Slide 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.

Slide 2 Estimating and Reducing Labor Costs

Slide 3 Subway – Firm Level Information Started as Pete’s Super Submarines in Connecticut in 1965 Now, largest sandwich chain with 34,000+ stores in 98 countries Estimated revenue: $12 Billion (compared to McDonald’s at $23 Billion) Franchise model – each restaurant is independently owned and operated Goal: “to become the number one Quick Service Restaurant in the World” Average revenue per store: $445k (compared to $2.3M at McDonald’s)

Slide 4 Subway – The Franchisee’s Perspective Relatively inexpensive to open a new store: Start-up costs for a restaurant are $100k to $200k No cooking, no grills, and no fryolators Potentially very small stores (as little as 600sqft is possible) Compares to about $1 Million to open a McDonald’s Franchise model 8 percent of revenue as royalty fee 4.5 percent of revenue as a marketing fee Initial Franchise fee of $15k Detailed training and instructions provided by franchiser (Doctor’s Associates) Two week training course Detailed operations manual

Slide 5 Subway – Assembly Line for Sandwiches What is the capacity of this line? What are the costs of direct labor? What is the labor content? How would you run this process assuming a demand of 180 sandwiches per hour?

Slide 6 Source of pictures: www2.isye.gatech.edu Job Shop Batch Process Worker-paced line Machine-paced line Continuous process Low Volume (unique) Medium Volume (high variety) High Volume (lower variety) Very high volume (standardized) Utilization of fixed capital generally too low Unit variable costs generally too high Examples from History:  In the matrix above, history has forced all industries to go down the diagonal  Examples: Eye Surgery, vehicle production, financial services The Product Process Matrix and the Industrialization of Work

Slide 7 How Long Does it Take to Produce X units? Time to Produce X units = X/R if system has a “full pipeline” Time to produce X units = Time through empty system + - worker paced line: Time through empty system is the sum of all activity times - assembly line: Time through empty system =(#steps) * cycle time - (X-1)/R for remaining X-1 units (see above) Machine Paced Process and Worker Paced Process: How Long Does it Take to Produce X units? Machine Paced Process Worker Paced Process No fundamental difference in productivity (except potential savings in handling time) Machine paced process forces a common takt / eliminates inventory pile-up Source of pictures: www2.isye.gatech.edu

Slide 8 Mortgage Exercise Four team members Preparation Work as fast as you can (calculators ok, no Excel) Write down the results of your step on the mortgage application and then pass them on to the next step Have FUN Applications PreparationAnalysis 1Analysis 2 Underwriting

Slide 9 Mortgage Exercise: Score your Team Efficiency (number of loans completed) Quality (percentage of decisions correct) >20 100% <90% 95% Compute the following two measures: How many loans did you complete (reject or approve) What percentage of your decisions was correct? Also: what was the average time for completion of the last three loans?

Slide 10 Basic Process Vocabulary Applications Completed applications PreparationAnalysis 1Analysis 2 Underwriting Inventory Activity time Capacity Bottleneck / Process capacity Flow Rate Utilization Flow Time

Slide 11 a1a1 Activity Time a2a2 a3a3 a4a Bottleneck =Idle Time Capacity i = Process Capacity=Min{Capacity i } Flow Rate = Min{Demand, Capacity} Utilization i = Review of Capacity Calculations Direct Labor Content=a 1 +a 2 +a 3 +a 4 If one worker per resource: Direct Idle Time=(a 4 -a 1 ) +(a 4 -a 2 ) +(a 4 -a 3 ) Average labor utilization Cost of direct labor Labor Productivity Measures =Activity time

Slide 12 Line Balancing and Staffing to Demand Takt 43 Time 123 Operator Time Operator seconds 30 seconds 116 seconds Labor content: 116 seconds / unit Demand: 670 units per day Work 8h shifts 8h=3600*8seconds=28,800 sec/shift Takt: 28,800sec / 670units=43 sec/unit Target manpower= = 2.7 => round up With waste in the current process, we can either increase capacity or reduce the number of operators Better to leave all idle time concentrated on the last operator as opposed to spreading it equally Staff to demand: start with the takt time and design the process from there 116 sec/unit 43 sec/unit

Slide 13 Line Balancing and Staffing to Demand Actual Demand Time Volume Leveled Demand Volume Takt time* Takt Resource planning Man power Takt time 1 minute Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Takt time 2 minutes Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Volume flexibility Ability to adjust to changing demands Often implemented with temporary workers Keeps average labor utilization high

Slide 14 Line Balancing and Labor Productivity: Summary Labor Productivity is key for cost and for revenue reasons Work has become increasingly standardized (process driven) Improve productivity by: Staffing to demand (increases utilization, avoids lost demand) Balancing the line (increases utilization, frees up capacity) Standardization of work / careful design => Reducing labor content => Lower skilled labor (lower wages) => Enables replication (growth / flexibility)