Chapter 1: Process Management and Strategy Chapter 1: Process Management and Strategy 1.1 The Process View of Organizations
1.1 The Process View of Organizations
ProcessProcess – – Any Transformation that converts inputs to outputsAny Transformation that converts inputs to outputs – – A systematic series of A systematic series of actions directed to some end.actions directed to some end.
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o Considers any organization to be a process with Considers any organization to be a process with interconnected sub processesinterconnected sub processes
Elements that characterize the transformation of Elements that characterize the transformation of a process:a process:
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o 1. Inputs & Outputs –1. Inputs & Outputs – To view an organization as a process, we must first identify its inputs and outputs To view an organization as a process, we must first identify its inputs and outputs
InputsInputs – –Any tangible or intangible items that ‘flow’ into Any tangible or intangible items that ‘flow’ into thth e process from the environment.e process from the environment.
Includes RM, component parts, energy, data, aIncludes RM, component parts, energy, data, a nd customers in need of service.nd customers in need of service.
OutputsOutputs – –Any tangible or intangible items that flow from tAny tangible or intangible items that flow from t he process back into the environmenthe process back into the environment
Finished products, pollution, processed information, or satisfied customersFinished products, pollution, processed information, or satisfied customers
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o 2. Flow Units –2. Flow Units – The item being analyzed The item being analyzed
May be an unit of input, or a unit of outputMay be an unit of input, or a unit of output
Can also be the financial value of the input or outputCan also be the financial value of the input or output
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o 3. Network of activities and buffers -3. Network of activities and buffers - Process activities are linked so the output of one becomes an input ofProcess activities are linked so the output of one becomes an input of another
another
ActivityActivity – –The simplest form of transformation; it is the building block of a processThe simplest form of transformation; it is the building block of a process
BufferBuffer – – Stores flow units that have finished with one activity but are waiting for the next activity to start Stores flow units that have finished with one activity but are waiting for the next activity to start
InventoryInventory – – Storage, the total number of f Storage, the total number of flow units present within process boundarieslow units present within process boundaries
Precedence Relationships Among ActivitiesPrecedence Relationships Among Activities – – The sequential relationships that determine which activity The sequential relationships that determine which activity
must be finished before another can begin must be finished before another can begin
Strongly influence the time performance of the processStrongly influence the time performance of the process
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o 4. Resources –4. Resources – Tangible assets Tangible assets
11.. CapitalCapital – – Fixed assets such as land, buildings, facilities, equipment, machines, and ISFixed assets such as land, buildings, facilities, equipment, machines, and IS
22.. LaborLabor – – People such as engineers, operators, CSReps, and sales staffPeople such as engineers, operators, CSReps, and sales staff
Facilitate the transformation of inputs into outputs Facilitate the transformation of inputs into outputs during the processduring the process
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o 5. Information Structure5. Information Structure - Shows what information is needed and - Shows what information is needed and is available to whom in order to is available to whom in order to performperform activities or make managerial decisions
activities or make managerial decisions
Business ProcessBusiness Process – –A network of activities separated by A network of activities separated by buffers and performed by resources that buffers and performed by resources that transform inputs intotransform inputs into outputs
outputs
Process DesignProcess Design – – specifies the structure of a specifies the structure of a business process in terms of inputs, outputs, the network of business process in terms of inputs, outputs, the network of activities andactivities and buffers, and the resources used
buffers, and the resources used
Process Flow ManagementProcess Flow Management – – A set of A set of managerial policies that specify how a managerial policies that specify how a process should be operated over time andprocess should be operated over time and which resources should be allocated to which activities
which resources should be allocated to which activities
Value Stream/Chain MappingValue Stream/Chain Mapping – – A tool used to map A tool used to map the network of activities and buffers ithe network of activities and buffers i n a process identifying then a process identifying the activities that add value and those like waiting that are wasteful
activities that add value and those like waiting that are wasteful o
o Goal Goal : Enable process designers and managers to focus : Enable process designers and managers to focus on process improvement by adding value to on process improvement by adding value to the finalthe final product
product
TheThe Process ViewProcess View of organizations is our main tool for: of organizations is our main tool for:
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o 1. Evaluating processes1. Evaluating processes o
o 2. Studying the ways in which processes can 2. Studying the ways in which processes can be designed, restructured, and managed to improve performancebe designed, restructured, and managed to improve performance 1.2 Performance Measures
1.2 Performance Measures
Effectiveness of a Process Is Determined By:Effectiveness of a Process Is Determined By:
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o 1.1. Evaluation and measurement of the firm’s current and Evaluation and measurement of the firm’s current and past performancepast performance o
o 2.2. Future goals as expressed by the firm’s Future goals as expressed by the firm’s strategystrategy
Quantitative Measurements:Quantitative Measurements: Financial, external, and internalFinancial, external, and internal 1.2.1 The Importance of Measurement: Management by Fact 1.2.1 The Importance of Measurement: Management by Fact
Professional ManagerProfessional Manager – – Defined by General Motors Chairman Alfred Sloan Defined by General Motors Chairman Alfred Sloan – – Someone who manages by fact rather Someone who manages by fact rather than by intuition or emotion
than by intuition or emotion
Performance measurement is essential in designing and implementing incentives for improving products and processesPerformance measurement is essential in designing and implementing incentives for improving products and processes and for assessing the result of
and for assessing the result of improvementsimprovements 1.2.2 Types of Measures: Financial, External and Internal 1.2.2 Types of Measures: Financial, External and Internal
Solid financial performance depends on the ability of Solid financial performance depends on the ability of a process to effectively meet ca process to effectively meet customer expectations. Thusustomer expectations. Thus process management requires external measures that track customer expectations and internal measures that gauge process management requires external measures that track customer expectations and internal measures that gauge the effectiveness of the process in meeting them.
the effectiveness of the process in meeting them.
Financial MeasuresFinancial Measures – – Track the difference between the value provided to customers and Track the difference between the value provided to customers and the cost of producing andthe cost of producing and delivering the product or service.
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o Represents the goal of the organization but cRepresents the goal of the organization but c annot be used as the sole measures to manage aannot be used as the sole measures to manage a nd controlnd control processes
processes It is important to link financial measures to external measures that track customer satisfaction withIt is important to link financial measures to external measures that track customer satisfaction with the process output and internal measures that track
the process output and internal measures that track operational effectivenessoperational effectiveness o
o Goal:Goal:Maximize the differenceMaximize the difference o
o Quarterly Reports:Quarterly Reports:
1.1. Absolute PerformancesAbsolute Performances (revenues, costs, net income, profit (revenues, costs, net income, profit
2.2. Performance relative to asset utilizationPerformance relative to asset utilization (accounting ratios, ROA, ROI, inventory turns) (accounting ratios, ROA, ROI, inventory turns)
3.3. Survival strengthSurvival strength (cash flow) (cash flow)
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o External MeasuresExternal Measures - - indicate how customers view the organization’s products and servicesindicate how customers view the organization’s products and services
Track customer expectations in terms of product or Track customer expectations in terms of product or service cost, response time, variety, and service cost, response time, variety, and quality,quality,
as well as customer satisfaction
as well as customer satisfaction with performance along these dimensionwith performance along these dimension
Can be used to estimate the value of goods or services to customersCan be used to estimate the value of goods or services to customers
American Society for Quality UOMichiganAmerican Society for Quality UOMichigan – – American Customer Satisfaction Index American Customer Satisfaction Index – – tracks overalltracks overall
customer satisfaction in several mfging. And service ind
customer satisfaction in several mfging. And service ind ustries and public sectors. Score is weighedustries and public sectors. Score is weighed average of customer responses to questions relating to service, quality,
average of customer responses to questions relating to service, quality, value, and the extent tovalue, and the extent to which products meet expectations
which products meet expectations
Customer Expectations Defined in terms of a Process Output Customer Expectations Defined in terms of a Process Output
Cost, response time, variety, and qualityCost, response time, variety, and quality
Customer Satisfaction: linked to whether the performance of the Customer Satisfaction: linked to whether the performance of the product along with the fourproduct along with the four
attributes meets or exceeds the
attributes meets or exceeds the customers’ expectationscustomers’ expectations
External market perspective that is objective and bottom-line oriented because it External market perspective that is objective and bottom-line oriented because it identifiesidentifies competitive benchmarks at which the process manager can
competitive benchmarks at which the process manager can aimaim
Measures satisfaction at an aggregate not individual level. Measures satisfaction at an aggregate not individual level. More results oriented then actionMore results oriented then action oriented. Lagging rather than leading indicators of success.
oriented. Lagging rather than leading indicators of success.
Measures that track customer dissatisfaction can Measures that track customer dissatisfaction can be used to guide future improvementbe used to guide future improvement – – Warranty Warranty
repairs, recalls, field failures repairs, recalls, field failures
Organizations typically lose 20% of their unsatisfied Organizations typically lose 20% of their unsatisfied customers forever. Attracting a newcustomers forever. Attracting a new customer is about 5x that of serving a current
customer is about 5x that of serving a current o
o Internal MeasuresInternal Measures - identify areas where the process is - identify areas where the process is performing well and areas where improvement isperforming well and areas where improvement is necessary. How satisfied the customer is
necessary. How satisfied the customer is likely likely to be with the process performance. to be with the process performance.
Internal Measures Must:Internal Measures Must:
1. Be linked to external measures that customers deem important1. Be linked to external measures that customers deem important
2. Be directly controllable by the process manager2. Be directly controllable by the process manager
Can be a predictor of external measures of customerCan be a predictor of external measures of customer (dis)satisfaction, if the customer expectations(dis)satisfaction, if the customer expectations
have been identified accurately have been identified accurately
Performance can only be assessed through acPerformance can only be assessed through ac tual experience relative to expectationstual experience relative to expectations
In order to meet customer expectations and improve financial In order to meet customer expectations and improve financial performance, a manager requiresperformance, a manager requires
internal operational measures that are detailed, can be controlled, a
internal operational measures that are detailed, can be controlled, a nd ultimately correlate withnd ultimately correlate with product and financial performance.
product and financial performance.
Customer expectations in terms of product/service cost, response time, variety, Customer expectations in terms of product/service cost, response time, variety, and qualityand quality can be translated into internal measures that track
can be translated into internal measures that track the performance of the process in termsthe performance of the process in terms of processing cost, flow time, process flexibility, and output quality
of processing cost, flow time, process flexibility, and output quality o
o Process Flexibility:Process Flexibility: Can be measured either by the time Can be measured either by the time or cost needed to switchor cost needed to switch production from one type of product/service to another or
production from one type of product/service to another or by the # of by the # of differentdifferent products/services that can be produced and delivered
products/services that can be produced and delivered o
o Product Quality:Product Quality: Managers must be specific as to which quality dimensions are Managers must be specific as to which quality dimensions are concerned with: product features, performance, reliability, serviceability, concerned with: product features, performance, reliability, serviceability, aesthetics, and conformance to customer expectations.
aesthetics, and conformance to customer expectations.
Reliability Reliability measured in terms of durability an frequency of repair can be measured in terms of durability an frequency of repair can be
assessed by: assessed by:
Failure rate which measures probability of product faFailure rate which measures probability of product fa ilureilure
Mean time between failures (Mean time between failures ( MTBFMTBF), which indicates how long a), which indicates how long a product is likely to perform satisfactorily before
product is likely to perform satisfactorily before needing repairneeding repair
Serviceability:Serviceability: Measured using mean time to repair (M Measured using mean time to repair (MTTR), indicates howTTR), indicates how
long a product is likely to be out of service while under repair long a product is likely to be out of service while under repair 1.3 Products and Product Attributes
1.3 Products and Product Attributes
ProductsProducts – –Desired set of process outputsDesired set of process outputs
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Services include tangible and intangible aspects experienced by the customerServices include tangible and intangible aspects experienced by the customer
Some services are often produced and consumed simultaneously and caSome services are often produced and consumed simultaneously and ca nnot be produced in advancennot be produced in advance
Product AttributesProduct Attributes – – Properties that customers consider important that define Properties that customers consider important that define customer expectations (external measurescustomer expectations (external measures help identify product attributes)
help identify product attributes) o
o 1. Product1. ProductCost Cost – – The total cost that a The total cost that a customer incurs in order to own and experience the productcustomer incurs in order to own and experience the product
Includes purchase prices plus any costs incurred during the lifetime of the Includes purchase prices plus any costs incurred during the lifetime of the product, including final disposalproduct, including final disposal
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o 2. Product delivery-response2. Product delivery-response timetime – – The total time that a customer must wait for, before receiving a product for The total time that a customer must wait for, before receiving a product for which he or she has expressed a
which he or she has expressed a need to the providerneed to the provider
Related to availability and accessibilityRelated to availability and accessibility – – reliability and duration reliability and duration
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o 3. Product3. ProductVariety Variety – –The range of choices offered to the customer to meet his or her needsThe range of choices offered to the customer to meet his or her needs
Level of customization offered, number of product lines or families offeredLevel of customization offered, number of product lines or families offered
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o 4. Product4. ProductQuality Quality – – The degree of excellence that determines how well the product performs.The degree of excellence that determines how well the product performs.
A function of effective design and production that conforms to designA function of effective design and production that conforms to design
Most difficult to define and meaMost difficult to define and measure because subjective judgment and perceptionsure because subjective judgment and perception
Can be seen from customer and Can be seen from customer and producer perspectiveproducer perspective
Customer:Customer:Depends on products features (what I can Depends on products features (what I can do), performance (how well it functions),do), performance (how well it functions), reliability (how consistently it functions over time), serviceability (how quickly is can be restored), reliability (how consistently it functions over time), serviceability (how quickly is can be restored), aesthetics, and conformance to expectations
aesthetics, and conformance to expectations o
o Product features and performance are influenced by quality of designProduct features and performance are influenced by quality of design o
o Reliability if influenced by how well the Reliability if influenced by how well the production process conforms to designproduction process conforms to design – – durability and failure-free performance over time
durability and failure-free performance over time
PRODUCT:PRODUCT: Cost, Time, Variety, QualityCost, Time, Variety, Quality
PRODUCT SPACE:PRODUCT SPACE: When CTVQ are measured and quantified When CTVQ are measured and quantified
EXTNERLA MEASURES:EXTNERLA MEASURES: Well defined track product performance along CTVQ Well defined track product performance along CTVQ relative to competition and relative torelative to competition and relative to customer expectations.
customer expectations.
PROUDCT VALUE:PROUDCT VALUE: Measured by the utility Measured by the utility that the customer derives from buying the combination of these attributes. Thethat the customer derives from buying the combination of these attributes. The maximum price a specific customer is willing to pay for a product
maximum price a specific customer is willing to pay for a product 1.4 Process and Process Competencies
1.4 Process and Process Competencies
ManufacturingManufacturing – – Process of producing physical goods Process of producing physical goods
Service OperationsService Operations – – Processes that perform services Processes that perform services
OperationsOperations – – Business processes that design, produce, and deliver goods and Business processes that design, produce, and deliver goods and servicesservices
Process CompetenciesProcess Competencies – – Determine the product attributes that the process is particularly good a Determine the product attributes that the process is particularly good a t supplyingt supplying
Process Competence MeasuresProcess Competence Measures
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o 1. Process Cost –1. Process Cost –The total cost incurred in producing and delivery outputs. Includes RM aThe total cost incurred in producing and delivery outputs. Includes RM a nd both fixed andnd both fixed and variable cost of operation the process.
variable cost of operation the process. o
o 2. Process Flow Time –2. Process Flow Time – The total time needed to transform a The total time needed to transform a flow unit from input into output. Includes the actualflow unit from input into output. Includes the actual processing time as well as any
processing time as well as any waiting time a flow unit spends in waiting time a flow unit spends in buffers.buffers.
Depends on the number of resource units and speed of Depends on the number of resource units and speed of processing by each resource unitprocessing by each resource unit
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o 3. Process Flexibility –3. Process Flexibility – Measures the ability of the p Measures the ability of the process to produce and deliver the desired product variety.rocess to produce and deliver the desired product variety. Ability to deal with fluctuating demand.
Ability to deal with fluctuating demand.
Depends on the flexibility of its resourcesDepends on the flexibility of its resources
Flexible ResourcesFlexible Resources – – Can perform multiple different activities and produce a verity of products Can perform multiple different activities and produce a verity of products
Specialized Resources –Specialized Resources – Can perform only a Can perform only a restricted set of activities, typically those designed for onerestricted set of activities, typically those designed for one
product product o
o Process Quality –Process Quality – The ability of the process to The ability of the process to produce and deliver quality products.produce and deliver quality products.
Includes process accuracy (precision) in producing products that conform to Includes process accuracy (precision) in producing products that conform to design specifications, as welldesign specifications, as well
as reliability, and maintainability of the process as reliability, and maintainability of the process 1.5 Enabling Process Success
1.5 Enabling Process Success
1. What should the process design or architecture be?1. What should the process design or architecture be?
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o DuringDuring Process DesignProcess Design, managers select process architecture that best develops the competencies that will , managers select process architecture that best develops the competencies that will meetmeet expectations of the product
expectations of the product
Planet location and capacity, product Planet location and capacity, product and process design, resource choice and investment, and scale and process design, resource choice and investment, and scale ofof
operation operation
2. What metrics should be used to track performance of a process?2. What metrics should be used to track performance of a process?
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o Metric Identification –Metric Identification –Managers identify measurable dimensions along which the performance of the process Managers identify measurable dimensions along which the performance of the process willwill be tracked
be tracked o
o Process metrics –Process metrics – Derived from customer expectations and company’s stDerived from customer expectations and company’s st rategic goals, which should related torategic goals, which should related to desired process competencies
Goal:Provide managers with information about performance that allows them to plan, control, and
improve the process to better meet customer expectations about the product 3. What policies should govern process operations?
o Process Planning – Identifying targets for various metric and specifying managerial policies that support that achievement of these targets
o Managerial Policies – Specify the operation of the process and use of resources over time to best meet customer demand
4. How should process performance be controlled over time?
o Process Control – The tactical aspect of process management that is focused on continually ensuring that in the short run, the actual process performance conforms to the planned performance
Goal:continuously monitor process performance to identify instances where external factors may have
intruded into process environment, limiting its ability to conform to the planned performance
Monitoring and correcting product cost, delivery time, inventory levels, a nd quality defects
5. How should process performance be improved?
o Process Improvement – Managers identify metrics that need to be improved in the long run and work on changes in process design or planning that are required to a chieve this improvement
1.6 Some Base Process Architectures
Process Architecture – The types of resources used to perform the activities a nd their physical layout in the processing network
o Spectrum:A flexible job shop process and a specialized flow shop process
Job Shop: Uses flexible resources to produce low volumes of highly customized variety products
Artisan bakeries, tool and die shops, management consulting firms, law firms, architectural and design companies
Use general-purpose resources that can perform many different activities and locate similar resources together
Functional/Process Layout – Groups organizational resources by processing activities or functions in departments
Simultaneously many products flowing through the process, each with its own resource needs and route
Large amount of storage buffers and substantial waiting between activities Highly structured IS to direct work flow
Because high variety, resources often need setups before they can be changed over - delays, loss of production, fluctuating workload
Less process flexibility that permits product customization High processing costs and long flow times
Flow Shops: Uses specialized resources that perform limited tasks but do so with high precision and speed
Standardized product produced quickly in large volumes More consistent quality
High fixed costs for plant and equipment, low variable processing cost, economics of scale Resources arranged according to sequence of activities needed to produce a product, limited
storage space used between activities
Product Layout – The location of resources is dictated by the processing requirements of the product, network layout
o Specialization of dedicated resources, duplication o Shorter process flow times
o Low unit-processing cost, short flow time, consistent quality at high volumes Summary
Process – Network of activities and buffers that use r esources to transform inputs into outputs
Effectiveness of a Process: Determined by financial performance – difference between value provided to customer and cost of producing and delivering the product
o Financial measures are lagging – cannot be used to manage and control process
o To improve, a firm must attract and retain customers by providing goods and services th at meet or exceed expectations
o To improve FP, firm must identify and deliver attributes that are valued by customers at a lower cost than the value delivered
Customer Expectations – Cost, delivery-response time, variety, and quality
Product attributes – Output of a process, can be measured only after the processing is complete
Process performance – manager must manage competency in terms of cost, flow time, flexibility, and quality.
o Competencies of a process determine the products that the process will be good at supplying o Different process architectures result in different process competencies
Job Shop: High process flexibility, customization, but high processing cost, and long flow times
Chapter 2: Operations Strategy and Management 2.1 Strategic Positioning and Operational Effectiveness
Strategy – Derives from the Greek military term ‘strategia’ – ‘the general art.’ A plan to achieve an objective.
o Plan: Specifies precisely what managers must do to reach corporate objectives
o Implicit Objective of a Business Strategy: Deliver sustained superior performance relative to the competition
Competitive Product Space – A representation of the firm’s product portfolio as measured along the four dimensions or product attributes (cost, time, variety, and quality) .
o Strategic Positioning – Defines those positions that the firm wants to occupy in its competitive product space. It identifies the product attributes that the firm wants to provide to its customers. To stay competitive, a firm must ensure its competition finds it difficult to imitate its chosen position
Operational Effectiveness – possessing process competencies that support the given strategic position.
o Includes but is not limited to efficiency
o Any number of practices that allow a company to better utilize its inputs, does not necessarily mean lowest-cost process (operational efficiency)
o Developing process competencies requires designing suitable business processes and operating policies.
Sustaining a competitive advantage requires a firm to hav e a good strategic position and operational effectiveness to support that position
2.3 The Strategy Hierarchy
Corporate Strategy – Defines the scope of each division or business unit in terms of the attributes of the products that it will offer and market segments that it will serve
o Goal:To differentiate the firm from its competition by establishing competitive priorities in terms of the four product attributes
o Two-Pronged Analysis entailed by a Business S trategy:
1. Competitive analysis of the industry in which the BU will compete 2. Critical analysis of the unit’s competitive skills and resources
Functional Strategies – Define the purpose for marketing, operations, and finance – the three main functions in most organizations
o Marketing: Identifies and targets customers that the BU wants to serve, the products that It must supply to meet customer needs, and the competition that It will face in the marketplace.
o Operations: Designs, plans, and manages processes through which the BU supplies customers with desired products
Operations Strategy: Configures and develops business processes that best enable a firm to produce and
deliver the products by the business strategy
Includes selecting activities and resources and combining them into a network architecture that defines the key elements of a process, such as inputs and outputs, flow units, and information structure.
Also, responsible for developing/acquiring the n ecessary process competencies – process cost, flow time, flexibility, and quality – to support the firm’s business strategy.
Business strategy choses products in which to compete – Operations strategy focuses on the process competencies required to produce a nd deliver those product attributes
o Finance: Acquires and allocates resources needed to operate a unit’s business processes
o The functions must translate the midlevel business strategy into its own functional requirements by specifying what it must do well to support the higher-level strategy
Business Strategy – Concerned with selecting external markets and products to supply them
Operations – Strategy must establish operational objectives that are consistent with overall business goals and develop processes that will accomplish them
Strategies and objectives
o Business Strategy: Lowest cost
Operations Strategy: Efficient and lea business processes, high utilization of assets, and high level of labor
productivity
o Business Strategy: Product variety
Operations Strategy: Flexible processes to produce and deliver customized products
o Business Strategy: Short response times
Operations strategy: Greater investment in inventories or greater resource availability through excess
capacity
o Business Strategy: Delivering high-quality products
Operations Strategy: High quality processes with precision equipment and highly trained workers
Cost Efficiency – Achieving a desired level of outputs with a minimal level of inputs and resources Efficient – Operates at a low cost
Effective – Supports the execution of the company’s strategy
Key Condition for Process Effectiveness is the exi stence of a strategic fit among three main components of a firm’s
strategy:
o 1. Its Strategic Position o 2. Its Process Architecture o 3. Its Managerial Polices
Strategic Fit – Consistency between the strategic position that a firm seeks and the competencies of its process architecture and managerial policies
Market and Process-Driven Strategies: Transforming a company’s key processes into strategic competencies that consistently provide superior value to the customers
o Market-Driven Strategy: A firm starts with key competitive priorates and then develops process to support them
Commodity products
o Process-Driven Strategy: A firm starts with a given set of process competencies and then identifies a market position that is best support by those processes
Technology innovative products
o Strategic fit requires both market and process driven strategies
Entails identifying external market opportunities along with developing internal process competencies
until the two are mutually consistent, repeatedly.
Inextricably links a company’s internal competencies and its external industry environment
2.4 Focused Operations
Focused Strategy and Focused Process:
o Focused Strategy – Committing to a limited, congruent set of objectives in terms of demand (products and
markets) and supply (inputs, necessary process technologies and volumes). Concentrates on serving li mited market segments with business processes specifically designed and operated to meet their needs.
Supported by a Focused Processed
o Focused Process – One whose products fall within a small region of the competitive product space
All products from a focused process hav e similar attributes
Area occupied on the produce space by the product portfolio is small
o Plant-within-a-Plant (PWP) – The entire facility is divide d into several ‘miniplants’ each devoted to its own specific mission with a process that focuses strictly on accomplishing that mission
Improve responsiveness, higher quality, lower cost
Achieving strategic fit through focused operations provides firms with a powerful deterrent barrier against competitor’s efforts to imitate them. Greater number of activities involv ed, the harder the wholesale imitation becomes. Supporting a firm’s strategic position with multiple, mutually reinforcing activities creates sustainable competitive advantage becau se it is harder for a rival to match an array of interlocked activities than to imitate a particular activities.
2.5 Matching Products and Processes
Product-Process Matrix – Useful tool for matching processes to products.
o Connects only one product attribute with one process competency
o Correlation between process flexibility and product cost: Standardizations typically results in economics of s cale and thus lower variable product cost
o Correlation between process flexibility and product response time: Flow shops typically have shorter flow times than job shops.
o Product quality bears no direct correlation to layout of resources and connecting routes
2.6 The Operations Frontier and Trade-Offs
Strategic position supported by consistent business processes that are managed effectively are essential for superior performance
Sustained competitive advantage requires good strategic opposition and operational effectiveness Operations Frontier – The smallest curve that contains all current industry positions
o Represents the current best practices of world-class firms
o Firms located on the same ray share the same strategic priorities o Firms operating at the frontier:
Have the highest operational effectiveness- measure of how well a firm manages its processes Their processes provide superior related to the distance of the current position from the ( current)
operations frontier
o The closer a firm is to the frontier, measured along its direction of improvement (whose slope represents the relative strategic priorities assigned by the firm to the four dimensions), the higher its operational effectiveness Trade-off – A decreasing of one aspect to increase another
o Any point on the frontier represents a trade-off
o To increase performance along one product dimension, one must give up some performance along the other(s) o Firms not on the frontier, do not face trade-offs – they can improve multiple dimensions simultaneously
o Typically reflected most clearly in the strategies of world-class companies
TPS – Toyota Production System – Produce exactly what you need, exactly when you need it – instead of focusing on low cost and no variety, TPS allowed product variety through process flexibility
o Permitted wide variety, high quality, low cost, a nd short response time
Strategic Positioning defines the direction of improvement from the current position, improving
Operational effectiveness reduces the distance of the current position to the current operations frontier along the direction of improvement
o When a firm’s position of the operations frontier is developed according to the ‘state of best practices’ it represents the best attainable trade-off between the two dimensions at a given point in time
Improvements in operational effectiveness bring a company closer to the f rontier or move the frontier itself along the direction of improvement specified by the strategic position
2.7 The Evolution of Strategy and Operations Management The factory system was the result of 3 innovations:
o 1. Division of Labor and Functional Specialization – A process and organizational structure where people are specialized by function, meaning each individual is dedicated to a specific task
Lead to vast improvements in cost and quality, at the expense of flexibility
Product Specialization – People are specialized by product, meaning each individual is dedicated to
performing all functions on a specific product line
o Steam Engine (James Watt) – made it possible for powered machinery to replace human labor
o Work Centralization – facilitated economics of scale and led to growth of the assembly line and mass production – large quantities of goods at a low cost
Standardization to Mass Production
o 1810 based on the innovations of Eli Whitney and Samuel Colt
o American System of Manufacturing – Introduced the use of interchangeable parts, thereby eliminating the need to custom-fit parts during assembly
Moving assembly line
Technological advances – ‘bicycle boom’
Flexibility and the Productivity Dilemma
o Flexible Mass Production – A method of high-volume production that allows differences in products – introduced product variety as a second mode of competition in the automotive industry
o Productivity Dilemma – Chose between the lower productivity entailed by frequent product changes or the higher productivity that was only possible if they declined to introduce variety into their product lines
From Scientific Management to Employee Involvement
o Taylor Phiosphy:
1. Scientific laws govern how much workers can produce per day
2. It is management’s function to discover and apply these laws to productive operations systems 3. It is the worker’s function to carry out management decisions without question
o Statistical Quality Control – A management approach that relies on sampling a flow units and stastical theory to ensure the quality of the process
Competitive Decisions After WW2
o High demand and scale economies rose to the top of the American strategic agenda o TQM, JIT, Time-based competition, business reengineering
o Computer-aided design and MFG, flexible mfg. systems, robotics, internet-based processes
Growth of IT
o Information Technology – The hardware and software used throughout business processes to support data gathering, planning, and operations
o ERP – Gather and monitor information regarding materials, orders, schedules, finished goods inventory, receivables, and other business processes across a firm
Facilitated coordination across business processes
2.8 The Opportunity Today In-Service Operations
Technological advances have allowed service processes to be designed and executed in a manner that provides increased access while lowering the production and delivery costs, and improving the response time.
o Resulted in an explosion in new services being offered at high and low end of the economic spectrum
Improvement in communications have made the transfer of information goods both cheaper, and quicker, while increasing access
Summary
Strategic Positioning – Deliberately performing activities different from or better than those of the competition Operations Strategy – Plans to develop the desired process competencies
Operational Effectiveness – requires developing processes and operating policies that support the strategic position better than competitors
o Both strategic positioning and operational effectiveness are necessary for gaining and sustain competitive advantage
Determining Strategic Fit:
o 1. Determine the strategic positioning by prioritizing the targeted customer needs of product cost, quality, variety, and response time
o 2. Determine what the process should be good at to support the strategic position – infer the necessary process competencies in terms of process cost, quality, flexibility, and flow time
Process Flow Measures
3.1 The Essence of Process Flow
Process Measures Flow – Three key internal process performance measures that together capture the essence of process flow:
o Flow Time o Flow Rate o Inventory
o These three process flows directly affect process cost and response time, and are affected by process flexibility and process quality
Questions to be answered:
o 1. On average, how much time does a typical flow unit spend within the process boundaries? o On average, how many flow units pass through the process per unit of time?
o On average, how many flow units are within the process boundaries at any point in time? 3.2 Three Key Process Measures
When a flow unit moves through the process, one of two things happen:
o 1. It undergoes an activity
o 2. It waits in a buffer to undergo an activity
Flow Time – The total time spent by a flow unit within process boundaries
o Indicates the time needed to convert inputs into outputs and includes any time spent by a flow unit waiting for processing activities to be performed
o Indicates how long working capital, in the form of inventory, is tied up in the process
Flow Rate – The number of flow units that flow through a specific point in the process per unit of time
o Instantaneous Flow Rate: Flow rate at a specific point in time ‘t’
Ri(t)
o Inputs may enter a process from multiple points and outputs may exit from multiple points
Inventory – The total number of flow units present within process boundaries
o Process Inventory at Time t: The total number of flow units present within process boundaries at time t
I(t)
Count all the flow units within process boundaries at that moment
o Current Inventory: represents all flow units that have entered the process but have n ot yet exited 3.3 Flow Time, Flow Rate, and Inventory Dynamics
Instantaneous Inventory Accumulation (buildup) Rate - ∆R(t), the difference between instantaneous inflow rate and outflow rate
o Inst. Inv. Acc. Rate ∆R(t) = Inst. Inflow Rate Ri(t) – Inst. Outflow Rate R0(t)
If Ins Inflow Rate Ri(t) > Inst out Flow Rate R0(t), then inventory is accumulated at a rate of ∆R(t) > 0 If Ins Inflow Rate Ri(t) = Inst out Flow Rate R0(t), then inventory remains unchanged
If Ins Inflow Rate Ri(t) < Inst out Flow Rate R0(t), then inventory is depleted at a rate ∆R(t),< 0
o If we pick a time interval (t1, t2), during which inventory build rate ∆R is constant
Inventory change = Buildup Rate X Length of time interval OR I(t2)-I(t1) = ∆R X (t2-t1)
Inventory Build Diagram – Depicts inventory fluctuation over time
o Horizontal Axis:Plot time
o Vertical Axis:Plot the inventory of flow units at each point in time o
3.4 Throughput in a Stable Process
Stable Process – One in which, in the long run, the average inflow rate is the same as the average outflow rate
o Average Flow Rate/Throughput – The average number of flow units that flow through (into and out of) the process per units of time
R
Tells us the average rate at which the process produces and delivers output If throughput is less than demand rate, some customers are not served
Average Inventory Overtime
o I
Average Flow Time – the average (of the flow times) across all flow units that exit the process during a specific span of time
o T
o Track the flow time of each flow unit over a long-time period and then compute its average o Or compute it from the throughput and the average inventory
1. On average, how much time does a typical flow unit spend within the process boundaries?
o Average Flow Time T
1. On average, how many flow units pass through the process per unit of time?
o Throughput R
3. On average, how many flow units are within the process boundaries at any point in time?
o Average Inventory I
Little’s Law: Average Inventory = Throughput X Average Flow Time
o Average inventory (I) = Throughput (R) X Average Flow Time (T) o I = R X T
o Allows us to derive the flow time averages of all flow units from the average throughput and inventory
T = I/R
o Implications of Little’s Law:
1. Of the three operational measures of performance – average flow time, throughput, and average
inventory – a process manager needs only focus on two measure because the y directly determine the third measure from Little’s law.
2. For a given level of throughput in any process, the only way to reduce flow time is to reduce inventory
and vice versa
3.6 Analyzing Financial Flows through Financial Statements
Average time it takes for a dollar invested in the factory to leave the doors of finished goods
o Throughput / R = COGS o I = Inventory
Average time it between the time a dollar is billed to a customer and enters AR to the time it is collected as cash from the customers payment
o R = Annual Sales (annual flow rate) o I+ AR
Accounts Payable
o R = RM
o I = AP Balance
Cash To Cycle Performance
o Tfinishedgoods+ TAR - TAP
3.7 Two Related Process Measures: Takt Time and Inventory Turns (Turnover Rate)
Takt Time – The reciprocal of throughput and denotes the maximal ti me that each process resource can devote to a flow unit to keep up with demand
o Takt Time = 1/R
o Key concept behind lean operations
o Translates customer demand into synchronized process design and execution
Inventory Turns – The ratio of throughput to average inventory
o COGS/I
o =R/I = R/(RXT) = 1/T
o Reciprocal of average flow time o Operational measure
o High inventory turns – small flow times
o Flow unit and measure inventory and throughput must be in same units 3.8 Linking Operational To Financial Measures: Valuing a n Improvement
NPV – A measure of expected aggregate monetary gain or loss that is computed by discounting all expected future cash inflows and outflows to their present value
o Equivalent to a single present sum such that any risk-neutral investor who is in a position to choose between accepting a future sequence of cash flows on the one hand or the single sum today values both the same o Rate of Return (r): The reward that an investor demands for accepting payment delayed by one period of time o NPV = C0+n{t=1, Ct/(1+r)t
True Throughput is measured by sales volume – the number of units sold
o The minimum of its output and market demand o Positive cash flows are correlated with throughput
A change in the process can be called an improvement if and only if it increases NPV
o 1. Has true process throughput (as measured by sales) risen without any increase in inventories or process cost? o 2. Has process inventory declined without any reduction in throughput or increase in process cost?
o 3. Has process cost declined without any reduction in throughput or increase in inventory?
o Measures the return on investment made by a firm’s shareholders
ROA = Earnings before interest/ Average total assets =
[ Net income + [ Interest expense X ( 1 – tax rate) ] / Average total assets
o Measures the return earned on each dollar invested by the firm in assets
Return on Financial Leverage (ROFL) - Difference between ROE and ROA
o Captures the amount of ROE that can attributed to financial leverage (accounts payable, debt, etc.).
Accounts Payable Turnover (APT) = COGS/AP
o Define financial leverage
o Small APT indicates firm was able to use money it owed suppliers to finance a considerable fraction of its operations
o 52/APT = weeks firm effectively financed own operations with its suppliers money
ROA can be written as the product of two ratios – profit margin and asset turnover:
o ROA = Earnings before interest/Sales revenues X Sales revenue/Total Assets
=Profit Margin X Assets Turnover
o Can increase ROA by growing the profit margin and/or increasing the asset turnover
Key Components of Asset Turnover
o ART (Accounts Receivable Turnover) = Sales Revenue / Accts. Receivable
52/ART = how quickly it collected its money from sales on average after making a sale
o INVT (Inv. Turnover) = COGS/Inventories
52/INVT = Weeks on average inventory spent with firm
o PPET( Plan and equipment turnover) = Sales Revenue / PP & E
Each dollar invested in PPE support about $ of sales
o CASH TO CASH CYCLE: 52/INVT + 52/ART -52/APT
Can improve asset turnover by turning inventory quicker or using existing warehousing infrastructure to support a higher level of sales (or dec. warehousing infrastructure needed to support existing level of sales)
Summary
Key Operational Measures that characterize the flow of units through a process:
o Throughput – Rate at which units flow through the process
Measures the rate at which the output of the process is being sold
An increase in throughput indicates increased revenues and also increased profits if the product has
positive margin
Higher throughput means a smaller takt time – thus less available time for each resource to process a flow
unit and keep up with demand
o Inventory – Number of flow units within the process boundaries
measure of tied-up capital or customers who are waiting
A decrease in in indicates a drop in working capital requirements
o Flow Time – Time it takes for a specific flow unit to be transformed from input to output
Measures how long it takes to transform orders and invested cash into products
Faster flow time means higher inventory turns and relatively lower working capital requirements
o Can be applied to processes with a variety of flow units, including money, customers, data, material, and orders o Leading indicators of financial performance
o Improvement in the three measures leads to an improvement in long -term financial measures, such as NPV and ROI
Little’s Law: Relates the 3 measures in a stable process
o Average inventory is the product of average throughput and average flow time
Managers need to track and control only two of the three measures – average throughput and average
inventory, typically, which then determine flow time Equations & Symbols
Equations:
Instantaneous Inventory Accumulation/buildup rate = ∆R(t) = Ri(t) -R0(t)
Inventory Change = Buildup rate X Length of time interval= I(t2) - I(t1) = ∆R(t) X (t2- t1)
Littles Law: I = R X T Takt Time = 1/R
o Maximum time that each process resource can devote to a flow unit to keep up with demand Inventory Turns = R/I = 1/T
Symbols:
o ∆R(t) = Instantaneous inventory accumulation /buildup rate o I(t) = Inventory at time t
o I: Average inventory
o R: Throughput / average flow rate o T: Average flow time
Exercises
3.1 A bank finds that the average number of people waiting in line during lunch hour is 10. On average, during this period, 2 people per minute leave the bank after receiving service. On average, how long do bank customers wait in line?
Average Inventory = I = 10 people, Throughput R = 2 people / ,in Average wait time T = I/R = 10 / 2min = 5 min
3.2 At the drive-through counter of a fast food outlet, an average of 10 cars wait in line. The manager wants to determine if the length of the line is having any impact on potential sales. A study reveals that on average, 2 cars per minute try to enter the drive-through area, but 2t percent of the drivers of these cars are dismayed by the long lines and simply mo ve on without placing orders. Assume that no car that enters the line leaves without service. On average, how long does a car spend in the drive -through line?
I = 10 cars, R = 2 cars P/min *60*.75 = 90 Cars P/hour T = I/R = 10/90 = .111 hr. = 6.67 minutes
3.3 Checking accounts at a local bank carry an average balance of $3,000. The bank turns over its balance 6 times a year. On average, how many dollars flow through the bank each month?
I = $3000, INVT = 6 per year – INVT = R/I, 6=R/3000, R = 18,000$ per year/ 12 months = $ 1500/month OR, I = $3000, INVT = 6, T = 1/turns = 1/6 year = 2 months, R = I/T = 3000/2 = $1500 / month
3.4 A hospital emergency room is currently organized so that all patients register through an initial check -in process. At his or her turn, each patient is seen by a doctor and then exists the process, either with a prescription or with admission to the hospital. Currently, 55 people per hour arrive at the ER, 10% of those who are admitted to the hospital. On average, 7 people are waiting to be registered and 34 are registered and waiting to see a doctor. The registration process takes on average, 2 minute per pati ent. Among patients who receive prescriptions, average time spent with a doctor is 5 minutes. Among those admitted to the hospital, average time is 30 minutes. On average, how long does a patient spend in the ER? On average, how many patients are being
examined by doctors? On average, how many patients are there in the ER? Assume the process is stable, that is, average inflow rate equals average outflow rate.
R = 55 patient / hr., R1 = 55(.10) = 5.5/hr., R2 = 55(.90) = 49.5/hr.
o Buffer 1: R = 55/hr., I=7, T=I/R = 7/55hr = .127hr or 7.6 minutes
o Registration: Flow Time T = 2 min = 2/60hr, R ==55/hr. I=RT = 55X2/60=1.83 patients o Buffer 2: R = 55/hr, I = 34, T = I/R = 33/55hr = .62 hr. or 37.1 minutes
o Doctor Time: Depends on flow unit
T1 = 30 minutes T2 = 5 minutes
1) How long does a patient spend in the ER? Calculate Flow Time o T1 = 76.7 minutes (10%), T2 = 51.7 minutes (90%)
o T = (.10*76.7minutes) + (.90*51.7 minutes) = 54.2 minutes
2) On average how many patients are being examined by a doctor? (Average inventory at the doctors activity) o R1 = 5.5/hr, T= 30 minutes or .5 hr, I= RT = 5.5/hr*.5hr = 2.75 patients
o R2 = 49.5 patients / hr, T = 5 min or 5/60 hour, I = RT = 49.5*(5/60)=4.125 patients o 2.75+4.127 = 6.875 patients
3) On average, how many patients are in the ER?
o Total Inv = B1 + inv in reg. + B2 + inv with doctor = 7+1.83+34+6.875 = 49.705 patients
3.5 a triage system has been proposed for the ER described in 3.4. E ntering patients will be registered as before. They will then be quickly examined by a nurse who will classify them as Simple Prescriptions or Potential Admits. SP will move on to an area staffed for regular care, PA will be taken to the emergency area. Planners anticipate that the initial examination will tak e 3 minutes. T hey expect that on average, 20 patients will be waiting to register and 5 will be waiting to be seen by the triage nurse. Recall registration takes on average 2 minutes p/patient. The triage nurse is expected to take average of 1 minute per patient. Planners expect t he SP area to have on average 15 patients waiting to be seen. Once a patient’s turn comes, each will take 5 minutes of a doctor’s time. The hospital anticipates that ton average, the emergency area will only have 1patient waiting to be seen. As before, once a pati ent’s turn comes, he or she will take 30 minutes with the doctor. Assume that 90% patients are SP. Assume the triage nurse i s 100% accurate..
1) On average, how many minutes will a patient spend in the ER? There are two flow units
o (1) Those that are potential admits: flow rate = 55*10% = 5.5/hr. o (2) Those that get a simple prescription: flow rate = 55*90% = 49.5/hr.
o To find the average flow times, we use Little's law at each activity for which the flow time is unknown:
(1) Buffer 1: R = 55/hr (both flow units go through there), I = 20, so that waiting time in buffer 1 = T = I/R =
20/55 hr = 0.3636 hours = 21.82 minutes.
(2) Registration: flow time T = 2 min = 2/60 hr. All flow units flow through this stage. Thus flow rate
through this stage is R = 55 / hr. Average inventory at registration is given by I = RT = 55*2/60 = 1.83 patients.
(3) Buffer 2: R = 55/hr (both flow units go through there), I = 5, so that waiting time in buffer 2 = T = I/R =
5/55 hr = 0.09 hours = 5.45 minutes.
(4) Triage Nurse: flow time T = 1 min = 1/60 hr. All flow units flow through this stage. Thus flow rate
through this stage is R = 55 / hr. Average inventory is given by I = RT = 55*1/60 = 0.92 pat ients.
(5) Buffer 3: R = 5.5/hr , I = 1, so that waiting time in buffer 1 = T = I/R = 1/ 5.5 hr = 0.1818 hours = 10.91
minutes.
(6) Potential Admits: flow time T = 30 min = 30/60 hr. Flow rate through this stage is R = 5.5 / hr. Average
inventory is given by I = RT = 5.5*30/60 = 2.75 patients.
(7) Buffer 4: R = 49.5/hr , I = 15, so that waiting time in buffer 1 = T = I/R = 15/ 49.5 hr = 0.3030 hours =
18.18 minutes.
(8) Simple Prescription: flow time T = 5 min = 5/60 hr. Flow rate through this stage is R = 49.5 / hr.
Average inventory is given by I = RT = 49.5*5/60 = 4.125 patients. o We find the flow time by adding the activity times on the path:
(a) For a potential admit, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 3 +
Potential Admits) = 21.82 + 2 + 5.45 + 1 + 10.91 + 30= 71.18 minutes
(b) For a person ending up with a prescription, average flow time (buffer 1 + registration + buffer 2 +
Triage Nurse + buffer 4 + Simple Prescription) = 21.82 + 2 + 5.45 + 1 + 18.18 + 5 = 53.45 minutes. o T = 10% * 71.18 + 90%*53.45 = 55.22 minutes.
2) On average, how many minutes will a Potential Admit spend in the ER?
o For a potential admit, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 3 + Potential Admits) = 21.82 + 2 + 5.45 + 1 + 10.91 + 30= 71.18 minute
3) On average, how many patients will be in the ER?
o For a potential admit, average flow time (buffer 1 + registration + buffer 2 + Triage Nurse + buffer 3 + Potential Admits) = 21.82 + 2 + 5.45 + 1 + 10.91 + 30= 71.18 minutes
3.7 Orange juice inc. produces and markets f ruit juice. During the heaviest seasons, trucks bring oranges from the fields to the processing plant during a workday that runs from 7 a.m. to 6 p.m. On peak day, approximately 10,000 kg of oranges are trucked per hour. Trucks dump their contents in a holding bin with a storage capacity of 6,000 kg. when the bin is full, incoming trucks must wait until it has sufficient available space. A conveyor moves oranges from the bins to the processing the plant. The plant is con figured to deal with an average harvesting day, and maximum throughput (flow rate) is 80 00 kg per/hr. Assuming oranges arrive continuously over time, construct an inventory buildup diagram for OJI.
1) In order to process all the oranges delivered during the day, how long must the plant operate on peak days? o 1. From 7am-6pm, oranges come in at a rate of 10,000kg/hr and are processed, and thus leave the plant, at
8000kg/hr. Because inflows exceed outflows, inventory will build up at a rate of
∆R = 10,000-8,000kg/hr = +2,000 kg/hr.
Thus, because we cannot have oranges stored overnight, we start with an empty plant so that inventory
at 7am is zero: I (7 am) = 0. Because inventory builds up linearly at 2,000kg/hr, the inventory at 6pm is I(6pm) = 2,000 kg/hr * 11 hr = 22,000kg.
o 2. After 6pm, no more oranges come in, yet processing continues at 8000 kg/hr until the plant is empty. Thus, inflows is less than outflows so that inventory is depleted at a rate of
∆R = 0 - 8,000 kg/hr = - 8,000 kg/hr.
Thus, since we have that I(6pm) = 22,000kg, we know that inventory depletes linearly from that level at a
rate of -8,000 kg/hr. Thus, to empty the plant, inventory must reach zero and this will take an amount of time ∆t where:
22,000 kg - 8,000 kg/hr ∆t = 0, or ∆t = 22,000/8,000 hr = 2.75 hr = 2 hr 45min.
o Thus, the plant must operate until 6pm + 2hr 45min = 8:45pm.
At what point during the day must a truck first wait before unloading into the storage bin?
o First inventory builds up in the bins. When the bin is full, then the trucks must wait. This happens at: 2,000 kg/hr ∆t = 6,000kg,
o so that the first truck will wait after ∆t = 6,000/2,000 hr = 3 hr, which is at 10am.
3.8 JVM is an auto dealership selling new and used cars. In an average month, JVM sells 160 cars. New vehicles represent 60% of sales, used vehciles represent 40%. Max recently took over the business from his father. Inventory financing was a significant expense for JVM.
JVM had been turning its inventory at a rate of 8 times per year. What is JVM’s average inventory? (including both new and used vehicles)
o TURNStotal = 1/Ttotal so Ttotal = 1/8 years = 1.5 months
o Itotal = RtotalTtotal= 160 vehicles/month * 1.5 months = 240 vehicles,
o
Turns of new vehicles are 7.2 per year, turns of used vehicles are 9.6 per year. Holding a new vehciles in inventory for a month cost $175. Holding a used car cost $145. What are JVM’s average monthly financing cost per vehicle?
o T new = 1/7.2 years = 1.667 months and T used = 1/9.6 years = 1.25 month
o Inew=0.6*160vehicles/month*1.667months=160newvehicles
o I used = 0.4 * 160 vehicles/month * 1.25 months = 80 new vehicles
o Total monthly financing costs then 160*$175 + 80*$145 = 28,000 + 11,600 = $39,600/month.
Consulting firm suggested JVM subscribe to its monthly market analysis service. They claim their program will allow JVM to maintain its current sales rate of new cars while reducing amount of time a new car sits in inventory before being sold by 20%. How much should Max be willing to pay?
o From Little’s Law, cutting time 20% while holding R unchanged will reduce inventory by 20%. From part b, average monthly financing costs for new vehicles is 160*$175 = $28,000/month. A 20% drop gives $5,600 per month, which is the answer.
3.9 CCR rents cars. The market consist of two segments: short-term, which rents for an average of .5 wek, and the medium term, which rents on average of 2 weeks. CCR rents an average of 200 cars p/week to ST segment, and 100 cars p/week to MT segment. About 20% of cars returned are found to be defective and in need of repairs before renting again. On average there are 100 cars waiting to be cleaned. The average cost of this operation is 5$ per car. Cars needing repairs spend an average of 2 weeks in repair shop and incur an average cost of $150 per car. Assume cars are rented as soon as they are available for rent. ST renters pay $200 per week, MT renters pay 120$ p/week.
1) What is the throughput (cars/week) at the ‘customer’ stage? a. 300
2) What is the inventory (cars) at the "Customer" stage?
a. 300
3) What is the flow time (weeks) at the "Customer" stage?
a. 1 week
4) What is the throughput (cars/week) at the "Cleaning" stage?
a. 240
5) What is the inventory (cars) at the "Cleaning" stage?
a. 100
6) What is the flow time (weeks) at the "Cleaning" stage?
a. .42
7) What is the throughput (cars/week) at the "Repair" stage?
a. 60
8) What is the inventory (cars) at the "Repair" stage?
a. 120
9) What is the flow time (weeks) at the "Repair" stage?
a. 2
10) What profit does Cheapest earn per week with the current system? Assume that each car loses $40 in value per week because of depreciation.
How much money can Cheapest save per week with improvement #1?
o Decreasing flow time in repairs by 1 week will lower the inventory in repairs from 120 to 60. This will reduce the number of cars required by 60 and thus weekly depreciation by $2400.
How much money can Cheapest save per week with improvement #2?
o Decreasing repair cost by $30 lowers repair cost by 60X30 = $18003.10 The Evanstonian is an upscale independent hotel that caters to both business and leisure travelers. On average, one -third of the guests checking in each day are liesure travelers. Leisure travelers generally stay for 3.6 nights -twice a long as the average business customer
On an average day, 135 guests check into The Evanstonian. On average, how many leisure travelers are in the hotel on any given day?
o RL = 135/3 = 45 guests/night and T L= 3.6 nights → IL = RL T L = 45 × 3.6 = 162 guests
On an average day, 135 guests check into The Evanstonian. On average, how many business travelers are in the hotel on any given day?
o For Business Travelers we have RL = 135 × 2/3 = 90 guests/night and T L= 1.8 nights → IL = RL T L = 90 × 1.8 =162
guests
o the total inventory is then IT = 324. We then have Turns = RT /IT = 135/324 = 0.4167 turns per day =12.5 turns per
month.
The average business traveler pays a rate of $250 per night, while leisure travelers pay an average rate of $210 per night. What is the average revenue The Evanstonian receives per night per occupied room?
o On average 324 rooms are occupied with half othe guests being leisure. Thus average rate received per occupied room is ½ X 250 + ½ X 210 = $230
POW 1
1. Each month a Bank carries an average balance of $3632 in all checking accounts. These accounts are being turned over 3 times a year. Based on this information, fill in the below data:
I = $3632, T = 4 months
On average, how much money is flowing through the bank each month? Hint: Keep in mind the conversion from year t o month.
o R = I/T = 3632 / 4 = $908/month
2. A manager observes that on average, 5 students per minute enter the campus cafeteria. 10% of the students that enter the cafeteria see a long line and leave without entering the line. Given students are leaving before entering the process, t he manager must determine the rate at which students are entering the process. On average, 18 students are waiting in line and we can assume that any student that enters the line will not leave.
I = 18, R = 4.5 (5*.90)
On average how long does a student spend in the cafeteria line?
o T = I/R = 18/4.5 = 4 minutes
3. A manager of a taco stand is interested in advertising to get more lunch time customers, but doesn't know how much time it takes to process a single customer. The amount of time it takes to process a single customer will help the manager determine the
maximum amount of customers they can process in the lunch hour. On average, during lunch hour, there are 12 people in line waiting to order at the window. 4 people per minute leave the taco stand after receiving their food.
I = 12, R = 4
On average how long do customers wait in line? Calculate answer in minutes. (Enter the value only. Do not enter text per Week 1 -> Important Instructions)
o 12/4 = 3 minutes
4. Cheapest Car Rental rents cars at the Chicago airport. The rental market consists o f two segments: the short term segment, which rents for an average of 0 .5 weeks, and the medium-term segment, which rents for an average of 2 weeks. Cheapest currently rents an average of 200 cars a week to the short-term segment and 100 cars a week to the medium-term segment. How many customers per week go through the process?
Total Inventory will be the sum of both segments. Hint: I = R * T can be calculated for both segments. Clean/Repair Data:
Approximately 20 percent of the cars returned or going bac k into the process (evenly distributed across both segments) are found to be defective and in need of repairs before they can be made available for rent again. The remaining 80 percent of cars not needing repairs are cleaned, filled with gas ,and made available for rent when returned. On average, there are 100 cars waiting to be cleaned. The average cost of this operation is $5 per car. Cars needing repairs spent an average of 2 weeks in the repair shop and incur an average cost of $150 per car. Assume that cars are rented as soon as they are available for rent, that is , as soon as they have been cleaned or repaired. Short term renters pay $200 per week, while medium-term renters pay $120 per week. The flow of cars is shown in Figure 3.9.
a. Identify throughput, inventory, and flow time at each stage.
Stage Inventory (I)
cars Throughput(R) cars/week Flowtime (T) week(s) Customers (.5*200)+(2*100)=300 200 + 100 = 300 I/R = 1 Cleaning 100 300*.8 = 240 I/R = .42 Repairs R*T=120 300 * .2 = 60 2
b. What profit does Cheapest earn per week with the current system? Assume that each car loses $40 in value
per week because of depreciation.
o Cars on rent for short * 200$/week +cars of Med. * $120 = (100 *$200) + (200*$120) = $44,000/ week is profit o Cleaning Cost is R or 240 * $5 = $1200/ week, Repair cost is R or 60 * $150 = $90 00/week
o Depreciation is total cars owned or all I = 300+100+120=520*40=20,800 o Profit is 44000 – (1200+9000+20800) = 13,000/week
5. Jasper Valley Motors (JVM) is a family-run auto dealership selling both new and used vehicles. In an average month, JVM sells a total of 160 vehicles. New vehicles represent 60 percent of sales, and used vehicles represent 40 percent of sales. Max has recently taken over the business from his father. His father always emphasized the importance of carefully managing the dealership’s
