Operation Process Flow

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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 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? – Don’t sell what you produce. Produce what sells. S. Chopra/Process Flows

• •


Operational Performance Measures
• • • • • Flow time Throughput Inventory Process Cost Quality

S. Chopra/Process Flows


The business imperative: creating economic value
Improvement levers Revenues Price x Quantity Material + Labor + Energy + Overhead PP&E + Inventory + Other 1. 2. Increase price Increase throughput


Costs Economic value added (EVA) -

1. 2.

Reduce costs Improve quality

Capital invested Opportunity cost x Weighted average cost of capital

1. 2.

Reduce capital intensity Reduce inventory

Reduce time
Operational metrics 4

Financial metrics S. Chopra/Process Flows

Relating operational measures (flow time T, throughput R & inventory I) with Little’s Law ... ... ...
Inventory I

Flow rate/Throughput R

... ...


Flow Time T [hrs]

• Inventory = Throughput x Flow Time I = RxT • Turnover = Throughput / Inventory = 1/ T S. Chopra/Process Flows 5

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/Process Flows 6

Process Flow Examples

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/Process Flows


MBPF Inc.: Consolidated Statement
Net Sales Costs and expenses Cost of Goods Sold Selling, general and administrative expenses Interest expense Depreciation Other (income) expenses TOTAL COSTS AND EXPENSES INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME RETAINED EARNINGS, BEGINNING OF YEAR LESS CASH DIVIDENDS DECLARED RETAINED EARNINGS AT END OF YEAR NET INCOME PER COMMON SHARE DIVIDEND PER COMMON SHARE 250.0 175.8 47.2 4.0 5.6 2.1 234.7 15.3 7.0 8.3 31.0 2.1 37.2 0.83 0.21

S. Chopra/Process Flows


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 PROPERTY, PLANT AND EQUIPMENT (at cost) Land Buildings Machinery and equipment Construction in progress Subtotal Less accumulated depreciation NET PROPERTY, PLANT AND EQUIPMENT Investments Prepaid expenses and other deferred charges Other assets TOTAL ASSETS S....
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