Operations Management

Process Analysis I

Yuanjie He

What is a process? • From customer point of view

– Visit your primary care doctor

– Go to www.amazon.com to purchase a book

– Buy lunch from McDonalds

• From the company’s POV? - resources

Describe processes • Using flow chart

– For example, visiting doctor’s office

• Use Gantt chart

R N D

Describe processes • Using flow chart

– For example, visiting doctor’s office

• Use Gantt chart

Register

Nurse

Doctor

Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Process Analysis II - three measures of process and

Little’s Law

Yuanjie He

Describe processes • Using flow chart

– For example, visiting doctor’s office

• Use Gantt chart

R N D

Describe processes • Using flow chart

– For example, visiting doctor’s office

• Use Gantt chart

Register

Nurse

Doctor

Time 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Three measures of process

• Flow unit

• If thinking the process as a black box, there are three essentials to know about a process

– Flow time: the time it takes a flow unit to get through the process

– Flow rate: the rate at which the process is delivering output (measured in flow units/unit of time) • The maximum flow rate for a process is called capacity

– Work in progress (WIP) / Inventory : number of flow units contained within the process

Process examples U.S. Immigration Champagne

Industry MBA program Large PC

Manufacturer

Flow unit Applications for immigration benefit

Bottle of champagne

MBA student Computer

Flow rate Approved or rejected visa cases: 6.3 mil per year

260 million bottles per year

600 students per year

5000 units per day

Flow time Average processing time: 7.6 months

Average time in cellar: 3.46 years

2 years 10 days

WIP (inventory) Pending cases: 4 mil cases

900 million bottles

1200 students 50,000 computers

To find out these three important measures for a process

Number Patient Name

Arrival Time

Departure Time Flow time

1 7:35 8:50 1:15

2 7:45 10:05 2:20

3 8:10 10:10 2:00

4 9:30 11:15 1:45

5 10:15 10:30 0:15

6 10:30 13:35 3:05

7 11:05 13:15 2:10

8 12:35 15:05 2:30

9 14:30 18:10 3:40

10 14:35 15:45 1:10

11 14:40 17:20 2:40

Little’s law • Average inventory = Average flow rate x Average flow time

• Always hold

– Sequence doesn’t matter!

– even with randomness!

Exercises • (Airline) Consider the baggage check-in of a small airline. Check-in data

indicate that from 9am to 10am , 255 passengers checked in. moreover, based on counting the number of passengers waiting in line, airport management found that the average number of passengers waiting for check-in was 35. how long did the average passenger have to wait in line.

Exercises • Butternut is a ski resort in Massachusetts. One of their triple chair lifts

unloads 1296 skiers per hour at the top of the slope. (A triple chair lift can carry three passengers per chair.) The ride from the bottom to the top takes 5 minutes. How many skiers are riding on the lift at any one time?

Process Analysis III – Little’s Law application in inventory

Yuanjie He

Little’s law • Average inventory = Average flow rate x Average flow time

• Always hold

– Sequence doesn’t matter!

– even with randomness!

Little’s law applications • Study of the financial statements of companies, you can find out:

– Flow rate – Inventory (accountants view vs operations view) – Flow time = Inventory / flow rate – Inventory turns = 1/ Flow time

• For example, Best Buy v.s. Radio Shack – Gross margin vs inventory turns

Little’s law applications • Inventory holding cost: becoming obsolete (example?), perishable,

shrinkage, storage/overhead, and other reasons

• Per-unit inventory costs = Annual inventory costs / annual inventory turns

– For example, consider a retailer of consumer electronics who has annual inventory cost of 30% (why?). Assuming that the retailer turns its inventory about four times per year.

– Per unit inventory cost in percentage

– Consider a TV this retailer sells with price tag $300 and procured by the retailer with $200, its per unit inventory cost

Inventory • Five reason for holding inventory

– Flow time – pipeline inventory

– Seasonal demand – seasonal inventory

– Economies of scales – cycle inventory

– Separation of steps in a process – decoupling inventory/buff

– Stochastic demand – safety inventory

Exercises • (Dell) what percentage of cost of a Dell computer reflects inventory costs?

Assume Dell’s year inventory cost is 40% to account for the cost of capital for financing the inventory, the warehouse space, and the cost of obsolescence. In other words, dell incurs a cost of $40 for a $100 component that is in the company’s inventory for one entire year. In 2001, Dell’s 10-k reports showed that the company had $400 million in inventory and COGS of $26,442 million.

Exercises • Assuming Trader Bob’s annual inventory holding costs are 20% (an item

that cost $10 to purchase would cost $2 to hold in inventory for one year), what is the inventory cost of an item which sells for $20 and costs Trader Bob $12 to buy? Assume that this item has inventory turns of 25 per year.