Operations Management: Chapter 3&4 - Process Analysis

Value-adding activities

those activities that *increase the economic value of a flow unit from the perspective of the customer* (that is the customer values such activities, and is willing to pay for them)

Takt Time

the reciprocal of throughput = 1/R = the maximal time that each process resource can devote to a flow unit to keep up with the demand. AKA sets the pace of the process to stay synchronized with the demand.

The flow time of a given activity

the time required by an average flow unit to flow through the activity

Flow time efficiency

*= Theoretical flow time/Average flow time = %* It's the ratio between theoretical flow time and the actual flow time of a given process.

How to reduce waiting time in a process? (4)

(i) Managing the effects of congestion/bottle-neck (ii) Reducing batch sizes (iii) Reducing safety buffers (iv) Synchronizing flows

5 basic approaches to reducing flow time i.e. shortening a critical path (reduce activity time)

(i) *Restructuring*: Move work content off the critical path ("work in parallel") (ii) *Elimination*: Eliminate non-value-adding activities ("work smarter") (iii) *Quality management system*: Reduce the amount of rework ("do it right the first time") (iv) *Prioritization*: Modify the product mix ("do the quickest things first") (v) *Faster*: Increase the speed of operation ("work faster")

2 ways to measure Average flow time (T)

*Direct* 1. Observe your process for some time 2. Take samples 3. Measure flow time 4. Estimate average values and variances. *Indirect* 1. Measure flow rate (R) 2. Measure inventory (I) 3. Apply Little's Law: T = I / R

Effective Capacity

*Effective capacity of a resource unit* = the maximum flow rate, if it were fully utilized during its net availability (if there were no periods of resource idleness). *Effective capacity of a resource pool* = the sum of the effective capacities of all the resource units in that pool - Since all resource pools are required to process each flow unit, no process can produce output any faster than its bottleneck—the "slowest" resource pool of the process. *Thus, we define the effective capacity of a process as the effective capacity of the bottleneck.*

Average Flow Time (T) - What is it? - Why is it useful?

*Flow time = Theoretical flow time + Waiting time* Flow time is the total time spent by a flow unit within the process boundaries. - 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 Must equal the flow time of the *critical path*, since a flow unit can exit the process only after all the activities along all the paths are completed, and critical activities take the longest - so other activities must wait for the critical path to be completed in order for the flow unit to exit the process

Ways to increase capacity (3)

*Key action = optimize only bottleneck management* 1. *Decrease the work content of bottleneck activities* a/ Never unnecessarily idle ("starve") bottlenecks = eliminate bottleneck waits: - Reduce variability if it leads to bottleneck waiting - Synchronize flows to and from the bottleneck: sync when resources start an activity b/ Work smarter: - Reduce & externalize setups/changeover times, streamline - Eliminate non-value added work from bottlenecks c/ Do it right the first time: eliminate rework/corrections d/ Work faster e/ Increase availability of bottleneck resources 2. *Move work content from bottlenecks to non-bottlenecks* a/ Create flexibility to offload tasks originally assigned to bottleneck to non-critical resource or to third party - Can we offload tasks to cross-trained staff members? 3. *Increase Net Availability of Process* - increase unit capacity and # of units a/ Work longer: increase scheduled availability b/ Increase scale of process: invest in more human and capital resources c/ Eliminate unscheduled downtimes/breakdowns - Preventive maintenance, backups, etc.

Lower flow times (T) imply 4 things:

1. Better customer service through faster delivery time. 2. Lower inventory lever (Little's law) - If flow rate is demand of a product, every time you reduce time of a process, you'll also reduce the inventory that you need 3. Faster time to market. 4. Better understanding of product life cycle. You learn more about your market by having live and updated info.

3 key operational measures that characterize the flow of units through a Process Flow:

1. Flow time - On average, how much time does a typical flow unit spend within the process boundaries? *AVERAGE FLOW TIME (T)* 2. Flow rate - On average, how many flow units pass through the process per unit of time? *THROUGHPUT (R)* 3. Inventory - On average, how many flow units are within the process boundaries at any point in time? *AVERAGE INVENTORY (I)*

Why is Process flow time a valuable measure of process performance? (6)

1. Flow time affects delivery-response time - customers value this - The less time customers must wait for a good or a service, the greater the value for the customer - the shorter the delivery response time, the *more quickly a firm can collect revenues*, thus improving its financial performance 2. Short flow times in the production and delivery process *reduce the inventory (by Little's law) and associated costs*. 3. A shorter flow time in a firm's new product development process enables the firm to *more quickly introduce new products to the market* --> competitive advantage! - Also enables the firm to bring *more generations of a product to market* within a given amount of time 4. In markets featuring short product life cycles, shorter manufacturing-process flow times allow firms to *delay production closer to the time of sale* and thus gain valuable market information, avoid product obsolescence, and minimize the inventory required. 5. Short flow times result in *fast feedback and correction of quality problems* 6. Flow time is an integrative measure of overall process performance—short flow time frequently requires a *high level of overall operational excellence*.

3 Questions to assess when a change in the process is an Improvement:

1. Has true process throughput (as measured by sales) risen without any increase in inventories or process cost? 2. Has process inventory declined without any reduction in throughput or increase in process cost? 3. Has process cost declined without any reduction in throughput or increase in inventory? A positive answer to all these means an increase in Return on Total Assets

FLOW TIME, FLOW RATE, AND INVENTORY DYNAMICS (3)

1. If instantaneous inflow rate Ri(t) > instantaneous outflow rate Ro(t), then inventory is accumulated at a rate change in R(t) > 0. 2. If instantaneous inflow rate Ri(t) = instantaneous outflow rate Ro(t), then inventory remains unchanged. 3. If instantaneous inflow rate Ri(t) < instantaneous outflow rate Ro(t), then inventory is depleted at a rate change in R(t) < 0.

2 requirements for Little's Law to work

1. Inventory, throughput and flow time must represent *long-term averages of a stable system* 2. Inventory, throughput and flow time must be *measured in consistent units*.

Determining flow time of a given process using Little's Law (4 steps)

1. Measure the throughput, R 2. Measure the average inventory, I 3. Compute average flow time T by using Little's law: I = R x T

Determining flow time of a given process using Direct Observation (4 steps)

1. Observe the process over a specified, extended period of time. 2. Select a random sample of flow units over the specified period. 3. Measure the flow time, from entry to exit, of each flow unit in the sample. 4. Compute the average of the flow times measured.

What happens when you reduce working capital requirements? (4)

1. Reduces the firm's interest expense 2. Makes extra cash available for investment in other profitable ventures. 3. Reduces flow time 4. Improves responsiveness

How to calculate slacks?

1. Start at the Beginning and move FORWARD. For each activity, compute the Earliest Start Time, EST and the Earliest Finishing Time, EFT. 2. Start at the end and move BACKWARDS. For each activity, compute the Latest Start Time, LST and the Latest Finishing Time, LFT. *Slack = LST - EST or Slack = LFT - EFT* LST = LFT - t (activity time or work content) LFT = min {LST immediate successor} EST = max {EFT immediate predecessor} EFT = EST + t

Process Flow: Definition

3 key internal process performance measures (i.e. Flow time, Flow rate, Inventory) that together capture the essence of process flow. They directly affect the 4 process qualities: process cost, response time, process flexibility (or lack thereof), and process quality.

What's the theoretical capacity of a resource unit?

= (1/Unit load Ti) x (load batch) x (scheduled availability) = the resource unit's maximum sustainable flow rate through the resource unit, if it were to be utilized without any waste. Since all resource pools are required to process a flow unit, no process can produce output any faster than its bottleneck. As such, the theoretical capacity of a process is defined as the theoretical capacity of the theoretical bottleneck.

Effective capacity of a resource pool

= (total # of resources in pool/total unit load) x [load batch] x [net availability]

What is the Work content of an activity?

= Activity time x Number of visits at that activity Visits = on average, how many times do you have to reprocess this activity? - Minimum number of visits is 1 It measures the total amount of time required to perform an activity during the transformation of a flow unit.

Theoretical Capacity: with Effective capacity and Capacity waste factor

= Effective Capacity / (1 - CWF)

Formula for the Instantaneous Inventory Accumulation (buildup) rate

= Instantaneous inflow rate Ri(t) - Instantaneous outflow rate Ro(t) OR Change in R(t) = Ri(t) - Ro(t)

Theoretical capacity of a resource pool

= Resource pool/Unit load = Ci/Ti

Capacity utilization of resource pool, p

= Throughput (R) / Theoretical capacity of resource pool, p

Theoretical flow time

= Time required to process one flow unit. It does not include waiting time. = the sum of the activity times of the activities that constitute the critical path.

Effective capacity of a resource unit

= [ 1 / total unit load] x [load batch] x [net availability]

Slack

= the amount of time that a task in a project network can be delayed without causing a delay to subsequent tasks *Slack = LST - EST or Slack = LFT - EFT*

Unit load of a resource unit (Ti)

= the average amount of time required by the resource unit to process one flow unit, given the way the resource is utilized by the process. It is measured in units of time per flow unit

Average Flow Rate (R) / Throughput

= the average number of flow units that flow through a specific point in the process per unit of time (t) *the average rate at which the process produces and delivers output* In a stable process, Inflow rate (Ri(t)) = Outflow rate (Ro(t)) Flow rate is either the *minimum value of the inflow rate* (how many orders are placed) OR the *capacity* (maximum you can produce per time period) Ideally, we would like process throughput rate to match the rate of customer demand. We obtain throughput by adding together the cost of inputs and any labor and overhead (L&OH) incurred in each department

Load batching

= the case when resources (batch resources) can process several flow units simultaneously For example: One oven can bake several pieces of bread at the same time. Each time a try with several pieces of bread is introduced into the oven, we call it a batch.

The Critical Path

= the longest path in the process flowchart Activities that lie on a critical path are called *critical activities* and have *zero slack* Flow time is calculated using the critical path, as the whole process can't be completed until the flow unit has gone through the critical path - A delay in completing any critical activity results directly in a corresponding delay in processing the flow unit Requires significant management of this path

Inventory Turns (Turnover Ratio)

= the ratio of throughput to average inventory *= R/I* Shows *how many times the inventory is sold and replaced during a specific period*. The cost of goods sold during a given period is nothing other than throughput, expressed in monetary units. Using Little's Law, Inventory turns also *= 1/T* Since R/I = R/(RxT) = 1/T It is the reciprocal of average flow time and thus is a direct operational measure -> a company with *high inventory turns has small flow times* and thus is quicker at turning its inputs into sold outputs. To derive a meaningful turnover ratio, we must specify the flow unit and measure inventory and throughput in the same units. - Inventory is measured in cost dollars

Resource pool (Ci)

A collection of interchangeable resources that can perform an identical set of activities. For example: A call center with many call-agents

Critical Path Method (CPM)

All about identifying the time-longest path in the process flow chart.

How does an improvement in the 3 operational measures affect financial measures?

An improvement in the three operational measures leads to an improvement in long-term financial measures, such as net present value and return on investment.

Time Based Competition

Concept that *time is a resource* and a firm that makes better use of time (in responding to the changing market situations and other environmental conditions) acquires a *competitive advantage*. This reduces complexity and rework and increased transparency, allowing businesses to *break the tradeoff between cost and quality*.

A buffer

Designated locations within the process for the accumulation of inventory Waiting area - *no transformation* here, waiting to move into activity typically represented as triangles in a flowchart

Resource availability loss AKA Capacity Waste Factor (CWF)

Difference between the scheduled availability and the net availability of a resource unit. It represents a loss of resource unit capacity and thus of process capacity.

Resource Unit

Each unit in a resource pool For example: One call-agent

Shortening critical path: Elimination

Eliminate non-value-adding activities ("work smarter") It leaves the network structure of the process as is, but reduces the total amount of work required for activities along the critical path. Can either: 1. Eliminate Non-value-adding work that doesn't support the current process 2. Redesign the process so that we can eliminate non-value-adding work that supports the current process. e.g. a process that is full of defectives may require a sorting station to separate the defective from the good units. The sorting activity is a non-value-adding activity, but is necessary given the process. However, if the process capability is increased so that no defectives are produced, the sorting activity becomes unnecessary, and, therefore, one that could be eliminated.

Effect of Product mix on the effective capacity

Firms often produce several products simultaneously. Since various products utilize resources at different rates, the effective capacity depends on the products produced and their proportions in the mix. Thus, we can represent the overall flow of the various products by constructing an (artificial) flow unit which represents the entire mix of the various products. i.e. unit load of the product mix

How is Flow Time an indicator of financial performance?

Flow time measures how long it takes to transform orders and invested cash into products. A faster flow time means higher inventory turns and relatively lower working capital requirements.

Little's Law

For a stable process, Little's Law shows the fundamental relationship between these 3 performance measures: *Average Inventory (I) = Throughput (R) x Average Flow Time (T)* 1. After the marked flow unit enters the process boundaries, it spends T time units before departing. 2. During this time, new flow units enter the process at rate R. Thus, during the time T that our marked flow unit spends in the system, R x T new flow units arrive. 3. Thus, at the time our marked flow unit exits the system, the inventory is R x T. 4. Because our marked flow unit was chosen at random and because the process is stable, the average inventory within process boundaries that a randomly picked flow unit sees, I, must be the same as R x T.

Crash Cost per Time Period

How much it'll cost you to accelerate an activity by a time period Calculate the slope of the CC x number of time periods you want to accelerate it by = (Crash cost - Normal cost) / (Normal time - Crash time)

Working capital

In accounting = current assets - current liabilities Gives investors an idea of the company's underlying operational efficiency. - Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital.

How is Inventory an indicator of financial performance?

Inventory is a measure of tied-up capital (for manufacturing) or customers who are waiting (for services). For a manufacturing firm, a decrease in inventory indicates a drop in working capital requirements.

Inventory (I) What is it? Why is it useful? (2)

Inventory is the total number of flow units present within the process boundaries at time, t. = Flow units that have entered process boundaries, but have not exited Useful because: 1. Can use inventory to identify the working capital requirements. 2. Inventory is like money that is tied up: *A reduction in inventory reduces working capital requirements* - When the number of flow units inside the process increases, it is because the inflow rate has exceeded the outflow rate.

Net availability of a resource

It is the actual time during which it is available for processing flow units.

Shortening critical path: Prioritization

Modify the product mix ("do the quickest things first") It gives priority to flow units that can be processed faster—to the extent allowed by the market --> will reduce overall flow time of the process

Shortening critical path: Restructuring

Move work content off the critical path ("work in parallel") It moves work off the critical path and into paths that do not affect process flow time --> means redesigning the process so that critical activities are performed in parallel rather than sequentially This task can be accomplished in 1 of 2 ways: 1. Move work off the critical path to a *noncritical activity*. 2. Move work off the critical path to the *"outer loop" (pre- or post processing)* --> performing them either before the countdown for the process starts (e.g. premeeting "homework" AKA fill out details prior to coming) or after it ends, as defined by the process boundary

What is a stable process?

One in which, in the long run, the average inflow rate is the same as the average outflow rate.

Shortening critical path: Quality management system

Reduce the amount of rework ("do it right the first time") Depends on setting a robust quality management system. Process-improvement techniques include: - Statistical process control - Design for manufacturability - Process foolproofing - Workforce training

Overall, what's the best way to reduce the flow time of a process?

Shorten the length of every critical path.

Scheduled availability

The amount of time that a resource is scheduled for operation For example: eight hours per day; five days per week; etc.

Cash-to-cash cycle

The company wants to determine how long it takes for a cost dollar to be converted into recovered revenue.

What does the capacity of a system depend on?

The level of resources deployed by the system and on the effectiveness at which these resources are utilized

How is Throughput an indicator of financial performance? (2)

Throughput measures the rate at which the output of the process is being sold. 1. An increase in throughput indicates increased revenues and also increased profits if the product has positive margin. 2. A higher throughput means a *smaller takt time* and thus less available time for each resource to process a flow unit and keep up with demand.

How to reduce cash-to-cash cycle?

To reduce total time, either we *speed up time in manufacturing facility*, or *speed up receivables* (time it takes for customers to pay you)

Instantaneous flow rate ( R(t) )

When we consider the flow rate at a specific point in time t, we call it the *instantaneous flow rate* and denote it by *R(t)*.

Shortening critical path: Faster

Working at a faster rate - Increase the speed of operation Can do this by: 1. Acquiring faster equipment 2. Increasing allocated resources 3. Offering incentives for faster work. Such steps often require either financial investment in faster equipment or modified incentives for labor resources

A process flowchart

a graphical representation of the network structure of the process

Non-value-adding activities

activities that do not directly increase the value of a flow unit. e.g. setting up machines, sorting, storing, counting, filling out forms These activities come in 2 types: (i) Non-value-adding work that is necessary to support the current process (ii) Non-value-adding work that does not.

Unit load of the product mix

averaging the unit loads of the individual products, using the weights of the mix: = W1 T1 + W2 T2 + ... Wi: percentage contribution of product i Ti: average unit load of resource i