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
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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
S. Chopra/Process Flows 2
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.
S. Chopra/Process Flows 3
Operational Performance Measures
• Flow time• Throughput• Inventory• Process Cost• Quality
S. Chopra/Process Flows 4
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
-
S. Chopra/Process Flows 5
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]
S. Chopra/Process Flows 6
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?
S. Chopra/Process Flows 7
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?
S. Chopra/Process Flows 8
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
S. Chopra/Process Flows 9
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