OPSM 301 Operations Management Class 5: Business process flows: Analysis Koç University Zeynep Aksin

Office Hours  My office hours, slight modification –Mon  TA’s office hours –TA: Canan Uckun, IEOM Graduate Student –Tuesday-Thursday 15:30-17:00 ENG 218  My office hours modified –Monday 13:00-15:00

Announcements  First set of study questions  Benihana to be discussed on 13/10 Thursday –Read the case, be prepared to discuss –Mini-quiz as part of class participation grade  Kristen’s due 18/10 Tuesday  First quiz on 18/10

Example: Focusing Improvement Efforts  MBPF operations called for the purchase of both sheet metal (raw materials) and prefabricated bases (purchased parts). Garages were made in the fabrication area from sheet metal and then assembled with prefabricated bases in the assembly area. Completed garages were stored in the finished goods warehouse until they were shipped to customers  Analyze the firm’s income statement, balance sheet, and cost of goods sold to determine in which department process improvements have the greatest impact on working capital

Definition: working capital  Working capital requirements include the value of inventories in the process and the value of any accounts receivable. Any reduction in working capital reduces the firm’s interest expense and makes extra cash available for other investments.

Consolidated Statements of Income and Retained Earnings  NET SALES250.0  COSTS AND EXPENSES –Cost of goods sold175.8 –Selling, general and administrative expenses 47.2 –Interest expense 4.0 –Depreciation 5.6 –Other (income) expenses 2.1 –TOTAL COSTS AND EXPENSES234.7  INCOME BEFORE INCOME TAXES 15.3  PROVISION FOR INCOME TAXES 7.0  NET INCOME 8.3  RETAINED EARNINGS, BEG. OF YEAR 31.0  LESS CASH DIVVIDENDS DECLARED 2.1  RETAINED EARNINGS AT THE END OF YEAR 37.2  NET INCOME PER COMMON SHARE 0.83  DIVIDENDS PER COMMON SHARE 0.21

Consolidated Balance Sheet of Dec. 31, x Current Assets Cash2.1 Short-term investments at cost3.0 Receivables, less allowances of $0.7 mil 27.9 Inventories 50.6 Other current assets4.1 TOTAL CURRENT ASSETS 87.7 Property, Plant, and Equipment (at cost) Land 2.1 Buildings 15.3 Machinery and equipment 50.1 Construction in progress 6.7 Subtotal 74.2 Less accumulated depreciation 25.0 NET PROPERTY, PLANT, AND EQUIPMENT 49.2 Investments 4.1 Prepaid expenses and other deferred charges 1.9 Other assets 4.0 TOTAL ASSETS 146.9

Inventories and Cost of Goods Details Cost of Goods Sold –Raw Materials50.1 –Fabrications (Labor and Overhead) 60.2 –Purchased Parts (Labor and Overhead)40.2 –Assembly (Labor and Overhead)25.3 –TOTAL Inventory –Raw Materials (roof) 6.5 –Fabrications WIP (roof)15.1 –Purchased Parts (base) 8.6 –Assembly WIP10.6 –Finished goods 9.8 –TOTAL50.6

Process Flows Raw materials Purchased Parts Fabrication AssemblyFinished goods $50.1/yr $40.2/yr $60.2/yr$25.3/yr $6.5$15.1$110.3/yr $8.6 $40.2/yr $10.6$9.8 $175.8/yr

Detailed look at Inventories and Flow times Raw materialsFabrication Purchased parts AssemblyFinished goods $6.5$15.1 $8.6 $10.6 $9.8 $175.8/yr $60.2/yr $25.3/yr $50.1/yr $40.2/yr 6.75 week 7.12 week 3.14 weeks2.90 weeks weeks 110.3/yr

Inventory Value Representation CT (week) TH (mil/week) Purchased Parts Raw materials Fabrication Assembly Finished goods Accounts Receivable

Operational Measure: Flow Time Driver: Activity Times, Critical Activity  (Theoretical) Flow Time  Critical Activity  Flow Time efficiency =

Most time inefficiency comes from waiting: E.g.: Flow Times in White Collar Processes

Critical Path & Critical Activities  Critical Path: A path with the longest total cycle time.  Critical Activity: An activity on the critical path. AB C D

X-Ray Service Process  1. Patient walks to x-ray lab  2. X-ray request travels to lab by messenger  3. X-ray technician fills out standard form based on info. From physician  4. Receptionist receives insurance information, prepares and signs form, sends to insurer  5. Patient undresses in preperation of x-ray  6. Lab technician takes x-ray  7. Darkroom technician develops x-ray  8. Lab technician checks for clarity-rework if necessary  9. Patient puts on clothes, gets ready to leave lab  10. Patient walks back to pysicians office  11. X-rays transferred to physician by messenger

Example startend 25% 75% transport support Value added decision Measured actual flow time: 154 minutes 8

Levers for Reducing Flow Time  Decrease the work content of critical activities –work smarter –work faster –do it right the first time –change product mix  Move work content from critical to non-critical activities –to non-critical path or to ``outer loop’’  Reduce waiting time.

Operational Measure: Capacity Drivers: Resource Loads  (Theoretical) Capacity of a Resource  Bottleneck Resource  (Theoretical) Capacity of the Process

X-Ray revisited Resource Pool Res. Unit Load Load Batch Theoretical Capacity of Res. unit No of units in pool Theoretical capacity of pool Messenger40 min/patient 11.5 patients/hr 69 Patient/hr Receptionist51121 X-ray technician X-ray lab Darkroom technician Darkroom Changing room

Utilizations given an observed throughput of 5.5 patients/hr Resource poolTheoretical capacity Patients/hr Capacity utilization Messenger Receptionist X-ray technician X-ray lab Darkroom technician Darkroom Changing room

Levers for Increasing Process Capacity  Decrease the work content of bottleneck activities –work smarter –work faster –do it right the first time –change product mix  Move work content from bottlenecks to non-bottlenecks –to non-critical resource or to third party  Increase Net Availability –work longer –increase scale (invest) –increase size of load batches –eliminate availability waste

Increasing Process Capacity in the Smiley Factory  Focus on the bottleneck –“ ensure the bottlenecks’ time is not wasted” increase availability of bottleneck resources eliminate non-value added work from bottlenecks –reduce/eliminate setups and changeovers synchronize flows to & from bottleneck –reduce starvation & blockage –“ the load of the bottlenecks (give it to non-bottlenecks)” move work from bottlenecks to non-bottlenecks need resource flexibility – unit capacity and/or #of units. invest

The role of variability 6/hr 4 or 8/hr 2 or 10 0 or 12 As variability increases, throughput (rate) decreases

Compounding effect of variability and unbalanced task times 6/hr4/hr 4 or 8/hr 2 or 6/hr 2 or 100 or 8 4/hr 3.5/hr 2.5/hr

Summary of fundamental process principles  identify and eliminate bottlenecks  reduce as much variability as possible  eliminate handoffs, improve communication to minimize resource interference