Class 2a

1
Operations Management Performance Modeling

• 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
• Littles 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

2
Michigan Manufacturing CorpOH Burden rates
Economies of Scale?
Total Mfg OH burden rate Mfg OH / DL
3
Economies of Scale versusDiseconomies of
Flexibility/Complexity
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

5
Classification of Processes by process
architecture

• Project
• Job Shop
• Batch
• Line Flow
• Continuous Flow

Job Shop
Flow Shop
6
Characteristics of Processes Job Shop vs. Batch
vs. Flow Shop
7
Matching Products and Processes with the
Product-Process Matrix
Product
Low volume Low Standardization One of a kind
Low volume Many Products
Higher volume Few Major Products
High volume High Standardization Commodity
Products
Process
Jumbled Flow. Process segments loosely linked.
Scheduling, Materials Handling, Shifting
Bottlenecks
JOB SHOP
(Commercial Printer)
Disconnected Line Flow/Jumbled Flow but a
dominant flow exists.
BATCH
Worker Motivation, Balance, Maintaining
Flexibility
(Heavy Equipment)
LINE FLOWS
Connected Line Flow (assembly line)
(Auto Assembly)
CONTINUOUS FLOW
Continuous, automated, rigid line flow. Process
segments tightly linked.
Capital Investment for big chunk
capacity, Technological Change, Vertical
Integration
(Oil Refinery)
Managerial Challenges
Bidding, delivery, product design flexibility
Quality Product Differentiation, output volume
flexibility
Price
8
Michigan Manufacturing Corp. using the
Product-Process Matrix
9
Classification of Processes by Positioning
Strategy

• Functional Focus
• Product Focus

Product 1
A
B
Product 2
C
D
resource pool (e.g., X-ray dept, billing)
Product 1
A
D
B
Product 2
C
B
A
10
Classification of Processes by Customer
Interface

• Make to Stock
• Make to Order

11
How can operations help a company compete?The
changing sources of competitive advantage

• Low Cost Scale Economies (lt 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?
• Dont sell what you produce. produce what sells.

12
Relating operational measures (flow time T,
throughput R inventory I) with Littles Law
Flow rate/Throughput R units/hr
Inventory I units
...
...
...
...
...
Flow Time T hrs

• Inventory Throughput x Flow Time
• I R x T
• Turnover Throughput / Inventory
• 1/ T

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 Wendys 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 hamburgers cycle time and Wendys
  turnover?

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?

15
CRU Computer Rentals
16
Case CRU Computer Rentals Flow Chart
Status 40
Ship
Receiving
Repairs
30
70
Status 24
Parts places order Receives from Supplier
15
Customer
Pre-Config
Status 41
Status 32
Repairs
Config
Ship
Status 20
Status 42
17
CRU Situation in 1996Customer term 8 wks,
Demand 1000 units/wk
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

19
CRU Situation in 1997 buffer sizes unchanged,
Demand 1400 units/wk
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

21
CRU Situation in 1997 flow times unchanged,
Demand 1400 units/wk
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

23
CRU Potential situation in 1997without sales
drive, Demand 600 units/wk
24
CRU Potential situation in 1997without 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

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 Littles law for process flow analysis