Chapter 2: The Process View of an Organization

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Chapter 2 The Process View of an Organization
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Process Structures

• Continuous Processing
• Repetitive (assembly lines)
• Batch processing
• Job Shops

continuous or semi-continuous
intermittent
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The Product-Process Matrix
Low Volume (unique)
Medium Volume (high variety)
High Volume (lower variety)
Very high volume (standardized)
Unit variable costs generally too high
Job Shop
CABG Surgery
Batch Process
Exec. Shirt
Manzana Insurance
Worker-paced line
Toshiba
Machine-paced line
Toyota
Utilization of fixed capital generally too low
National Cranberry
Continuous process

• Categorizes processes into one of five clusters
• Similar processes tend to have similar problems
• There exists a long-term drift from the upper
  left to the lower right

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Exercise

• Form a group of 2-3 students
• From your experience/observation, select a
  product produced for each of these processing
  models
• Job shop
• Batch processing
• Assembly line
• Continuous processing
• Share results with the class

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Three Measures of Process Performance
First choose an appropriate flow Unit a
customer, a car, a scooter, etc.

• Inventory (WIP in a process)
• Flow time
• Time it takes a unit to get through the process
• Flow rate (throughput rate)
• Rate at which the process is delivering output
• Maximum rate that a process can generate supply
  is called the capacity of the process

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Example
Topic Flow Unit Flow Rate Flow Time Inventory

U.S. Immigration Applications Approved/rejected cases (6.3 MM/year) Average processing time (7.6 months) Pending cases (4.0 MM)

Champagne Industry Bottles of Champagne 260 MM bottles per year 3.46 years in cellar 900 Million bottles

MBA Program MBA Student 600 students/year 2 years 1200 students

Muhlenberg College

Outback Steak House
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Littles Law

• What it is Inventory (I) Flow Rate (R)
  Flow Time (T)
• Implications
• Out of the three performance measures (I,R,T),
  two can be chosen by management, the other is
  GIVEN by nature
• Hold throughput (flow rate) constant Reducing
  inventory reducing flow time

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Examples

• Suppose that from 12 to 1 p.m. 200 students per
  hour enter the GQ and each student is in the
  system for an average of 45 minutes. What is the
  average number of students in the GQ?
• Inventory Flow Rate Flow Time
• 200 per hour 45 minutes ( 0.75 hours)
• 150 students
• If ten students on average are waiting in line
  for sandwiches and each is in line for five
  minutes, on average, how many students are arrive
  each hour for sandwiches?
• Flow Rate Inventory / Flow Time 10 Students /
  5 minutes 0.083 hour
• 120 students per hour

• Problem 2.2 Airline check-in data indicate from
  9 to 10 a.m. 255 passengers checked in. Moreover,
  based on the number waiting in line, airport
  management found that on average, 35 people were
  waiting to check in. How long did the average
  passenger have to wait?
• Flow Time Inventory / Flow Rate 35 passengers
  / 255 passengers per hour 0.137 hours
• 8.24 minutes

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Queuing Theory

• Waiting occurs in
• Service facility
• Fast-food restaurants
• post office
• grocery store
• bank

Manufacturing Equipment awaiting repair Phone
or computer network Product orders Why
is there waiting?
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Measures of System Performance

• Average number of customers waiting
• In the queue (Lq)
• In the system (L)
• Average time customers wait
• In the queue (Wq)
• In the system (W)
• System utilization (r)

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Number of Servers
Single Server
Multiple Servers
Multiple Single Servers
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Some Models
1. Single server, exponential service time
(M/M/1) 2. Multiple servers, exponential
service time (M/M/s)
A Taxonomy
M / M / s
Poisson Arrival Exponential
Number of Distribution Service Dist Servers
where M exponential distribution
(Markovian) (Both Poisson and Exponential are
Markovian hence the M notation)
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Given l customer arrival rate m service
rate (1/m average service time) s number of
servers Calculate Lq average number of
customers in the queue L average number of
customers in the system Wq average waiting
time in the queue W average waiting time
(including service) Pn probability of having n
customers in the system r system utilization
Note regarding Littles Law L l W and Lq l
Wq
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Model 1 M/M/1 Example The reference desk at a
library receives request for assistance at an
average rate of 10 per hour (Poisson
distribution). There is only one librarian at the
reference desk, and he can serve customers in an
average of 5 minutes (exponential distribution).
What are the measures of performance for this
system? How much would the waiting time decrease
if another server were added?
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Example One Fast Server or Many Slow Servers?
Beefy Burgers is considering changing the way
that they serve customers. For most of the day
(all but their lunch hour), they have three
registers open. Customers arrive at an average
rate of 50 per hour. Each cashier takes the
customers order, collects the money, and then
gets the burgers and pours the drinks. This takes
an average of 3 minutes per customer (exponential
distribution). They are considering having just
one cash register. While one person takes the
order and collects the money, another will pour
the drinks and another will get the burgers. The
three together think they can serve a customer in
an average of 1 minute. Should they switch to one
register?
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3 Slow Servers
1 Fast Server
W is less for one fast server, so choose this
option.
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Application of Queuing Theory
We can use the results from queuing theory to
make the following types of decisions How many
servers to employ Whether to use one fast server
or a number of slower servers Whether to have
general purpose or faster specific servers
Goal Minimize total cost cost of servers
cost of waiting
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Cost/Benefit Analysis

• Cost of service Servers Cost of each server
• Service cost s Cs
• Cost of Waiting Cost of waiting Time waiting
  number of customers/time unit
• Waiting Cost l Cw W
• If you save more in waiting than you spend in
  service, make the change

• Example
• A fast food restaurant has three servers, each
  earning 10 per hour. Fifty customers per hour
  arrive and a server can serve a customer in three
  minutes. Should the restaurant add a fourth
  server if the cost of a customer waiting is
  estimated at 20 per hour?
• Answer

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Example Southern Railroad

• The Southern Railroad Company has been
  subcontracting for painting of its railroad cars
  as needed. Management has decided the company
  might save money by doing the work itself. They
  are considering two alternatives. Alternative 1
  is to provide two paint shops, where painting is
  to be done by hand (one car at a time in each
  shop) for a total hourly cost of 70. The
  painting time for a car would be 6 hours on
  average (assume an exponential painting
  distribution) to paint one car. Alternative 2 is
  to provide one spray shop at a cost of 175 per
  hour. Cars would be painted one at a time and it
  would take three hours on average (assume an
  exponential painting distribution) to paint one
  car. For each alternative, cars arrive randomly
  at a rate of one every 5 hours. The cost of idle
  time per car is 150 per hour.
• Estimate the average waiting time in the system
  saved by alternative 2.
• What is the expected total cost per hour for each
  alternative? Which is the least expensive?

Answer Alt 2 saves 1.87 hours. Cost of Alt 1
is 421.25 / hour and cost of Alt 2 is 400.00
/hour.
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Calculating Inventory Turns Per Unit Inventory
Costs
Annual inventory costs (as a of item value)
include financing costs, depreciation,
obsolescence, storage, handling, theft

• Obtaining data
• Look up inventory value on the balance sheet
• Look up cost of goods sold (COGS) from earnings
  statement not sales!!
• Common benchmark is inventory turns
• Inventory Turns COGS/ Inventory Value
• Compute per unit inventory costs
• Per unit inventory costs
• Annual inventory costs (as a of item cost)
  / Inventory turns

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Example

• Problem 2.3 A manufacturing company producing
  medical devices reported 60 million in sales
  last year. At the end of the year, they had 20
  million worth of inventory in ready-to ship
  devices.
• Assuming that units are valued at 1000 per unit
  and sold at 2000 per unit, what is the turnover
  rate?
• Assume the company uses a 25 per year cost of
  inventory. What is the inventory cost for a
  1000 (COGS) item. Assume that inventory turns
  are independent of price.

• Answer
• Sales 60,000,000 per year / 2000 per unit
  30,000 units sold per year _at_ 1000 COGS per unit
• Inventory 20,000,000 / 1000 per unit 20,000
  units in inventory
• Turns COGS/Inventory
• 30,000,000/20,000,000 1.5 turns
• Cost of Inventory For a 1000 product, the total
  inventory cost (for one turn) is 1000 25 or
  250. This divided by 1.5 turns gives an
  absolute inventory cost of 166.66.

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Why Hold Inventory?

• Pipeline inventory
• Seasonal Inventory

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Why Hold Inventory?

• Cycle Inventory
• Decoupling inventory/Buffers
• Safety Inventory

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Inventory Turnover Statistics
Industries with higher gross margins tend to have
lower inventory turns

• Wholesale
• Groceries related 17.8
• Vehicles automotive 6.9
• Furniture fixtures 5.5
• Sporting goods 4.8
• Drug store items 8.5
• Apparel related 5.5
• Petroleum related 42.4
• Alcoholic beverages 8.5

• Retail
• Hardware stores 3.5
• Retail Nurseries Garden Supply 3.3
• General Merchandise Stores 4.7
• Grocery Stores 12.7
• New Used Car Dealers 6.8
• Gas stations mini-marts 39.3
• Apparel Accessories 3.5
• Furniture home furnishings 4.1
• Drug Stores 5.3
• Liquor Stores 6.6
• Other Retail Stores 4.3

Source Bizstats.com