Lin/Operations/Process Analysis & Apps1 Process Analysis and Applications Module u Operational Measures: Time T, Inventory I, Throughput rate R »Link to Financial Measures »Link through Little’s Law »CRU Computer Rentals u Capacity and Flow Time Analysis »Pizza Pazza Company »Levers for Improvement »Optimal Capacity Investment »Multi-product Capacity Management »National Cranberry Cooperative

Lin/Operations/Process Analysis & Apps2 Operational Performance Measures u Flow time T u Throughput rate R u Inventory I u Process Cost u Quality

Lin/Operations/Process Analysis & Apps3 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: creating economic value

Lin/Operations/Process Analysis & Apps4 Relating operational measures (flow time T, throughput R & inventory I) with Little’s Law  Inventory = Throughput x Flow Time I = R x T  Turnover = Throughput / Inventory = 1/ T Inventory I [units] Flow rate/Throughput R [units/hr]... Flow Time T [hrs]

Lin/Operations/Process Analysis & Apps5 Process Flow Examples Monetary Flow: Wim Duisenberg must decide how many Euro notes to print by Euroland’s central banks’ cash handling is estimated at €2,400 billion per year. The average cash holding time by consumers and businesses is estimated at 2 months. How many Euro notes should Duisenberg print? 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? 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”.

Lin/Operations/Process Analysis & Apps6 Process Flow Examples 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? Question: 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?

CRU Computer Rentals Linking Financial and Operational Flows & Targeting Areas for Improvement

Lin/Operations/Process Analysis & Apps8 Learning Objectives Basic Process Analysis u Process Measures: time, inventory, and throughput u What is an improvement? –Link financial measures to operational ones –Good operational measures are leading indicators of financial performance u Using Little’s law for process flow analysis

Lin/Operations/Process Analysis & Apps9 Process Analysis and Applications Module u Operational Measures: Time T, Inventory I, Throughput rate R » Link to Financial Measures » Link through Little’s Law » CRU Computer Rentals u Capacity and Flow Time Analysis »Pizza Pazza Company »Levers for Improvement »Optimal Capacity Investment »Multi-product Capacity Management »National Cranberry Cooperative

Lin/Operations/Process Analysis & Apps10 Pizza Pazza Flow Chart

Lin/Operations/Process Analysis & Apps11 Process Architecture is defined and represented by a process flow chart: Process = network of activities performed by resources 1. Process Boundaries: –input –output 2. Flow unit: the unit of analysis 3. Network of Activities & Storage/Buffers –activities with activity times –routes: precedence relationships (solid lines) 4. Resources & Allocation 5. Information Structure & flow (dashed lines)

Lin/Operations/Process Analysis & Apps12 Pizza Pazza: Flow Time vs. Throughput/Capacity 1. Flow Time: u 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? u Without spending money, how would you reduce this response time? 2. Maximal throughput = capacity: u What is the maximum number of orders that PP can fill per hour in steady state?

Lin/Operations/Process Analysis & Apps13 Operational Measure: Flow Time Driver: Activity Times u Flow Time: Theoretical vs. Average u Critical Activity u Flow Time efficiency

Lin/Operations/Process Analysis & Apps14 Most Time Inefficiency Comes from Waiting: Flow Times in White Collar Processes

Lin/Operations/Process Analysis & Apps15 Levers for Reducing Flow Time u Decrease the work content of critical activities. –work smarter. –work faster. –do it right the first time. u Move work content from critical to non-critical activities. –to non-critical path or to “outer loop.’’ u Reduce waiting time.

Lin/Operations/Process Analysis & Apps16 Operational Measure: Capacity Drivers: Resource Loads u (Theoretical) Capacity of a Resource u Bottleneck Resource u (Theoretical) Capacity of the Process u Capacity Utilization of a Resource/Process = throughput [units/hr] capacity [units/hr]

Lin/Operations/Process Analysis & Apps17 A Recipe for Capacity Measurements * assuming system is processing at full capacity

Lin/Operations/Process Analysis & Apps18 Pizza Pazza: Flow Rate/Capacity Analysis 1. What is the minimum number of pizza pans needed to ensure that no order has to wait for a pan? 2. If the Jacqueline calls in sick one day, what is the maximum number of orders that PP can fill?

Pizza Pazza: What if demand changes over time? u After operating for a few weeks, Jean realizes that hourly orders follow a predictable pattern: 1.during a 2 hour busy period in the evening, the restaurant receives 6 orders/hr and some customers have to wait a little for their pizza. 2.After this peak period, the order rate falls to 2 orders/hr. u Draw a build-up diagram showing how the backlog (unfilled orders) changes throughout the evening. What is the maximum backlog during the day? When is the backlog cleared?

Pizza Pazza’s Backlog Diagram # of unfilled orders

Lin/Operations/Process Analysis & Apps21 Pricing: Wages and Quantity Discounts 1. 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 = 2. Is it worth offering any discount to encourage all orders to be for three pizzas? If so, how much?

Lin/Operations/Process Analysis & Apps22 Capacity Investments: Another oven? Task reallocation 1. 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 = 2. Can you think of ways to increase profits by reallocating tasks between the employees?

Lin/Operations/Process Analysis & Apps23 Levers for Increasing Process Capacity u Decrease the work content of bottleneck activities –work smarter –work faster –do it right the first time u Move work content from bottlenecks to non-bottlenecks –create flexibility to handle tasks originally assigned to bottleneck –to non-critical resource or to third party u Increase Net Availability –work longer: increase scheduled availability –increase scale (invest) –increase size of load batches/reduce or eliminate setups & changeovers –eliminate availability waste

Lin/Operations/Process Analysis & Apps24 Product Mix Decisions: Pizza Pazza offers 2 pizza types Sale Price of thin crust:€5 Cost of Materials:€1.40 Sale Price of deep dish:€7.50 Cost of Materials: €1.90 Which of these two products should Jean push to customers that call in and are undecided? Suppose they take the same processing except that deep dish require 5 min (vs 2) in sauce prep and 29 min (vs 15) in baking.

Lin/Operations/Process Analysis & Apps25 Product Mix Decisions Margin of thin crust pizza = €3.60 Margin of deep dish pizza = €5.60 Margin per oven minute from thin crust = €3.60 / 16 min = € 0.225/min Margin per oven minute from deep dish = €5.60 / 30 min = € 0.180/min

Lin/Operations/Process Analysis & Apps26 Solver Model for Optimal Product Mix Selection x t :Number of thin crust pizzas sold. x d :Number of deep dish pizzas sold. Max 3.60 x t x d subject to 16 x t + 30 x d <1200 …<… x t < 100 x d < 50 Technology/Resource Constraints Market/Demand Constraints Assume we work 20 hrs = 1200min per week Assume this is maximal weekly demand

Lin/Operations/Process Analysis & Apps27 National Cranberry Cooperative