1. Matching Supply with Demand: An Introduction to Operations Management Gérard Cachon ChristianTerwiesch
All slides in this file are copyrighted by Gerard Cachon and Christian Terwiesch. Any instructor that adopts Matching Supply with Demand: An Introduction to Operations Management as a required text for their course is free to use and modify these slides as desired. All others must obtain explicit written permission from the authors to use these slides.

2. Variability – Waiting Times

3. An Example of a Simple Queuing System
Call center
Answered
Calls
Incoming
calls
Sales reps
processing
calls
Calls
on Hold
At peak, 80% of calls dialed received a busy signal.
Customers getting through had to wait on average 10 minutes
Extra telephone expense per day for waiting was $25,000.
Blocked calls
(busy signal)
Abandoned calls
(tired of waiting)
Financial consequences
Lost throughput
Holding cost
Lost goodwill
Lost throughput (abandoned)
Cost of capacity
Cost per customer
$$$ Revenue $$$

4. A Somewhat Odd Service Process
Patient
Arrival
Time
Service 1 2 3 4 5 6 7 8 9 10 11 12 15 20 25 30 35 40 45 50 55
7:00
7:10
7:20
7:30
7:40
7:50
8:00

5. A More Realistic Service Process
Patient 1
Patient 3
Patient 5
Patient 7
Patient 9
Patient 11
Patient
Arrival
Time
Service 1 2 3 4 5 6 7 8 9 10 11 12 18 22 25 30 36 45 51 55
Patient 2
Patient 4
Patient 6
Patient 8
Patient 10
Patient 12
Time
7:00
7:10
7:20
7:30
7:40
7:50
8:00 3 2
Number of cases 1
2 min.
3 min.
4 min.
5 min.
6 min.
7 min.
Service times

6. Variability Leads to Waiting Time
Patient
Arrival
Time
Service 1 2 3 4 5 6 7 8 9 10 11 12 18 22 25 30 36 45 51 55
Service time
Wait time
7:00
7:10
7:20
7:30
7:40
7:50
8:00 5 4 3 2 1
Inventory
(Patients at
lab)
7:00
7:10
7:20
7:30
7:40
7:50
8:00

7. Modeling Variability in Flow
Flow Rate
Minimum{Demand, Capacity} = Demand = 1/a
Outflow
No loss, waiting only
This requires u<100%
Outflow=Inflow
Buffer
Processing
Inflow
Demand process is “random”
Look at the inter-arrival times
a: average inter-arrival time
CVa =
Often Poisson distributed:
CVa = 1
Constant hazard rate (no memory)
Exponential inter-arrivals
Difference between seasonality and variability
Processing
p: average processing time
Same as “activity time” and “service time”
CVp =
Can have many distributions:
CVp depends strongly on standardization
Often Beta or LogNormal
IA1
IA2
IA3
IA4
Time
St-Dev(processing times)
Average(processing times)
St-Dev(inter-arrival times)
Average(inter-arrival times)

8. The Waiting Time Formula
Average flow
time T
Flow rate
Inventory
waiting Iq
Increasing
Variability
Inflow
Outflow
Entry to system
Begin Service
Departure
Time in queue Tq
Service Time p
Theoretical Flow Time
Flow Time T=Tq+p
Utilization
100%
Waiting Time Formula
Variability factor
Utilization factor
Service time factor

9. Waiting Time Formula for Multiple, Parallel Resources
Inventory
in service Ip
Inventory
waiting Iq
Inflow
Outflow
Flow rate
Entry to system
Begin Service
Departure
Time in queue Tq
Service Time p
Flow Time T=Tq+p
Waiting Time Formula for Multiple (m) Servers

10. Example: Online retailer
Customers send s to a help desk of an online retailer every 2 minutes, on average, and the standard deviation of the inter-arrival time is also 2 minutes. The online retailer has three employees answering s. It takes on average 4 minutes to write a response . The standard deviation of the service times is 2 minutes.
Estimate the average customer wait before being served.

11. Service Levels in Waiting Systems
Fraction of customers who have to wait x seconds or less 1
90% of calls had to wait 25 seconds or less
0.8
Waiting times for those customers who do not get served immediately
0.6
0.4
Fraction of customers who get served without waiting at all
0.2 50
100
150
200
Waiting time [seconds]
Target Wait Time (TWT)
Service Level = Probability{Waiting TimeTWT}
Example: Deutsche Bundesbahn Call Center - now (2003): 30% of calls answered within 20 seconds - target: 80% of calls answered within 20 seconds
Formulas: see Service Operations course / simulation

12. Managerial Responses to Variability: Pooling
Independent Resources
2x(m=1)
Waiting
Time Tq
70.00
m=1
60.00
50.00
40.00
m=2
30.00
20.00
m=5
Pooled Resources
(m=2)
10.00
m=10
0.00
60%
65%
70%
75%
80%
85%
90%
95%
Utilization u
Implications: + balanced utilization + Shorter waiting time (pooled safety capacity)
- Change-overs / set-ups

13. Managerial Responses to Variability: Priority Rules in Waiting Time Systems
Service times:
A: 9 minutes B: 10 minutes C: 4 minutes D: 8 minutes A C B
4 min. D
9 min.
19 min. C
12 min. A
23 min. D
21 min. B
Total wait time: =51min
Total wait time: =38 min
Flow units are sequenced in the waiting area (triage step)
Shortest Processing Time Rule - Minimizes average waiting time - Problem of having “true” processing times
First-Come-First-Serve - easy to implement - perceived fairness
Sequence based on importance - emergency cases - identifying profitable flow units

14. Data in Practical Call Center Setting
Number of customers
Number of customers
Distribution Function
Distribution Function
Per 15 minutes
Per 15 minutes
160
160 1 1
140
140
0.8
0.8
Exponential distribution
Exponential distribution
120
120
100
100
0.6
0.6 80 80
0.4
0.4 60 60
Empirical distribution
Empirical distribution
(individual points)
(individual points) 40 40
0.2
0.2 20 20
0:00:00
0:00:00
0:00:09
0:00:09
0:00:17
0:00:17
0:00:26
0:00:26
0:00:35
0:00:35
0:00:43
0:00:43
0:00:52
0:00:52
0:01:00
0:01:00
0:01:09
0:01:09
0:15
0:15
2:00
2:00
3:45
3:45
5:30
5:30
7:15
7:15
9:00
9:00
10:45
10:45
12:30
12:30
14:15
14:15
16:00
16:00
17:45
17:45
19:30
19:30
21:15
21:15
23:00
23:00
Inter -
arrival time
Time
Seasonality vs. variability
Need to slice-up the data
Within a “slice”, exponential distribution (CVa=1)
See chapter 6 for various data analysis tools

15. What to Do With Seasonal Data
Measure the true demand data
Apply waiting model in each slice
Slice the data by the hour (30min, 15min)

16. Managing Waiting Systems: Points to Remember
Variability is the norm, not the exception
Variability leads to waiting times although utilization<100%
Use the Waiting Time Formula to - get a qualitative feeling of the system - analyze specific recommendations / scenarios
Managerial response to variability: - understand where it comes from and eliminate what you can - accommodate the rest by holding excess capacity
Difference between variability and seasonality - seasonality is addressed by staffing to (expected) demand

17. Call Center: Lean Diagnostic Example

18. Call Center Overview
Large UK Retail bank- operates each week day from 8.30am to 6pm
Handles three types of calls (agents are dedicated to call type)
All subsequent information is about type 1 calls (similar numbers for type 2 and 3 calls)
Type 1 calls are direct payments for mortgages / loans that customers do using checks or credit cards
Agents make 30 pounds per hour loaded salary
Typical time commitments from agents:
Taking calls / “wrap time”
Six weeks of paid vacation
Average absenteeism rate of 6%
Other time commitments for the agents, such as breaks, training, special duties: 15%
Picture from Switzer & CO, illustrative only

19. Demand, Call Handling, and Service Level
Demand information (Type 1 calls)
Call volume changes over the course of the day
Typical day is shown on the right
Calls come in randomly, given this seasonal pattern (CVa=1)
Call center operates for 252 days a year (closed week-ends, holidays)
Call handling information
Type 1 calls take on average 5 minutes (with a CVp=1) This includes actual call time as well as wrap time
Actual value varies by agent / customer
Number of staffed seats for type 1 calls
In each time slot, 9 agents are currently on duty from 8.30am to 6.00pm
Service level / targeted wait time
The average wait time is targeted to be 2 minutes or less
Present wait time is significantly longer for time slot
At other times, agents have plenty of capacity (e.g., at 8.30am)
Cost: about 0.04 pounds per minute for wait or talk time

20. Sample of Calls
Variation exists across agents handling calls – the following information is about type 1 calls
A sample of calls across three agents has been collected (Matthew, Daniel, and Anna)
For the purpose of this exercise, consider the following calls:
1b, 1c, 2a, 2b, 2d, 3a, 3b
You can assume that this data (and its variation in customer and agent behavior) is representative
Audio files have been made available to you
Picture from Livehacker blog

21. Assignment
You are on site in the call center and have the information provided above
The goal of the project is to conduct an initial diagnosis of the call center operation
What productivity improvement will you aim for?
What is your pitch to the client’s CEO?
Detailed assignments:
1. Excel model of status quo (with Tq)
2. Compute current OPE / OEE
3. Detailed, micro-level analysis of calls; estimate improvement potential
4. Evaluate improvements (shorter calls, staffing plan, pooling, other)

22. What generates queues?
An arrival rate that predictably exceeds the service rate (i.e., capacity) of a process.
e.g., toll booth congestion on the NJ Turnpike during the Thanksgiving Day rush.
Variation in the arrival and service rates in a process where the average service rate is more than adequate to process the average arrival rate.
e.g., calls to a brokerage are unusually high during a particular hour relative to the same hour in other weeks (i.e., calls are high by random chance).

23. Predicable and unpredictable variation at An-ser20 40 60 80
100
120
140
160
0:15
2:00
3:45
5:30
7:15
9:00
10:45
12:30
14:15
16:00
17:45
19:30
21:15
23:00
Number of customers
Per 15 minutes
Time

24. Defining inter-arrival times and a stationary process
An inter-arrival time is the amount of time between two arrivals to a process.
An arrival process is stationary over a period of time if the number of arrivals in any sub-interval depends only on the length of the interval and not on when the interval starts.
For example, if the process is stationary over the course of a day, then the expected number of arrivals within any three hour interval is about the same no matter which three hour window is chosen (or six hour window, or one hour window, etc).
Processes tend to be non-stationary (or seasonal) over long time periods (e.g., over a day or several hours) but stationary over short periods of time (say one hour, or 15 minutes).

25. Arrivals to An-ser over the day are non-stationary20 40 60 80
100
120
140
160
0:15
2:00
3:45
5:30
7:15
9:00
10:45
12:30
14:15
16:00
17:45
19:30
21:15
23:00
Number of customers
Per 15 minutes
Time
The number of arrivals in a 3-hour interval clearly depends on which 3-hour interval your choose …
… and the peaks and troughs are predictable (they occur roughly at the same time each day.

26. How to describe (or model) inter-arrival times
We will use two parameters to describe inter-arrival times to a process:
The average inter-arrival time.
The standard deviation of the inter-arrival times.
What is the standard deviation?
Roughly speaking, the standard deviation is a measure of how variable the inter-arrival times are.
Two arrival processes can have the same average inter-arrival time (say 1 minute) but one can have more variation about that average, i.e., a higher standard deviation.

27. Relative and absolute variability
The standard deviation is an absolute measure of variability.
Two processes can have the same standard deviation but one can seem much more variable than the other:
Below are random samples from two processes that have the same standard deviation. The left one seems more variable.

28. Relative and absolute variability (cont)
The previous slide plotted the processes on two different axes.
Here, the two are plotted relative to their average and with the same axes.
Relative to their average, the one on the left is clearly more variable (sometime more than 400% above the average or less than 25% of the average)

29. Coefficient of variation
The coefficient of variation is a measure of the relative variability of a process – it is the standard deviation divided by the average.
The coefficient of variation of the arrival process:
CVa = 10 /10 = 1
CVa = 10 /100
= 0.1

30. Service time variability
The coefficient of variation of the service time process:
Frequency
800
Standard deviation of activity times = 150 seconds.
Average call time (i.e., activity time) = 120 seconds.
CVp = 150 / 120 = 1.25
600
400
200
100
200
300
400
500
600
700
800
900
1000
Call durations (seconds)

31. Customers waiting for service
A multi-server queue
Arriving customers
Departing customers
Customers waiting for service
Multiple
servers
Assumptions:
All servers are equally skilled, i.e., they all take p time to process each customer.
Each customer is served by only one server.
Customers wait until their service is completed.
There is sufficient capacity to serve all demand.
a = average interarrival time
Flow rate = 1 / a
p = average activity time
Capacity of each server = 1 / p
m = number of servers
Capacity = m x 1 / p
Utilization = Flow rate / Capacity
= (1 / a) / (m x 1 / p)
= p / (a x m)

32. A multi-server queue – some data and analysis
Suppose:
a = 35 seconds per customer
Flow rate = 1 / 35 customers per second
p = 120 seconds per customer
Capacity of each server = 1 / 120 customers per second
m = number of servers = 4
Then
Capacity = m x 1 / p = 4 x 1 / 120 = 1 / 30 customers per second
Utilization = Flow rate / Capacity
= p / (a x m)
= 120 / (35 x 4)
= 85.7%

33. The implications of utilization
A 85.7% utilization means:
At any given moment, there is a 85.7% chance a server is busy serving a customer and a = 14.3% chance the server is idle.
At any given moment, on average 85.7% of the servers are busy serving customers and 1 – = 14.3% are idle.
If utilization < 100% then:
The system is stable which means that the size of the queue does not keep growing over time. (Capacity is sufficient to serve all demand)
If utilization >= 100% then:
The system is unstable, which means that the size of the queue will continue to grow over time.

34. Stable and unstable queues
p = 120
m = 4
Utilization = 86%
a = 35
p = 120
m = 3
Utilization = 114%

35. Time spent in the two stages of the system
Recall:
p = Activity time
m = number of servers
Tq = Time in queue
p = Time in service
T = Tq + p = Flow time
The above Time in queue equation works only for a stable system, i.e., a system with utilization less than 100%

36. What determines time in queue in a stable system?
The capacity factor:
Average processing time of the system = (p/m).
Demand does not influence this factor.
The variability factor:
This is how variability influences time in queue – the more variability (holding average demand and capacity constant) the more time in queue.
The utilization factor:
Average demand influences this factor because utilization is the ratio of demand to capacity.

37. Evaluating Time in queue
Suppose:
a = 35 seconds, p = 120 seconds, m = 4
Utilization = p / (a x m) = 85.7%
CVa = 1, CVp = 1
So Flow time = = 270 seconds.
In other words, the average customer will spend 270 seconds in the system (waiting for service plus time in service)

38. How many customers are in the system?
Use Little’s Law, I = R x T
R = Flow Rate = (1/a)
The flow rate through the system equals the demand rate because we are demand constrained (utilization is less than 100%)
Iq = (1/a) x Tq = Tq / a
Ip = (1/a) x p = p / a
Note, time in service does not depend on the number of servers because when a customer is in service they are processed by only one server no matter how many servers are in the system.
Iq = Inventory in queue
Ip = Inventory in service
I = Iq + Ip = Inventory in the system

39. Utilization and system performance
Activity time = 1
m = 1
CVa = 1
CVp = 1
Time in queue increases dramatically as the utilization approaches 100%

40. Which system is more effective?
Across these three types of systems:
Variability is the same: CVa = 1, CVp = 1
Total demand is the same: 1/35 customers per second.
Activity time is the same: p = 120
Utilization is the same: p / a x m = 85.7%
The probability a server is busy is the same = 0.857
Pooled system:
One queue, four servers
a = 35
m = 4
Partially pooled system:
Two queues, two servers with each queue.
For each of the 2 queues:
a = 35 x 2 = 70
m = 2
Separate queue system:
Four queues, one server with each queue.
For each of the 4 queues:
a = 35 x 4 = 140
m = 1

41. Pooling can reduce Time in queue considerably
a = 35, p = 120, m = 4, CVa = 1, CVp = 1
Tq = 150
Flow Time = 270
Pooled system
For each of the two queues:
a = 70, p = 120, m = 2, CVa = 1, CVp = 1
Tq = 336
Flow Time = 456
Partially pooled system
For each of the four queues:
a = 140, p = 120, m = 1, CVa = 1, CVp = 1
Tq = 720
Flow Time = 840
Separate queue system

42. Pooling reduces the number of customers waiting but not the number in service
Iq = 4.3
Ip = 3.4
Iq = 4.3
Ip = 3.4
Pooled system
Inventories for each queue within the system
Partially pooled system
Iq = 4.8
Ip = 1.7
Iq = 9.6
Ip = 3.4
( 2 times the inventory in each queue )
Inventories for the total system
Separate queue system
Iq = 5.1
Ip = 0.86
Iq = 20.4
Ip = 3.4
( 4 times the inventory in each queue )

43. Why does pooling work? = A customer waiting = A customer in service
Separate queue system
Pooled system
Both systems currently have 6 customers
In the pooled system, all servers are busy and only 2 customers are waiting
In the separate queue system, 2 servers are idle and 4 customers are waiting
The separate queue system is inefficient because there can be customers waiting and idle servers at the same time.

44. Some quick service restaurants pool drive through ordering
The person saying “Can I take your order?” may be hundreds (or even thousands) of miles away:
Pooling the order taking process can improve time-in-queue while requiring less labor.
It has been shown that queue length at the drive through influences demand – people don’t stop if the queue is long.
However, this system incurs additional communication and software costs.

45. Limitations to pooling
Pooling may require workers to have a broader set of skills, which may require more training and higher wages:
Imagine a call center that took orders for McDonalds and Wendys … now the order takers need to be experts in two menus.
Suppose cardiac surgeons need to be skilled at kidney transplants as well.
Pooling may disrupt the customer – server relationship:
Patients like to see the same physician.
Pooling may increase the time-in-queue for one customer class at the expense of another:
Removing priority security screening for first-class passengers may decrease the average time-in-queue for all passengers but will likely increase it for first-class passengers.

46. Why the long queues for the women’s restroom?

47. Potty-parity Laws Women’s Restroom Equity Bill:
Passed NY City Counsel May 2005.
Requires women’s restrooms to have twice the flushing capacity of men’s restrooms (at least a 2:1 ratio of women’s toilets to men’s toilets & urinals)
In the context of Time in queue equation, this law requires m to increase for women, which decreases the capacity factor (p/m), and decreases utilization.
Other solutions:
Unisex restrooms (pools capacity, at least the toilets)
Flexible partitions that can change the size of each restroom.

48. Summary
Even when a process is demand constrained (utilization is less than 100%), waiting time for service can be substantial due to variability in the arrival and/or service process.
Waiting times tend to increase dramatically as the utilization of a process approaches 100%.
Pooling multiple queues can reduce the time-in-queue with the same amount of labor (or use less labor to achieve the same time-in-queue).

49. Recitation Questions (prepare the questions described on the following slides for the R5 recitation)

50. Rent-A-Phone
Rent-A-Phone is a new service company that provides European mobile phones to American visitors to Europe. The company currently has 80 phones available at Charles de Gaulle Airport in Paris. There are, on average, 25 customers per day requesting a phone. These requests arrive uniformly throughout the 24 hours the store is open. (Note: This means customers arrive at a faster rate than 1 customer per hour) The corresponding coefficient of variation is 1.

51. Rent-A-Phone (cont)
Customers keep their phone for 72 hours on average. The standard deviation of this time is 100 hours.
Given that Rent-A-Phone currently does not have a competitor in France providing equally good service, customers are willing to wait for the telephones. Yet, during the waiting period, customers are provided a free calling card. Based on prior experiences, Rent-A-Phone found that the company incurred a cost of $1 per hour per waiting customer, independent of day or night.

52. Rent-A-Phone (Questions)
What is the average number of telephones the company has in its store?
How long does a customer, on average, have to wait for the phone?
What are the total monthly (30 days) expenses for telephone cards?
Assume that it costs Rent-A-Phone $1000 per unit per month for a new phone. Is it worth it to buy one additional phone? Why?