slide 1process analysis & improvement© van mieghem targeting improvement module key operational...
TRANSCRIPT
Slide 1Process Analysis & Improvement © Van Mieghem
Targeting Improvement Module
Key Operational Metrics: Time T, Inventory I, Throughput rate R Link through Little’s Law
Link Operational Metrics to Financial Metrics Levers for Improvement
Firm & Divisional Level: MBPF Inc. Mkt-Ops: CRU Computer Rentals
Slide 2Process Analysis & Improvement © Van Mieghem
What is an improvement?
Strategic fit & competencies
Financials & process view
Slide 3Process Analysis & Improvement © Van Mieghem
Operational Performance Measures
Flow (Cycle) time - T Throughput / flow rate – R Takt Time Inventory - I Process Cost Quality
Slide 4Process Analysis & Improvement © Van Mieghem
Price
Quantity
Material
Labor
Energy
Overhead
PP&E
Inventory
Other
Revenues
Costs
Capital invested
Weighted average cost of capital
x
+
+
+
+
+x
Profit
Opportunity cost
-
Economic value added (EVA)
Financial metrics Operational metrics
1. Increase price2. Increase
throughput
Improvement levers
3. Reduce costs4. Improve quality
5. Reduce capital intensity6. Reduce inventory
Reduce time
-
The business imperative: economic value creation
Slide 5Process Analysis & Improvement © Van Mieghem
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.)
Slide 6Process Analysis & Improvement © Van Mieghem
How reduce flow time?There are only two available levers
Slide 7Process Analysis & Improvement © Van Mieghem
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
Slide 8Process Analysis & Improvement © Van Mieghem
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]
Slide 9Process Analysis & Improvement © Van Mieghem
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
Slide 10Process Analysis & Improvement © Van Mieghem
Targeting Improvement Module
Key Operational Metrics: Time T, Inventory I, Throughput rate R Link through Little’s Law
Link Operational Metrics to Financial Metrics
Slide 11Process Analysis & Improvement © Van Mieghem
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.
Slide 12Process Analysis & Improvement © Van Mieghem
Cash Conversion CycleMeasures duration between purchase of inventory and collection of accounts receivable: Cash Conversion Cycle=
Days of Inventory + Days of Receivables - Days of Payables
How long does it take between outlay of cash and collecting the reward?
Inventory
AccountsReceivable
AccountsPayable
Cash
Cash-to-Cash Cycle
Slide 13Process Analysis & Improvement © Van Mieghem
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
Slide 14Process Analysis & Improvement © Van Mieghem
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
Slide 15Process Analysis & Improvement © Van Mieghem
Business Process Flows at MBPF, Inc:Cash to Cash cycle
C2C = - Days payable + Days of inventory + Days receivables
Slide 16Process Analysis & Improvement © Van Mieghem
Period Ending Dec 31, 2010
Total Revenue 34,204,000
Cost of Revenue 26,561,000
Gross Profit 7,643,000
Selling General and Administrative 6,237,000
Operating Income or Loss 1,406,000
Income from Continuing Operations
Total Other Expenses Net 130,000
Earnings Before Interest And Taxes 1,536,000
Interest Expense 39,000
Income Before Tax 1,497,000
Income Tax Expense 352,000
Net Income From Continuing Ops
1,152,000
Net Income 1,152,000
Amazon Income Statement
Slide 17Process Analysis & Improvement © Van Mieghem
Period Ending Dec 31, 2010
Cash And Cash Equivalents 3,777,000 Short Term Investments 4,985,000 Net Receivables 1,783,000 Inventory 3,202,000
Total Current Assets 13,747,000 Property Plant and Equipment 2,414,000 Goodwill 1,349,000 Intangible Assets - Other Assets 1,265,000 Deferred Long Term Asset Charges 22,000 Total Assets 18,797,000
Accounts Payable 10,372,000 Short/Current Long Term Debt -
Total Current Liabilities 10,372,000 Long Term Debt - Other Liabilities 1,561,000
Total Liabilities 11,933,000
Total Stockholder Equity 6,864,000
Net Tangible Assets 5,515,000
Amazon Balance Sheet
Slide 18Process Analysis & Improvement © Van Mieghem
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
Slide 19Process Analysis & Improvement © Van Mieghem
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
Slide 20Process Analysis & Improvement © Van Mieghem
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
Slide 21Process Analysis & Improvement © Van Mieghem
Where target improvement?
Flow rate R($/week)
0.96
Flow Time T (weeks)
Accounts
Receivable
Finished
GoodsAss
embl
y
Fabrication
Raw MaterialsPurchased Parts
11.12 6.75 7.12 3.14 2.90 5.80
0.77
2.12
3.38
5.0
Slide 22Process Analysis & Improvement © Van Mieghem
Case: CRU Computer Rentals
Linking Financial and Operational Flows&
Targeting Areas for Improvement
Handouts to be distributed in class