MSIN0095: Operations Analytics
Class 1: Introduction to OM and Process Analysis I
» OM as Managing Transformation Processes
» Operations Strategy Meets Corporate Strategy
Class 2: Process Analysis I
» Introduction to Process Analysis I, Utilization,
Little’s Law
Learning Objectives: Class 2
▪ Introduction to Process Analysis I
▪ Utilization and Bottleneck
▪ Little’s Law: Inventory, Throughput and Time
What is a process?
Inputs Outputs
Raw material, Transformation
Goods,
Customers Process Served customers
3
What is a process?
Transformation
Inputs Transformation Outputs
Process
Raw material, Process Goods,
Customers Served Customers
Resources
Labor & Capital
Resources
Labor, Material & Capital
4
Examples of Processes
Organization Inputs Process Outputs
Auto Factory
Restaurant
MSIN0095
Note: The process depends on the perspective you take
5
Basic Process Measures
Output rate/
Input rate Process: Serving customers Throughput rate
[units/hr] [units/hr]
Inventory [units]
Input: Output:
Hungry Flow Time [hrs]
Satisfied
customers customers
Flow time is time a unit takes from entering to leaving the process
Cycle time is the time between consecutive units leaving process
Capacity is the maximum output rate when working at full speed
Warnings:
• Cycle time vs. flow time
• In process analysis, capacity is a rate not a number 6
Process Analysis Example
Salads Up
7
Process Analysis Example
▪ Ordering a salad from the Salads Up
▪ Process Flow Diagram:
Serving customers
Customers Salad maker Check out
come to WIP makes the WIP with cashier FG
the shop salad
Activity
Buffer
8
Whether I have enough salad makers,
enough cashiers?
Salad maker Check out
makes the WIP with cashier FG
salad
Individual stages
Maximum
Capacity: 15 orders / hr 20 orders / hr
efficiency
Time between
Cycle time: outputs
Time spent in
Flow time: an activity
The (whole) Process
Flow time:
Capacity:
Cycle time:
(assuming operated
at full capacity)
9
Process Analysis
Salad maker
makes the
salad Check out
WIP FG
with cashier
Salad maker
makes the
Individual stages salad
Capacity rate: 15 orders / hr / chef Maximum
20 orders / hr
or 30 orders / hr efficiency
Time between
Cycle time:
outputs
Flow time: Time spent in
an activity
The (whole) Process
Flow time:
Capacity rate:
Cycle time:
(assuming
operated at full
capacity) 10
Bottleneck
Bottleneck
Input
Maximum Flow Rate
(Capacity)
11
Bottleneck analysis and Gantt charts: Example 1
Nurse Doctor
3 min 4 min
Which is the bottleneck?
Doctor 1
4 min
Nurse Which is the bottleneck?
3 min
Doctor 2
4 min
12
Identifying Bottleneck: Example 2
75%
Validator Server
5 min 6 min
25% (yield loss)
▪ Validator capacity = 12 units/hr
Server capacity = 10 units/hr
▪ Max output from Validator =
Max output from Server =
▪ Bottleneck is Validator
▪ Bottleneck is not necessarily the station with the smallest
capacity.
13
14
Key steps in analyzing a process
▪ Step 1: Draw a process flow diagram (define the
process)
▪ Determine the process boundary and flow unit
▪ Determine the activities, their sequence, and the
resources required for each activity
▪ Determine the buffers in the process
▪ Step 2: Bottleneck Analysis
▪ Determine the capacity of each activity, of the resource,
and of the process
▪ Bottleneck is always a resource!
15
Practice: Zingerman’s Aged Chelsea
▪ Mold ripened and aged for 4 weeks, it has a thicker rind that
gives the insides a hint of mushroom flavor.
▪ Smooth, creamy, intense without being “overly goaty.”
([Link])
16
Practice: Zingerman’s Aged Chelsea
▪ Scenario 1: Creamery starts 1 batch of cheese every day.
▪ What is the cycle time of the cheese batch? ______
▪ What is the flow time of the cheese batch? ______
▪ Scenario 2: Creamery starts 1 batch of cheese every 12 hours.
▪ What is the cycle time of the cheese batch? ______
▪ What is the flow time of the cheese batch? ______
▪ Scenario 3: Creamery starts 1 batch of cheese every day, but
make Chelsea Select which requires 6 weeks aging.
▪ What is the cycle time of the Chelsea Select cheese batch?
_____
▪ What is the flow time of the Chelsea Select cheese batch?
_____
17
Learning Objectives: Class 2
▪ Introduction to Process Analysis II
▪ Utilization and Bottleneck
▪ Little’s Law: Inventory, Throughput and Time
Why is the bottleneck important?
▪ Bottleneck
▪ Is the slowest resource
▪ Can change when resources are added
– important when justifying capital investment
▪ Shortening non-bottleneck tasks
▪ No impact on capacity
▪ Decreases flow time (improves responsiveness)
19
Utilization and Bottleneck
▪ Utilization =
Throughput rate (how much does it produce)
Capacity (how much it can produce)
▪ Bottleneck is always station with highest utilization
Example 1
Doctor
Rate in Nurse 15 /hr
18 /hr 20 /hr Doctor
15 /hr
Example 2
Rate in Validator 75% Server
12 /hr 12 /hr 10 /hr
20
Actual vs. Implied Utilization
▪ Actual Utilization = Throughput rate / Capacity
▪ Implied Utilization = Demand rate / Capacity
12 /hr 8 /hr 16 /hr
Actual utilization
Implied utilization
Can this process keep up with demand?
What is the maximum rate the line
can handle?
21
Identifying a bottleneck: Multi-flow Process
▪ Implied Utilization = Demand rate / Capacity rate, may>100%
Bottleneck is always resource with highest implied utilization
Contact previous employer
6/hr
Accept file Verification
20/hr 18/hr
Full time applicants
12/hr
Internships
6/hr
Benchmark grades
10/hr
Identifying a bottleneck: Multi-flow Process
▪ Implied Utilization = Demand rate / Capacity rate, may>100%
▪ Actual Utilization = Throughput rate / Capacity rate, always
≤100%
Contact previous employer
6/hr
Accept file Verification
20/hr 18/hr
Full time applicants
12/hr
Internships
6/hr
Benchmark grades
10/hr
Learning Objectives: Class 2
▪ Introduction to Process Analysis II
▪ Utilization and Bottleneck
▪ Little’s Law: Inventory, Throughput and Time
Little’s Law
Inventory = Throughput Rate × Flow Time
Inventory Throughput Rate
... ... ... ... ... ...
Flow Time
25
Little’s Law: I = R × T
Inventory = Throughput Rate × Flow Time
Input rate: 2 customers per sec
Process
26
Example 1: Mark & Spencer’s Supply Chain
▪ M&S imports 3000 sweatshirts from an overseas supplier
every month. The products go through several stages before
arriving at M&S stores:
Factory Ship
Port Warehouse
10 days 4 days 5 days 1 day
▪ How many sweatshirts in each stage, and in the entire supply
chain? (Assuming that there is enough resources in each stage
and 30 days in a month)
▪ Little’s Law can be applied to any part of the process.
27
Example 2: Insurance Company
▪ An insurance company processes 10,000 claims per year.
The average processing time is 3 weeks. How many claims
are in the system on average? (Assuming 50 weeks in a
year)
▪ Now, the company reduces its processing time by 80%.
How many claims are in the system on average?
▪ A manager can influence any one of these measures by
controlling the other two.
Example 3: Days of Inventory and Inventory Turnover
Inventory ($)
Cost of goods sold ($/year)
(Throughput Rate)
Days of Inventory
(Flow Time)
▪ By Little’s Law, Inventory
Days of Inventory = –––––––––––––––– x 365 days/yr
Cost of goods sold
Cost of goods sold
Inventory Turnover = ––––––––––––––––
Inventory
Example 3: PC Industry
Dell Lenovo Apple HP
Revenue (billion $) $56.94 $33.87 $170.91 $111.85
Net income (billion $) $2.37 $0.64 $37.04 $5.11
Inventory (billion $) $1.38 $1.96 $1.76 $6.05
COGS (billion $) $44.75 $29.80 $106.61 $85.79
Days of inventory
Source: [Link]
Practice Example 4: Days Sales Outstanding
▪ DSO measures how quickly a company collects
revenue after a sale has been made.
▪ Samsung sells $300 million worth of cellular
equipment per year. The average accounts
receivable in the cellular group is $45 million. What
is the average DSO?
Learning Objectives: Class 4
▪ Little’s Law Application
▪ Inventory Buildup Diagram
▪ Product-Process Matrix
Three Measures of Process Performance
Example
US Immigration Champaign Masters of BA Large PC
Industry Program Manufacturer
Flow Unit Immigration Bottle of Masters Student Computer
applications champagne
Flow 6.3 million/year 260 million 150 students/year 5000 units/day
rate/throughput (approved or bottles/year
rejected cases)
Flow time 7.6 months 3.46 years 1 year 10 days
(average
processing time)
Inventory 4.0 million cases 900 million 150 students 50000 computers
(pending) bottles
▪ Decrease Flow time
▪ Increase Throughput rate
(Capacity)
▪ Decrease Inventory
1. Increase Process Capacity Rate
▪ Be more productive, i.e.,
produce/serve more within a
certain time period
▪ Why is it important?
Nearly two years after the Wii's
launch, consumers still can't walk
into a retailer such as Best Buy and
pick one up off the shelf. Online
retailers haven't done much better,
though secondary market sites like
eBay have Wii consoles in stock—
for a price jacked up from the
$249.99 retail cost of the console.
(Other sites, like Newegg, require
customers to buy Wii "bundles,"
which can total nearly $500.)
▪ Among several speculative
explanations of shortage:
packaging problems
Practical Ways to Increase Capacity
Labor Machine
Long - term Cross-train workers Invest in new equipment
Hire or lay off workers Outsourcing
Develop the flexibility
Improve the reliability
Medium - term Subcontracting Reduce setup time
Flexible time Preventive maintenance
Subcontracting
Short - term Employ part-time
workers Priority management
Use overtime
Add Shifts
2. Reduce Process Flow Time
• Be more responsive, i.e.,
produce/serve a unit within
a short time period
• How responsiveness can
contribute?
Something (you might not know) about
▪ WHOM
Zara was described by Louis Vuitton fashion director Daniel Piette as
“possibly the most innovative and devastating retailer in the world.”
▪ Zara can offer considerably more products than similar companies. It
# distinct items annually compared with 2,000 to
produces about 11,000
4,000 items for its key competitors
▪ The company can design a new product and have finished goods in its
stores in four to five weeks; it can modify existing items in as little as two
#
weeks, compared to a six-month industry average
3. Reduce Inventories
Example: Cross Docking at Walmart
Little’s Law and Business Functions
Performance Measures Effects seen in
Inventory Use of Working Capital Balance Sheet
Throughput Rate of Revenue
Income Statement
Rate Generation
Responsiveness Operations
Flow Time Lead time Marketing