1. Process Analysis and Applications Module
Operations Management:
Process Analysis and Applications Module
Changing Sources of Competitive Advantage
Targeting Improvement: Operational Measures - Time T, Inventory I, Throughput rate R
Link through Little’s Law
Link to Financial Measures
Targeting improvement: CRU Computer Rentals
Capacity and Flow Time Analysis
Pizza Pazza
Levers for Improvement
Multi-product Capacity Management and Investment
Joint Marketing & Production Decisions
Optimal Capacity Investment
National Cranberry Cooperative
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

2. How can operations help a company compete
How can operations help a company compete? The changing sources of competitive advantage
Low Cost & Scale Economies (< 1960s)
You can have any color you want as long as it is black
Focused Factories (mid 1960s)
Flexible Factories and Product variety (1970s)
A car for every taste and purse.
Quality (1980s)
Quality is free.
Time (late 1980s-1990s)
We love your product but where is it?
Don’t sell what you produce. produce what sells.
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

3. What is Improvement? Operational Performance Measures
Flow time
Throughput
Inventory
Process Cost
Quality
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

4. The business imperative: creating economic value
Improvement levers
Price
Increase price
Increase throughput
Revenues x
Quantity
Profit -
Material +
Labor
Costs +
Reduce costs
Improve quality
Economic value added (EVA)
Energy + -
Overhead
PP&E
Capital invested +
Reduce capital intensity
Reduce inventory
Inventory +
Opportunity cost x
Other
Reduce time
Weighted average cost of capital
Financial metrics
Operational metrics
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

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

6. Process Flow Examples
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”.
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?
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

7. Process Flow Examples
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?
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

8. Targeting Improvement MBPF Inc.: Consolidated Statement
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

9. Targeting Improvement MBPF Inc.: Balance Sheet
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

10. Targeting Improvement MBPF Inc.: Inventory and Cost of Goods
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

11. MBPF Business Process Flows
Targeting Improvement
MBPF Business Process Flows
Raw Materials
(roofs)
Fabrication
$60.2/yr
Assembly
$25.3/yr
Purchased Parts (bases)
Finished Goods
$6.5
$50.1/yr
$40.2/yr
$8.6
$15.1
$10.6
$110.3/yr
$175.8/yr
$9.8
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

12. Targeting Improvement MBPF Inc.: Flow Times
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

13. Targeting Improvement
Flow rate R
($/week)
0.96
Flow Time T (weeks)
Accounts
Receivable
Finished
Goods
Assembly
Fabrication
Raw Materials
Purchased Parts
0.77
2.12
3.38
5.0
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

14. Why the Difference in Performance?
S. Chopra/Operations/Process Analysis & Apps

15. CRU Computer Rentals S. Chopra/Operations/Process Analysis & Apps

16. Learning Objectives Basic Process Analysis
Process Measures: time, inventory, and throughput
What is an improvement?
Link financial and operational measures
Good operational measures are leading indicators of financial performance
Using Little’s law for process flow analysis
Targeting areas and performance measures for improvement
Notes:
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

17. Process Analysis and Applications Module
Operations Management:
Process Analysis and Applications Module
Changing Sources of Competitive Advantage
Operational Measures: Time T, Inventory I, Throughput rate R
Link through Little’s Law
Link to Financial Measures
Targeting Improvement: CRU Computer Rentals
Capacity and Flow Time Analysis
Pizza Pazza
Levers for Improvement
Multi-product Capacity Management and Investment
Joint Marketing & Production Decisions
Optimal Capacity Investment
National Cranberry Cooperative
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

18. Operational Performance Measures
How to measure and decrease flow times?
How to measure and increase throughput?
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

19. Pizza Pazza Flow Chart S. Chopra/Operations/Process Analysis & Apps

20. 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)
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

21. Operational Measure: Flow Time Driver: Critical Activity Times
(Theoretical) Flow Time
Critical Activity
Flow Time efficiency
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

22. Most time inefficiency comes from waiting: E. g
Most time inefficiency comes from waiting: E.g.: Flow Times in White Collar Processes
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

23. 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.
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

24. Operational Measure: Capacity Drivers: Resource Loads
(Theoretical) Capacity of a Resource
Bottleneck Resource
(Theoretical) Capacity of the Process
Capacity Utilization of a Resource/Process =
throughput [units/hr]
capacity [units/hr]
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

25. A Recipe for Capacity Measurements
* assuming system is processing at full capacity
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

26. Pricing and Capacity Investment: Pans + Rent another oven at €10/hr?
Resource cost = €8/hour
Material cost = €1.4/pizza
Minimum sale price =
Contribution margin if sale price is €5 / pizza =
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

27. Cost Capacity Profile Capacity Resource x NCX-10 Furnaces Demand
[units/time]
Marginal Investment Cost
[$/unit/time]
Resource x
NCX-10
Furnaces
Demand
Process Capacity
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

28. 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: decrease changeover time
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

29. Increasing Process Capacity in The Goal
“is to increase the capacity of only the bottlenecks”
“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
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

30. Other factors affecting Process Capacity
Batch (Order) Sizes
Product Mix
other managerial policies ...
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

31. Product Mix Decisions: Pizza Pazza offers 2 products
Sale Price of thin crust pizza: €5.00/pizza
Cost of Materials: €1.40/pizza
Sale Price of deep dish pizza: €7.50/pizza
Cost of Materials: €1.90/pizza
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

32. Product Mix Decisions S. Chopra/Operations/Process Analysis & Apps

33. Product Mix Decisions Margin per thin crust pizza = € 3.60
Margin per deep dish pizza = € 5.60
Margin per oven minute from thin crust = 3.60×2 / 16 = € 0.450
Margin per oven minute from deep dish = 5.60×2 / 30 = € 0.373
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

34. National Cranberry Cooperative
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps

35. Learning Objectives: Multi-Product Process Analysis & Apps
Process measures:
Flow time  manage critical activities
Capacity  manage bottleneck resources
Levers for improving
Decrease time in critical activities
Perform activities in parallel
Decrease waiting time
Capacity & Throughput  manage bottleneck resources
Decrease unit load of bottleneck resource
Move work from bottleneck to non-bottleneck resource
Increase availability of bottleneck resource
Shifting bottleneck
Bottleneck affected by product mix, batch size and other factors
Product profitability based on $ per unit time on bottleneck
S. Chopra/Operations/Process Analysis & Apps
S. Chopra/Operations/Process Analysis & Apps