1. The Essence of Process Flow Process Measures
Outline
The Essence of Process Flow
Process Measures
Flow Time
Flow Rate
Inventory
Little’s Law:
Average Inventory = Average Flow Time × Throughput
Throughput: The average flow rate in a stable process
Process view of financial statements
Using Little’s Law to improve financial measures

2. Five Elements of the Process View
Management
Information
structure
Network of
Activities and Buffers
Inputs
Outputs
Goods
Services
Flow units
(customers, data,
material, cash, etc.)
Labor & Capital
Resources

3. How target improvement
How target improvement? Identify and Monitor Operational Performance Measures
Inventory
Flow Rate
Quality
Cost
Flexibility
Time

4. Flow Time, Flow Rate, and Inventory
The time required by a flow unit to move through all the processes from entry to exit.
It is not the same for all flow units
different types of flow units
variability in the flow time of a flow unit.
Average flow time of a process is the average flow time of all flow units.
Flow Rate
The number of flow units passing a specific point (entry, exit or any intermediate point) in the process per unit of time.
It changes over time
variability in the flow rate
seasonality (e.g. tax season for a CPA)
Average flow rate in a stable process  Throughput
Inventory
The number of flow units within the boundaries of the process at any time

5. The Essence of Process Flow
Customer expectations
Customer Value Proposition  
Customer satisfaction  
Process competencies
Financial performance 
Inventory
Flow time
Flow rate
In any process our goal is to meet our customers’ expectations. Certain measures to help us accomplish that is to identify key attributes that are important to customers. We categorize these product attributes along the following 4 dimensions.
Cost:
Time:
Variety:
Quality:
Quality
Time
Cost
Flexibility
 Essence of process flow 

6. Is the Security Checkpoint a stable Process?
In a Stable Process
Average inflow rate is the same as average outflow rate.
Throughput (R) is the average flow rate
Ideally, R should be equal to the customer demand.
Is the Security Checkpoint a stable Process?
Scanner can handle 12 passengers per minute
It can handle inflow
Average inflow rate
is 600 passengers/hr,
or 10 passengers/min
Can we have 9 instead of 12?
If we have 20 instead of 12, could we still have people waiting in the line?
Average outflow capacity (process capacity) must be greater than average inflow rate, while average inventory is not zero.

7. There is a relationship between R, T, and I.
The Little’s Law
Inventory I
[units]
Flow rate/Throughput R
[units/hr]
...
Flow Time T [hrs]
There is a relationship between R, T, and I.
Throughput x Flow Time = Inventory
RT=I

8. Little’s Law: Examples
In Vancouver Airport:
Average waiting line length = I = 17.5 passengers
Throughput or R = 600/60 = 10 passengers/minute
Compute the flow time at
Flow time T  RT=I  T= I/R
T= /10 = 1.75 minutes / passenger (on average).

9. Little’s Law: Examples
I=2000 garages, with no inventory buildup (i.e. stable process; always on average we have 2000)
R=1000 garages/week. Each garage costs $3,300 to produce.
What is the Average Flow Time for $1?
We can translate volumes into $
I = 2,000(3,300) = $6,600,000 tied up in inventory (average).
R = 1,000(3,300) = $3,300,000/week.
I=RT  T=I/R
T = 6,600,000/3,300,000 = 2 weeks.

10. Little’s Law applied to different process flow examples
Monetary Flow. For the new euro introduction in 2002, Wim Duisenberg had to decide how many new Euro coins to stamp by Euroland’s central banks’ cash-in-coins handling was estimated at €300 billion per year. The average cash-in-coins holding time by consumers and businesses was estimated at 2 months. How many Euro coins were to be made?
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?
Euro’s: NYT 2001: “As of Jan. 1, some 50 billion new coins and 14.5 billion euro notes are to be pumped into circulation.”
Our number: I = 300/yr * 2mo = 300/yr * 1/6 yr = 50

11. Little’s Law applied to different process flow examples
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”.
Material Flow. Wendy’s processes an average of 5,000 lb. of hamburgers per week. The typical inventory of raw meat is 2,500 lb. What is the average hamburger’s cycle time and Wendy’s turnover?
Cash Flow. Motorola sells $300 million worth of cellular equipment per year. The average accounts receivable in the cellular group is $45 million. What is the average billing to collection process cycle time?

12. Little’s Law: Cash Flow
Steel Company: Processes $400M of iron ore per year. The cost of
processing the ore is $200M per year. The average inventory is
$100M. How long does a dollar spend in the process?
The flow unit is a cost dollar.
The process is the steel manufacturing operations
The value of the inventory includes both ore and processing cost. I = $100M/year
A Total of $400M + $200M = $600M flows through the process each year. Throughput R = $600M/year
Average flow time T = I/R = 100/600 = 1/6 year = 2 months

13. Two Implications of Little’s Law
Question: A general manager at Baxter states that her inventory turns three times a year (Cost of Goods Sold is three times of average inventory). She also states that everything that Baxter buys gets processed and leaves the docks within six weeks. Are these statements consistent?
Of the 3 operational measures of performance, inventory, throughput and average flow time – a process manager only needs to focus on 2 measures, as they directly determine the third measure via Little’s Law. Measuring which one is cheaper?
For a given level of throughput in any process, the only way to reduce flow time is to reduce inventory and vice versa.

14. Little’s Law: Auto-Moto Financial Services
Auto-Moto receives 1,000 applications per month (30 working days). In the old process, each application is handled individually, with 20% of applications being approved. 500 were in the process at any time. Average flow time T = ?
Process
Ip=500
1000/month
200/month
800/month
Throughput R = 1,000 applications/month, Average Inventory I = 500 applications; T=15 days means that each application spent 15 days (on average) before receiving accept/reject decision.
Average flow time T = I/R = 500/1,000 months = 0.5 month or 15 days.
The firm recently implemented a new loan application process. In the new process, applicants go through an initial review and are divided into three categories

15. Admission Flow
Marshall provides higher education to executives and receives about 1000 applications per month.
The evaluation starts with a preliminary classification with basic information:
Group A: Applicants with desired recommendations, working experience, etc. (50% of the applicants)
Group B: Other applicants. (50% of the applicants)
Applicants in group A will be further considered through an advanced review.
Applicants in group B will be rejected.

16. Work In Process (WIP) On average there were:
200 applications in the preliminary review stage
100 applications in the advanced review stage
How long does group A spend in the application process?
How long does group B spend in the application process?
How long is the average process time?

17. How long do the applicants spend in the preliminary stage?
Admission Flow Chart
1000
50%
200
100
Reject
Accept
How long do the applicants spend in the preliminary stage?
RT=I  T = I/R=200/1000 = 0.2 month
Applicants spend 0.2(30) = 6 days in the first stage
Applicants from group B receive an answer in 6 days on average

18. Admission Flow
How long do the applicants from group A spend in the advanced review stage?
I =100 , R = 1000(0.5) = 500
TR= I  T=I/R  T= 100/500 = 0.2
Applicants from group A spend 0.2(30) = 6 days on average in the advanced review stage.
Applicants from group A receive answer in 12 days (6 + 6) on average.

19. 0.5(6)+0.5(12) = 9 days Admission Flow
What is the average processing time?
0.5(6)+0.5(12) = 9 days
Is there an alternative way to calculate the average waiting time? Do it------
Little’s Law holds for complicated systems.

20. Assignment (Due next week)
1. Bank XYZ receives 20 loan requests per hour on average. Each loan request goes through an initial processing stage, after which an “accept or reject” decision is made. Approximately 80% of the loans are accepted, and these require additional processing. Rejected loans require no additional processing. Suppose that on average 5 loans are in the initial processing stage, and 25 (accepted) loans are in the additional processing stage.
What is the average processing time required for a loan request?
 What is the average processing time required for a rejected loan?
 What is the average processing time required for an accepted loan (including the initial processing stage)?

21. Assignment (Due next week)
2. A call center employs 1000 agents. Every month 50 employees leave the company and 50 new employees are hired.
 How long on average does an agent work for this call center?
 Suppose the cost of hiring and training a new agent is $ The manager of this call center believes that increasing agents’ salary would keep them working longer term in the company. The manager wants to increase the average time that an agent works for the call center to 24 months, or 2 years.
 If an agent works for the call center for 24 months on average, how much can the company save on hiring and training costs over a year? Hint: first determine the current annual cost for hiring and training, then determine the new annual cost for hiring and training.
How much the monthly salary of each agent can be increased?

22. Practice 1: Auto-Moto New Process
Subprocess A
Review
IA = 25
70%
200/month
Accepted
30%
25%
10%
Subprocess B
Review
IB = 150
1000/month
Initial
Review
IIR=200
25%
90%
50%
New process for loan application review:
Each application is preprocessed and divided into three categories based on mechanical criteria. The company found the following data upon analyzing the new system:
On average, 200 applications are with the Initial ‘Review Team at any time.
Of those reviewed, 25% are categorized as “Excellent”, 25% as “Needs Further review”, and 50% are “Rejected”.
70% of the “Excellent” applications are eventually approved.
10% of the “Needs Further Review” applications are approved.
800/month
Rejected
Compute average Flow time of an application.
Compute Average Flow Time for Activities IR, A, and B.
Compute average Flow time of a rejected application, an accepted application, and use them to Compute average Flow time of an application.

23. Problem 3.4, MBPF
A hospital emergency room (ER) is currently organized so that all patients register through an initial check-in process. At his or her turn, each patient is seen by a doctor and then exits the process, either with a prescription or with admission to the hospital. Currently 55 people per hour arrive at the ER, 10% of who are admitted to the hospital. On average, 7 people are waiting to be registered and 34 are registered and waiting to see a doctor. The registration process takes, on average, 2 minutes per patient. Among patients who receive prescriptions, average time spent with a doctor is 5 minutes. Among those admitted to the hospital, average time is 30 minutes. On average, how long does a patient spend in the ER? Assume the process to be stable; that is, average inflow rate equals average outflow rate.

24. Directions o) Draw the flow process chart
b) On average how long a patient spend in ER?
c) On average how many patients are in ER?
Hints:
Compute flow time in buffer 1
Compute average activity time of Doctor
Compute the average flow time in this process
Compute average flow time for a simple prescription patient
Compute average flow time for a potential admission patient
Compute number of patients in Doctor activity
Compute the average number of patients in the process.

25. Problem 3.5, MBPF
A triage system has been proposed for the ER described in Exercise 3.4. As mentioned earlier, 55 patients per hour arrive at the ER. Under the proposed triage plan, entering patients will classify them as Simple Prescriptions or Potential Admits. While Simple Prescriptions will move on to an area staffed for regular care, Potential Admits will be taken to the emergency area. Planners anticipate that the initial examination will take 3 minutes. They expect that, on average, 20 patients will be waiting to register and 5 will be waiting to be seen by the triage nurse. Recall that registration takes an average of 2 minutes per patient. Planners expect eh Simple Prescriptions area to have, on average, 15 patients waiting to be seen. As before, once a patient’s turn come, each will take 5 minutes of a doctor’s time. The hospital anticipates that, on average, the emergency area will have only 1 patient waiting to be seen . As before, once that patient’s turn comes, he or she will take 30 minutes of a doctor’s time. Assume that, as before, 90% of all patients are Simple Prescriptions, assume, too, that the triage nurse is 100% accurate in making classifications. Under the proposed plan, how long on average, will a patient spend in the ER? On average, how long will a Potential Admit spend in the ER? On average, how many patients will be in the ER? Assume the process to be stable; that is, average inflow rate equals average outflow rate.

26. Directions
o) Draw the flow process chart a) On average how many patients are in ER? b) On average, how long a patient spend in ER? Hints: Average flow rate is still 55 per hour (50 is typo) Planners estimate that initial examination takes 3 minutes. It is the flow time in triage activity. It is 3 it is not 1. One, as we will see in the future chapters is an estimate for the theoretical flow time. Compute average flow rate in buffer 3 and buffer 4. Compute average flow time in all buffers. Compute average number of patients in all activities.

27. Problem 3.6, MBPF
Refer again to Exercise 3.5. Once the triage system is put in place, it performs quite close to expectations. All data conform to planners’ expectations except for one set-the classifications made by the nurse practitioner. Assume that the triage nurse has been sending 91% of all patients to the Simple Prescription area when in fact only 90% should have been so classified. The remaining 1% is discovered when transferred to the emergency area by a doctor. Assume all other information from Exercise 3.5 to be valid. On average, how long does a patient spend in the ER? On average, how long does a Potential Admit spend in the ER? On average, how many patients are in the ER? Assume the process to be stable; that is, average inflow rate equals average outflow rate.

28. Directions
o) Draw the flow process chart b) On average how many patients are in this process? c) On average, how long a patient spend in this process? Hints: Compute flow rates at Buffer 3 Compute flow rates at Buffer 4