OPSM 501: Operations Management

Week 3:

Process measurement

Little’s Law

The House Building Game

Koç University Graduate School of BusinessMBA Program

Zeynep Aksinzaksin@ku.edu.tr

KEEP DESKS CLEAR!

Only need a pen or pencil.Please keep desks and aisles

clear of notebooks, PCs, backpacks etc.

Please do not disturb materials!

HouseBuilding.com:Manufacturing Operations

Production Control(color sheets, log sheets, scissors)

(scissors)

Base Punch(scissors)

Final Assembly(tape)

Base Weld(stapler)

Quality Control

Customer

Roof Base Form

Production Control Operating Procedures

Prepare a batch of 4 units.– Cut each sheet (one at a time) into two: roof and base.– Write the batch number on the roof and the base. All items in the same batch have the

same number. The numbers have to match in assembly.– Repeat – 4 times, which yields one batch

When 4 units (one batch) are complete, “release” the batch.– Put the batch in your out-basket: it’s ready for pickup by the trucker.– Record release time for each batch.

Release one batch each minute.

Truckers Operating Procedures

Truckers are responsible for transporting work in process inventory between production steps.

You can carry only one batch of 4 roofs or 4 bases at a time. Not both!

Production Control(color sheets, log sheets, scissors)

(scissors)

Base Punch(scissors)

Final Assembly(tape)

Base Weld(stapler)

Quality Control

Customer

Roof Base Form(scissors)

Roof Operating Procedures

Cut the roof along double lines, one at a time. Fold roof along dotted line at top. Think quality! Work in batches of 4 units. When a batch is ready, call the trucker and send to

Final Assembly. Ask trucker for inputs when needed.

Base Punch (Cut) Operating Procedures

Cut the base along double lines, one at a time. Think quality! Work in batches of 4 units When a batch is ready, call the trucker and send to Base

Form. Ask trucker for inputs when needed.

Base Form Operating Procedures

Fold the lines on the base (4 folds). Work in batches of 4 units When a batch is ready, call the trucker to send them

to Base Weld. Ask trucker for inputs when needed

Base Weld Operating Procedures

Staple base on top and bottom about 0.5 cm from the edge. Work in batches of 4 units. When a batch is ready, call the trucker to send them to

Final Assembly. Ask trucker for inputs when needed.

Final Assembly Operating Procedures

Tape the roof to the base (2 tapes). Work in batches of 4 units. When a batch is ready, send them to QA. (No trucker

required.) Ask trucker for inputs when needed.

Quality Assurance Operating Procedures

Check each batch if they conform to quality standards!

If the house conforms to quality standards, put it on the market. Once on the market no more rework!

Customers can reject houses

Quality Standards

Batch numbers must match. Folds and cuts should be along

appropriate lines.– Folds should be crisp and cuts

should be straight. Roof should be centered and

door should be visible.– Top of base should be flush

with roof. Staples and tape should be

centered and parallel to the ground.– Not too much tape. About 1 cm– Staples about 0.5 cm from

edge.

House Game Overview

Quality Standards

Batch numbers must match. Folds and cuts should be along

appropriate lines.– Folds should be crisp and cuts

should be straight. Roof should be centered and

door should be visible.– Top of base should be flush

with roof. Staples and tape should be

centered and parallel to the ground.– Not too much tape. About 1

cm.– Staples about 0.5 cm from

edge.

Production Control(color sheets, log sheets, scissors)

(scissors)

Base Cut(scissors)

Final Assembly(tape)

Base Weld(stapler)

Quality Control

Customer

Roof Base Form(scissors)

HouseBuilding.com: Operational Performance

Flow time T

House # 1To - Ti = T

QualityQ = R/ Ro

InventoryI

OutputRo

InputRiHouse # 16

To - Ti = T

SalesR

Team(color)

The process view of an organization

The Dynamics of a Process

We examine processes from the perspective of flow To study process flows, we first answer three important

questions:– On average, how many flow units pass through the

process per unit time?

– On average, how much time does a typical flow unit spend within process boundaries?

– On average, how many flow units are within process boundaries at any point in time?

Operational Measures

On average, how many flow units pass through the process per unit time?

THROUGHPUTor FLOW RATE (R)

Throughput or Flow Rate (R)The average output of a production process per unit time. At the firm level, it is defined as the production per unit time that is sold.

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Terminology

Operational Measures

On average, how much time does a typical flow unit spend within process boundaries?

FLOW TIME (T)

Terminology

Flow Time (T)The flow time (also called variously throughput time, cycle time) of a given routing is the average time from release of a job at the beginning of the routing until it reaches an inventory point at the end of the routing.

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Flow time

System Cycle TimeThe average interdeparture time between two jobs leaving a routing

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System cycle time

Terminology

Operational Measures

On average, how many flow units are within process boundaries at any point in time?

INVENTORY (I)

Work in Process inventory (I)The average inventory between the start and end point of a product is called work in process Inventory

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WIP (9 for this realization)

Terminology

Slope (R), verical distance (I), horizontal distance(T)

Relating operational measures (flow time T, throughput R & inventory I) with Little’s Law

Inventory = Throughput x Flow Time

I = R x T

Inventory Turns = 1/ T

Inventory I[units]

Flow rate/Throughput R

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

Flow Time T [hrs]

...Inventory I

[units]

Flow Rate[units/hr]

... ...... ...

Flow Time T [hrs]

Time=0

...Inventory I

[units]

Flow Rate[units/hr]

... ...... ...

Flow Time T [hrs]

Time=t

...Inventory I

[units]

Flow Rate[units/hr]

... ...... ...

Flow Time T [hrs]

Time=T

Understanding Little’s Law: Consider a first come first served Queue

An Intuitive Argument for Little's Law

Consider a process with the FCFS queue discipline

An order departs the process: At this moment there are I (Inventory) orders within the process

The orders that are in the process now are the ones that came after our departing order had arrived, in other words, they arrived during the waiting period of the departing order

Since order arrival rate is equal to the flow rate, we have the following relationship:

Inventory = Flow Rate x Flow Time

Little’s Law basics

Little’s Law is for a system in steady state: input rate = output rate

Applies to most systems, even those with variability

Uses average values

Example: flow unit is material

Fast food restaurant processes an average of 5000kgs, of hamburgers per week. Typical inventory of raw meat in cold storage is 2500kg.

Throughput R=5000kg/week Average Inventory I=2500 kg. Average flow time T=I/R=2500/5000=0.5 weeks

Example: flow unit is customers

A café in Beyoglu serves on average 60 customers per night. A typical night is about 10 hours. At any point there are on average 18 customers in the café.

Throughput R=60 customers/night; 6 customers/hour Average Inventory I=18 customers Average flow time T= I/R= 3 hours

Example: flow unit is cash

A steel company processes $400 million of iron ore per year. The cost of processing is $200 million per year. The average inventory is $100 million. How long does a typical dollar spend in the process?

R=$600 million/year I=$100 million T=I/R=1/6 year or 2 months

What it is: Inventory (I) = Flow Rate (R) * Flow Time (T)

How to remember it: - units

Implications:• Out of the three fundamental performance measures (I,R,T), two can be chosen by management, the other is GIVEN by nature• Hold throughput constant: Reducing inventory = reducing flow time

Examples:• Indirect measurement of flow time

• Inventory turns: compute right from financial data

Throughput: 5000kg/weekInventory: 2500kg

Throughput: 1500 customers/dayInventory: 25 customers

Cost of Goods sold: 25,263 mill $/yearInventory: 2,003 mill $

Cost of Goods sold: 20,000 mill $/yearInventory: 391 mill $

Little’s law: It’s more powerful than you think...

0

1

2

3

4

5

6

7

8

9

10

0% 10% 20% 30% 40% 50%

Gross Margin (%)

Inve

nto

ry T

urn

s

Retailer A

Retailer B

Inventory Cost Calculation

Compute per unit inventory costs as: Per unit Inventory costs=

turnsInventory

costsinventory Annual

Example:

• Annual inventory costs=30%• Inventory turns=6 Per unit Inventory costs= %5

year per turns 6

year per 30%

Source: Gaur, Fisher, Raman

Inventory Turns in Retailing and Its Link to Inventory Costs

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Example: Auto-Moto Financial Services

Auto-moto provides loans to qualified customers. The company receives about 1000 loan applications per 30-day working month and makes accept/reject decisions based on an extensive review of each application

Auto-Moto Financial Services

Currently, Auto-Moto processes each application individually. On average, 20% of all applications received approval. An internal audit showed that, on average, Auto-Moto had about 500 applications in process at various stages of the approval procedure, but on which no decisions had yet been made.

In response to customer complaints about the time taken to process each application, Auto-Moto called in OPSM Consulting Inc.

Current System

1000/month200/month

800/month

review

500

accept

reject

20%

80%

Example: cont’d

OPSM Consulting found out that although most applications could be processed rather quickly, some took a disproportionate amount of time because of insufficient and/or unclear documentation. They suggested the following Process II:

Because, the percentage of approved applications is fairly low, and Initial Review Team should be set up to pre-process all applications according to strict but fairly mechanical guidelines.

Auto-Moto Financial Services

Each application would fall into one of three categories: type A (looks excellent), type B (needs more detailed evaluation), and type C (reject summarily). Type A and B applications would be forwarded to different specialist subgroups

Each subgroup would then evaluate the applications in its domain and make accept/reject decisions

Example: (cont’d)

Process II was implemented on an experimental basis. The company found out that, on average, 25% of all applications were of type A, 25% were of B, and 50% were of C. Typically, about 70% of type A and 10% of B were approved on review.

Example (cont’d)

Internal audit checks showed that, on average, 200 applications were with the Initial Review Team undergoing preprocessing. Only 25 were with the Subgroup A Team undergoing the next stage of processing and approximately 150 were with the Subgroup B Team

Auto-moto would like to determine if the implemented changes have improved service performance.

Proposed System

initialreview

1000/month

200

Subgroup Areview

Subgroup Breview

accept

reject

200/month

800/month

25%

25%

50%

70%

30%

10%

90%

25

150

New process

Flow units: applications Initial review: R=1000, I=200 T=0.2 months or 6 days Team A: R=250, I=25, T=3 days Team B: R=250, I=150, T=18days Type A: 9 days Type B: 24 days Type C: 6 days Average: R=1000, I=375, T=11.25 days

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New process: different flow unit definition

Flow units: approved/rejected applications

Approved: 70% of Type A and 10% of Type B= 0.7(250)+0.1(250)=175+25=200 applications/month

Tapproved=175/(175+25)*(TIR+TA)+ 25/(175+25)*(TIR+TB) = (175/200)*9 +(25/200)*24=10.875 days

Rejected: 30% of Type A and 90% of Type B and all C= 75+225+500=800 applications/month

Treject=11.343 days

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Key learnings: Little’s Law

Relates three leading performance measures based on process flows: throughput, inventory, flow time

Applies to processes in steady state Important to

– First determine process boundaries for analysis– Then identify appropriate flow unit for your analysis

From measurement to analysis

So far we have considered – Measuring process flows-R, T, I– Relating these measures through Little’s Law: I=RxT

Next: understand what drives each measure– What drives flow time?– What drives throughput rate?– What drives inventory?

Announcements

Continue reading The Goal Read the case Kristen’s Cookie before coming

to class-be prepared for in-class group work.