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Slide 1Process Analysis & Improvement© Van Mieghem Targeting Improvement Module Key Operational Metrics: Time T, Inventory I, Throughput rate R Link through Littles Law Link Operational Metrics to Financial Metrics Levers for Improvement Firm & Divisional Level: MBPF Inc. Mkt-Ops: CRU Computer Rentals
Slide 2Process Analysis & Improvement© Van Mieghem What is an improvement? Strategic fit & competencies Financials & process view
Slide 3Process Analysis & Improvement© Van Mieghem Operational Performance Measures Flow (Cycle) time - T Throughput / flow rate – R Takt Time Inventory - I Process Cost Quality
Slide 4Process Analysis & Improvement© Van Mieghem Price Quantity Material Labor Energy Overhead PP&E Inventory Other Revenues Costs Capital invested Weighted average cost of capital x x Profit Opportunity cost - Economic value added (EVA) Financial metrics Operational metrics 1.Increase price 2.Increase throughput Improvement levers 3.Reduce costs 4.Improve quality 5.Reduce capital intensity 6.Reduce inventory Reduce time - The business imperative: economic value creation
Slide 5Process Analysis & Improvement© Van Mieghem What is Toyota doing now? Taiichi Ohnos answer was very simple: All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes. Simple but brilliant. (Taiichi Ohno. Toyota Production System: Beyond Large-Scale Production. p. ix.)
Slide 6Process Analysis & Improvement© Van Mieghem How reduce flow time? There are only two available levers
Slide 7Process Analysis & Improvement© Van Mieghem Takt Time Takt time = – Takt time yields the rate at which customers demand product – and the production rate to stay synchronized with demand Example: – Demand = 150,000 cars per year – Total available production time = 2 x 8 hrs/day x 250 days/yr = 4,000 hrs/year – Takt = 4,000 hrs/150,000 cars = 1hr/37.5 cars = 96 sec / car What does Littles Law say about takt time? The rhythm of the conductor to keep the orchestra in time Total time available Customer demand metronome Willys Jeep
Slide 8Process Analysis & Improvement© Van Mieghem Linking operational measures: Littles Law Inventory = Throughput x Flow Time I = R x T Inventory Turnover = Throughput / Inventory = 1/ T Inventory I [units] Flow rate/Throughput R [units/hr]... Flow Time T [hrs]
Slide 9Process Analysis & Improvement© Van Mieghem A Process Example using Littles Law 5 min Doctor requests tests for patient Initial doctor consultation Patient checks in Nurse takes tests Wait 12 min5 min30 min1 patient 25% quit 75% 4 patients/hr Wait 2 patients
Slide 10Process Analysis & Improvement© Van Mieghem Targeting Improvement Module Key Operational Metrics: Time T, Inventory I, Throughput rate R Link through Littles Law Link Operational Metrics to Financial Metrics
Slide 11Process Analysis & Improvement© Van Mieghem Inventory Turns in Retailing and Its Link to Inventory Costs Home Depot (1/30/2011) Wal-Mart (1/31/2011) Net Sales$67,997$418,952 Cost of sales$44,693$315,287 Net Income$ 3,338$ 15,355 Inventories$10,625$ 36,318 Months of Inventory If Wal-Mart carried the same months of inventory as Home Depot, its inventories would be I = This would tie up about $ billion extra in inventory.
Slide 12Process Analysis & Improvement© Van Mieghem Cash Conversion Cycle Measures duration between purchase of inventory and collection of accounts receivable: Cash Conversion Cycle= Days of Inventory + Days of Receivables - Days of Payables How long does it take between outlay of cash and collecting the reward? Inventory Accounts Receivable Accounts Payable Cash Cash-to-Cash Cycle
Slide 13Process Analysis & Improvement© Van Mieghem MBPF Inc.: Consolidated Statement
Slide 14Process Analysis & Improvement© Van Mieghem MBPF Inc.: Balance Sheet
Slide 15Process Analysis & Improvement© Van Mieghem Business Process Flows at MBPF, Inc: Cash to Cash cycle C2C = - Days payable + Days of inventory + Days receivables
Slide 16Process Analysis & Improvement© Van Mieghem Period EndingDec 31, 2010 Total Revenue34,204,000 Cost of Revenue26,561,000 Gross Profit7,643,000 Selling General and Administrative6,237,000 Operating Income or Loss1,406,000 Income from Continuing Operations Total Other Expenses Net130,000 Earnings Before Interest And Taxes1,536,000 Interest Expense39,000 Income Before Tax1,497,000 Income Tax Expense352,000 Net Income From Continuing Ops 1,152,000 Net Income1,152,000 Amazon Income Statement
Slide 17Process Analysis & Improvement© Van Mieghem Period EndingDec 31, 2010 Cash And Cash Equivalents3,777,000 Short Term Investments4,985,000 Net Receivables1,783,000 Inventory3,202,000 Total Current Assets13,747,000 Property Plant and Equipment2,414,000 Goodwill1,349,000 Intangible Assets- Other Assets1,265,000 Deferred Long Term Asset Charges22,000 Total Assets18,797,000 Accounts Payable10,372,000 Short/Current Long Term Debt- Total Current Liabilities10,372,000 Long Term Debt- Other Liabilities1,561,000 Total Liabilities11,933,000 Total Stockholder Equity6,864,000 Net Tangible Assets5,515,000 Amazon Balance Sheet
Slide 18Process Analysis & Improvement© Van Mieghem MBPF Inc.: Inventory and Cost of Goods
Slide 19Process Analysis & Improvement© Van Mieghem Raw Materials (roofs) Fabrication (roofs) $60.2/yr Labor & OH Assembly $25.3/yr Labor & OH Purchased Parts (bases) Finished Goods $6.5 $50.1/yr $40.2/yr $8.6 $15.1 $10.6 $110.3/yr $40.2/yr $175.8/yr $9.8 $175.8/yr MBPF Inc.: Detailed Financial Flows
Slide 20Process Analysis & Improvement© Van Mieghem MBPF Inc.: Detailed Flow Times
Slide 21Process Analysis & Improvement© Van Mieghem Where target improvement? Flow rate R ($/week) 0.96 Flow Time T (weeks) Accounts Receivable Finished Goods Assembly Fabrication Raw Materials Purchased Parts
Slide 22Process Analysis & Improvement© Van Mieghem Case: CRU Computer Rentals Linking Financial and Operational Flows & Targeting Areas for Improvement Handouts to be distributed in class
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