managing business process flows: ch 3-5 process analysis and improvement key operational measures:...

Managing Business Process Flows: Ch 3-5

Process Analysis and Improvement Key Operational Measures: Time T, Inventory I, Throughput rate R Link through Little’s Law and scorecard representation Link to Financial Measures

Targeting Improvement Firm & Divisional Level: MBPF Inc. Mkt-Ops: CRU Computer Rentals

Responsiveness vs. Capacity– Flow Time vs. Bottleneck Analysis

• Pizza Pazza Company

• Levers for Improvement

– Multi-product Capacity Management and Investment• Joint Marketing & Production Decisions

• Optimal Capacity Investment

1Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

What is an improvement?

Strategic Fit & capabilities

Financials & process view


Operational Performance Measures

Flow (Cycle) time - T Throughput / flow rate – R Takt Time Inventory - I Process Cost Quality


What is Toyota doing now?

Taiichi Ohno’s answer was very simple:

“All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes.”

Simple but brilliant.

(Taiichi Ohno. Toyota Production System: Beyond Large-Scale Production. p. ix.)


How reduce flow time?There are only two available levers


Takt Time

Takt time =

– Takt time yields the rate at which customers demand product– and the production rate to stay synchronized with demand

Example: – Demand = 150,000 cars per year– Total available production time = 2 x 8 hrs/day x 250 days/yr = 4,000 hrs/year– Takt = 4,000 hrs/150,000 cars = 1hr/37.5 cars = 96 sec / car

What does Little’s Law say about takt time?

“The rhythm of the conductor to keep the

orchestra in time”

Total time available

Customer demand

metronome

Willys Jeep 6Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

http://www.youtube.com/watch_popup?v=lgwF8mdQwlw&feature=player_embedded

http://www.youtube.com/watch_popup?v=lgwF8mdQwlw&feature=player_embedded

Linking operational measures:Little’s Law

Inventory = Throughput x Flow Time

I = R x T

Inventory Turnover = Throughput / Inventory

= 1/ T

Inventory I[units]

Flow rate/Throughput R

[units/hr]... ...... ......

Flow Time T [hrs]


Inventory Turns in Retailing and Its Link to Inventory Costs

Home Depot (1/30/2011)

Wal-Mart (1/31/2011)

Net Sales $67,997 $418,952

Cost of sales $44,693 $315,287

Net Income $ 3,338 $ 15,355

Inventories $10,625 $ 36,318

Months of Inventory

If Wal-Mart carried the same months of inventory as Home Depot, its inventories would be

I =

This would tie up about $ billion extra in inventory.8Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

A Process Example using Little’s Law

5 min

Doctor requeststests for patient

Initial doctorconsultation

Patient checks in

Nurse takestests

Wait

12 min 5 min 30 min1 patient

25% quit

75%4 patients/hr

Wait

2 patients


Process Analysis and Improvement Module

Changing Sources of Competitive Advantage Operational Measures: Time T, Inventory I, Throughput rate R

Link through Little’s Law Link to Financial Measures



MBPF Inc.: Consolidated Statement

Net Sales 250.0

Costs and expensesCost of Goods Sold 175.8Selling, general and administrative expenses 47.2Interest expense 4.0Depreciation 5.6Other (income) expenses 2.1TOTAL COSTS AND EXPENSES 234.7

INCOME BEFORE INCOME TAXES 15.3PROVISION FOR INCOME TAXES 7.0NET INCOME 8.3

RETAINED EARNINGS, BEGINNING OF YEAR 31.0LESS CASH DIVIDENDS DECLARED 2.1RETAINED EARNINGS AT END OF YEAR 37.2

NET INCOME PER COMMON SHARE 0.83DIVIDEND PER COMMON SHARE 0.21


MBPF Inc.: Balance Sheet

CURRENT ASSETS Cash 2.1 Short-term investments at cost (approximate mkt.) 3.0 Receivables, less allowances of $0.7 mil 27.9 Inventories 50.6 Other current assets 4.1 TOTAL CURRENT ASSETS 87.7 PROPERTY, PLANT AND EQUIPMENT (at cost) Land 2.1 Buildings 15.3 Machinery and equipment 50.1 Construction in progress 6.7 Subtotal 74.2 Less accumulated depreciation 25.0 NET PROPERTY, PLANT AND EQUIPMENT 49.2 Investments 4.1 Prepaid expenses and other deferred charges 1.9 Other assets 4.0 TOTAL ASSETS 146.9

(Selected) CURRENT LIABILITIES

Payables 11.9

12

Cash-to-Cash Cycle

At MBPF Inc, cash-to-cash cycle =

Cash-to-Cash Cycle Times by Industry in the US (measured in days):

Industry Best in class Average Median

Pharmas and Chemical 31.3 120.2 96.8

Computers 27.5 62.1 51.5

Consumer Package Goods 19.9 77.0 63.6

Defense and Industrial 20.8 70.3 67.1

Electronic Equipment 31.6 116.3 103.1

Semiconductors 49.4 110.3 104.5

Telecommunications 19.4 90.5 85.8

Source: Supply Chain Council, Aug. 2000

13

MBPF Inc.: Inventory and Cost of Goods

INVENTORYRaw materials (roof) 6.5Fabrication WIP (roof) 15.1Purchased parts (base) 8.6Assembly WIP 10.6Finished goods 9.8TOTAL 50.6

COST OF GOODS SOLDRaw materials 50.1Fabrication (L&OH) 60.2Purchased parts 40.2Assembly(L&OH) 25.3TOTAL 175.8


Raw Materials(roofs)

Fabrication (roofs)

$60.2/yrLabor & OH

Assembly

$25.3/yrLabor & OH

Purchased Parts (bases)

Finished Goods

$6.5$50.1/yr

$40.2/yr$8.6

$15.1

$10.6

$110.3/yr

$40.2/yr

$175.8/yr$9.8

$175.8/yr

MBPF Inc.: Detailed Financial Flows


MBPF Inc.: Detailed Flow Times

Raw Materials

Fabrication Purchased Parts

Assembly Finished Goods

Throughput R $/Year 50.1 110.3 40.2 175.8 175.8 $/Week 0.96 2.12 0.77 3.38 3.38 Inventory I ($) 6.5 15.1 8.6 10.6 9.8 Flow Time T = I/R (weeks)

6.75 7.12 11.12 3.14 2.90


Case: CRU Computer Rentals

Linking Financial and Operational Flows&

Targeting Areas for Improvement

Handouts to be distributed in class


Customer

Receiving Repairs

Pre-Config

Partsplacesorder

Receivesfrom

Supplier

Repairs

Status 40

Status 24

Status 41

Status 42Status 20

Config

30%

70%

15%

ShipStatus 32

Ship

CRU Computer Rentals:Flow Chart


Questions to ask when adopting a process view

1. What are the process boundaries: what is the input and output?

2. What is the flow unit or the unit of analysis?

3. “Attach yourself to” the flow unit and record its process steps through the process– What are the value-added and necessary activities? What are the associated processing

times or work content?– Where does the flow unit wait (buffers)? What are the associated waiting times?– What are the routes a flow unit can take? What are necessary precedence relationships?

(i.e., what must be done sequentially?) Note that the first improvement step will be to delete non-value-added and unnecessary

activities and buffers = waste

4. Who does the work? What are the resources for each activity?– What are all the activities a given resource performs? (cross-training , flexibility)– What are the resource constraints? What determines the flow rate? (demand or capacity)– How is quality measured?– What is the cost of each resource?

5. What information is required to perform each activity? Where does this information come from? This specifies the information flow (dashed lines)

Key for Capacity Analysis

Slide 19Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

CustomerIc

Receiving Repairs

Pre-Config

Partsplacesorder

Receivesfrom

Supplier

Repairs

Status 40

Status 24

Status 41

Status 42Status 20

Config

30%

70%

15%

ShipStatus 32

Ship

R = 1000/wk

R1 = 595/wk

R2 = 105/wk

R3 =

300/wk

CRU Computer Rentals:Revenue and Cost Drivers

20

CRU Situation last year:Customer term = 8 wks, Demand = 1000 units/wk

Customer Receiving Status 24 Status 40 Status 41

Status 42 Status 20

Parts

Suppliers Total

Throughput (units/week)

1,000 1,000 700 300 + 105 = 405

405 405 405 405 1,000

Inventory (units)

500 1,500 1,000 500 500

Flow Time (weeks)

8 1 2


CRU Situation last year:Customer term = 8 wks, Demand = 1000 units/wk


Status 42 Status 20

Parts

Suppliers Total


1,000 1,000 700 300 + 105 = 405

405 405 405 405 1,000

Inventory (units)

Total = 14,405

8,000 500 1,500 1,000 500 405 500+405 = 905

500 2,000

Flow Time (weeks)

8 0.5 2.14 2.47 1.23 1 1.23+1 = 2.23

1.23 2


CRU Situation last year:Financial Performance: per week

Number of units on rent = 8,000 Total number of units = 14,405 Utilization = 0.56 (56%) Revenue rate = 8,000 x $30 = $240,000/wk Variable Cost rate = $25 x 1,000 (receive) + $25 x 1,000 (ship) + $4 x 595

(preconfig) + $150 x 405 (repair) = $113,130/wk Contribution Margin = $126,870/wk Depreciation = 14,405 x ($1000/156wks) = $92,340/wk

Operating Margin = $34,530/wk


CRU Situation last year: Financial Performance: per route & per computer

R1: True Non-Defectives

R2: False Non-Defectives

R3: Defectives

Duration of a cycle (weeks)

8 + 0.5 + 2.14 + 2 = 12.64

8 + 0.5 + 2.14 + 2 + 2.47 + 2.23 + 1.23 = 18.57

8 + 0.5 + 2 + 2.47 + 2.23 + 1.23 = 16.43

Cost per cycle ($) 25 + 25 + 4 = 54 25 + 25 + 150 = 200

25 + 25 + 150 = 200

Depreciation per cycle ($)

12.64 weeks × $6.41/week = $81

18.57 weeks × $6.41/week = $119

16.43 weeks × $6.41/week = $105

Margin per cycle ($)

240 – 54 – 81

= 105

240 – 200 – 119

= -79

240 – 200 – 105

= -65

Margin per week ($/wk)

105/12.64 = 8.31 -79/18.57 = - 4.25 -65/16.43 = - 3.96


CRU Potential situation this year:without sales drive, Demand = 600 units/wk

R : what about I and T? Assume T remains as before: what about I?


Status 42 Status 20

Parts

Suppliers Total


600 600 420 180 + 63 = 243

243 243 243 243 600

Inventory (units)

Total = 8,643

4,800 300 900 600 300 243 300+243 = 543

300 1,200

Flow Time (weeks)

8 0.5 2.14 2.47 1.23 1 1.23+1 = 2.23

1.23 2

25

CRU Potential situation this year:without sales drive, Demand = 600 units/wk

Number of units on rent = 4,800 Total number of units = 8,643 Utilization = 0.56 (56%) Revenue = 4,800 x 30 = $144,000/wk Cost = $25 x 600 (R) + $25 x 600 (S) + $4x(420-63) + $150 x 243 =

$67,878/wk Contribution Margin = $76,122/wk Depreciation = 8,643 x (1000/156) = $55,404/wk

Operating Margin = $20,718/wk = 60% of 1996 OpMargin


What about I? At the customer: I4wk = , I8wk = , Tmarket =

In the process: Assume T remains as before: Customer Receiving Status 24 Status 40 Status 41

Status 42 Status 20

Parts

Suppliers Total


1,400 1,400 980 420 + 147 = 567

567 567 567 567 1,400

Inventory (units)

Total = 16,967

8,000 700 2,100 1,400 700 567 700+567 = 1,267

700 2,800

Flow Time (weeks)

5.7 0.5 2.14 2.47 1.23 1 1.23+1 = 2.23

1.23 2

CRU Situation this year: Target short term market. Total demand = 1400units/wk


CRU Situation this year: flow times unchanged, Demand = 1400 units/wk

Number of units on rent = 8,000 Total number of units = 16,967 Utilization = 0.47 (47%) Revenue = 4,800 x 30 + 3,200 x 35 = $256,000/wk Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4 x 980x .85 + 150 x 567 =

$158,382/wk Contribution Margin = $97,618/wk Depreciation = 16,967 x (1000/156) = $108,763/wk

Operating Margin = - $11,145/wk


Case Take-aways: CRU Three key operational measures: flow time, inventory, and throughput

– Little’s law connects them

The business flow paradigm links operational measures to financial flows– This inter-functional macro process view of the organization incorporates both

the revenue and cost side of a business– It highlights operational key performance indicators (KPIs) that are leading

indicators of financial performance and make up a “dashboard”

Use it to identify, value, and prioritize improvement areas for performance measures: need more than only “utilization” for targeted improvement of customers segments + internal ops

On the analysis side:– distinguish throughput rate from flow time:

costs: throughput driven (“cycle costs”) revenues: flow time driven (“length of rental”)

– Analyze different routes and product segments:29Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

Learning ObjectivesBasic Process Analysis

Process Measures: time, inventory, 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


Process Analysis and Improvement Module: Ch4-5

Operational Measures: Time T, Inventory I, Throughput rate R Link through Little’s Law Link to Financial Measures


Responsiveness vs. Capacity– Flow Time vs. Bottleneck Analysis

• Pizza Pazza Company

• Levers for Improvement

– Multi-product Capacity Management and Investment• Joint Marketing & Production Decisions

• Optimal Capacity Investment


Concepts to Cover and Analyze

32

Flow Time

Critical Path

(Theoretical) Capacity of a Resource

Bottleneck Resource

(Theoretical) Capacity of the Process

Copyright © 2013 Pearson Education Inc. publishing as Prentice Hall

Analyzing Process Performance:Mortgage Application

Credit rating

Kiki15min

Verify/CheckEmployment etc

Marcus20min

Initial policyoptions/rates

Maxi15min

Assemble,Present to client

Karolien15min

Application review,Data entry

Shannon5min


Pizza Pazza: Flow Chartif job order = 2 identical pizzas

start Take Order Sauce Prep Dough Prep Spread

Activity time: 2 3 12 = 2Resource: Jean Jean Jean, Pan

end BillUnload &

PackBake

Load & Set timer

Activity time: 2 1 2 = 2 3 15 1Resource: Jaqueline Jaqueline, Pan Pan Oven, Pan Jaqueline, Oven, Pan

cool


Pizza Pazza: Flow Time vs. Throughput/Capacity

1. Flow Time: What is the minimum time to fill a rush order, assuming that all steps of the process are

started only after the order is received?

Without spending money, how would you reduce this response time?

2. Maximal throughput = capacity: What is the maximum number of orders that PP can fill per hour in steady state?


Operational Measure: Flow TimeHow to quote a due-date at Pizza Pazza

3. Assume that there is one order waiting to be processed, Jean is just about to start mixing the sauce for a second order and Jacqueline is just about to start loading the two pizza pans of a third order into the oven. A customer calls in with a new order for two pizzas and wants to know when she can pick up her order. What due-date time should Jean promise assuming that they process all orders in the sequence received?


Gantt Charts

A Gantt chart is a graphical representation of the duration of tasks against the progression of time.

It is a useful tool for planning and scheduling projects. It also is helpful when monitoring a project's progress.


Industry Process Average Flow Time

Theoretical Flow Time

Flow Time Efficiency

Life Insurance New Policy Application

72 hrs. 7 min. 0.16%

Consumer Packaging New Graphic Design

18 days 2 hrs. 0.14%

Commercial Bank Consumer Loan

24 hrs. 34 min. 2.36%

Hospital Patient Billing 10 days 3 hrs. 3.75%

Automobile Manufacture

Financial Closing

11 days 5 hrs 5.60%

Most time inefficiency comes from waiting: E.g.: Flow Times in White Collar Processes


Levers for Reducing Flow Time

Decrease the work content of critical activities– work smarter– work faster– do it right the first time– change product mix

Move work content from critical to non-critical activities– to non-critical path or to ``outer loop’’

Restructure sequential activities into parallel activities Reduce waiting time.


A Recipe for Capacity Measurements: Minimal resource capacity = bottleneck

Resource Unit Load Resource Capacity Process Resource(time/job) Unit Capacity # of units Total Capacity Utilization*

*assuming system is processing at full capacity

Define a “job” = …


Pizza Pazza: Flow Rate/Capacity Analysis if job order = 2 identical pizzas

* What is the maximum number of orders that PP can fill per hour in steady state?

4. If the Jacqueline calls in sick one day, what is the maximum number of orders that PP can fill?

5. What is the minimum number of pizza pans needed to ensure that no order has to wait for a pan?


Pizza Pazza: Financial Flows & Pricing if job order = 2 identical pizzas

6. Assume Jean and Jacqueline decide to hire two employees to perform their respective tasks; each paid €8 per hour. What is the contribution margin (revenue - variable costs) generated per hour of operation of the process if pizzas sell for €5 each?

– Throughput R = … pizzas/hr– Revenue rate if sale price is €5 = – Resource cost rate per hour =– Material cost rate per hour =– Contribution margin rate =

7. What is the minimum amount that Jean can charge per pizza, and still make a positive contribution margin?

– Minimum sale price =


Pizza Pazza: Capacity Investment if job order = 2 identical pizzas

8. The pizzas have become wildly popular and Jean feels that they can easily sell thirty pizzas per hour. To increase capacity, he is thinking of renting additional industrial ovens, which would cost €10 for each hour that an oven is used. Should Jean rent more ovens, assuming the rest of the process is kept as is? How many? What would be the contribution margin from each hour of operation of the process (assume the employees do all the work)?

Rent second oven Rent third oven

Bottleneck

Additional throughput

Additional revenue

Additional costs

Additional profit

ROI


Pizza Pazza: Capacity Investment if job order = 2 identical pizzas

9. Can Jean do better, relative to question 8 above, by restructuring the process? For example, can he increase profits by reallocating tasks between the employees? (Assume all orders are for two pizzas.)

Rent third oven after process change =

Bottleneck

Additional throughput

Additional revenue

Additional costs

Additional profit

ROI


Product Mix Decisions:Pizza Pazza offers 2 pizza types

Sale Price of thin crust: €5

Cost of Direct Materials: €1.40

Sale Price of deep dish: €7.50

Cost of Direct Materials: €2.10

Which of these two products should Jean push to customers that call in and are undecided?


Product Mix Decisions

Unit margin of thin crust pizza = €3.60

Unit margin of deep dish pizza = €5.40

Margin rate from thin crust

= €3.60 * 7.5/hr = € 27/hr

Margin rate from deep dish

= €5.40 * 4/hr = € 21.60/hr


Pizza Pazza: Other factors affecting Process Capacity Batch (Order) Sizes:

– Is it worth offering any discount to encourage all orders to be for three pizzas? If so, how much?

other managerial policies ...

Product Mix


How increase capacity? Summary of Typical Actions

Key action = optimize only bottleneck management

Decrease the work content of bottleneck activities– 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

– work smarter: Reduce & externalize setups/changeover times, streamline + eliminate non-value added work

– do it right the first time: eliminate rework/corrections– work faster

Move work content from bottlenecks to non-bottlenecks– 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?

Increase Net Availability of Process– work longer: increase scheduled availability– increase scale of process: invest in more human and capital resources– eliminate unscheduled downtimes/breakdowns

Preventive maintenance, backups, etc.


“Theory of Constraints” in The Goal Increasing Process Capacity

“is to increase the capacity of only the bottlenecks”– “ensure the bottlenecks’ time is not wasted”

increase availability of bottleneck resources eliminate non-value added work from bottlenecks

• reduce/eliminate setups and changeovers synchronize flows to & from bottleneck

• reduce starvation & blockage

– “ the load of the bottlenecks (give it to non-bottlenecks)” move work from bottlenecks to non-bottlenecks need resource flexibility

– unit capacity and/or #of units. invest


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