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IntroductionSession 1

Prof. Christian Terwiesch

Operations in a Restaurant


Operations in an Emergency Room


Four Dimensions of Performance

Cost▪ Efficiency

Quality▪ Product quality (how good?)

▪ Process quality (as good▪ Process quality (as good as promised?)

Time▪ Responsiveness to

demand

Variety▪ Customer heterogeneity

Important for- Performance measurement- Defining a business strategy


Four Dimensions of Performance: Measurements for a Sandwich Store

Cost▪ Efficiency


▪ Process quality (as good as promised?)

Time▪ Responsiveness to demand

p )

Variety▪ Customer heterogeneity ▪ Responsiveness to demand▪ Customer heterogeneity


Four Dimensions of Performance: Trade-offs

Cost▪ Efficiency▪ Measured by:


=> Price▪ Process quality (as good- cost per unit

- utilization

▪ Process quality (as good as promised?)=> Defect rate

Time▪ Responsiveness to

Variety▪ Customer heterogeneity p

demand▪ Measured by:

- customer lead time- flow time

Customer heterogeneity▪ Measured by:

- number of options- flexibility / set-ups

make to order


- flow time- make-to-order

What Can Ops Management (This Course) Do to Help? Step 1: Help Making Operational Trade-Offs

ResponsivenessHigh

Very short waiting times,Comes at the expense ofFrequent operator idle time

Trade-off Long waiting times,

yet operators are almostfully utilized

Example: Call center of a large retail bank

Labor Productivity(e.g. $/call)

Low

Low laborproductivity

High laborproductivity

y

Example: Call center of a large retail bank- objective: 80% of incoming calls wait less than 20 seconds - starting point: 30% of incoming calls wait less than 20 seconds- Problem: staffing levels of call centers / impact on efficiency


OM helps: Provides tools to support strategic trade-offs

What Can Ops Management (This Course) Do to Help?Step 2: Overcome Inefficiencies

Responsiveness

HighCurrent frontier

Eliminate inefficiencies

In the industry

Competitor A

Low

Competitor C

Competitor B

Labor Productivity(e.g. $/call)

Low laborproductivity

High laborproductivity

Competitor B

Example:• Benchmarking shows the pattern above• Don’t just manage the current system… Change it!

Provides tools to identify and eliminate inefficiencies => Define Efficient Frontier


Types of inefficiencies:-Poor process design- Inconsistencies in activity network

What Can Ops Management (This Course) Do to Help?Step 3: Evaluate Proposed Redesigns/New Technologies

Responsiveness

HighHigh

Redesignprocess

Current frontierNew frontier

LowIn the industry

Labor Productivity( $/ )

Low labor High labor

Example:• What will happen if we develop / purchase technology X?

Better technologies are al a s (?) nice to ha e b t ill the pa ?

(e.g. $/call)productivity productivity


• Better technologies are always (?) nice to have, but will they pay?

OM helps: Evaluates system designs before they occur

Example: The US Airline Industry


Course Outline / Grading / Homework

Objective of the course: Understanding and improving business processes

Performance measuresHow-to

Mix of industries: healthcare restaurants automotive computers call centers banking etcMix of industries: healthcare, restaurants, automotive, computers, call centers, banking, etc

Course OutlineIntroduction (0.5 weeks)1. Process analysis (1.5 weeks)2. Productivity3. Product variety 4. Responsiveness 5. Quality

Requirements / Prerequisites: There are no prerequisites for the course

Some modules require statistical knowledge (standard deviation, normal distribution)

Homework assignmentsOne large assignment after each module (five assignments); 10% each

Final exam with questions from all modules; 50%


q ;

Text Book

Course book Cachon, Gerard, Christian Terwiesch, Matching Supply with Demand: An Introduction to Operations Management, 3rd edition, Irwin - McGraw Hill, 2012 (ISBN 978-0073525204, 507 pages)


Personal IntroductionMBA core course: Operations Management: Quality and Productivity

Taught ~ 60 times ~ 4000 MBA students

Research: Operations Management, focus on Healthcare Management

Innovation tournaments and contests

Christian Terwiesch Andrew M. Heller Professor at the Wharton SchoolSenior Fellow Leonard Davis Institute for Health EconomicsSenior Fellow Leonard Davis Institute for Health Economics

573 Jon M. Huntsman Hall Philadelphia, PA 19104.6366


Process AnalysisSession 1


Subway – Sitting in Front of the Store


Processes: The Three Basic Measures

• Flow rate / throughput: number of flow units going through the process per unit of time

• Flow Time: time it takes a flow unit to go from the beginning to the end of the process

• Inventory: the number of flow units in the process at a given moment in time

• Flow Unit: Customer or SandwichFlow Unit: Customer or Sandwich


Process Analysis: The Three Measures

Immigration department Champagne MBA program Auto company

Applications

Approved or rejected cases

Processing time

Bottle of champagne

Bottles sold per year

Time in the cellar

Student

Graduating class

2 years

Car

Sales per year

60 daysProcessing time

Pending cases

Time in the cellar

Content of cellar

2 years

Total campus population

60 days

Inventory


Why Do We Care About Inventory?

About $1 Trillion in Inventory in the US EconomyAbout $1 Trillion in Inventory in the US Economy

That is manufacturing inventory alone


Why Do We Care About Inventory? (ctd)

Inventory corresponds to Supply Demand mismatchesInventory corresponds to Supply-Demand mismatches

That is inventory waiting for customers, but also customers wait for products and services

Service Examples ER Wait Times: 58-year-old Michael Herrara of Dallas died of a heart attack after an estimated 19

h i th l l H it l ERhours in the local Hospital ERSome ER’s now post expected wait times online / via Apps

It takes typically 45 days do get approval on a mortgage; Strong link between wait times and conversion

Waiting times for drive through at McDonald’s: 159 seconds; Long queues deter customers to join Waiting times for drive-through at McDonald s: 159 seconds; Long queues deter customers to join

Production Examples• Buying an Apple computer

B i D ll t


• Buying a Dell computer=> Make-to-order vs Make-to-Stock

Summary

When observing a process always aim to understand the three process measuresWhen observing a process, always aim to understand the three process measures

• Flow rate / throughput: number of flow units going through the process per unit of time

Flow Time: time it takes a flow unit to go from the beginning to the end of the process• Flow Time: time it takes a flow unit to go from the beginning to the end of the process

• Inventory: the number of flow units in the process at a given moment in time

In the next session we will discuss what drives these measuresIn the next session, we will discuss what drives these measures

We will then find out that the three measures are related to each other


Process Analysis

In this session, we will take you INSIDE the black box

Specifically, you will learn how to:

1. Create a process flow diagram

2. Find the bottleneck of the process and determine the maximum flow rate

3 Conduct a basic process analysis3. Conduct a basic process analysis


Subway – Inside the Store


Drawing a Process Flow Diagram


Drawing a Process Flow Diagram

Customers Station 1 Station 2 Station 3

Symbols in a process flow diagram

Difference between project management and process management


Basic Process Vocabulary

• Processing times: how long does the worker spend on the task?

• Capacity=1/processing time: how many units can the worker make per unit of timeIf there are m workers at the activity: Capacity=m/activity time

• Bottleneck: process step with the lowest capacity

• Process capacity: capacity of the bottleneck

• Flow rate =Minimum{Demand rate, Process Capacity)

• Utilization =Flow Rate / Capacity

• Flow Time: The amount of time it takes a flow unit to go through the process

• Inventory: The number of flow units in the system


Inventory: The number of flow units in the system

Labor Productivity MeasuresTi

me

a2

a4

Bottleneck=Idle Time =Processing time

a1

Pro

cess

ing

a• Cycle time CT= 1/ Flow Rate

Di t L b C t t

Labor Productivity Measures

P a3 Direct Labor Content=p1+p2+p3+p4If one worker per resource:

Direct Idle Time=(CT-p1) +(CT-p2) +(CT-p3)

A l b tili ti1 2 3 4

• Capacityi =

Review of Capacity CalculationsResources ofNumber i

time idle direct content labor content labor

• Average labor utilization

Capacityi

• Process Capacity=Min{Capacityi}

• Flow Rate = Min{Demand Capacity}

iTime Processing

timeofunitperRateFlow time of unit perwages Total

• Cost of direct labor


Flow Rate Min{Demand, Capacity}

• Utilizationi=iCapacity

Rate Flow

p

Example: Assembly Line with Six Stations

3 min/unit 5 min/unit 2 min/unit 3 min/unit 6 min/unit 2 min/unit


100%

The Role of Labor Costs in Manufacturing: The Auto Industry

70%

80%

90%

100%

QualityWarrantyOverheadOther

30%

40%

50%

60%

Purchasedparts andassemblies

Parts andmaterialcosts Logistics costs

Assembly and otherLabor costs

0%

10%

20%

30%

Fi l I l di I l di R ll d

Material costs

Final Assembler’s cost

IncludingTier 1Costs

IncludingTier 2Costs

Rolled-upCosts over~ 5 Tiers

• While labor costs appear small at first, they are importantlook relative to value added- look relative to value added

- role up costs throughout the value chain

• Implications


- also hunt for pennies (e.g. line balancing) - spread operational excellence through the value chain

Source: Whitney / DaimlerChrysler

slides module 1 - memberfiles.freewebs.com · - defining a business strategy ... one large...

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