emp processflow

S. Chopra/Process Flows 1

Operations Management:

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


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.


Operational Performance Measures

• Flow time• Throughput• Inventory• Process Cost• Quality


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

The business imperative: creating economic value

3. Reduce costs4. Improve quality

5. Reduce capital intensity6. Reduce inventory

Reduce time

-


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

• Inventory = Throughput x Flow Time

I = R x T

• Turnover = Throughput / Inventory

= 1/ T

Inventory I[units]

Flow rate/Throughput R

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

Flow Time T [hrs]


Process Flow ExamplesCustomer Flow: Taco Bell processes on average 1,500 customers per day

(15 hours). On average there are 75 customers in the restaurant (waiting to place the order, waiting for the order to arrive, eating etc.). How long does an average customer spend at Taco Bell and what is the average customer turnover?

Job Flow: The Travelers Insurance Company processes 10,000 claims per year. The average processing time is 3 weeks. Assuming 50 weeks in a year, what is the average number of claims “in process”.

Material Flow: Wendy’s processes an average of 5,000 lb. of hamburgers per week. The typical inventory of raw meat is 2,500 lb. What is the average hamburger’s cycle time and Wendy’s turnover?


Process Flow Examples

Cash Flow: Motorola sells $300 million worth of cellular equipment per year. The average accounts receivable in the cellular group is $45 million. 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. She also states that everything that Baxter buys gets processed and leaves the docks within six weeks. Are these statements consistent?


MBPF Inc.: Consolidated StatementNet 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 SheetCURRENT ASSETS

Cash 2.1Short-term investments at cost (approximate mkt.) 3.0Receivables, less allowances of $0.7 mil 27.9Inventories 50.6Other current assets 4.1TOTAL CURRENT ASSETS 87.7

PROPERTY, PLANT AND EQUIPMENT (at cost)Land 2.1Buildings 15.3Machinery and equipment 50.1Construction in progress 6.7

Subtotal 74.2Less accumulated depreciation 25.0

NET PROPERTY, PLANT AND EQUIPMENT 49.2

Investments 4.1Prepaid expenses and other deferred charges 1.9Other assets 4.0TOTALASSETS

146.9


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/yr

Assembly

$25.3/yr

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 Business Process Flows


MBPF Inc.: Flow Times

RawMaterials

Fabrication PurchasedParts

Assembly FinishedGoods

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

6.75 7.12 11.12 3.14 2.90


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


Why the Difference in Performance?

Inventory Over Last 8 Quarters (Ending Q3 2001)

0

1000

2000

3000

4000

5000

6000

0 1 2 3 4 5 6 7 8 9

Quarter

Inve

ntor

y Nokia

Ericsson

Motorola


CRU Computer Rentals


Case: CRU Computer RentalsFlow Chart

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 Situation in Previous Year:Customer term = 8 wks, Demand = 1000 units/wk

Customer Receiving Status 24

Status 40

Parts Suppliers Status 41 Status 42 Status 20

Throughput (units/week)

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

405 405 405 405 1,000

Inventory (units)

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

500 2,000

Flow Time (weeks)

8.0 0.5 2.14 2.47 1.23 1 2.23 1.23 2


CRU Situation in Previous Year:Financial Performance

• 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 (R) + 25 x 1,000 (S) + 4x700x.85 + 150 x 405 = $113,130/wk

• Contribution Margin = $126,870/wk

• Depreciation = 14,405 x ($1000/156wks) = $92,340/wk– bottomline = $126,870-$92,340 = $34,530


CRU Situation in Current Year: flow times unchanged, Demand = 1400 units/wk

Customer Receiving Status24

Status40


Throughput(units/week)

1,400 1,400 980 567 567 567 567 567 1,400

Inventory(units)

8,000 700 2,100 1,400 700 567 1,267 700 2,800

Flow Time(weeks)

5.7 0.5 2.14 2.47 1.23 1 2.23 1.23 2


CRU Situation in Current Year: flow times unchanged, Demand = 1400 units/wk




• 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


• Depreciation = 16,967 x (1000/156) = $108,763/wk– bottomline = $97,618 - $108,763 = -$11,145


CRU Potential situation in Current Year:without sales drive, Demand = 600 units/wk

Customer Receiving Status24

Status40


Throughput(units/week)

600 600 420 243 243 243 243 243 600

Inventory(units)

4,800 300 900 600 300 243 543 300 1,200

Flow Time(weeks)

8 0.5 2.14 2.47 1.23 1 2.23 1.23 2


CRU Potential situation in Current Year:without sales drive, Demand = 600 units/wk




• Revenue = 4,800 x 30 = $144,000/wk

• Cost = 25 x 600 (R) + 25 x 600 (S) + 4x420x .85 + 150 x 243 = $67,878/wk


• Depreciation = 8,643 x (1000/156) = $55,404/wk– bottomline = $76,122 - $55,404 = $20,718


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

• Targeting areas and performance measures for improvement; link financial and operational flows

emp processflow

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