OM&PM/Class 2a 1

1 Operations Strategy– Class 1a: Introduction to OM

– Class 1b: Strategic Operational Audits

2 Process Analysis– Class 2a: Process Flow Analysis

» Classification of Processes

» Changing sources of competitive advantage: time

» Operational Measures: time, inventory and throughput» Little’s Law» Link to Financial Measures

» CRU Computer Rentals

3 Lean Operations

4 Supply Chain Management

5 Capacity Management in Services

6 Total Quality Management

7 Business Process Reengineering

Operations Management & Performance Modeling

OM&PM/Class 2a 2

Michigan Manufacturing Corp:OH Burden rates: Economies of Scale?

Mfg OH Burden Rates

1

10

10 100 1000

Plant Sales (M$)

To

tal

Mfg

OH

Bu

rden

Rat

e

Fremont

MaysvilleLebanon

Saginaw

TiffinSandusky

Pontiac

EssexLima

Total Mfg OH burden rate = Mfg OH / DL

OM&PM/Class 2a 3

Economies of Scale versusDiseconomies of Flexibility/Complexity

Mfg OH Burden Rates

1

10

10 100 1000

Plant Sales (M$)

Tot

al M

fg O

H B

urd

en R

ate

2 families

4 families

8 families

16 familiesFremont(10)

Maysville (2)Lebanon (2)

Saginaw (6)

Tiffin (4)

Sandusky (5)

Pontiac (>20)

Essex (4)Lima (4)

OM&PM/Class 2a 4

Class 1b Learning Objectives

How do a strategic operational audit

Relationship between process choice and strategy– operational focus

Price vs. Variety Competition– trade off scale economies with variety diseconomies

OM&PM/Class 2a 5

Classification of Processesby process architecture

Project

Job Shop

Batch

Line Flow

Continuous Flow

Job Shop

Flow Shop

OM&PM/Class 2a 6

Characteristics of Processes:Job Shop vs. Batch vs. Flow Shop

Type ofProcess

ProductVolume

SpecializedEquipment

ProductVariety

MachineSetup

Frequency

LaborSkills

VariableCost

Job Shop

Batch

Flow Shop

OM&PM/Class 2a 7

Matching Products and Processes withthe Product-Process Matrix

Capital Investment for bigchunk capacity,Technological Change,Vertical Integration

Product

ProcessJumbled Flow.Process segmentsloosely linked.

Disconnected LineFlow/Jumbled Flowbut a dominant flowexists.

JOB SHOP

(Commercial Printer)

BATCH

(Heavy Equipment)

LINE FLOWS

(Auto Assembly)

CONTINUOUS FLOW

(Oil Refinery)

Low volumeLow Standardization

One of a kind

Low volume

Many Products

Higher volume

Few Major Products

High volumeHigh StandardizationCommodity Products

Connected LineFlow (assembly line)

Continuous, automated,rigid line flow.Process segments tightlylinked.

Bidding, delivery,product design flexibility

Quality & Product Differentiation,output volume flexibility

Price

Scheduling,Materials Handling,Shifting Bottlenecks

Worker Motivation,Balance,Maintaining Flexibility

ManagerialChallenges

Opportunity

Costs

Out-of-pocket

Costs

OM&PM/Class 2a 8

Michigan Manufacturing Corp.:using the Product-Process Matrix

ProductProcess

Jumbled Flow.Process segments

loosely linked.

Job Shop

Disconnected LineFlow/Jumbled Flowbut a dominant flow

exists.

Batch

Low volumeLow Standardization

One of a kind

Low volume

Many Products

Higher volume

Few Major Products

High volumeHigh StandardizationCommodity Products

Connected LineFlow (assembly line)

Line Flow

Continuous, automated,rigid line flow.

Process segments tightlylinked.

Continuous Flow

1

10

100

1.0

10.0 100.0

(Designed Dollar) Volume per family

# ro

utes

(pr

oduc

t fa

mili

es)

Pontiac

LimaEssex

Saginaw

Sandusky

Tiffin

Fremont

Lebanon Maysville

OM&PM/Class 2a 9

Classification of Processes:by Positioning Strategy

Functional Focus:

Product Focus:

A B

C D

Product 1

Product 2

A D B

C B A

Product 1

Product 2

= resource pool (e.g., X-ray dept, billing)

OM&PM/Class 2a 10

Classification of Processes:by Customer Interface

Make to Stock

Make to Order

OM&PM/Class 2a 11

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.

OM&PM/Class 2a 12

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]

OM&PM/Class 2a 13

Process Flow Examples

Customer 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?

OM&PM/Class 2a 14

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?

CRU Computer Rentals

OM&PM/Class 2a 16

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

OM&PM/Class 2a 17

CRU Situation in 1996:Customer term = 8 wks, Demand = 1000 units/wk

Customer Receiving Status24

Status40

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

OM&PM/Class 2a 18

CRU Situation in 1996: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 =

OM&PM/Class 2a 19

CRU Situation in 1997: buffer sizes unchanged, Demand = 1400 units/wk

Customer Receiving Status24

Status40

Parts Suppliers Status 41 Status 42 Status 20

Throughput(units/week)

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

Inventory(units)

8,000 500 1,500 1,000 500 405 905 500 2,800

Flow Time(weeks)

5.7 0.36 1.53 1.76 0.88 0.71 1.60 0.88 2

OM&PM/Class 2a 20

CRU Situation in 1997: Financialsbuffer sizes unchanged, Demand = 1400 units/wk

Number of units on rent = 8,000 Total number of units = 15,205 Utilization = 0.53 (53%) Revenue = 4,800 x 30 + 3,200 x 35 = $256,000/wk Cost = 25 x 1,400 (R) + 25 x 1,400 (S) + 4x980 x .85

+ 150 x 567 = $158,382/wk Contribution Margin = $97,618/wk Depreciation = 15,205 x (1000/156) = $97,468/wk

– bottomline =

OM&PM/Class 2a 21

CRU Situation in 1997: flow times unchanged, Demand = 1400 units/wk

Customer Receiving Status24

Status40

Parts Suppliers Status 41 Status 42 Status 20

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

OM&PM/Class 2a 22

CRU Situation in 1997: flow times unchanged, Demand = 1400 units/wk

Number of units on rent = 8,000 Total number of units = 16,967 Utilization = 0.47 (47%) 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 Contribution Margin= $97,618/wk Depreciation = 16,967 x (1000/156) = $108,763/wk

– bottomline =

OM&PM/Class 2a 23

CRU Potential situation in 1997:without sales drive, Demand = 600 units/wk

Customer Receiving Status24

Status40

Parts Suppliers Status 41 Status 42 Status 20

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

OM&PM/Class 2a 24

CRU Potential situation in 1997:without sales drive, Demand = 600 units/wk

Number of units on rent = 4,800 Total number of units = 8,643 Utilization = 0.56 (56%) 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 Contribution Margin = $76,122/wk Depreciation = 8,643 x (1000/156) = $55,404/wk

– bottomline =

OM&PM/Class 2a 25

Lecture 2a Learning Objectives

Classification of processes– Match with strategy

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