Operations Management: Process Analysis and Applications

Operations Management:
Process Analysis and Applications Module

Changing Sources of Competitive Advantage
Operational Measures: Time T, Inventory I,
Throughput rate R
Link through Littles Law

Link to Financial Measures
Levers for Improvement
CRU Computer Rentals
S. Chopra/Process Flows
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?
Dont sell what you produce. Produce what sells.
Operational Performance Measures
Flow time
Throughput
Inventory
Process Cost
Quality
The business imperative: creating

economic value
Improvement levers
1.
2.
Increase price
Increase throughput
Costs
Material
+
Labor
+
Energy
+
Overhead
3.
4.
Reduce costs
Improve quality
Capital
invested
PP&E
+
Inventory
+
Other
5.
6.
Reduce capital intensity

Reduce inventory
Revenues
Profit
Economic
value added
(EVA)
Opportunity
cost
x
Weighted average
cost of capital
Price
x
Quantity
Reduce time
Operational metrics
Financial metrics
Relating operational measures (flow time T,

throughput R & inventory I) with Littles Law
Inventory I
...
... ...
Flow rate/Throughput R
[units]
[units/hr]
... ...
Flow Time T [hrs]
Inventory = Throughput x Flow Time

I = RxT
Turnover = Throughput / Inventory
= 1/ T
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: Wendys 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 hamburgers cycle time and Wendys
turnover?
6
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?
MBPF Inc.: Consolidated Statement

Net Sales
250.0
Costs and expenses

Cost of Goods Sold
Selling, general and administrative expenses
Interest expense
Depreciation
Other (income) expenses
TOTAL COSTS AND EXPENSES
175.8
47.2
4.0
5.6
2.1
234.7
INCOME BEFORE INCOME TAXES

PROVISION FOR INCOME TAXES
NET INCOME
15.3
7.0
8.3
RETAINED EARNINGS, BEGINNING OF YEAR

LESS CASH DIVIDENDS DECLARED
RETAINED EARNINGS AT END OF YEAR
31.0
2.1
37.2
NET INCOME PER COMMON SHARE

DIVIDEND PER COMMON SHARE
0.83
0.21
MBPF Inc.: Balance Sheet

CURRENT ASSETS
Cash
Short-term investments at cost (approximate mkt.)
Receivables, less allowances of $0.7 mil
Inventories
Other current assets
TOTAL CURRENT ASSETS
2.1
3.0
27.9
50.6
4.1
87.7
PROPERTY, PLANT AND EQUIPMENT (at cost)

Land
Buildings
Machinery and equipment
Construction in progress
Subtotal
Less accumulated depreciation
NET PROPERTY, PLANT AND EQUIPMENT
2.1
15.3
50.1
6.7
74.2
25.0
49.2
Investments
Prepaid expenses and other deferred charges
Other assets
TOTAL
ASSETS
4.1
1.9
4.0
146.9
9
MBPF Inc.: Inventory and Cost of

Goods
INVENTORY
Raw materials (roof)
Fabrication WIP (roof)
Purchased parts (base)
Assembly WIP
Finished goods
TOTAL
6.5
15.1
8.6
10.6
9.8
50.6
COST OF GOODS SOLD

Raw materials
Fabrication (L&OH)
Purchased parts
Assembly(L&OH)
TOTAL
50.1
60.2
40.2
25.3
175.8
10
MBPF Business Process Flows

$60.2/yr
$50.1/yr
$6.5
Raw Materials
(roofs)
$40.2/yr
$25.3/yr
$110.3/yr
$15.1
Fabrication
(roofs)
$8.6
$10.6
Assembly
$175.8/yr
$9.8
$175.8/yr
Finished Goods
$40.2/yr
Purchased Parts (bases)
11
MBPF Inc.: Flow Times
Throughput R
$/Year
$/Week
Inventory I ($)
Flow Time T =
I/R (weeks)
Raw
Materials
Fabrication
Purchased
Parts
Assembly
Finished
Goods
50.1
0.96
6.5
6.75
110.3
2.12
15.1
7.12
40.2
0.77
8.6
11.12
175.8
3.38
10.6
3.14
175.8
3.38
9.8
2.90
12
Flow rate R
($/week)
5.0
3.38
Accounts
Assembly
Receivable
2.12
Fabrication
0.96
0.77
Purchased Parts
11.12
Finished
Goods
Raw Materials
6.75
7.12
3.14
2.90
5.80
Flow Time T
(weeks)
13
Why the Difference in Performance?

Inventory Over Last 8 Quarters (Ending Q3 2001)
6000
5000
Inventory
4000
Nokia
Ericsson
Motorola
3000
2000
1000
0
0
Quarter
14
CRU Computer Rentals
15
Case: CRU Computer Rentals

Flow Chart
Status 40
Ship
Receiving
30%
Repairs
70%
Status 24
Customer
15%
Status 41
Pre-Config
Parts
places
order
Receives
from
Supplier
Status 32
Ship
Config
Status 20
S. Chopra/Process
Flows
Repairs
Status 42
16
CRU Situation in Previous Year:

Customer term = 8 wks, Demand = 1000 units/wk
Customer
Throughput 1,000
(units/week)
Receiving
Status
24
Status Parts Suppliers

40
Status 41 Status 42
Status 20
1,000
700
300 +
105 =
405
405
405
405
405
1,000
Inventory
(units)
8,000
500
1,500
1,000
500
405
500+405
= 905
500
2,000
Flow Time
(weeks)
8.0
0.5
2.14
2.47
1.23
2.23
1.23
17
CRU Situation in Previous Year:

Financial Performance
Number of units on rent = 8,000

Total number of units = 14,405
Utilization = 0.56 (56%)
Revenue rate = 8,000 x 30 = $240,000/wk
Variable Cost rate = 25 x 1,000 (R) + 25 x 1,000 (S) +
4x700x.85 + 150 x 405 = $113,130/wk
Contribution Margin = $126,870/wk
Depreciation = 14,405 x ($1000/156wks) = $92,340/wk
bottomline = $126,870-$92,340 = $34,530
18
CRU Situation in Current Year:

flow times unchanged, Demand = 1400 units/wk
Customer
Throughput 1,400
(units/week)
Receiving
Status
24
Status Parts Suppliers

40
Status 41 Status 42
Status 20
1,400
980
567
567
567
567
567
1,400
Inventory
(units)
8,000
700
2,100
1,400
700
567
1,267
700
2,800
Flow Time
(weeks)
5.7
0.5
2.14
2.47
1.23
2.23
1.23
19
CRU Situation in Current Year:

flow times unchanged, Demand = 1400 units/wk

Revenue = 4,800 x 30 + 3,200 x 35 = $256,000/wk
Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4 x 980x .85 + 150 x 567
= $158,382/wk
Depreciation = 16,967 x (1000/156) = $108,763/wk
bottomline = $97,618 - $108,763 = -$11,145
20
CRU Potential situation in Current Year:

without sales drive, Demand = 600 units/wk
Customer Receiving
Status
24
Status
40
Parts
Suppliers Status 41 Status 42
Status 20
Throughput
(units/week)
600
600
420
243
243
243
243
243
600
Inventory
(units)
4,800
300
900
600
300
243
543
300
1,200
Flow Time
(weeks)
0.5
2.14
2.47
1.23
2.23
1.23
21
CRU Potential situation in Current Year:
without sales drive, Demand = 600 units/wk

Revenue = 4,800 x 30 = $144,000/wk
Cost = 25 x 600 (R) + 25 x 600 (S) + 4x420x .85 + 150 x 243
= $67,878/wk
Depreciation = 8,643 x (1000/156) = $55,404/wk
bottomline = $76,122 - $55,404 = $20,718
22
Learning Objectives
Basic Process Analysis
Process Measures: time, inventory, and throughput
What is an improvement?
Link financial measures to operational ones
Good operational measures are leading indicators of financial
performance
Using Littles law for process flow analysis

Targeting areas and performance measures for
improvement; link financial and operational flows
23

Operations Management: Process Analysis and Applications

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Operations Management: Process Analysis and Applications

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Operations Management:

Process Analysis and Applications Module

Link through Littles Law

How can operations help a company compete?

Low Cost & Scale Economies (< 1960s)

Focused Factories (mid 1960s)

Flexible Factories and Product variety (1970s)

Time (late 1980s-1990s)

Operational Performance Measures

The business imperative: creating

Reduce capital intensity

Relating operational measures (flow time T,

Flow Time T [hrs]

Inventory = Throughput x Flow Time

Process Flow Examples

Process Flow Examples

MBPF Inc.: Consolidated Statement

Costs and expenses

INCOME BEFORE INCOME TAXES

RETAINED EARNINGS, BEGINNING OF YEAR

NET INCOME PER COMMON SHARE

MBPF Inc.: Balance Sheet

PROPERTY, PLANT AND EQUIPMENT (at cost)

MBPF Inc.: Inventory and Cost of

COST OF GOODS SOLD

MBPF Business Process Flows

Purchased Parts (bases)

MBPF Inc.: Flow Times

Why the Difference in Performance?

CRU Computer Rentals

Case: CRU Computer Rentals

CRU Situation in Previous Year:

Status Parts Suppliers

CRU Situation in Previous Year:

Number of units on rent = 8,000

CRU Situation in Current Year:

Status Parts Suppliers

CRU Situation in Current Year:

Number of units on rent = 8,000

CRU Potential situation in Current Year:

Suppliers Status 41 Status 42

CRU Potential situation in Current Year:

without sales drive, Demand = 600 units/wk

Number of units on rent = 4,800

Using Littles law for process flow analysis

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