Operations Management

Session 3 – Production systems and Process Analysis

Dr. Ramesh Krishnan

IIM Kozhikode
4-1
Ramesh.Krishnan@iimk.ac.in
 How the production process works and where are
the goods stored?
 What triggers the production in a facility?
 Whether the complete production process is
completed in one go?
Customer order decoupling point – where inventory is positioned to allow entities in the
supply chain to operate independently
 Examples of products include the following:
 Televisions
 Clothing
 Packaged food products

 Essential issue in satisfying customers is to balance the

level of inventory against the level of customer service.
 Easy with unlimited inventory, but inventory costs money
 Trade-off between the costs of inventory and level of customer
service must be made.
 A primary task is to define a customer’s order in terms of
alternative components because these are carried in
inventory.
 An example is the way Dell Computer makes their desktop
computers.
 One capability required is a design that enables as much
flexibility as possible in combining components.
 There are significant advantages from moving the
customer order decoupling point from finished goods to
components. ???
 Boeing’s process for making commercial aircraft is
an example.

 The customer order decoupling point could be in

either raw materials at the manufacturing site or the
supplier inventory.

 Depending on how similar the products are, it might

not even be possible to preorder parts.
 Similar to product life cycle stages, the production
process too goes through a change.
 The process evolution typically begins with a “fluid”
process, one that is highly flexible, but not very cost
efficient
 If the focus is on quality & innovation -
which is the better process structure?

Is the same strategy for all the

different products by a
company works?

- Zara products

Overall there has to be an

alignment between the product
and process structure

Permits a company to be more precise about what its distinctive competence is and
to concentrate its attention on a restricted set of process decisions and alternatives

The competitive emphasis shifts as we move from one top diagonal to the next - while moving from job shop to batch process -
the competitive emphasis shifts from flexibility and quality (measured in terms of product specialization) to the reliability,
predictability and cost.
Hayes and Wheelwright (1979)
 Throughput Rate (Capacity vs Throughput)
 How much can we produce vs How much we have actually produced? - TR=Demand.
 Capacity represents a ceiling
 Goal: Align demand and throughput
 Flow Time (Not just the summation of cycle time)
 Total time is taken to go through all the processes to produce a product – including the
waiting times
 How long does it take the process to produce an item?
 Often difficult to capture it because of inventory buildup and all. Hence - Little’s Law
 Little’s Law
 For a system in equilibrium, Little’s Law governs the relationship between the average rate
of flow through a system (i.e., average throughput rate), the average amount of inventory
in the system (within the defined boundary), and the average amount of time that a unit
spends in the system. (i.e., average throughput time).
I=R*T
I = Inventory = how many flow units are in the process
R = Flow Rate = rate at which flow units enter or leave the process
T = Flow Time = total time a flow unit is in the process

Depending on the boundary defined, the inventory in the system, the time it takes for a
product to go through the entire process or the throughput rate can be obtained.
For example, a single line at a grocery store checkout:
• Customers are processed at an average throughput rate of R=32 customers per hour
• On average, I=4 customers in line (including in service).
• Therefore, the average throughput time is T = I/R = 4 customers/ 32 customers
per hour = 0.125 hour or 7.5 minutes.

A customer arriving in the line should expect to wait, on average, 7.5 minutes to be
processed and out the door.
 incoming completed
calls Call center calls

R = On average 11 callers per I = Average number of callers on the

minute phone with the call center
T = On average a caller spends 2.5 = R x T = 11 x 2.5
minutes with the call center
= 27.5 callers
  O’Neill, based in California (CA), buys wetsuits from a supplier in Thailand:
 Each month they order on-average 15,000 wetsuits, R = 15,000
 Shipping between Thailand and CA takes on-average 2 months, T = 2
 I = R x T = 15,000 x 2 = 30,000 units are in-transit on average

I = 30,000 wetsuits

Thailand wetsuits CA
R = 15000/month R = 15000/month

T = 2 months
 In terms of flow units (The “ I ” in I = R x T):
 Number of wetsuits, patients, tons of wheat, semiconductor chips, etc.
 Useful when the focus is on one particular flow unit.

 In terms of $s (The “ I ” in I = R x T):

 The $ value of inventory
 This is an intuitive measure of a firm’s total inventory.

 In terms of days-of-supply:
 The average number of days a unit spends in the system.
 Also, the number of days inventory would last at the average flow rate if
no replenishments arrive.

 In terms of turns:
 The number of times the average amount of inventory exits the system.
 Days-of-supply is the “T ” in I = R x T

 Days-of-supply = I / R = Inventory / Average daily flow

rate

 Can also be measured in different time lengths (Keep

units consistent):
 Weeks-of-supply = Inventory / Average weekly flow rate
 Months-of-supply = Inventory / Average monthly flow rate
 Years-of-supply = Inventory / Average yearly flow rate

 Our O’Neill example:

T = 2 months-of-supply

wetsuits
R = 15000/month

I = 30,000 wetsuits
 Inventory Turns = 1 / T = R / I

 Different measures of turns:

 Yearly turns = Average annual flow rate / Inventory
 Monthly turns = Average monthly flow rate / Inventory
 Weekly turns = Average weekly flow rate / Inventory
 Daily turns = Average daily flow rate / Inventory
 Keep units consistent!

 O’Neill’s annual turns:

 R = 15000 x 12 = 180,000 per year
 I = 30,000
 T = 2 months = 1/6 year
 Annual Turns = R / I = 180,000 / 30,000 = 6
 Annual Turns = 1/T = 1 / (1/6) = 6
 * All figures in $Million from balance
sheet and income statement

I = Inventory = $33,160 R = COGS = $304,657

 COGS = Cost of Goods Sold = Flow Rate

 The Flow Rate is not Sales (which was $405,046) because inventory
is measured in the cost to purchase goods, not in the sales revenue
that may be earned from the goods.
 Note: Some companies use the term “Cost of sales” to mean COGS

 Annual turns = $304,657 / $33,160 = 9.19

 Days-of-supply = $33,160 / ($304,657 / 365) = 39.7

 10 140

9
120
8

7 100

Days-of-supply
(red squares)
(blue diamonds)
Annual turns

6
80
5
60
4

3 40

2
20
1

0 0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Year
 Defined as a standard approach to choosing among
alternative processes or equipment.
 The model seeks to determine the point in units produced
where a company will start making a profit in the process.
 The model seeks to determine the point in units produced
where total revenue and cost are equal.

Purchase cost of process or equipment

Breakeven Demand =
Price per unit - Cost per unit
or
Total fixed costs of process or equipment
=
Unit price to customer - Variable cost per unit
 Buy for $200

 Make on lathe for $75

 Make on machining center for $15

 Buy has no fixed costs

 Lathe has $80,000 fixed costs

 Machining center has $200,000 fixed costs

 Purchase
Cost = $200 x Demand

 Produce Using Lathe

Cost = $80,000 + $75 x Demand

 Produce Using Machining Center

Cost = $200,000 + $15 x Demand
Point A
$80,000 + $75 * Demand = $200,000 + $15 * Demand
$80,000 + $60 * Demand = $200,000
$60 * Demand = $120,000
Demand = $120,000 = 2,000
$60

Point B
$200 * Demand = $80,000 + $75 * Demand
$125 * Demand = $80,000
Demand = $80,000 = 640
$125
Things to be considered
 Define the boundary
 Define the symbols and their representations
 Follow similar representations for processes &
resources
 0 12

Raw Material (RM)

Work in Process Inventory (WIP)
Finished Goods Inventory (FGI)

To manage or improve a process, it is important first to understand it.

 How can we
increase the
capacity?
o

What is the bottleneck operation?

Step 3? sewer?
Suppose, in Step 1, if 160 shirts (bottleneck) are produced

Similarly for Step 2 – 66.6%, Step 3 – 100% & Step 4 – 33.3%

Combining step 2 & 3? Why to do it separately!

o

Since the capacity increases while combining the tasks,

Why not always have the workers in a process perform all the steps? (cellula
manufacturing / Seru production system)
What are the advantages of combining or separating tasks between workers?
(Learning Curves)
Assuming each batch contains 5 shirts & a setup time of 22 minutes per batch for step 1

Decrease in capacity from 192 to 142? Why?

If there is no setup time for process 2-4, then process 1 becomes as a bottleneck

How can we reduce the setup time? SMED?

So batch size affects the capacity of the process.
What happens if we increase/decrease?
What is the right batch size?
Right batch size is one that doesn’t create too much of inventory in the subsequent levels and at the same time
not being a bottleneck operation. At the same time, batching is required if there are multiple variety of products
are produced. So batching helps in reducing the number of setup changes required.
 Process Flow Diagram
 Process Flow Chart
 Time-Function Mapping
 Process Chart
 Value Stream Mapping
 Service Blueprint

4-48
Frame tube Frame-building Frame Hot-paint
bending work cells machining frame painting
THE ASSEMBLY LINE
TESTING Engines and
Incoming parts transmissions
28 tests
Arrive on a JIT
schedule from a
Air cleaners Oil tank work cell 10-station work
cell in Milwaukee
Fluids and mufflers Shocks and forks

Fuel tank work cell Handlebars

Wheel work cell Fender work cell

Roller testing
Crating

4-49
 Process flowcharting: the use of a diagram to
present the major elements of a process

 The basic elements can include tasks or

operations, flows of materials or customers,
decision points, and storage areas or queues

 It is an ideal methodology by which to begin

analyzing a process

4-50
4-51
4-52
 Order
product Receive
Customer product
Process
Sales order
Order

Production Wait
control

Product
Order

Plant A Print
WIP

Product
Warehouse Wait Wait
Wait

Product
WIP
WIP
Plant B
WIP

Extrude

Transport Move
Move

12 days 13 days 1 day 4 days 1 day 10 days 1 day 9 day 1 day

52 days

4-53
 Order Receive
Customer product product

Process
Sales order

Product
Order

Production
control Wait

Order
WIP
Plant Print Extrude

Product
Warehouse Wait

Product
Transport Move

1 day 2 days 1 day 1 day 1 day

6 days

4-54
4-55
1. Begin with symbols for customer, supplier, and production to ensure
the big picture
2. Enter customer order requirements
3. Calculate the daily production requirements
4. Enter the outbound shipping requirements and delivery frequency
5. Determine inbound shipping method and delivery frequency
6. Add the process steps (i.e., machine, assemble) in sequence, left to
right
7. Add communication methods, add their frequency, and show the
direction with arrows
8. Add inventory quantities between
every step of the entire flow
9. Determine total working time (value-added time) and delay (non-
value-added time)
4-56
4-57
 Focuses on the customer and provider interaction
 Defines three levels of interaction
 Each level has different management issues
 Identifies potential failure points

4-58
 Personal Greeting Service Diagnosis Perform Service Friendly Close

Level Customer arrives

for service. Customer departs
#1
(3 min)

F
Determine Notify Customer pays bill.
specifics. customer (4 min)
Warm greeting (5 min)
and obtain service No and recommend
request. an alternative
(10 sec)
F
provider.
Standard Can
Level request. (7 min)
service be
#2 (3 min) done and does Notify
Direct customer customer No customer the
to waiting room. Yes approve? car is ready.
(5 min) (3 min)

Yes
F F F F

Perform required
Level work. F Prepare invoice.
#3 (varies) (3 min)

4-59
 Some interaction with customer is necessary, but this often
affects performance adversely
 The better these interactions are accommodated in the process
design, the more efficient and effective the process
 Find the right combination of cost and customer interaction

4-60