Operations Management

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Process Analysis and Applications Module
• Changing Sources of Competitive Advantage • Operational Measures: Time T, Inventory I, Throughput rate R
• • • • Link through Little’s Law Link to Financial Measures Levers for Improvement CRU Computer Rentals

S. Chopra/Process Flows

1

How can operations help a company compete? The changing sources of competitive advantage
• Low Cost & Scale Economies (< 1960s) – You can have any color you want as long as it is black Focused Factories (mid 1960s) Flexible Factories and Product variety (1970s) – A car for every taste and purse. • Quality (1980s) – Quality is free. Time (late 1980s-1990s) – We love your product but where is it? – Don’t sell what you produce. Produce what sells.
S. Chopra/Process Flows 2

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Operational Performance Measures • • • • • Flow time Throughput Inventory Process Cost Quality S. Chopra/Process Flows 3 .

The business imperative: creating economic value Improvement levers Revenues Price x Quantity Material + Labor + Energy + Overhead 1. Reduce costs Improve quality Capital invested Opportunity cost x Weighted average cost of capital PP&E + Inventory + Other 5. 6. Increase price Increase throughput Profit - Costs Economic value added (EVA) - 3. Reduce capital intensity Reduce inventory Reduce time Operational metrics 4 Financial metrics S. Chopra/Process Flows . 2. 4.

Relating operational measures (flow time T.. . throughput R & inventory I) with Little’s Law Inventory I Flow rate/Throughput R ... .. [units] ...... . [units/hr] Flow Time T [hrs] • Inventory = Throughput x Flow Time I = RxT • Turnover = Throughput / Inventory = 1/ T S. Chopra/Process Flows 5 ..

How long does an average customer spend at Taco Bell and what is the average customer turnover? Job Flow: The Travelers Insurance Company processes 10. The average processing time is 3 weeks. eating etc. What is the average hamburger’s cycle time and Wendy’s turnover? S. Assuming 50 weeks in a year.000 claims per year.Process Flow Examples Customer Flow: Taco Bell processes on average 1. The typical inventory of raw meat is 2. what is the average number of claims “in process”. Material Flow: Wendy’s processes an average of 5.500 customers per day (15 hours).).500 lb.000 lb. of hamburgers per week. On average there are 75 customers in the restaurant (waiting to place the order. waiting for the order to arrive. Chopra/Process Flows 6 .

Chopra/Process Flows 7 . She also states that everything that Baxter buys gets processed and leaves the docks within six weeks. What is the average billing to collection process cycle time? Question: A general manager at Baxter states that her inventory turns three times a year. The average accounts receivable in the cellular group is $45 million. Are these statements consistent? S.Process Flow Examples Cash Flow: Motorola sells $300 million worth of cellular equipment per year.

2 4.: Consolidated Statement Net Sales Costs and expenses Cost of Goods Sold Selling.6 2.1 37.3 31.2 0.7 15.1 234.0 175.8 47.0 5.21 S. general and administrative expenses Interest expense Depreciation Other (income) expenses TOTAL COSTS AND EXPENSES INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME RETAINED EARNINGS.MBPF Inc. Chopra/Process Flows 8 .83 0.3 7. BEGINNING OF YEAR LESS CASH DIVIDENDS DECLARED RETAINED EARNINGS AT END OF YEAR NET INCOME PER COMMON SHARE DIVIDEND PER COMMON SHARE 250.0 8.0 2.

PLANT AND EQUIPMENT Investments Prepaid expenses and other deferred charges Other assets TOTAL ASSETS S.: Balance Sheet CURRENT ASSETS Cash Short-term investments at cost (approximate mkt.7 mil Inventories Other current assets TOTAL CURRENT ASSETS PROPERTY.) Receivables.1 15.2 25. less allowances of $0.MBPF Inc.0 27.0 146.1 3.3 50. PLANT AND EQUIPMENT (at cost) Land Buildings Machinery and equipment Construction in progress Subtotal Less accumulated depreciation NET PROPERTY. Chopra/Process Flows 2.2 4.1 6.1 1.9 4.1 87.6 4.0 49.9 50.9 9 .7 74.7 2.

5 15.8 S.6 9.1 60.6 10.1 8.3 175.: Inventory and Cost of Goods INVENTORY Raw materials (roof) Fabrication WIP (roof) Purchased parts (base) Assembly WIP Finished goods TOTAL COST OF GOODS SOLD Raw materials Fabrication (L&OH) Purchased parts Assembly(L&OH) TOTAL 6.MBPF Inc.2 25.6 50.8 50.2 40. Chopra/Process Flows 10 .

6 Purchased Parts (bases) Finished Goods $40.8/yr $9.8 $175. Chopra/Process Flows 11 .2/yr $25.6 Assembly $175.MBPF Business Process Flows $60.3/yr $10.2/yr $8.1 Fabrication (roofs) $110.1/yr $6.3/yr $50.5 Raw Materials (roofs) $15.2/yr S.8/yr $40.

12 175.12 15.: Flow Times Raw Materials Throughput R $/Year $/Week Inventory I ($) Flow Time T = I/R (weeks) 50.8 3.1 7.77 8.MBPF Inc.90 110.5 6.2 0. Chopra/Process Flows 12 .38 9.12 Assembly Finished Goods 175.75 Fabrication Purchased Parts 40.8 3.96 6.3 2.6 3.6 11.8 2.14 S.38 10.1 0.

12 3.77 Purchased Parts 11.14 2. Chopra/Process Flows Flow Time T (weeks) .38 Accounts Receivable Assembly 2.12 0.80 13 S.Flow rate R ($/week) 5.75 7.96 0.90 5.12 Raw Materials Fabrication Finished Goods 6.0 3.

Chopra/Process Flows 14 .Why the Difference in Performance? Inventory Over Last 8 Quarters (Ending Q3 2001) 6000 5000 4000 Inventory 3000 Nokia Ericsson Motorola 2000 1000 0 0 1 2 3 4 5 6 7 8 9 Quarter S.

Chopra/Process Flows 15 .CRU Computer Rentals S.

Case: CRU Computer Rentals Flow Chart Status 40 Ship Receiving 70% Status 24 30% Repairs 15% Customer Pre-Config Status 41 Parts places order Receives from Supplier Status 32 Ship Config Status Flows S. Chopra/Process20 Repairs Status 42 16 .

000 405 405 405 405 1.000 (units/week) 1. Demand = 1000 units/wk Customer Receiving Status 24 Status Parts Suppliers 40 Status 41 Status 42 Status 20 Throughput 1.000 Flow Time (weeks) 8.47 1.23 1.0 0.14 2.CRU Situation in Previous Year: Customer term = 8 wks.000 500 1. Chopra/Process Flows 17 .23 2 S.000 700 300 + 105 = 405 1.5 2.23 1 2.000 Inventory (units) 8.500 500 405 500+405 = 905 500 2.

000 (S) + 4x700x.870/wk • Depreciation = 14.870-$92.340 = $34.• • • • • Number of units on rent = 8.130/wk • Contribution Margin = $126.000 x 30 = $240.000 (R) + 25 x 1.56 (56%) Revenue rate = 8.000/wk Variable Cost rate = 25 x 1.405 x ($1000/156wks) = $92.85 + 150 x 405 = $113.340/wk – bottomline = $126.530 CRU Situation in Previous Year: Financial Performance S.405 Utilization = 0.000 Total number of units = 14. Chopra/Process Flows 18 .

23 2 S.400 700 567 1.5 2.7 0.23 1.23 1 2. Chopra/Process Flows 19 .CRU Situation in Current Year: flow times unchanged.14 2.400 (units/week) 1.267 700 2.400 Inventory (units) 8. Demand = 1400 units/wk Customer Receiving Status 24 Status Parts Suppliers 40 Status 41 Status 42 Status 20 Throughput 1.000 700 2.47 1.400 980 567 567 567 567 567 1.800 Flow Time (weeks) 5.100 1.

763 = -$11.400 (R) + 25 x 1.145 S.200 x 35 = $256.85 + 150 x 567 = $158. Chopra/Process Flows 20 .967 x (1000/156) = $108.000 Total number of units = 16.400 (S) + 4 x 980x .382/wk • Contribution Margin = $97.618 .618/wk • Depreciation = 16.CRU Situation in Current Year: flow times unchanged. Demand = 1400 units/wk • • • • • Number of units on rent = 8.47 (47%) Revenue = 4.000/wk Cost = 25 x 1.800 x 30 + 3.967 Utilization = 0.763/wk – bottomline = $97.$108.

200 Flow Time (weeks) 8 0.5 2. Demand = 600 units/wk Customer Receiving Status 24 Status 40 Parts Suppliers Status 41 Status 42 Status 20 Throughput (units/week) 600 600 420 243 243 243 243 243 600 Inventory (units) 4. Chopra/Process Flows 21 .14 2.47 1.23 2 S.23 1 2.800 300 900 600 300 243 543 300 1.CRU Potential situation in Current Year: without sales drive.23 1.

643 Utilization = 0.718 without sales drive.CRU Potential situation in Current Year: • • • • • Number of units on rent = 4.122 .122/wk • Depreciation = 8.404 = $20.800 x 30 = $144.000/wk Cost = 25 x 600 (R) + 25 x 600 (S) + 4x420x .$55.85 + 150 x 243 = $67. Demand = 600 units/wk S.878/wk • Contribution Margin = $76.404/wk – bottomline = $76. Chopra/Process Flows 22 .643 x (1000/156) = $55.800 Total number of units = 8.56 (56%) Revenue = 4.

link financial and operational flows S. inventory. Chopra/Process Flows 23 .Learning Objectives Basic Process Analysis • Process Measures: time. and throughput • What is an improvement? – Link financial measures to operational ones – Good operational measures are leading indicators of financial performance • Using Little’s law for process flow analysis • Targeting areas and performance measures for improvement.

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