Presentation on theme: "III. Operational Measures"— Presentation transcript:
1 III. Operational Measures Flow TimeCapacity and Flow Rate
2 Operational Measures and Direct Cost InputsOutputsInventory (in production setting, referred to as Working in Process WIP): the number of units contained within the process.Working capital shown in your balance sheetFlow Time (throughput time): the time it takes a unit to get through the process.Shorter flow times reduce the time delay between occurrence of demand and its fulfillment in the form of supplyFlow Rate (throughput rate, output rate): the rate at which the process is delivering output.Higher flow rate generates more revenues shown in your income statement when capacity is tight.The maximum rate with which the process can generate supply is called the capacity of the process.Direct Cost: incurred when transforming a unit from input to outputInventory could take the form of the number of insurance claims or tax returns at the IRS, patients, students.How do these measures relate to the idea of matching supply with demand? Why no mention of profit? Higher flow rate increases supply and translate into more revenue if you have sufficient demand. Shorter flow time reduces delay btw the occurrence of demand and its fulfillment in the form of supply.
3 Flow Time Active Non-Active Flow Time = Meas. &MixSpoonClean & HashSpread ToppingsPick FillingsLoad & Set TimerBakeBoxPaymentTake Orders1 min.5 min.3 min.2 min.8 min.Theoretical vs. Actual Flow TimeActual = Value-Added and Non-Value-Added ActivitiesActive and Non-Active TimesVANVAActiveNon-ActiveFlow Time efficiency
5 Performance in Auto Industry GMFordDaimler-ChryslerToyotaHondaNissanFlow Time (hrs)40.539.944.8126.96.36.199Quality (probs/car)1.461.621.541.45Market Share28%21%13.2%Profit/car in 2001$367< 0In Jan, 2000, 43% of GM cars were flunking inspection as soon as they rolled off the line. Today, it is down to 16%. These improvement + strong balance sheet + lower cost structure = sell more at 0% financing campaign. Market share for GM is steady at 28% while Ford dropped 1.1% and DC dropped 1.3%.“Finally, Skid Control at GM”, BusinessWeek, March 25, 2002.Most data are for 2001.“Pick Me as Your Strike Target! No, Me!”, BusinessWeek, April 21, 2003Business Week, March 25, 2002GMFordDaimler-ChryslerJapaneseAutomakersFlow Time (hrs)26273117-22Business Week, April 21, 2003
6 Levers for Reducing Flow Time See page 73-76: 4.5 – 4.6Flow time:Levers:
7 Capacity (units/unit time) Capacity: maximal units a process can process per unit of timeCapacity of a Single ResourceCapacity of the oven =Capacity of c Identical Resourcescapacity of bake operation =Capacity of a network of resources (system capacity)Process time TpovenProcess time Tpc ovensFrom a supply perspective, the most important question that arises is how much a process can supply in a given unit of time, say one day. This measure is called process capacity.
8 Flow Rate (units/unit time) Flow rate R =Cycle time =Process utilization =Pipeline Principle: In the long run, on average,input rate = output rate RFlow rate: the units that a process actually does process per unit of timeInput rateOutput rate RThe process actually does produce, not what it can produce.
9 Flow Rate (cont.) Time to produce X units = Time to complete X units starting with an empty systemUtilization of a resource in the processr =RProcess time Tpc
13 Levers for Increasing Throughput See page 99: 5.7. Levers for Managing Flow RateThroughput:Levers:
14 Case Discussion: Manzana Insurance 1991 Second Quarter Performance
15 Manzana Insurance (cont.) 28.4 min./requestDistribution Clerks (4)Underwriting Team #1Underwriting Team #3Raters (8)Underwriting Team #2Policy Writers (5)41 min./request70.4 min./request54.8 min./requestWeighted average
16 Today’s Takeaways Operational Measures: Flow Time Critical pathTheoretical vs. actual, value added vs. non value addedLevers for improving flow timeFlow Rate (cycle time)Capacity, bottleneck, levers for improving throughputUtilization, server or machine idle timePipeline principalInventory (next lecture)Articles:Can Marketing and Manufacturing Coexist? – HBRCompeting on Capabilities: The New Rules of Corporate Strategy – HBR