1

III. Operational Measures

• Flow Time

• Capacity and Flow Rate

2

Operational Measures and Direct Cost

• Inventory (in production setting, referred to as Working in Process WIP): the number of units contained within the process.– Working capital shown in your balance sheet

• Flow Time (throughput time): the time it takes a unit to get through the process.– Shorter flow times reduce the time delay between occurrence of

demand and its fulfillment in the form of supply• Flow Rate (throughput rate, output rate): the rate at which the

process is delivering output. – Higher flow rate generates more revenues shown in your income

statement when capacity is tight.– The maximum rate with which the process can generate supply

is called the capacity of the process.• Direct Cost: incurred when transforming a unit from input to output

Inputs Outputs

3

Flow Time

• Theoretical vs. Actual Flow Time

– Actual = Value-Added and Non-Value-Added Activities

– Active and Non-Active Times

VA NVA

Active Non-Active

• Flow Time efficiency

• Flow Time =

Meas. &Mix

Spoon

Clean & Hash

Spread Toppings

Pick Fillings

Load & Set Timer

Bake Box PaymentTake Orders

1 min.

5 min.1 min.

3 min. 2 min.

2 min. 1 min. 8 min. 1 min. 1 min.

4

Flow Time Efficiency

5

Performance in Auto Industry

Business Week, March 25, 2002

GM Ford Daimler-Chrysler

Toyota Honda Nissan

Flow Time (hrs)

40.5 39.9 44.8 31.1 29.1 27.6

Quality (probs/car)

1.46 1.62 1.54 1.45

Market Share 28% 21% 13.2%

Profit/car in 2001

$367 < 0 < 0

GM Ford Daimler-Chrysler

Japanese

Automakers

Flow Time (hrs)

26 27 31 17-22

Business Week, April 21, 2003

6

Levers for Reducing Flow Time

• See page 73-76: 4.5 – 4.6

• Flow time:

• Levers:

7

Capacity (units/unit time)• Capacity: maximal units a process can process per unit of time

– Capacity of a Single Resource

• Capacity of the oven =

– Capacity of c Identical Resources

• capacity of bake operation =

– Capacity of a network of resources (system capacity)

Process time Tp

oven

Process time Tp

c ovens

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Flow Rate (units/unit time)

• Flow rate R =

• Cycle time =

• Process utilization =

• Pipeline Principle: In the long run, on average, input rate = output rate R

Input rate Output rate R

• Flow rate: the units that a process actually does process per unit of time

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Flow Rate (cont.)

• Time to produce X units =

• Time to complete X units starting with an empty system

• Utilization of a resource in the process

=

R

Process time Tp

c

10

Bottlenecks

10 min. 20 min.8 min. 5 min.

c = 2 c = 1 c = 3 c = 1

Tp

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Bottlenecks: Multiple types of flow units

10 min. 20 min.8 min. 5 min.

15 min. 40 min.12 min. 7 min.

Cookies

Pizzas

2 1 3 1

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Bottlenecks: Multiple flows

15 min.

10 min.

1 min.

MixBake bread

SpoonBake

cookiesPay

20 min.8 min.

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Levers for Increasing Throughput

• See page 99: 5.7. Levers for Managing Flow Rate

• Throughput:

• Levers:

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Case Discussion: Manzana Insurance 1991 Second Quarter Performance

15

Manzana Insurance (cont.)

28.4 min./request

Distribution Clerks (4)

Underwriting Team #1

Underwriting Team #3

Raters (8)Underwriting Team #2

Policy Writers (5)

41 min./request 70.4 min./request 54.8 min./request

Weighted average

16

Today’s Takeaways

Operational Measures: – Flow Time

• Critical path• Theoretical vs. actual, value added vs. non value added• Levers for improving flow time

– Flow Rate (cycle time)• Capacity, bottleneck, levers for improving throughput• Utilization, server or machine idle time • Pipeline principal

– Inventory (next lecture)