flow time T, throughput R & inventory I)with Little’s LawFlow rate/Throughput R[units/hr]Inventory I[units]...............Flow Time T [hrs]Inventory = Throughput x Flow TimeI = R x TTurnover = Throughput / Inventory= 1/ T
7Process Flow ExamplesCustomer 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”?
8Process Flow ExamplesIs 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?
9EXAMPLE 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?
14MBPF Business Process Flows $60.2/yr$25.3/yr$110.3/yr$50.1/yr$6.5$15.1$175.8/yrRaw Materials(roofs)Fabrication(roofs)$175.8/yr$10.6$9.8$40.2/yrAssemblyFinished Goods$8.6$40.2/yrPurchased Parts (bases)
15MBPF Inc.: Flow Times Flow Time T (weeks) Flow rate R ($/week) 5.03.38AccountsReceivable2.12AssemblyFinishedGoods0.96FabricationPurchased PartsRaw Materials0.77Flow Time T (weeks)
16(to be distributed in class) CRU COMPUTERRENTALS(to be distributed in class)
17Capacity & Flow Time Analysis Pizza Pazza: Flow Chart startTake OrderSauce PrepDough PrepSpreadActivity time:231Resource:JeanJean, PanBatch size:endBillUnload &PackBakeLoad & Settimer15JaquelineJaqueline, PanOven, PanJaqueline, Oven, PancoolTime for order of 2 pizzas:23151
18Pizza 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?
19Operational Measure: Flow Time Driver: Activity Times Critical Path:Theoretical Flow Time:Average Flow Time:
20Most Time Inefficiency Comes from Waiting: Flow Times in White Collar Processes
21Levers 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.
22A Recipe for Capacity Measurements * assuming system is processing at full capacity
23A Recipe for Capacity Measurements * assuming system is processing at full capacity
24A Recipe for Capacity Measurements * assuming system is processing at full capacity and order size = 2 pizzas
25Pizza 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?
26A Recipe for Capacity Measurements * assuming system is processing at full capacity
27A Recipe for Capacity Measurements * assuming system is processing at full capacity
28Pricing: 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?
29A Recipe for Capacity Measurements * assuming system is processing at full capacity
30Capacity 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?
31A Recipe for Capacity Measurements * assuming system is processing at full capacity
32Other 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 laterother managerial policies ...
33Operational Measure: Capacity Drivers: Resource Loads (Theoretical) Capacity of a ResourceBottleneck Resource(Theoretical) Capacity of the ProcessCapacity Utilization of a Resource/Process =throughput [units/hr]capacity [units/hr]
34Levers for Increasing Process Capacity Decrease the work content of bottleneck activitieswork smarterwork fasterdo it right the first timechange product mixMove work content from bottlenecks to non-bottleneckscreate flexibility to handle tasks originally assigned to bottleneckto non-critical resource or to third partyIncrease Net Availabilitywork longer: increase scheduled availabilityincrease scale (invest)increase size of load batches/reduce or eliminate setups & changeovers
35Increasing 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 resourceseliminate non-value added work from bottlenecksreduce/eliminate setups and changeoverssynchronize flows to & from bottleneckreduce starvation & blockage“ the load of the bottlenecks (give it to non-bottlenecks)”move work from bottlenecks to non-bottlenecksneed resource flexibilityunit capacity and/or #of units.invest
36Product Mix Decisions: Pizza Pazza offers 2 pizza types Sale Price of thin crust: €5Cost of Materials: €1.40Sale Price of deep dish: €7.50Cost of Materials: €1.90Which of these two products should Jean push to customers that call in and are undecided?
37A Recipe for Capacity Measurements * assuming system is processing at full capacitySuppose they take the same processing except that deep dish require 5 min (vs 2) in sauce prep and 29 min (vs 15) in baking.
38Product Mix Decisions Margin of thin crust pizza = €3.60 Margin of deep dish pizza = €5.60Margin per oven minute from thin crust= 2*€3.60 / 16 min = € 0.45/minMargin per oven minute from deep dish= 2*€5.60 / 30 min = € 0.36/min
40Learning 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 activitiesCapacity manage bottleneck resourcesLevers for improvingCapacity & ThroughputProcess capacity depends on a zillion thingsEffect of product mix decisions on process capacitymarginal contribution per unit of bottleneck capacity usedBottleneck may shift on adding capacitydiminishing returns to capacity investment