Operations management

Table oof Conteents

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8007 | Core Reading: PROCESS ANALYSIS 2

1 Introduction .............................................................................................. 3

2 Essential Reading ................................................................................... 5

2.1 Process Flow Diagrams ........................................................... 5

2.2 Batch Processes ......................................................................... 8

2.3 Assessing Capacity ................................................................... 9

Bottleneck Analysis ................................................................... 9

Cycle Times .................................................................................. 11

2.4 Assessing Efficiency ............................................................... 16

2.5 Assessing Effectiveness ......................................................... 17

Quality ........................................................................................... 17

Speed ............................................................................................. 18

Flexibility .................................................................................... 20

Safety........................................................................................... 20

3 Key Terms ............................................................................................... 22

4 For Further Reading ........................................................................... 23

5 Endnotes.................................................................................................. 23

6 Index .......................................................................................................... 24

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Table of Contents

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8007 | Core Reading: PROCESS ANALYSIS 3

1 INTRODUCTION

t its most basic level, operations management is concerned with the work that every organization must do to meet its objectives—how that work is organized, managed,

analyzed, and ultimately carried out. More precisely, operations management is about designing, managing, and improving the activities involved in creating products and services and delivering them to customers. We call these activities and the people, resources, and procedures that dictate how work is organized the operating system.

The basic building block of an operating system is the operating process. Most operating systems consist of multiple processes. A process is a set of tasks to be performed in a defined sequence and uses inputs (such as labor, capital, knowledge, raw materials, purchased components, and energy) to create outputs that are of great value to customers and therefore to the organization itself.a While it may be easier for many of us to visualize an automobile assembly process or a steel-making process, every organization— manufacturing or service, public or private, for-profit or not-for-profit—organizes its work through its operating processes.

A hospital takes as input a sick patient, applies labor (doctors, nurses, and other personnel), knowledge, capital (in the form of facilities and technology), energy, and supplies and, as its output (we hope), produces a healthy patient. An airline takes as input a passenger who is at Point A but wants to be at Point B, and it applies similar categories of resources (pilots, baggage handlers and equipment, the airplane, and so on) to output a passenger at Point B. A successful local government agency takes the needs of its citizens, applies resources, and provides services that improve community life. Unfortunately, while almost all manufacturing organizations routinely visualize and analyze their operating processes, many service organizations do not have an explicit process “viewpoint,” which often hampers their ability to achieve their objectives as well as they would like.1

An organization’s operating processes are generally meant to fulfill two overarching goals:

1 Deliver the “customer promise.” Every business seeks to provide specific things for its customers better than any other business can. This is often referred to as “strategic positioning.” We will refer to it as the “customer promise.” Ultimately, it is the job of a firm’s operating processes to deliver that promise, whether it is lower cost, faster service, higher quality, customization, or some combination of those attributes. Customer satisfaction is highly correlated with how well the firm’s operating processes

a In the for-profit sector, this translates to creating profits. We purposely avoid this language because the concepts in this reading also apply to nonprofit and governmental organizations, for which creating value may not translate into profits.

A

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8007 | Core Reading: PROCESS ANALYSIS 4

function. This is particularly true for service organizations, in which the customer interacts directly with those operating processes.

A firm that designs its operating processes to try to be all things to all people will find it difficult to compete with a focused competitor. So a firm has to understand which attributes are most important to customers and which are less so, and it must design its operating processes to reflect that understanding.

2 Create value for stakeholders. For the for-profit firm, creating value for stakeholders often means running operating processes efficiently enough to ensure profits to the firm’s shareholders while simultaneously providing an environment that motivates and retains workers. For a charitable organization, it may mean serving its clientele effectively enough so that it will be able to continue to attract funding from benefactors. For a governmental administration, it means serving the public to provide social welfare at a reasonable cost that—perhaps—ensures its reelection. The circumstances vary widely, but the principle—that an operating system must create value for its stakeholders—always applies.

The goal of this reading is to introduce you to a broad set of operating processes and to give you concepts and tools you can use to describe them and to analyze them to assess their performance. Organizations without the means to improve rarely can keep up with competition, and improvement requires a deep understanding of underlying operating processes and an ability to assess their performance. Put more simply, the goal of this reading is to allow you to observe an operating process, have a sense of what data needs to be collected, and then, after some analysis of those data, be able to answer the key question, “How is this process doing?” and “How could it do better?” This is the essence of process analysis.

How can you tell whether a process is “doing” well? That depends on what the customer promise is and how the firm seeks to create and capture value for its stakeholders. For example, if the customer promise is fast and effective service, we would be concerned with speed, the quality of service, and customer satisfaction. On the other hand, if we are running a high-volume, capital-intensive factory with a customer promise of low cost, we might be most concerned with capital utilization, high volumes, and various measures of efficiency and productivity.

In the material that follows, we first introduce a tool that allows us to represent pictorially, and better understand, the sequence of tasks and the flow of product and information in a process. We then use a variety of numerical analyses to measure process performance, focusing on three critical dimensions: capacity, efficiency, and effectiveness.b

b We use the term “effectiveness” to refer to measures of how well a process does what it is supposed to do (e.g., how well it delivers on the customer promise). Efficiency refers to how well the process utilizes its resources or inputs in producing the output. The efficiency with which a resource is used is often called that resource’s productivity.

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2 ESSENTIAL READING

The first step in analyzing any process is describing it. This starts with mapping the sequence of tasks and the flow of product and information in what is often called a process flow diagram or a process map. There are various conventions for mapping processes; we will use a set of conventions and terminology that are common in practice and that we use in teaching process analysis at the Harvard Business School.

The process flow diagram for a very simple sequential process might be drawn as shown in Figure 1.

Figure 1 A Sequential Process

For a product to be produced, or a service to be performed, Task A must be done before Task B can begin, Task B must be done before Task C can begin, and Task C must be done before Task D can begin. A single worker is assigned to each of these four tasks. Tasks are represented by rectangles; the arrows indicate the direction of product flow in a manufacturing context, or, in a service context,c the movement of a customer or documentation. In each case this is usually called the process flow. The structure of the process flow diagram and the way to think about process flow are based on what is called the “product’s eye view.” Namely, the sequential flow in Figure 1 is what is “seen” by a product or customer moving through the process. However, all tasks are generally performed simultaneously, on four separate products or customers. If we were to check in on the process in the middle of the day, we would see all four tasks under way. We call this steady state, because the process is not affected by start-up or shut-down activity.

Processes often include tasks that are performed in parallel, and sometimes material (or customers) must wait along the way. Consider a small, busy café at which customers order either tea or coffee beverages, as pictured in Figure 2. Orders for tea are prepared at a dedicated tea station, and orders for coffee are prepared at a barista station.

c For simplicity, we will call a process a service process if the customer is directly involved in the operating process. Thus, for example, for our purposes, the backroom process in which a loan application is analyzed and, then, either approved or denied is not a service process.

2.1 Process Flow Diagrams

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Figure 2 Process Flow Diagram for a Café

This process is different in several ways from the simple four-step process that we encountered earlier. First, it includes tasks that can be done at the same time. We call this a parallel process. Second, it includes upside-down triangles to indicate two points at which customers may need to wait between tasks. In a manufacturing process, points at which components or partially manufactured products wait for the next process step are called Work in Process (WIP) inventory buffers. Third, this process includes a decision node, denoted by a diamond with a question mark. At this point in the process, the flow (of either customers or materials) can move in different directions. A decision node is commonplace in processes that involve a technology choice—that is, a choice of different methods of making a product (e.g., an automated technology versus a manual approach) or delivering a service.

Fourth, this process includes the flow of information, indicated with a dotted line and an arrow. The customer’s order informs the decision as to which employee will serve that customer. In most processes, information flow is much more complicated.

Parallel processes need not involve decision nodes. Consider a small workshop that makes wooden chairs using a simple parallel process, as shown in Figure 3.

Figure 3 Process Flow Diagram for Making Chairs

The making of the seat, the front legs, and the single-piece unit that comprises the

back legs and chair back are done in parallel (at the same time) and then they are assembled. Again, consider the “product’s eye view.” Initially, the product consists of three components, so it has three sets of “eyes.” Each component sees the work that is being done on it. This explains the fundamental difference between a sequential process and a parallel one.

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8007 | Core Reading: PROCESS ANALYSIS 7

For another example, consider the parallel process in a commercial bakery that makes filled dumplings, as shown in Figure 4. This process involves parallel operation and batch flow (product moves in batches rather than one by one).

Figure 4 Process Flow Diagram for Making Dumplings

Process flow diagrams are useful in many different ways. One use (which does not

involve the kind of detailed numerical analysis discussed in the next section) is as a communications tool that allows a team of people to share a common view of the work they are performing. When a team has such a shared view of what activities (tasks) are being performed and in what sequence, as well as how products and information flow, they can more easily discuss the pros and the cons of changes and improvements to the process.

For example, a large financial services firm that we’ve visited routinely schedules “process mapping days” during which a team of people who have been working together on a certain set of (mostly computerized) tasks necessary for processing complex financial transactions come together to examine how they do their work. They spend the first part of the day mapping out the process on flip-chart pages that often cover the wall of a conference room and may involve over 100 boxes, arrows, and decision nodes. Specific task times or other numerical performance measures are rarely noted.

After this stage the team begins to question the effectiveness and efficiency of the process. Comments and questions are then discussed:

• “I know the manual says that we are supposed to do Y after we do X, but in practice we don’t.”

• “Why do we do A after B? Would it be more efficient to do them in parallel?” • “Why do we have to do Z? It would take less time if we eliminated that.” • “How is that decision made? Don’t we need more information?”

These are valuable conversations. In the material that follows, we will go beyond a purely descriptive use of process

mapping and instead use it as the backbone of numerical analysis that facilitates a discussion of the key question, “How is this process doing?” This requires understanding the timing of process flows more precisely.

Thus, the first step in more precisely measuring process performance is measuring task times.d In practice, firms usually use standard times. The standard time of a task is defined as the average time that an employee (or customer in many service processes)

d A critical element in process design is the determination of what constitutes a “task.” This topic is taken up in Core Reading: Designing, Managing, and Improving Operations, HBP No. 8012 (Boston: Harvard Business Publishing, 2013).

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8007 | Core Reading: PROCESS ANALYSIS 8

with average skills will take to complete that task, under ordinary circumstances, and working at a sustainable pace.e

One important measure of any process is labor content, the total time that is spent by the firm’s employees on the product or service. Labor cost is, of course, greater than labor content multiplied by the wage rate, because the firm needs to pay employees for any idle time that they incur because of imbalances in the process structure.

Firms often choose to process not just one product at a time but a batch or a lot of the same products at once. In services (e.g., rides at Disney World), it will sometimes make sense to process a fixed number of customers at once. The reasons for batch processing are many, but usually it is more efficient to process multiple products or customers at the same time, if possible. It would be inefficient for Disney World to send one customer at a time through some of its rides, and at the dumpling bakery diagrammed in Figure 4, it would be inefficient to mix enough filling for only one dumpling and then to switch to mixing filling for another dumpling. In this case, as in many manufacturing contexts, it takes time to change a machine from processing one kind of part or product to another, so processing multiple units of the same product together will save changeover (or setup) time. For example, if it takes an hour to change a screwdriver stamping machine from Phillips to slotted, or back, one would prefer to make a large batch of Phillips screwdrivers and then a large batch of slotted screwdrivers, rather than one Phillips, change, one slotted, change, one Phillips, change, and so on.

These considerations require that we expand our notion of task times. A task in a batch process (or in any process) may require the following:

1 a setup time, the amount of time required to get ready for the task (to load the riders on the Disney World ride, for example, or to prepare the settings on the machine that mixes the dumpling filling) and, if necessary, clean up afterward. Formally, setup time is any time taken to perform a task that is independent of the number of products or customers being processed;

2 and a run time, the time it take to process each unit. Formally, run time is the time taken to perform a task that varies with the number of products or customers being processed.

Intuitively, setup time and run time calculations affect our everyday thinking. For example, if you are making an omelet for yourself, you likely stir a few eggs with a fork; if you are hosting a brunch for 20, you probably use an electric mixer. For a large batch size, the extra time required to get the mixer ready and to clean it afterward is worthwhile. Without explicitly thinking about the tradeoffs between setup time and run time, we make these kinds of decisions every day.

e Of course, actual times will vary, at any given time, from standard times. This introduces a good deal of complexity, and for the sake of developing basic concepts, these complexities are covered separately in Core Reading: The Impact of Variability on Process Performance, HBP No. 8228 (Boston: Harvard Business School Publishing, 2013).

2.2 Batch Processes

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An important attribute of any operating system is its ability to produce enough “output” (in other words, make enough products or serve enough customers) to meet demand. For many businesses, profits increase as volume grows, so being able to produce high volumes is key to profitability. And for businesses that hope to grow, the ability to produce more output as demand increases is critical. We define capacity as the number of units of product that a process can produce (denoted in units of product per time period, e.g., units per hour) or, for service processes, the number of customers who can be served (again, customers per time period). Capacity (often called “design capacity” or “rated capacity”) is an ideal, assuming nothing goes wrong to slow the process or shut it down. Actual output is typically lower than capacity.

The key to assessing the capacity of a process is discovering its bottleneck.

Bottleneck Analysis Let us start with the simple four-step process in Figure 5.

Figure 5 Four-Step Process with Task Times

Task times are written below the task boxes. At Task A, for example, it takes 5 minutes to process one unit. Let’s assume, to keep this as simple as possible, that the process is a manual process, setups are not required, no WIP builds up, and that the four workers associated with the four tasks are specialized—that is, the worker at Task A stays at Task A and never moves to another task. What does product flow look like? We’ll get the process into steady state before we begin the analysis. The chart in Figure 6f depicts what happens over time.

f This kind of chart is known as a Gantt chart.

2.3 Assessing Capacity

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Figure 6 Gantt Chart of the Four-Step Process

P1, P2, and so on, represent the products being worked on. Note that because of the sequential nature of this process, a task cannot begin on a particular unit until the previous task is completed. Quite quickly, the process is in steady state. At minute 14, P1 is complete and all four tasks are active. A few important observations:

• The worker at Task A is always busy. • The worker at Task B has a minute of idle time between successive products. • The worker at Task C has two minutes of idle time between successive

products. • The worker at Task D has three minutes of idle time between successive

products. Upon reflection, these observations should not be surprising; workers at Tasks B, C,

and D receive a product only once every five minutes (time for Task A) and therefore have to wait. Task A is the bottleneck for this process.

Let’s digress briefly to bottlenecks, which is perhaps the most critical concept in process analysis. In simple terms, the bottleneck of any process is the task that causes all other tasks to have idle time (there may be two or more bottlenecks in any process).g In other words, a bottleneck constrains product flow. It may help to conceptualize this concept in terms of a flow we think about in everyday life—liquid flow. Imagine the water pipeline pictured in Figure 7.

Figure 7 Pipeline

Assuming viscosity and a pump that pumps water into the pipeline at least as fast as it can accept it, what will determine the rate of outflow? The outflow will not be determined by the rate of inflow, but rather by the rate of flow through the bottleneck. Indeed, the section of the pipeline after the bottleneck will be only partly filled.

g We will expand on this definition later.

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8007 | Core Reading: PROCESS ANALYSIS 11

Why do we call it a bottleneck? Think of a typical soda bottle, illustrated in Figure 8. Why does the soda bottle have a neck? We might expect that the bottle would be more efficient to produce if it were a simple cylinder, with no indentation. But then the soda would flow out at a rate greater than your ability to drink it (or to pour it into a cup without splashing). The bottleneck is designed into the bottle explicitly to limit the rate of outflow. In this case, bottlenecks are good; in operating processes, they tend to be bad because limiting the rate of flow limits output. Limiting output decreases potential revenue (assuming that there is adequate demand) and, thus, decreases potential profits. Bottlenecks also slow processes, incur idle time, and increase lead time.h

As the Figure 6 chart confirms, Task A limits the other tasks, and because Task A can produce only 12 units per hour, the entire four-step process can produce only 12 units per hour.

What happens when the bottleneck isn’t the first task, starving all the others? Consider a different version of the four-step process, as shown in Figure 9.

Figure 9 Four-Step Process with a Bottleneck

For this process, Task C is the bottleneck; it limits the output of the process. Tasks A

and B could produce greater output, but that would result in work-in-process inventory building up in front of Task C indefinitely, with no increase in process output. This is neither desirable nor physically sustainable. When the physical space for holding WIP in front of Task C is full, we say that Workstations A and B are blocked tasks. Task D has to wait for Task C’s full five-minute cycle to do its work. We say that Task D is a starved task.

In practice, the workers at Tasks A and B would slow down, or be idle, to match their output to the fastest rate at which Task C can run. This is referred to as bottleneck pacing because the pace of the system is set by the pace of the bottleneck.

Blocking and starving are two sides of the same coin: They both lead to idle time for the workers at those workstations. The worker at Task A will be idle for three of every five minutes; at Task B, the worker will be idle for one of every five minutes; and at Task D, he will be idle for two of every five minutes. Theoretically, Task C will never be idle.

Cycle Times Another way to think about how this process operates is through a simple thought experiment. Imagine standing at the end of the process with a stopwatch, clocking successive finished products as they emerge from the final task. The system’s cycle time is the average time between the completion of successive units of product or, in the case of a service process, the average time between the departures of successive customers.

h This is particularly problematic when speed is part of our customer promise. We will discuss this in more detail later in this reading.

Figure 8 Soda Bottle

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8007 | Core Reading: PROCESS ANALYSIS 12

You can use Interactive Illustration 1 to see how task times at individual workstations affect the system’s cycle time. Try varying the task times at each workstation to see how blocking and starving occurs.

Interactive Illustration 1 Blocked and Starved Tasks

You will notice that the system cycle time (for all three tasks together) is equal to the task time of the bottleneck task. All other tasks are either blocked or starved and have some idle time.i System cycle time can never be less than the cycle time of the bottleneck.

So far, we’ve been assuming that each task is performed by only one worker. To understand the effect on cycle times, and thus on capacity, of multiple workers doing the same task, consider a one-step, manual process, as pictured in Interactive Illustration 2. The task time for each worker is always 12 minutes. Therefore, if there is one worker at the task, the cycle time for the task is also 12 minutes. You will notice, however, that as the number of workers at the task increases, the cycle time drops. The task time remains 12 minutes, but, with four workers the task cycle time will drop to 3 minutes, in which case a new unit would come off the line every 3 minutes. One way of “breaking” a bottleneck is to add another worker to that task.

Interactive Illustration 2 Cycle Time with Multiple Workers

i Unless there are multiple bottlenecks (tasks with the same task time as the system cycle time).

Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2pHNWah

Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2GdGUAs

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8007 | Core Reading: PROCESS ANALYSIS 13

Formally, we have defined capacity as the maximum output, in terms of units produced or customers served, in a specified time period (e.g., units manufactured per hour or customers served per day). This is a critical measure of process performance because it constrains revenue. You can’t sell more than you can make—a firm’s maximum revenue is limited by its capacity.j

Capacity is the inverse of cycle time.

For example, returning to the simple process in Figure 9, the cycle time of Task A is two minutes per unit. Therefore, its capacity is ½ unit per minute, or 30 units per hour. Task A can produce at most 30 units per hour. Similarly, Tasks B, C, and D have capacities of 15, 12, and 20 units per hour, respectively. The line can run no faster than the bottleneck, so the line capacity (or system capacity) is 12 units per hour. The system capacity is only as great as the task with the lowest capacity. You’re only as strong as your weakest link.

If the line is running at the pace of the bottleneck, 12 units per hour, then capacity utilization at Task A is 40%. The workstation is actually producing 40% of what it is capable of producing. Similarly, capacity utilizations at B, C, and D are 80%, 100%, and 60%, respectively. Workstations that are higher than the bottleneck will have idle time. Table 1 summarizes these calculations.

Table 1 Capacity Calculations for Process in Figure 9

Cycle Time

(minutes/unit) Capacity

(units/hour) Capacity Utilization at Bottleneck Pacing

Task A 2 30 40%

Task B 4 15 80%

Task C 5 12 100%

Task D 3 20 60%

Clearly, making a process more efficient means decreasing idle times as much as possible. This requires redefining tasks, wherever possible, to balance the process—that is, to make cycle times as nearly equal as possible and capacity utilization at each task as high as possible. However, because many tasks are not easily divisible it is rarely possible to balance a process fully.

Returning to Figure 9, let’s say because demand is high and profits for this product are good, we decide to add a second worker to increase our capacity. If that worker is specialized to one task, it’s clear that the best plan would be to assign this fifth worker to Task C. Often, two workers assigned to a single task will work on successive products.k With two (equally competent) workers performing Task C, on average, two products will be produced every five minutes; the cycle time for Task C becomes two and a half

j Capacity determines maximum revenue. In practice, for a myriad of reasons, actual output will typically be less than capacity. The ratio of actual output to capacity is called capacity utilization. k The calculations here are the same as two workers working together on the same product (or customer), as shown in Interactive Illustration 2. In many cases, however, this is not feasible (or clumsy), particularly in service processes, so we will generally view multiple workers working on a product by themselves.

= = 1 1

capacity ,   cycle time cycle time capacity

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8007 | Core Reading: PROCESS ANALYSIS 14

minutes. The bottleneck would shift to Task B, with a task time of four minutes, and the system capacity would rise to 15 units per hour, a 25% increase. Whether the profits on 3 additional units would be greater than the hourly labor cost of an additional worker would be an important consideration.

We might instead assign a higher-skilled worker capable of doing both Task B and Task C alongside the specialists already there, as shown in Figure 10. Then for Tasks B and C together, three workers would process 3 units every nine minutes, so the task cycle time is three minutes.l Then Tasks B, C, and D become equal bottlenecks, the system cycle time drops to three minutes, and the capacity of the process jumps to 20 units per hour. Figure 10 Four-Step Process with Tasks B and C Combined

For the examples discussed above, capacity is determined by the maximum cycle time

for any of the tasks in the process. In reality, any resource used in a process can be a bottleneck and, thus, constrain output. If raw materials are sufficiently scarce, all tasks will have idle time; raw materials constrain output. In a restaurant, we often speak of seating capacity. On a busy night, the number of seats will constrain output, and thus be the bottleneck.

In general, we can improve performance at a bottleneck by adding resources, increasing capacity, or lowering task time. For example, a very busy pizzeria with a bottleneck at the oven could add resources by buying another oven, increase capacity by fitting more pizzas into the existing oven, or lower task time by baking the pizzas more quickly at higher heat.

In the foregoing discussion, we’ve been looking at simple sequential processes. Let’s now revisit the chair-making workshop to investigate bottlenecks, capacity, and cycle times for parallel processes. The process is diagrammed in Figure 11.

l This will be true independently of how we schedule the work.

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8007 | Core Reading: PROCESS ANALYSIS 15

Figure 11 Task Times for Making Chairs

For simplicity, let’s first assume that specialized workers work on each of the tasks,

never move from one task to another, and work eight-hour days. Consider the assembly task. It takes only one hour, but since it can’t commence until

all three components of the chair are available, it will have to wait, which means there is idle time. In particular, the difficult task of fashioning the back legs and chair-back unit takes two hours to complete. Thus, a finished back-legs-and-chair-back unit appears in component inventory once every two hours, so the assembler will have to wait an hour after assembling each chair for a full set of components to be ready for another assembly operation. (Note that the other workers can finish their components for the chair in less than two hours.)

The logic here is exactly the same as it was for a line-flow process. Because the system cycle time (the time between the completion of successive chairs) is two hours and the task time of the longest task is the bottleneck, only four chairs per day (eight hours/day divided by 2 hours/chair) can be produced.

Specialization of the workers makes this process very unbalanced and inefficient. Let’s now examine the impact of cross-training one worker. For example, if the worker who fashions the front legs could be cross-trained to help with the back-legs-and-chair- back unit, then the system cycle time would decrease, and the capacity of the process would increase. To illustrate this, assume that the front-leg maker (whom we will call Worker A) is trained to work on the first half of the two-hour bottleneck process (with Worker B, who did it alone before).

To keep things simple, assume that Worker A is just as proficient as Worker B on that part of the process. With two workers working on the first half of the task, it’s reasonable to assume that it could be completed in a half hour. Then Worker B would complete the second hour. In total, the task would be completed in one and a half hours.

Now, the fashion-seat step is balanced with the fashion-back-legs-and-chair-back- unit step, at one and a half hours. Worker A spends one and a half hours per chair (a half hour working with Worker B and an hour on the fashion-front-legs task). The capacity would increase from 4 chairs per day to 8/1.5 = 5⅓ chairs per day. Cross training one worker has increased capacity by 33%.m

As we have alluded to above, process performance is a matter of efficiency (how well a process turns its inputs into outputs) and effectiveness (how well a process delivers its

m Note that capacity is a rate, and need not be an integer. Cross training, here, allows the shop to make 16 chairs every three days versus only 12 chairs every three days.

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8007 | Core Reading: PROCESS ANALYSIS 16

customer promise). Our focus in this reading is on assessing process performance. Efficiency and effectiveness are the two broad categories of “performance.” We now delve into how we can measure these.

Capacity and bottleneck analysis are important because capacity limits output and output (as well as price) determines revenue, but neither capacity nor bottleneck analysis tells us much about other key measures of process performance. In particular, most operations managers are quite concerned with the efficiency of their processes—the cost of the inputs, and, often as important, how well these processes make use of those inputs. Let’s first consider labor, a crucial input. A process that delivers service to 100 customers per day and requires 20 employees is preferable to one that delivers the same service to the same number of customers utilizing 25 employees (with the same skills and being paid the same wage rate). Well-balanced processes with minimal idle time will make better use of labor than unbalanced processes.

With this in mind, we define labor utilization as useful time (namely, time actually working on a product or delivering a service) spent by workers as a percentage of the total time for which they are available (and being paid).n

Reconsider the following four-step process, shown again in Figure 12.

Figure 12 Four-Step Process with a Bottleneck

We had earlier concluded that the cycle time of this process is 5 minutes, and hourly

capacity is thus 12 units per hour. During that hour, Worker A worked on 12 units for 2 minutes each, or 24 minutes, but Worker A is available (and paid to work) for 60 minutes. Similarly, Worker B worked for 12 · 4 = 48 minutes; Worker C worked for 60 minutes; and Worker D worked for 36 minutes.

The labor utilization for the entire process is:

+ + + = =

24 48 60 36 minutes worked 168 70%

(60 minutes)(4 people) 240

Using earlier terminology and thinking of calculating utilization per cycle rather than per hour, we can write labor utilization of the process as:

n This is often called labor productivity, and is sometimes measured by the value of the output divided by the cost of the input.

2.4 Assessing Efficiency

+ + + = =

labor content per unit 2 4 5 3 70%

(process cycle time)(# of workers) (5)(4)

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8007 | Core Reading: PROCESS ANALYSIS 17

We need to be careful as to how we use the labor utilization calculation to make decisions. Some managers, thinking that efficiency is reflected in “workers being busy,” exhort their workers to increase their utilization by making more product. However, at non-bottleneck steps, greater labor utilization translates into more inventory, not more saleable product. Rather than increasing labor utilization itself, emphasis should be placed on breaking bottlenecks. Reducing a bottleneck’s time will automatically raise labor utilization, but in a useful way, namely one that results in more saleable product and increased revenues.

Labor, however, is only one of many important inputs. Consider capital (i.e., funds invested in machines/equipment). If the four operations above were fully automated using four separate machines, then the same calculations above would give us machine utilization, an indication of how efficiently capital was being employed. If machine downtime entered the picture, as it usually does with real machines, then machine utilization would drop. Machine utilization is a particularly important performance measure in capital-intensive processes (such as steel production, oil refineries, or semiconductor manufacturing).

Or, let’s consider material utilization. If, in the processing of a valuable raw material (such as lithium for batteries), only 90% of the material processed ended up in the finished product, we would say that the material utilization for that material was 90%. For example, in many agricultural processing operations, not all harvested product ends up in finished goods.

In today’s world, operations are particularly concerned with energy utilization. It is not uncommon to find operations that consume energy to make finished product and then throw that energy away—for example, in the form of hot wastewater.

As we have highlighted earlier, delivering the customer promise is also an essential goal of any operating system and its processes. We refer to this ability as effectiveness. There are many aspects of effectiveness that operating managers will want to observe and improve. Here, we will highlight two aspects of effectiveness that virtually all firms pay attention to—quality and speed. For a more complete discussion, refer to Core Reading: Managing Quality with Process Control (HBP No. 8020) and Core Reading: Managing Quality (HBP No. 8025).

Quality Quality is the ability of a product or service to meet or exceed customers’ expectations.2 These expectations, of course, will be influenced by the customer promise. Consider the two hotel chains Four Seasons and EconoLodge. Four Seasons provides a high-end luxury customer experience. In contrast, EconoLodge provides limited amenities but at a much lower price than Four Seasons. These businesses have very different customer promises, and one would expect to find differences in how they achieve quality.

Types of Quality We define quality in two different ways:

2.5 Assessing Effectiveness

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8007 | Core Reading: PROCESS ANALYSIS 18

• Performance quality • Conformance quality

When we say that a Four Seasons hotel is a “quality” resort, we are referring to performance quality. When we say that the BMW 7-series is “the ultimate driving machine,” we are also referring to performance quality. When we call a bicycle a “quality bicycle,” we are usually referring to the use of lightweight alloys and high-performance components. A firm that competes on performance quality produces goods and services that deliver a high level of some set of performance dimensions. For cars, it could be superior handling, cornering, and braking. For hotels, it might be a superior level of luxury, comfort, and spa services. In higher education, it might be based on the faculty’s high level of research output and the quality of its teaching. In software, it might be additional features, a high level of functionality, or processing speed.

In contrast, a product or service with high conformance quality delivers on its specifications, whether that means a high level of performance or not. In software, conformance quality is more about the absence of bugs and simply meeting whatever level of functionality or speed is specified in planning documentation. An EconoLodge with high conformance quality has rooms and cleaning services that conform to specifications and only basic amenities, which also conform to specifications. When we talk about quality in everyday life, we typically mean performance quality, but conformance quality is critical in operations.

Performance quality is primarily the realm of designers and product developers. Operations is responsible for developing processes that meet design specifications. A product that does not meet its design specifications is typically called a defect; depending on the process, it will be either reworked or scrapped (which will be indicated on a process flow diagram). The yield of the process is the number of good products expressed as a percentage of the starting total. The concept of defect rates may also be applied to services with quantifiable design specifications. However, from the customer’s perspective, a suboptimal service experience may be more detrimental to the company’s reputation than a product defect, which can be caught before the product reaches the customer. The job of Quality Assurance in a manufacturing process is to minimize the number of defects that occur and ensure that defective products are never shipped to the customer. In a service context, it’s only about the former.

The cost-quality tradeoff is often debated. At its heart, it depends on whether performance quality or conformance quality is being discussed. Often this isn’t clarified, and confusion reigns. Typically, creating high performance quality is costly, because of the expensive materials and components used, the skill (and consequent cost) of the service staff, the amenities provided, and so on. In contrast, assuring high conformance quality usually cuts costs, because it cuts rework costs; it saves on materials that would otherwise need to be scrapped, and it reduces returns and warranty costs.

Speed A second aspect of effectiveness that is important to many firms is how quickly (and reliably) they can produce and deliver a product to customers, or, in a service context, how quickly a customer can be served. In analyzing processes, whether speed is an important consideration will depend on a number of factors. An elegant, expensive restaurant may see a long, leisurely meal as a benefit, whereas fast-food restaurants, almost by definition, are very concerned with how quickly customers get their food. For physical products, the order-to-delivery lead time (the time between the placement of an

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8007 | Core Reading: PROCESS ANALYSIS 19

order by a customer and the delivery of that order) often involves myriad players in a long supply chain. A toothpaste manufacturer will be concerned with how long the product is in the supply chain, but the time it takes to produce the product is less important. The set of interactions that speed up response time in a supply chain is taken up in Core Reading: Supply Chain Management (HBP No. 8031) and Core Reading: Strategic Sourcing (HBP No. 8037). For the purpose of process analysis, we will focus on what takes place in the manufacturing or service process itself.

We define throughput time (TPT) as the start-to-finish time of a process, namely the total elapsed time between the time when a customer walks in the door and the time when the customer leaves, or the time from when the raw materials and components begin to be gathered and the time the finished product is completed.o We calculate two different versions of throughput time:

• Minimum (or rush order) throughput time • Average throughput time

Minimum throughput time is particularly important for manufacturing firms that accept customized rush orders (for example, “Make five units of this specialized electronic device so that our product development engineers can test those prototypes; we need it right away”) or want to speed VIP customers through a service process (such as, “Our platinum customers can go to the head of the line”). For a sequential process with a single specialized worker at each task, minimum TPT equals labor content. Consider the process from earlier, shown again in Figure 13.

Figure 13 Four-Step Process with a Bottleneck

A rush-order product will take two minutes at Task A. Then Worker B will put away

whatever she had been processing and work on the rush product, and so on. The rush- order TPT is 2+4+5+3 = 14 minutes.

Parallel processes are a bit more complicated. For the artisan woodworking shop, the full set of components will arrive in the components inventory buffer, ready to be assembled, once every 2 hours. Thus, the minimum TPT of all woodworking is 2 hours. From the time that the wood is selected and woodworking is begun to the time that a finished set of components is available for assembly is 2 hours. The minimum TPT for this process is 2 hours (woodworking) + 1 hour (assembly) + ½ hour (staining), or 3½ hours in total.

Note that minimum TPT will only be achieved by firms that promise rush orders (or, for service firms, VIP service), and this will require that a rush order (or VIP customer) be moved to the head of the line, ahead of earlier products or customers.

This kind of simple analysis is neither possible nor useful for most processes that have many tasks and WIP inventory buffers (or customer waiting lines) and in which products (or customers) are processed in a first-in-first-out sequence. Instead, operating managers want to know, “What is the average throughput time?” This is critical for many organizations because it influences promised delivery time, or estimated time of service. These are often critical parts of the customer promise. o In manufacturing contexts, this is often called the manufacturing lead time.

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8007 | Core Reading: PROCESS ANALYSIS 20

To better understand average TPT, imagine waiting in line for a popular movie that has just been released to theaters. The teller takes, on average, 30 seconds to sell a ticket (for simplicity, assume that it takes twice as long to sell two tickets to a couple). The movie starts at 7:12 p.m. You’ve heard from your friends that the line is usually long—on average 25 people. When do you need to get there to enter the theater by 7:10 p.m.?

The 25 people in line will take 12½ minutes to process (25 people · ½ minute/person), and then you’ll need another 30 seconds to buy your ticket, so from the time you arrive until the time you enter, it will take 13 minutes. Thus, you should arrive by 6:57. See the Core Reading: Managing Queues (HBP No. 8047) for further information about analyzing the performance of queues.

Flexibility A third measure of effectiveness and, for some processes a critical source of competitiveness, is flexibility. David Upton defined flexibility as “the ability to change or react with little penalty in time, effort, cost or performance.” This is a very abstract definition, and, indeed, there are many forms of flexibility. Consider the following questions:3

• Dimensions: What needs to be flexible? What needs to be adaptable? Do we need our process to quickly adapt to different raw material specifications, different worker skills, or different customer needs?

• Time Horizon: What does “little penalty in time” mean? Minutes? Days? Weeks? Years?

• Elements: Which element(s) of flexibility are most important to us? Which of the following are we trying to manage or improve? • Range—the breadth of products we can manufacture or the range of

customer needs we can satisfy. • Uniformity—consistency of quality or speed across the entire range. • Mobility—the speed with which we can change from one

task/product/customer to another.

Safety While customer promise of a business rarely explicitly involves employee safety, most effective operating managers would rank it as their number-one process metric. In 2011, U.S. Secretary of Labor Hilda Solis made a simple statement that underscores the importance that worker safety must play in any operation’s catalog of performance metrics:

Every day in America, 12 people go to work and never come home. Every year in America, 3.3 million people suffer a workplace injury from which they may never recover. These are preventable tragedies that disable our workers, devastate our families, and damage our economy.4

In 2010, the federal Office of Safety and Health Administration (OSHA) made more than 40,000 inspection visits. Despite these efforts, 4,547 workers were killed on the job in 2011.5

Responsible operating managers have in place well-publicized safety procedures, and they train employees in their use. A prominent sign in many well-run factories announces the number of days since the last lost-work-time injury, and operating managers track

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8007 | Core Reading: PROCESS ANALYSIS 21

and manage a number of performance measures, including workplace injuries (typically injuries requiring some medical interventions) per 200,000 hours of work (100 people working for a year), workman’s compensation costs, and various metrics for OSHA compliance. Unfortunately, in too many workplaces around the world, operations managers allow unsafe work practices to persist, subordinating safety to efficiency.

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8007 | Core Reading: PROCESS ANALYSIS 22

3 KEY TERMS Blocked Task: A task that is idled because the next task is still in process on another unit, and thus the blocked task has no space for output.

Bottleneck: The task or resource that limits the capacity of a process. The bottleneck can be any resources (e.g., raw materials, labor, machinery, energy). If the bottleneck is a task, it will be the task performed by the workstation(s) with the longest cycle time.

Capacity Utilization: The ratio of actual output to capacity.

Cycle Time: The average time between the completion of successive units of product or, for a service process, the average time between the departures of successive customers.

Labor Content: The total time that is spent by the firm’s employees on the product or service.

Labor Utilization: Productive time spent by workers as a percentage of total time for which they are available.

Lead Time: Usually the elapsed time between when an order is placed and when it is delivered.

Machine Utilization: Percentage of time that a machine is running and productive.

Parallel Process: Tasks that can be performed at the same time. Outputs from parallel processes are typically integrated into one product at some point later in the process flow.

Process Flow Diagram (also called a Process Map): A diagram that shows the sequence in which tasks take place as well as the flow of products, customers, and/or information through the tasks. The scale and scope of process flow diagrams are determined by the management issue they are intended to elucidate. Some show task flows at a high level and across separate departments; others show every detail of a small, complicated process.

Sequential Process: A set of tasks that must be performed in sequence, one after another. If a task cannot be started until the previous task is complete, those tasks form a sequential process.

Starved Task: A task that is idled because it lacks sufficient inputs.

Steady State: When an operating system starts up, initial conditions affect the status of process flows. After a while, when the system’s status no longer depends on initial conditions, it reaches steady state.

Throughput Time (TPT): The time it takes for one unit to complete a process, from beginning to end.

Work in Process (WIP): The number of units or partially completed units in the process at any point in time. WIP includes units currently being worked on as well as those in WIP inventory. WIP inventory is separate from raw materials inventory (RMI) and finished goods inventory (FGI). In a service, WIP can be customers, either receiving service or waiting to be served.

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8007 | Core Reading: PROCESS ANALYSIS 23

4 FOR FURTHER READING

The Goal: A Process of Ongoing Improvement, by Eliyahu M. Goldratt (North River Press) is an entertaining novel about production flow at a factory.

5 ENDNOTES 1 For an interesting view of a process viewpoint in health care delivery, see Richard Bohmer, Designing Care: Aligning the Nature and Management of Health Care (Boston: Harvard Business Press, 2009). 2 See David Garvin, “Competing on the Eight Dimensions of Quality,” Harvard Business Review 65 (November–December 1987): 101–109. 3 This section is taken from David Upton’s typology: David M. Upton, “The Management of Manufacturing Flexibility,” California Management Review 36, no. 2 (Winter 1994): 72–89. 4 http://www.osha.gov/oshstats/commonstats.html, accessed March 26, 2012. 5 Ibid.

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8007 | Core Reading: PROCESS ANALYSIS 24

6 INDEX Page numbers followed by f refer to figures. Page numbers followed by i refer to interactive illustrations. Page numbers followed by t refer to tables. automated process in batch processing, 3, 6, 17

average throughput time (TPT), 19–20

batch flow, 7, 7f

batch processes, 8

batch size, 8

blocked task (blocking), 11, 11f, 12i, 22

bottleneck pacing, 11

bottlenecks, 9–11, 9f, 10f, 11f, 12, 13t, 14, 14t, 15, 16, 16f, 17, 19f, 22

capacity, 9

capacity assessment, 4, 9–16

capacity utilization, 13, 13t, 22

capital, and machine utilization, 17

changeover times, 8. See also setup times in batch processing

conformance quality, 18

conventions in process flow diagrams, 5

cost, tradeoff between quality and, 18

cycle time, 11–16, 12i, 13t, 14f, 15f, 22

customer promise, 3–4, 16, 17, 20

decision node, 6

defect, 18

design capacity, 9

design specifications, 18

effectiveness, 7, 15–16, 17

effectiveness assessment, 4, 17–19

efficiency, 7, 13, 15, 16

efficiency assessment, 4, 16–17, 16f

energy utilization, 17

flexibility, 20

inputs, 3

labor content, 8, 16, 19, 22

labor cost, 8, 14

labor utilization, 16–17, 22

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8007 | Core Reading: PROCESS ANALYSIS 25

lead time, 18–19, 22

machine utilization, 17, 22

manual process in batch processing, 6, 9, 9f, 12, 12i

mapping of processes. See process flow diagrams

material utilization, 17

minimum throughput time (TPT), 19

operating processes, 3–4

operating system, 3

operations management, 3

output, 3, 9, 11, 13, 14, 16. See also capacity assessment

parallel process, 6–7, 6f, 7f, 19, 22

performance,14, 15, 17. See also process performance

performance quality, 18

processes, 3–4

process flow, 5, 6f

process flow diagrams (process maps), 5–8, 5f, 6f, 7f, 22

process performance, 4, 7, 13, 15–16

process yield, 18

quality, 17–18

rated capacity, 9

run time in batch processing, 8

rush orders, 19

safety, 20–21

sequential process, 5, 5f, 6, 14, 19, 22

setup times in batch processing, 8

size of batch, 8

specialization, 9, 13, 15

specifications, 18

speed, 18–20

stakeholder value, 4

standard time, 7–8

starved task (starving), 11, 11f, 12i, 22

steady state, 5, 22

strategic positioning, 3

supply chain, 19

system capacity, 13

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8007 | Core Reading: PROCESS ANALYSIS 26

task time, 7–8, 12, 14, 15, 15f

throughput time (TPT), 19–20, 19f, 22

value for stakeholders, 4

wage rate, 8

waiting lines, 19

work in process (WIP), 9, 11, 22

work in process (WIP) buffers, 6, 19

yield, 18

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